Handout 7-1: Standard Cost Variances Boise Recreational Supplies makes a large t
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Question
Handout 7-1: Standard Cost Variances
Boise Recreational Supplies makes a large tent that they sell to the U. S. Army. Following is the information relative to the year ended December 31, 2013. During the year they manufactured 1,000 tents. Standard cost for each tent is as follows: 50 yards of canvas with a standard price of $5.00 per yard. It takes a worker 8 hours to cut and stitch a tent. Workers standard labor rate is $20 per hour. Variable overhead is applied at the rate of $5.00 per direct labor hour.
During the year they purchased 60,000 yards of canvas for $360,000. They used 55,000 yards to produce the 1,000 tents. The laborers worked 7,000 direct labor hours and were paid $175,000. Actual variable overhead was $49,000.
Required:
Compute the material quantity and price variances.
Compute the labor efficiency and rate variances.
Compute the variable overhead spending and efficiency variances.
Why do companies do variance analysis?
To what general ledger accounts are the variances closed to?
Explanation / Answer
Material Price Variance = ( SP AP ) × AQ
Material Price Variance = (5-6) x 55000
Labour Efficiency Variance = ( SH AH ) × SR
labour Efficiency Variance = (8000-7000) x 20
labour Rate Variance = ( SR AR ) × AH
labour Rate Variance = (20-25) x 7000
Variable overhead Spending Variance = ( SR AR ) × AU
VOH Spending Variance = ( SR × AU ) Actual Variable Overhead Cost
Variable overhead Spending Variance = (40x1000) - 49000
VOH Efficiency Variance = ( SH AH ) × SR
Material Quantity Variance = ( SQ AQ ) × SP Where, SQ is the standard quantity allowed AQ is the actual quantity of direct material used SP is the standard price per unit of direct material Standard quantity allowed (SQ) is calculated as the product of standard quantity of direct material per unit and actual units produced. SQ = 50 x 1000 AQ = 55 x 1000 SP = $ 5 Material Quantity Variance = (50000-55000) x 5 -25000 AdverseMaterial Price Variance = ( SP AP ) × AQ
Where, SP is the standard unit price of direct material AP is the actual price per unit of direct material AQ is the actual quantity of direct material used SP = $ 5 AP = $ 6 (360000/60000) AQ = 55000 yardsMaterial Price Variance = (5-6) x 55000
-55000 AdverseLabour Efficiency Variance = ( SH AH ) × SR
Where, SH are the standard direct labor hours allowed AH are the actual direct labor hours used SR is the standard direct labor rate per hour The standard direct labor hours allowed (SH) in the above formula is the product of standard direct labor hours per unit and number of finished units actually produced. SH = 1000 x8 = 8000 AH = 7000 SR = $ 20 per hourlabour Efficiency Variance = (8000-7000) x 20
20000 Favourablelabour Rate Variance = ( SR AR ) × AH
Where, SR is the standard direct labor rate AR is the actual direct labor rate AH are the actual direct labor hours SR = $ 20 AR = (175000/7000) = 25 AH = 7000 hourslabour Rate Variance = (20-25) x 7000
-35000 AdverseVariable overhead Spending Variance = ( SR AR ) × AU
Where, SR is the standard variable overhead rate AR is the actual variable overhead rate AU are the actual units of allocation base The standard variable overhead rate is the same as variable overhead application rate. The allocation base is usually the number of labor hours used. The above formula can also be stated alternatively as follows:VOH Spending Variance = ( SR × AU ) Actual Variable Overhead Cost
SR = 5x8 = 40 AU = 1000 units Actual variable overhead cost = 49000Variable overhead Spending Variance = (40x1000) - 49000
-9000 AdverseVOH Efficiency Variance = ( SH AH ) × SR
Where, SH are standard direct labor hours allowed AH are the actual direct labor hours SR is the standard variable overhead rate The standard direct labor hours allowed (SH) in the above formula is calculated by multiplying standard direct labor hours per unit and actual units produced. SH = 1000 x 8 = 8000 AH = 7000 SR = $ 5 VOH efficiency variance = (8000 - 7000) x 5 5000 FavourableRelated Questions
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