Liquid manufactures a single product that has a standard materials cost of $20 (

Question

Liquid manufactures a single product that has a standard materials cost of $20 (2 units of raw materials at $10 per unit), standard direct labor cost of $18 (1 hour per unit), and standard variable overhead cost of $8 (based on direct labor-hours). Fixed overhead is budgeted at $34,000 per month.

The following data pertain to operations for May of this year:

Raw materials purchased

3,600 units costing $31,620

Raw materials used in production of 1,500

units of finished product

3,200 units of raw materials

Direct labor used

1,500 hours costing $30,000

Variable overhead costs incurred

$11,920

Fixed overhead costs incurred

$35,000

Required:

a.

Compute the following variances (show calculations):

1.

Materials quantity variance

2.

Labor rate variance

3.

Labor efficiency variance

4.

Variable overhead spending variance

5.

Variable overhead efficiency variance

Raw materials purchased

3,600 units costing $31,620

Raw materials used in production of 1,500

units of finished product

3,200 units of raw materials

Direct labor used

1,500 hours costing $30,000

Variable overhead costs incurred

$11,920

Fixed overhead costs incurred

$35,000

Explanation / Answer

Ans:

1.       Material quantity variance:

(Actual raw materials used- standard direct material required for production of 1500 units)*standard rate per unit

= (3200-1500*2)*$10

= $2000 “U”

2.       Labor rate variance= (Actual labor rate per hour-standard rate per hour)*quantity of direct labor used

                                                       = ($20-$18)*1500

                                                       = $3000”U”

3.       Labor efficiency variance:

( Standard labor allowed-number of hours actually worked)*standard labor rate per hour

            = (1500*1-1500)*$18

              = Nil

4.       Variable overhead spending variance= (standard overhead rate per hour-actual overhead rate per hour)*actual direct labor worked

=( $8-$11920/1500)*1500

= $75 “F”

5.       Variable overhead efficiency variance= (Standard labor allowed-number of hours actually worked)*standard variable overhead rate per hour

= (1500-1500)*$8

= Nil

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