MONTANA CORPORATION … has the following standard cost sheet for its main product

Question

MONTANA CORPORATION

… has the following standard cost sheet for its main product:

The fixed and variable overhead rates were based on expected activity of 2,500 hours.

During the year, the following actual results were recorded:

REQUIRED:

1. Compute the direct materials price and usage variances, and the direct labor rate and efficiency variances. Record the journal entries using standard costing. For direct materials, do the variances for the following 2 scenarios: a) 11,000 feet purchased and used, b) 11,750 purchased and 11,000 used (as shown above)

2. Compute the variable overhead spending and efficiency variances.

3. Compute the fixed overhead spending and volume variances

4. Record all related journal entries for above under standard costing.

Direct materials Direct labor Variable overhead Fixed overhead 2 feet at 0.5 hours at 0.5 hours at 0.5 hours at $5 per foot $10 per hour $2 per hour $4 per hour $10 $5 $1 $2 Standard unit cost $18

Explanation / Answer

Hi,

1. The formulae for calculating direct material and labour variances are as follows;

a. Direct Material Price Variance

(Standard Price - Actual Price) * Actual Quantity

($5 per unit - ($61,100 / 11,750 feet)) * 11,000 feet

(5 – 5.2)*11,000= -2,200 i.e. $2,200 Unfavourable

b. Direct Material Usage Variance

(Standard Quantity - Actual Quantity) * Standard Price

((6000 units * 2 feet per unit) - 11,000 units) * $5

(12,000 - 11,000)*5 = 5,000 i.e. $5,000 favourable

c. Direct Labour Rate Variance

(Standard Rate - Actual Rate) * Actual Hours

($10 – ($29,580 / 2900) * 2900 hrs

(10-10.2)*2900=-580 i.e. $580 unfavourable

d. Direct Labour Efficiency Variance

(Standard Hours - Actual Hours) * Standard Rate

(2500 – 2900) * $10

-4,000 i.e. $4,000 unfavourable

Now if 11,000 feet of direct material was purchased and used then the variances would be as follows

a. Direct Material Price Variance

(Standard Price - Actual Price) * Actual Quantity

($5 per unit - ($61,100 / 11,000 feet)) * 11,000 feet

(5 – 5.5545)*11,000= -6,100 i.e. $6,100 Unfavourable

b. Direct Material Usage Variance

(Standard Quantity - Actual Quantity) * Standard Price

((6000 units * 2 feet per unit) - 11,000 units) * $5

(12,000 - 11,000)*5 = 5,000 i.e. $5,000 favourable

If 11,750 feet of direct material was purchased and 11,000 feet used then the variances would be as shown in the first set of calculation.

Variable overhead spending and efficiency variances

(Standard overhead rate – actual overhead rate) * actual hours worked

($2 per hour – ($6,000 / 2900 hrs)) *2900hrs

(2-2.0689)*2900=-200 i.e $200 unfavourable

Variable overhead efficiency variance

(Standard hours – Actual hours) * Standard overhead rate

(0.5 hrs per unit * 6000 units – 2900 hrs) * $2

(3000-2900)*2= i.e. $200 favourable

Fixed overhead spending variance

Standard fixed overhead – Actual fixed overhead

(6000 units * $2 per unit) - $10,500

12000-10500 = 1,500 i.e. $1,500 favourable

Fixed overhead volume variance

(Standard hours – Actual hours) * Standard overhead rate

(2500 hrs – 2900 hrs) * $4

(2500-2900)*4=-1600 i.e. $1,600 unfavourable

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