Koontz Company manufactures a number of products. The standards relating to one

Question

Koontz Company manufactures a number of products. The standards relating to one of these products are shown below, along with actual cost data for May.

2.52

15.30

23.22

The production superintendent was pleased when he saw this report and commented: “This $0.83 excess cost is well within the 5 percent limit management has set for acceptable variances. It's obvious that there's not much to worry about with this product."

Actual production for the month was 11,000 units. Variable overhead cost is assigned to products on the basis of direct labor-hours. There were no beginning or ending inventories of materials.

Required:

1. Compute the following variances for May:

a. Materials price and quantity variances.

b. Labor rate and efficiency variances.

c. Variable overhead rate and efficiency variances.

2. How much of the $0.83 excess unit cost is traceable to each of the variances computed in (1) above.

3. How much of the $0.83 excess unit cost is traceable to apparent inefficient use of labor time?

Standard Cost per Unit Actual Cost per Unit Direct materials: Standard: 1.80 feet at $1.40 per foot $

2.52

Actual: 1.75 feet at $1.80 per foot $ 3.15 Direct labor: Standard: 0.90 hours at $17.00 per hour

15.30

Actual: 0.95 hours at $16.40 per hour 15.58 Variable overhead: Standard: 0.90 hours at $6.00 per hour 5.40 Actual: 0.95 hours at $5.60 per hour 5.32 Total cost per unit $

23.22

$ 24.05 Excess of actual cost over standard cost per unit $ 0.83

Explanation / Answer

1.a.

Material price variance = $7,700 Unfavourable

Material quantity variance = $770 favourable

Working:

b.

Labor rate variance = $6,270 favourable

Labor eficiency variance = $9,350 unfavourable

Working:

c.

Variable overhead rate variance = $2,090 unfavourable

Variable overhead eficiency variance = $2,970 unfavourable

Working:

2.

From the analysis of the above variances we get a overall unfavourable variance of $1.37 per unit.

This means the actual cost per unit exceds the standard cost per unit by $1.37 , which is above the 5% limit (5% of 23.22), and therefore needs to be investigated.

Working:

3. The excess unit cost attributable to inefficient use of labor time is $1.12, ($0.85 for labor efficiency, and $0.27 for variable overhead efficeincy).

Material Variances: Std. Qty per case (feet) 1.8 Production -- units 11000 Std. Qty for production (lbs) A 19800 Std. cost per foot ($) B $1.40 Actual Quantity used (feet) 11,000 x 1.75 C 19250 Actual cost per foot ($) D $1.80 Material Qty.Variance E $770 Favourable     (A-C) x B Material Price Variance F $7,700 Unfavourable        (B-D) x C Total Material Variances (E+F) G $6,930 Unfavourable

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