Problem 68 - Wacko, Inc. produces one product called Whimsy. The company uses a
ID: 2451677 • Letter: P
Question
Problem 68 - Wacko, Inc. produces one product called Whimsy. The company uses a standard cost system and sells each whimsy for $8. At the start of monthly production, the company estimated 3,000 whimsies would be produced in March with total overhead per month estimated at $22,050,of which variable overhead is $18,000. Overhead is applied based on units produced. Wacko has established the following material and labor standards to produce one whimsy:
Standard Quantity
Standard Price
Direct materials
Direct labor
2.4 pounds
36 minutes
$2.90 per pound
$10 per hour
During March 2015, the following activity was recorded by the company relating to production:
1. The company produced 3,100 whimseys during the month.
2. A total of 8,000 pounds of material were purchased at a cost of $22,000.
3. A total of 8,400 pounds of material were used in production.
4. Actual overhead incurred was $21,700, of which fixed is $3,800.
5. 1,600 hours of labor were incurred during the month at a total wage cost of $17,600.
A. Calculate all labor variances. Explain what information is provided by each.
B. If 2% is the threshold for materiality, indicate which variances should be investigated and who is responsible for each.
C. Calculate all material variances. Explain what information is provided by each.
D. If 2% is the threshold for materiality, indicate which variances should be investigated and who is responsible for each.
Standard Quantity
Standard Price
Direct materials
Direct labor
2.4 pounds
36 minutes
$2.90 per pound
$10 per hour
Explanation / Answer
(A) Labor variances
1. Direct labor rate variance = Actual Wage cost - (Actual quantity x Standard wage rate)
= $17,600 - (3,100 units x (36/60) hours per unit x $10)
= $(17,600 - 18,600)
= $1,000 (Favorable)
This variance provides information about how much the actual wage expense varied from the standard wage expense targeted for the actual production.
2. Labor efficiency variance = Standard wage rate x (Actual hours - Standard hours)
= $10 x [1,600 - (3,100 units x (36/60) hours]
= $10 x (1,600 - 1,860)
= $2,600 (Favorable)
This variance shows how many labor hours were required to produce the actual output, in comparison to the standard labor hours set for the same level of output.
(B)
Since both variances are favorable, there is no need for an investigation to drive out the reason for negative performance.
(C)
1. Material Price variance = Actual cost - (Actual quantity x Standard price)
= $22,000 - (8,000 x $2.90) = $(22,000 - 23,200)
= $1,200 (Favorable)
This shows the total cost of actual materials used in production, compared to the standard cost of same amount of output.
2. Material Usage variance = Standard price x (Actual quantity - Standard quantity)
= $2.9 x [8,000 - (3,100 units x 2.4 pounds per unit)]
= $2.9 x (8,000 - 7,440) = $2.9 x 560
= $1,624 (Adverse)
This provides information of how much quantity of material was used in actual output in comparison to the standard quantity set.
(D)
Since material usage variance is beyond the 2% tolerance limit, and is adverse as well, this should be investigated. Since usage of material is administered at the production division, the Production Manager should be asked to provide an explanation of this variance.