ariance Analysis Part III: Budget The following information pertains to Christma

Question

ariance Analysis Part III: Budget The following information pertains to Christmas Wreaths & Co. The firm allocates variable overhead based on direct labor hours Units produced (actual) 21,000 Master Budget: Units produced (expected) Direct Materials Direct Labor Overhead 20,000 $165,000 $140,000 $199,000 Standard Costs per unit: Direct Materials Direct Labor Overhead $1.65 $14.00 $11.90 per lb; 5 lbs per unit of output per hr; 0.5 hrs per unit per direct labor-hour Actual Costs: Direct Materials Direct Labor Overhead (Variable) $188,700 (102,000 lbs) $140,000 (10,700 hours) $124,440 Required. a. Compute the Flexible Budget Variance for Direct Materials, Direct Labor, and Variable Overhead. b. Compute the Price Variance for Direct Materials and Direct Labor c. Which variance from part (b) is the largest? In no more than two sentences, explain why. d. Compute the Efficiency Variance for Direct Materials and Direct Labor.

Explanation / Answer

Ans:- 1 Flexible budget variance:- It is a variance between budget converted according to actual quantity and actual numbers. Computation of Flexible budget variance Flexible budget amount Actual amount Variance Direct Materials          173,250               188,700     (15,450) (21000x 5 x 1.65) Direct Labour          147,000               140,000          7,000 (21000x 0.5 x 14) Overheads Variable          124,950               124,440 510 (21000x 0.5 x 11.90) 2 Computation of price variance of direct materials Actual Rate 1.85 (188700/102000) Standard Rate 1.65 Actual Quantity 102000 Price variance of direct materials - = 1.65-1.85 x 102000 =          (20,400) Computation of price variance of direct Labour Actual Rate            13.084 (140000/10700) Standard Rate 14 Actual labour hours            10,700 Price variance of direct labour - = 14.00 - 13.084 x 10700 =              9,801 3 There is 11 %price variance in direct material and 7 % price variance in direct labour so price variance of direct material is largest. 4 Computation of efficiency variance of direct materials Actual quantity of direct material 102000 Standard quantity of direct material 105000 (21000x5) Standard Rate 1.65 Efficiency variance of direct materials - = 105000-102000 x 1.65 = 4950 Efficiency variance of direct labour Actual labour hours 10700 Standard labour hours 10500 (21000x.5) Standard Rate of labour 14 Efficiency variance of direct labour - = 10500-10700 x 14 = -2800

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