Road Ready Tire Co. manufactures automobile tires. Standard cost and actual cost

Question

Road Ready Tire Co. manufactures automobile tires. Standard cost and actual costs for direct materials, direct labor, and factory overhead incurred for the manufacture of 5,200 tires were as follows:
                            Standard Cost                                      Actual costs
Direct materials     71,000 lbs. @ 5.10                                70,600 lbs. @ 5.00
Direct labor            1,300 hrs. @ 17.50                               1,330 hrs. @ 17.80
Factory overhead    Rates per direct labor hr,
based on 100% of normal capacity of 1,350 direct labor hrs.

Variable cost 3.10     4,000 Variable cost
Fixed cost 4.90          6,615 Fixed cost

Each tire requires 0.25 hour of direct labor.

Explanation / Answer

a.                                                                           Direct Materials Cost Variance

Price variance:

Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity

Direct Materials Price Variance = ($5.00 per lb. – $5.10 per lb.) × 70,600 lbs.

Direct Materials Price Variance = – $7,060 Favorable Variance

Quantity variance:

Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) ×

                                                                       Standard Price

Direct Materials Quantity Variance = (70,600 lbs. – 71,000 lbs.) × $5.10 per lb.

Direct Materials Quantity Variance = – $2,040 Favorable Variance

Direct Materials Cost Variance =      Direct Materials Quantity Variance + Direct

                                                               Materials Price Variance

Direct Materials Cost Variance = – $7,060 + ($2,040)

Direct Materials Cost Variance = – $9,100 Favorable Variance

b.                                                                           Direct Labor Cost Variance

Rate variance:

Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) ×

                                                         Actual Hours

Direct Labor Rate Variance = ($17.80 – $17.50) × 1,330 hrs.

Direct Labor Rate Variance = $399 Unfavorable Variance

Time variance:

Direct Labor Time Variance = (Actual Direct Labor Hours – Standard Direct Labor

                                                         Hours) × Standard Rate per Hour

Direct Labor Time Variance = (1,330 hrs. – 1,300 hrs.) × $17.50 per hour

Direct Labor Time Variance = $525 Unfavorable Variance

Total direct labor cost variance:

Direct Labor Cost Variance = Direct Labor Time Variance + Direct Labor Rate

                                                        Variance

Direct Labor Cost Variance = $399 + $525

Direct Labor Cost Variance = $924 Unfavorable Variance

c.                                                                           Factory Overhead Cost Variance

Variable factory overhead controllable variance:

      Actual variable factory overhead cost incurred            .    $   4,000

      Budgeted variable factory overhead for 1,300 hrs.                4,030

           Variance—favorable                                                ......                                $– 30

Fixed factory overhead volume variance:

      Normal capacity at 100%                                             ......         1,350   hrs.

      Standard for amount produced                                    ....         1,300  

      Productive capacity not used                                       ....               50   hrs.

      Standard fixed factory overhead cost rate                   ...    ×   $4.90

           Variance—unfavorable                                            .....                                      245

Total factory overhead cost variance—unfavorable...........                                           $215

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