P89-5 Calculating Dlrect Materials, Direct Labor, Variable Manufacturing Overhea

Question

P89-5 Calculating Dlrect Materials, Direct Labor, Variable Manufacturing OverheadL Variances Lc Dolles Clay, Inc, manufactures basic terra cotta planters. Its standard costinformation for the past year follows: Standard Quantity Standard Price (Rate) Standard Unit Cost Direct materials (clay Direct labor Variable manufacturing overhead (based on direct labor hours) Fixed manufacturing overhead $480,000+800,000 units) 2 lbs. 0.5 hr 0.5 hr $ 0.80 per lb. $12.00 per hr. $ 0.40 per hr $1.60 6.00 0.20 0.60 Dolles Clay has the following actual results for the past year: Number of units produced and sold Number of pounds of clay used Cost of clay purchased and used Number of labor hours worked Direct labor cost Variable overhead cost Fixed overhead cost 675,000 1,305,000 $ 991,800 337,500 $3,712,500 $ 157,500 $ 505,000 Required: culate the following for Dolles Clay: 1. Direct 2. Direct materials price, quantity, and spending variances. abor rate, efficiency, and spending variances. overhead rate, efficiency, and spending variances. d Snending, Volume Variances

Explanation / Answer

(1) Computation of the Direct material price, quantity and spending variances.We have,

(a) Direct material price variances:

Direct material price variances = Actual quantity ( Actual price - standard price)

Direct material price variances = 1,305,000 ( 991,800/ 1,305,000 - 0.80)

Direct material price variances = 1,305,000 ( 0.76 - 0.80) = $ 52,200 (Favourable)

(b) Direct material quantity variances:

Direct material quantity variances = Standard price ( Actual quantity - standard quantity)

Direct material quantity variances = 0.80 ( 1,305,000 - 1,600,000)

Direct material quantity variances = $ 236,000 ( Favourable)

(c) Direct material spending variances:

Direct material spending variances = Actual price - Standard price

Direct material spending variances = 991,800 - ( 1,600,000*0.80)

Direct material spending variances = 991,800 - 1,280,000 = $ 288,200 (Favourable)

(2) Computation of the Direct labor rate, efficiency and spending variances.We have,

(a) Direct labor rate:

Direct labor rate = Actual labor hours ( Actual rate - Standard rate)

Direct labor rate = 337,500 ( 3,712,500 / 337,500 - 12.00)

Direct labor rate = 337,500 ( 11.00 - 12.00) = $ 337,500 (Favourable)

(b) Direct labor efficiency variances:

Direct labor efficiency variances = ( Actual hours - Standard hours ) Standard rate

Direct labor efficiency variances = ( 337,500 - 800,000*0.5) 12.00

Direct labor efficiency variances = ( 337,500 - 400,000) 12.00

Direct labor efficiency variances = $ 750,000 ( Favourable)

(c) Direct labor spending variances:

Direct labor spending variances = Total Actual cost - Total Standard cost

Direct labor spending variances = 3,712,500 - 4,800,000

Direct labor spending variances = $ 1,087,500 ( Favorable)

(3) Computation of variable overhead rate, efficiency and spending variances.We have,

(a)Variable overhead rate = Actual variable cost - Actual hours x standard variable overhead rate per unit

Variable overhead rate = 157,500 - ( 0.5 x 0.4 x 800,000) = 157,500 - 160,000

Variable overhead rate = $ 2,500 ( Favourable)

(b) Variable efficiency variances = ( standard hours - actual hours) Standard variable overhead rate per hours

Variable efficiency variances = ( 800,000*0.5 - 337,500/ 675,000 x 675,000) * 0.40

Variable efficiency variances = ( 400,000 - 337,500) 0.40 = $ 25,000 ( Favourable)

(c) Variable spending variances = Total standard variable overhead cost - Total actual variable overhead cost

Variable spending variances = 800,000*0.2 - 157,500 = 160,000 - 157,500 = $ 2,500 ( Favourable)

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