Wonderful! Not only did our salespeople do a good job in meeting the sales budge

Question

Wonderful! Not only did our salespeople do a good job in meeting the sales budget this year, but our production people did a good job in controlling costs as well,” said Kim Clark, president of Martell Company. “Our $12,750 overall manufacturing cost variance is only 2% of the $1,536,000 standard cost of products made during the year. That’s well within the 3% parameter set by management for acceptable variances. It looks like everyone will be in line for a bonus this year.”     The company produces and sells a single product. The standard cost card for the product follows: Standard Cost Card—per Unit   Direct materials, 2.50 feet at $3.30 per foot $ 8.25   Direct labor, 2.3 direct labor-hours at $10 per direct labor-hour 23.00   Variable overhead, 2.3 direct labor-hours at $3.00 per direct labor-hour 6.90   Fixed overhead, 2.3 direct labor-hours at $5.00 per direct labor-hour 11.50   Standard cost per unit $ 49.65 The following additional information is available for the year just completed: a. The company manufactured 25,000 units of product during the year. b. A total of 60,000 feet of material was purchased during the year at a cost of $3.70 per foot. All of this material was used to manufacture the 25,000 units. There were no beginning or ending inventories for the year. c. The company worked 60,000 direct labor-hours during the year at a direct labor cost of $9.60 per hour. d. Overhead is applied to products on the basis of standard direct labor-hours. Data relating to manufacturing overhead costs follow:   Denominator activity level (direct labor-hours) 55,000   Budgeted fixed overhead costs $ 275,000   Actual variable overhead costs incurred $ 186,000   Actual fixed overhead costs incurred $ 270,000 1. Compute the materials price and quantity variances for the year. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).) Compute the labor rate and efficiency variances for the year. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and Compute the labor rate and efficiency variances for the year. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).) 3. For manufacturing overhead compute: a. The variable overhead rate and efficiency variances for the year. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).) b. The fixed overhead budget and volume variances for the year. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

Explanation / Answer

1. Direct materials price and quantity variances:

Materials price variance = AQ (AP – SP)

= 60,000($3.70- $3.30)

=$24,000 U

Materials quantity variance = SP (AQ – SQ)

= $3.30(60,000 – 62,500*)

=$8,250 F

* 25,000 units x 2.50 feet per unit = 62,500 feet

2.

Direct labor rate and efficiency variances:

Labor rate variance = AH (AR – SR)

= 60,000($9.60 - $10.00)

=$24,000 F

Labor efficiency variance = SP (AQ – SQ)

= $10.00(60,000 – 57,500*)

=$25,000 U

* 25,000 units x 2.3 DLHs per unit

= 57,500 DLHs

3.

a)Variable overhead spending and efficiency variances:

Variable overhead spending variance = (AH x AR) – (AH x SR)

= (186,000) – (60,000 x 3.00)

= $ 6000 U

Variable overhead efficiency variance = SR(AH - SH)

= 3.00 x (60,000 -57,500)

= $ 7,500 U

B. Fixed overhead budget and volume variances:

Fixed overhead Budget variance = Actual fixed overhead cost – Budgeted fixed overhead cost

= $270,000 – $275,000

= $ 5,000 F

Volume variance = Fixed portion of the predetermined overhear rate x (Denominator –Standard hours allowed)

= $5.00 x (55,000 -57,500)

= $ 12,500 F

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