Gold Corporation produces a single product and the standard labor cost of that p

Question

Gold Corporation produces a single product and the standard labor cost of that product is 5 hours at a labor rate of $25 per hour. During the month of January, 50,000 hours of labor are incurred at a cost of $23 per hour to produce 9,850 units. Compute the labor price and quantity variance, as well as the total labor variance.

In producing that product, the standard material cost for 1 unit is 10 pounds of direct materials at $3.50 per pound. During January, 95,000 pounds of direct materials were used at a cost of $3.25 per pound to make the 9,850 units. Compute the materials price and quantity variance, as well as the total materials variance.

Gold Corporation allocates overhead using a predetermined rate.  The predetermined rate is calculated using direct labor hours as the cost driver. Budgeted overhead for the month of January was $150,000 and budgeted direct labor hours were 45,000.  Total overhead incurred during the month of January was $165,000.  Compute the overhead variance for Gold Corporation for January.

Now, compute the total variance for Gold Corporation for the month of January.  Explain some reasons behind why those variances may have occurred.

Explanation / Answer

a) Direct labor rate variance = (Actual rate-Standard rate)*Actual DLH = (23.00-25.00)*50000 = $       1,00,000 Favorable Direct labor time variance = (Actual DLH-Standard DLH)*Standard rate = (50000-9850*5)*23.00 = $          17,250 Unfavorable Total direct labor cost variance = DL price variance+DL time variance = 100000+18750 = $          82,750 Unfavorable [ or 50000*23-9850*5*25) $          81,250 Unfavorable b) Direct material price variance = (Actual price-Standard price)*Actual quantity purchased = (3.25-3.50)*95000 = $          23,750 Favorable Direct material quantity variance = (Actual quantity used-Standard quantity)*Standard price = (95000-9850*10)*3.50 = $          12,250 Favorable Total direct materials cost variance = DM price variance+DM quantity variance = 23750+12250 = $          36,000 Favorable [or 95000*3.25 - 9850*10*3.50 = $          36,000 Favorable c) Overhead variance = Actual overhead-Overhead assigned = 165000-9850*5*150000/45000 = $                833 Unfavorable The overhead variance can be broken into overhead spending variance and overhead volume variance. Overhead spending variance = Actual overhead-Budgeted overhead = 165000-150000 = $          15,000 Unfavorable Overhead volume variance = Budgeted overhead-Standard hours for actual production)*Predetermined OH rate = 150000-9850*5*150000/45000 = $          14,167 Favorable Overhead cost variance = 15000-14167 = $                833 Unfavorable d) TOTAL COST VARIANCE = Direct labor cost variance+Direct material cost variance+Overhead cost variance = 81250 [U]+36000 [F]+833[F] = $          44,417 Favorable

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