Amber Manufacturing produces ceramic teapots. Amber allocates overhead based on

Question

Amber Manufacturing produces ceramic teapots. Amber allocates overhead based on the number of direct labor hours. The company is looking into using a standard cost system and has developed the following standards? (one "unit" is a batch of 100 ?teapots):

Standards:

Direct material 50 pounds per batch at $2.00 per pound

Direct Labor 2.0 hours per batch at $16.00 per hour

Variable MOH standard rate $6.00 per direct labor hour

Predetermined fixed MOH standard rate $5.00 per direct labor hour

Total budgeted fixed MOH cost $1,250

Actual cost and operating data from the most recent month are as follows:

purchased 3,660 pounds at a cost of $1.70 per pound

used 3,400 pounds in producing 60 batches

actual direct labor cost of $2,324 at an average direct labor cost per hour of $16.60

Actual variable MOH $924

actual fixed MOH $1,550

All manufacturing overhead is allocated on the basis of direct labor hours.

Requirements:

1.

Calculate the standard cost of one batch.

2.

Calculate the following? variances:

a. The direct material variances.

b. The direct labor variances.

c. The variable manufacturing overhead variances.

d. The fixed manufacturing overhead variances.

3.

Have the? company's managers done a good job or a poor job controlling?materials, labor, and overhead? costs? Why or why? not?

4.

Describe how the? company's managers can benefit from the standard costing system. Do you think the company should continue with the standard cost?system?

1.

Calculate the standard cost of one batch.

Standard cost Standard cost per batch Direct materials Direct labor variable MOH Fixed MOH Total standard cost

2.

Calculate the following? variances:

a. The direct material variances.

b. The direct labor variances.

c. The variable manufacturing overhead variances.

d. The fixed manufacturing overhead variances.

3.

Have the? company's managers done a good job or a poor job controlling?materials, labor, and overhead? costs? Why or why? not?

4.

Describe how the? company's managers can benefit from the standard costing system. Do you think the company should continue with the standard cost?system?

Explanation / Answer

Solution:

Part 1 -- the standard cost of one batch.

Standard cost

Standard cost per batch

Direct materials (50 pounds x $2)

$100

Direct labor (2 hours x $16)

$32

variable MOH (2 hrs x $6)

$12

Fixed MOH (2 hrs x $5)

$10

Total standard cost

$154

Standard Cost of one batch = $154

Part 2(a) – Direct material variance

Direct Material Variance = Direct Material Price Variance + Direct Material Quantity Variance

Material Price Variance

Material Price Variance is the variance arises in the material cost due to difference in actual material purchase price from standard material price. Mathematically, it is calculated as below:

Material Price Variance = Actual Quantity (Standard Price – Actual Price)

Note --- Here actual quantity means actual quantity of material PURCHASED. If the question does not provide the information about material purchase, it is taken as equal to material consumed.

Direct Material Price Variance

Actual Price

$1.70

per pound

Standard Price

$2.00

per pound

Variance or Difference in Price

$0.30

per kg

x Actual Quantity PURCHASED

3660

Pounds

Material Price Variance

$1,098

Favorable

Material Quantity Variance = Standard Price (Standard Quantity for Actual Production – Actual Quantity USED)

Note --- Here actual quantity means actual quantity of material CONSUMED/USED

Direct Material Quantity Variance

Standard Quantity Allowed for actual production:

Actual Production/Activity

60

Batches

x Allowed Standard Quantity Per Unit

50

Pounds

Total Standard Quantity Allowed for actual production (SQAP)

3000

Pounds

Actual Quantity USED (AQU)

3400

Pounds

Variance or Difference in Quantity

400

Pounds

x Standard Price (SP)

$2.00

Per Pound

Material Quantity Variance

$800

Unfavorable

Part 2(b) – Direct labor variances

Labor Rate Variance

Actual Hourly Rate (AHR)

$16.60

Per Hour

Standard Hourly Rate (SHR) ($2.20 / 0.2)

$16.00

Per Hour

Variance or Difference in Rate

$0.60

Per Hour

x Actual Labor Hours worked ($2,324 / 16.60)

140

Hours

Labor Rate Variance

$84

Unfavorable

Labor Quantity / Efficiency Variance

Standard Hours Allowed for actual production:

Actual Production

60

Batches

x Allowed Standard Hours Per Unit

2

hours

Total Standard Hours Allowed for actual production (SHAP)

120

hours

Actual Labor Hours Worked (AH)

140

hours

Variance or Difference in Hours

20

hours

x Standard Hourly Rate (SHR)

$16.00

per hour

Labor Efficiency Variance

$320

Unfavorable

Part 2© -- The variable manufacturing overhead variances

Actual Direct Labor Hours worked = 140 Hours

Variable Overhead Spending/Rate Variance = Actual Variable Overhead – Actual Hour x Std Variable OH Rate

= $924 – (140*6)

= $924 - $840

= $84 Unfavorable

Variable Overhead Efficiency/Quantity Variance

Variable Overhead Efficiency/Quantity Variance = Standard VOH Rate (Actual Hours – Std Hours for actual batches)

= 6 (140 – 120 refer direct labor hour efficiency variance calculation)

= $120 Unfavorable

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Pls ask separate question for remaining parts.

Standard cost

Standard cost per batch

Direct materials (50 pounds x $2)

$100

Direct labor (2 hours x $16)

$32

variable MOH (2 hrs x $6)

$12

Fixed MOH (2 hrs x $5)

$10

Total standard cost

$154

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