Standard Products Company recognizes variences from standards at the earliest op

Question

Standard Products Company recognizes variences from standards at the earliest opportunity, and the quality of direct materials purchased is equal to the quantity used. The following information is available for the most recent month:

1. Calculate the Direct Material Price and Volume Variances.

2. Calculate the Direct Labor Rate and Efficiency Variances

3. Calculate the Variable Overhead Spending and Efficiency Variances

4. Calculate the Fixed Overhead Budget and Volume Variances

Direct Materials Direct Labor Standard quantity/ unit 6.00 pounds 2.5 hours Standard price/ pound $8.10 / pound Standard price / hour $8.00 / hour Actual quantity / unit 6.25 pounds 2.8 hours Actual price / pound $8.00 / pound Actual price / hour $7.50 / hour Static budget volume 800 units Actual volume 900 units Actual overhead $11,000 Actual fixed overhead $5.100 Standard variable overhead $5 / unit Standard fixed overhead $5,600

Explanation / Answer

1. Direct Material Price and Volume Variances.

Direct Material Price Variance = Actual cost of materials used - Standard cost of materials used

900*6.25*8 - 900*6.25*8.1 = 45000 - 45562.5 = $562.5 (F)

Direct Material Volume Variance = Standard cost of actual material used - standard cost of standard quantity of material for actual production = 900*6.25*8.1 - 900*6*8.1 = 45562.5 - 43740 = $1822.5 (A)

                               

2. Calculate the Direct Labor Rate and Efficiency Variances

Direct Labor Rate Variance = Actual labor cost - Standard cost for actual labor

= 900*2.8*7.5 - 900*2.8*8 = 18900 - 20160 = $1260 (F)

Direct labor efficiency variance = standard cost of actual labor - standard cost of standard labor

900*2.8*8 - 900*2.5*8 = 20160 - 18000 = $2160 (A)

3. Calculate the Variable Overhead Spending and Efficiency Variances

Variable overhead spending variance = Actual units produced x (Actual overhead rate - standard overhead rate)

= 900[(5900/900) - 5] = 1400 (A)

Variable overhead efficiency variance efficiency variance can be calculated only if the absorption of overhead is based on labor hours.

4. Calculate the Fixed Overhead Budget and Volume Variances

Actual fixed overhead - budgeted fixed overhead = 5100 - 5600 = 500 (F)

Fixed overhead volume variance = (units produced - budgeted production) * budgeted overhead rate

= (900 - 800)*(5600/800) = 700 (F)

Note: Overhead variances are worked assuming that the basis of absorption is no of units produced ( as indicated by the variable overhead standard rate which is given in units. If it is based on labor hours the calculations will differ.

Further actual variable overhead is taken as acutal overhead of 11000 - actual fixed overhead of 5100; hence 5900.

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