5. Compute Midwest’s direct labor quantity variance (this variance is also calle

Question

5. Compute Midwest’s direct labor quantity variance (this variance is also called the labor usage variance or the labor efficiency variance).

6. By what amount did profit change because Midwest used too much or too little direct labor in its tables? How is this answer related to the variance you calculated in question 13?

7. Based on the variance you computed in this activity and in Midwest A, what is the most likely explanation of what went wrong at Midwest in October? Remember, a good explanation is parsimonious – it requires the fewest independent causes.

• Has your answer changed from the answer you gave in Midwest Crafts A? Why or why not?

• What would you investigate to determine whether you explanation is correct?

• What corrections to processes or estimates would you recommend to help avoid the variances in the future?

Explanation / Answer

1. This report is misleading. The reason is that the management has prepared the variance report using the budgeted units sold and budgeted rates and cost, considering them as base for comparison in judging the overall performance of the company. Actual costs of resources like material, labor and overheads should be comparable with the standard cost rather than budgeted cost. Standard costs are calculated using actual level of production and sales (level of operation) that existed during the year. Henceforth, the management of the company can judge the true performance of the company.

2. To make this repot a useful one, the various cost figures should be built up based on the actual level of operation that has remained in the company during the year. These cost figures are called Standard Costs. The information which will be useful is listed below:

Data for resource variance

Thus, it is evident that the acutal variable cost exceeded the standards by $29000. This means percent overage of 2.14%

Data for Fixed overhead variance

Thus, it is evident that the acutal fixed cost is less than the standards by $42000. This means favorable variance.

3. Flexible Budget

4. The flexible budget cost rather than the master budget cost will be used as the benchmark for computing the price and efficiency variances for wood and labor. The flexible budget cost is based on the actual level of operation in the business during the production period. Whereas the master budget considers the planned level of operation estimated during the end of previous period or in the beginning of current budgeted period. Therefore, the master budget cost is not the right benchmark in deciding the variances that occured during the production period.

Resource Budgeted Rate Standard Cost Actual Rate Actual Cost Wood 700000/2500 = 280 280*3000 = 840000 820000/3000 = 273.33 820000 Direct Labor 300000/2500 = 120 120*3000= 360000 350000/3000 = 116.67 350000 Variable Manufacturing Overhead 60000/2500 = 24 24*3000 = 72000 74000/3000 = 24.67 74000 Variable Selling and distribution overhead 70000/2500 = 28 28*3000 = 84000 83000/3000 = 27.67 83000 Total 1356000 1327000

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