Inc., produces various chemical compounds for industrial use. One compound, call
ID: 2556747 • Letter: I
Question
Inc., produces various chemical compounds for industrial use. One compound, called Fludex, is prepared using an elaborate distilling process. The company has developed standard costs for one unit of Fludex, as follows: Standard Quantity Standard Price Standa Cost or Bours 2.10 ounces 0.80 hours .80 hours or Rate Direct materials Direct labor Variable manufacturing overhead Total standard cost per unit 22.00 per ounce46.20 12.00 s 2.50 per hour2.00 $15.00 per hour 2.00 $60.20 s During November, the following activity was recorded related to the production of Fludex: b. There was no beginning inventory of materials: however, at the end of the month, 2,600 ounces of material remained in erking inventory. c. The company employs 20 lab technicians to work on the production of Fludex. During November, they each worked an average of 180 hours at an average pay rate of $14.00 per hour d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $7,000. e. During November, the company produced 3,700 units of Fludex. Required: 1. For direct materials: a. Compute the price and quantity variancesExplanation / Answer
Part 1 --- For Direct Material
Material Price Variance
Material Price Variance is the variance arises in the material cost due to difference in actual material purchase price from standard material price. Mathematically, it is calculated as below:
Material Price Variance = Actual Quantity (Standard Price – Actual Price)
Note --- Here actual quantity means actual quantity of material PURCHASED. If the question does not provide the information about material purchase, it is taken as equal to material consumed.
Direct Material Price Variance
Actual Price (AP) (216,825 / 10,500)
$20.650
per ounce
Standard Price (SP)
$22.000
per ounce
Variance or Difference in Price
$1.350
per ounce
x Actual Quantity PURCHASED
10500
ounce
Material Price Variance
$14,175
Favorable
Favorable because actual cost paid for material purchase is less than anticipated.
Material Quantity/Efficiency/Usage Variance
Material Efficiency (Usage) Variance measures variance in material cost due to usage/consumption of materials. It is calculated as below:
Material Quantity Variance = Standard Price (Standard Quantity for Actual Production – Actual Quantity USED)
Note --- Here actual quantity means actual quantity of material CONSUMED/USED
Direct material used = Total Purchased Quantity 10,500 – Ending Inventory 2600 = 7,900 Ounces
Direct Material Quantity Variance
Standard Quantity Allowed for actual production:
Actual Production/Activity
3700
Units
x Allowed Standard Quantity Per Unit
2.1
ounce
Total Standard Quantity Allowed for actual production (SQAP)
7770
ounce
Actual Quantity USED (AQU) (Purchased 10500 - Ending Inventory 2600)
7900
ounce
Variance or Difference in Quantity (AQU - SQAP)
130
ounce
x Standard Price (SP)
$22.00
per kilogram
Material Quantity Variance
$2,860
Unfavorable
Unfavorable because actual quantity used is higher than standard quantity at standard cost
Recommendation
Overall Material Variance is 2860 U + 14,175 F = $11,315 F
Since overall material variance is favorable, it is not recommended to enter into a contract with new supplier.
Part 2 – For Labor
Labor Rate Variance
Labor Price Variance – It arises due to difference in actual rate paid from standard rate. It is calculated as below:
Labor Price Variance = Actual Time (Standard Rate per hour – Actual Rate per hour)
Here, actual time means time for which wage has been paid.
Labor Rate Variance
Actual Hourly Rate (AHR)
$14.00
Per Hour
Standard Hourly Rate (SHR)
$15.00
Per Hour
Variance or Difference in Rate
$1.00
Per Hour
x Actual Labor Hours worked (20*180)
3600
Hours
Labor Rate Variance
$3,600
Favorable
Favorable Labor Rate Variance because actual hourly rate paid is less than standard hourly rate.
Labor Quantity Variance
Labor Efficiency Variance – It arises due to variation in the working hours from the set standard.
Labor Quantity / Efficiency Variance
Standard Hours Allowed for actual production:
Actual Production
3700
Units
x Allowed Standard Hours Per Unit
0.8
hours
Total Standard Hours Allowed for actual production (SHAP)
2960
hours
Actual Labor Hours Worked (AH)
3600
hours
Variance or Difference in Hours (AH - SHAP)
640
hours
x Standard Hourly Rate (SHR)
$15
per hour
Labor Efficiency Variance
$9,600
Unfavorable
Unfavorable Labor Efficiency Variance because the Actual Hours Worked is higher than the allowed standard hours at standard rate
Recommendation
Since overall labor variance is $3600 F + $9,600 U = $6,000 U
It means the efficiency of labor is not upto the mark. It is suggested to try new labor mix in order to reduce the labor cost.
Part 3 --- Variable overhead rate and efficiency variance
Variable Overhead Rate = (AH x AR) – (AH*SR)
= $7,000 – (3600*$2.5)
= $7,000 – 9,000
= $2000 Favorable
Variable Efficiency Variance
Variable Overhead Efficiency/Quantity Variance
Standard Hours Allowed for actual production:
Actual Production
3,700
Units
x Allowed Standard Hours Per Unit
0.8
hours
Total Standard Hours Allowed for actual production (SHAP)
2960
hours
Actual Direct Labor Hours (AH)
3600
Hours
Variance or Difference in Hours (SHAP - AH)
640
hours
x Standard Hourly Variable Overhead Rate (Refer Note 1)
$2.50
per hour
Variable Overhead Efficiency Variance
$1,600
Unfavorble
Direct Material Price Variance
Actual Price (AP) (216,825 / 10,500)
$20.650
per ounce
Standard Price (SP)
$22.000
per ounce
Variance or Difference in Price
$1.350
per ounce
x Actual Quantity PURCHASED
10500
ounce
Material Price Variance
$14,175
Favorable