PROBLEM 11-5. Comprehensive Variance Problem [LO 2,3,4] Hayes Chemical Company p

Question

PROBLEM 11-5. Comprehensive Variance Problem [LO 2,3,4] Hayes Chemical Company produces a chemical used in dry cleaning.Its accounting system uses standard costs.The standards per .5-gallon can of chemical call for 1.20 gallons of material and 1.50 hours of labor.(1.20 gallons of material are needed to produce a .5-gallon can of product due to evaporation.) The standard cost per gallon of material is $6.00.The standard cost per hour for labor is $9.00.Overhead is applied at the rate of $7.75 per can.Expected production is 20,000 cans with xed overhead per year of $55,000 and variable overhead of $5.00 per unit (a .5-gallon can).

During 2015,23,000 cans were produced;35,000 gallons of material were purchased at a cost of $250,000; 30,000 gallons of material were used in production. The cost of direct labor incurred in 2015 was $290,000 based on an average actual wage rate of $8.25 per hour.Actual overhead for 2015 was $220,000.

Required

a. Determine the standard cost per unit.

b. Calculate material,labor,and overhead variances.

c. List a possible cause for each variance.

Explanation / Answer

a. standard cost per unit ( a .5 gallon can )

Material 1.2 gallon * $6 = $7.2

labor 1.5 hours *9 = $13.5

overhead = $7.75

total cost $28.45

b&c.
umber of can produced = 23,000
Standard material required for 23,000 cans = 23,000 * 1.2 = 27,600 gallons
Standard cost for 27,600 gallons = 27,600 * 6 = $165,600
Actual cost for 30,000 gallons = 250,000 * 30,000/35,000 = $214,285

Material variance = Standard cost - actual cost = $165,600 - $214,285 = $48,685 unfavorable

Material variance is un favorable because the actual price is too high as well as the actual material used is more than the standard

labor variance = standard cost - actual cost

= 23,000 * 1.5 *9 - $290,000 = 310,500 - 290,000 = $20,500 favorable

Labor variance is favorable as the hour rate for labor in actual is less than the standard hour rate

Overhead variance = Standard cost - actual cost

= (55,000 + 23,000*5) - 220,000
   = 170,000 - 220,000 = $50,000 unfavorable
Overhead variance is unfavorable as the actual overhead rate is more than the standard overhead rate

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