Required information [The following information applies to the questions display

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Required information [The following information applies to the questions displayed below.] Preble Company manufactures one product. Its variable manufacturing overhead is applied to production based on direct labor-hours and its standard cost card per unit is as follows: Direct materials: 5 pounds at $10 per pound Direct labor: 4 hours at $14 per hour Variable overhead: 4 hours at $4 per houz Total standard cost per unit $ 50 56 16 $122 The planning budget for March was based on producing and selling 29,000 units. However, during March the company actually produced and sold 34,200 units and incurred the following costs a. Purchased 180,000 pounds of raw materials at a cost of $9.50 per pound. All of this material was used in production. b. Direct laborers worked 74,000 hours at a rate of $15 per hour c. Total variable manufacturing overhead for the month was $440,300. 5. If Preble had purchased 189,000 pounds of materials at $9.50 per pound and used 180,000 pounds in production, what would be the materials price variance for March? (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance.). Input all amounts as positive values. Do not round intermediate calculations.) Materials price variance

Explanation / Answer

(5) CALCULATION OF MATERIAL PRICE VARIANCE

MATERIAL PRICE VARIANCE = ACTUAL QUANTITY PURCAHSED * (STANDARD PRICE PER UNIT - ACTUAL PRICE PER UNIT )

= 189000 pounds * ($10-$9.50)

= 189000 pounds * ($0.05)

=$94500 FAVOURABLE (F)

NOTE : IF THE ACTUAL PRICE PER UNIT IS LESS THAN STANDARD PRICE PER UNIT THEN THE MATERIAL PRICE VARIANCE IS FAVOURABLE. WE HAVE SPENT LESS AMOUNT IN PURCHASING THE RAW MATERIAL. HENCE THE VARIANCE IS FAVOURABLE.

(6) CALCULATION OF MATERIAL QUANTITY VARIANCE

MATERIAL QUANTITY VARIANCE = SP*(SQ-AQ)

WHERE , SQ = STANDARD QUANTITY ALLOWED

AQ = ACTUAL QUANTITY OF DIRECT MATERIAL USED

SP = STANDARD PRICE PER UNIT OF DIRECT MATERIAL

SO WE HAVE,

= $10*(180000pounds - 189000pounds)

=$10*(-9000pounds)

=(-) $90000 UNFAVOURABLE (U)

NOTE: THE MATERIAL QUANTITY VARIANCE IS UNFAVOURABLE WHEN THE ACTUAL QUANTITY OF RAW MATERIAL ACTUALLY USED IN PRODUCTION IS MORE THAN THE STANDARD RAW MATERIAL QUANTITY.

(7) DIRECT LABOUR COSTS TO BE INCLUDED IN COMPANY'S PLANNING BUDGET FOR MARCH

IF 1UNIT REQUIRES 4 HOURS OF DIRECT LABOUR THEN 29000UNITS (AS MENTIONED IN PLANNING BUDGET FOR MARCH) WOULD REQUIRE 29000UNITS*4HOURS EQUALS 116000 DIRECT LABOUR HOURS

DIRECT LABOUR COST = PLANNED DIRECT LABOUR HOURS * STANDARD DIRECT LABOUR COST PER HOUR

= 116000HOURS * $14 PER HOUR

= $1624000

NOTE: SINCE THE QUESTION SPECIFIED THE AMOUNT OF DIRECT LABOUR COST TO BE INCLUDED IN PLANNING BIDGET. SO, WE USED THE STANDARD FIGURES AND NOT ACTUAL FIGURES IN CALCULATION OF DIRECT LABOUR COST.

(8) DIRECT LABOUR COST TO BE INCLUDED IN COMPANY FLEXIBLE BUDGET

DIRECT LABOUR COST = ACTUAL DIRECT LABOUR HOURS WORKED * ACTUAL DIRECT LABOUR COST PER HOUR

= 74000HOURS * $15

= $1110000

NOTE: WE HAVE USED COST DATA ON THE BASIS OF ACTUAL FIGURES DATA 34200UNITS PRODUCED AND SOLD DURING MARCH TO BE INCLUDED IN FLEXIBLE BUDGET FOR MARCH FOR CALCULATION OF DIRECT LABOUR COST.

FLEXIBLE BUDGET IS A BUDGET WHICH ADJUST ACCORDING TO VOLUME OF ACTIVITY OF THE COMPANY/FIRM.SO WE HAVE USED THE ACTUAL ACTIVITY LEVEL OF MARCH FOR CALCULATION OF DIRECT LABOUR COST.

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