ABC manufactures a product which is used in the retail industry. They have provi
ID: 2499467 • Letter: A
Question
ABC manufactures a product which is used in the retail industry. They have provided you with the following data:
Standards -
DM 3lbs at $1 per lb
DL 5Hrs at $4 per hour
Variable OH (per DL hour) $3.20
Fixed OH $22,000
Expected DL Hours 8,000
Actual Data -
DM 3,100lbs at $0.90 per lb
DL 4,900hrs at $4.05 per hr
Variable OH $16,170
Fixed OH $19,000
Units produced 1,000 units
Required:
ABC has asked you to prepare a report that shows all variable production cost price and efficiency variances and the fixed overhead spending variance.
Direct Materials
Price Variance: _____________________ Efficiency Variance: __________________________
Total DM Variance: __________________
Direct Labor
Price Variance: _____________________ Efficiency Variance: __________________________
Total DL Variance: ___________________
Variable OH
Price Variance: _____________________ Efficiency Variance: __________________________
Total VOH Variance: _________________
Fixed OH
Spending Variance: _____________________
Using the results of this analysis suggest to Shell:
WHO might be responsible for each of the DM and DL variances
For ALL variances, indicate one reason why the variance exist (remember one variance might be favorable while another is unfavorable).
For ALL variances, with the one reason you selected, provide ABC with one specific (and distinct) suggestion regarding action they might take to improve their performance (in suggesting recommendations think about variances holistically and what are some business scenarios that might be occurring in the company).
Explanation / Answer
ABC has asked you to prepare a report that shows all variable production cost price and efficiency variances and the fixed overhead spending variance alongwith recommandations are:
Direct Materials
Price Variance:=Actual quantity (Standard Price - Actual Price)
= 3000 ($1 - $0.90) = 300 F
Efficiency Variance= Standard Price (Standard Quantity for actural output - Actual Quantity)
= $1 ( 3*1000 - 3100) = 100 A
RECOMMENDATION : TO EMPLOY MORE SKILL LABOR AND PROVIDE TRAINING TO THE EXISTING LABOR SO THAT LESS AND EFFICIENT UTILISATION OF MATERIAL TAKE PLACE.
Total DM Variance= DM Price Variance + Efficiency Variance = 300 F + 100 A = 200 F
Direct Labor
Price Variance: Actual Time (Standard Rate - Actual Rate)
= 4900 ( $4 - $4.05) =$ 245 A
RECOMMENDATION : AQUIRE CHEAPER LABOR AND EFFICIENT LABOR SO THAT PER HOUR RATE OF LABOR IS REDUCED.
Efficiency Variance= Standard Rate (standard time for actual output - Actual Time)
= $4 ( 5000 - 4900) = $400 F
Total DL Variance: DL Price Variance + Efficiency Variance = 245 A + 400 F = $155 F
Variable OH
Price Variance: Standard variable overheads on Actual Production - Actual Variable Overheads
= ($16 * 1000 - $16170) = 170 A
RECOMMENDATION : STOP WASTAGE AT THE WORK STATIONS AND STRICT CONTROL ON THE OVERHEADS DISTRIBUTION AND APPLICATION.
Efficiency Variance= Standard variable overheads on actual production - Standard variable overheads for actual time = ( $16000 - $15680) = 320 F
Total VOH Variance: VOH Price Variance + Efficiency Variance = 170 A + 320 F = 150 F
Fixed OH
Spending Variance: Standard Recommended - Actual Fixed Overhead
= $22000 - $ 19000 = $3000 F
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