Determining Unit Costs, Variance Analysis, and Interpretation Happy Dog Company,

Question

Determining Unit Costs, Variance Analysis, and Interpretation

Happy Dog Company, a manufacturer of dog food, produces its product in 1,000-bag batches. The

standard cost of each batch consists of 8,000 pounds of direct materials at $0.60 per pound, 48 direct

labor hours at $13.25 per hour, and variable overhead cost (based on machine hours) at the rate of

$15 per hour with 16 machine hours per batch. The following variable costs were incurred for the last

1,000-bag batch produced:

Direct materials  . . . . . . . . . . . . . . . . 8,300 pounds costing $4,731 were purchased and used

Direct labor. . . . . . . . . . . . . . . . . . . . 45 hours costing $675

Variable overhead. . . . . . . . . . . . . . . $338

Machine hours used. . . . . . . . . . . . . 18 hours

Required

a. Determine the actual and standard variable costs per bag of dog food produced, separated into

direct materials, direct labor, and variable overhead.

b. For the last 1,000-bag batch, determine the standard cost variances for direct materials, direct

labor, and variable overhead.

c. Explain the possible causes for each of the variances determined in requirement (b)

Explanation / Answer

Solution:

a) Actual and Standard Variable Cost per bag

Actual Variable Cost per bag

Total Cost

Direct materials

$4,731

Direct labor

$675

Variable Overhead

$338

Total Variable Cost (a)

$5,744

Number of Bags Produced (b)

1,000 bag

Actual Variable Cost per Bag (a/b)

$5.744

Standard Variable Cost per bag

Total Cost

Direct materials (8000*0.60)

$4,800

Direct labor (48*13.25)

$636

Variable Overhead (16*15)

$240

Total Variable Cost (a)

$5,676

Production Bags (b)

1,000 bag

Standard Variable Cost per Bag (a/b)

$5.676

b)

Direct Material Cost Variance = (Standard Quantity x Standard Rate) – (Actual Quantity x Actual Rate)

= (8000*$0.60) - $4,731

= $69 favorable

Direct labor cost variance = (Std Hours x Std Rate per hour) – (Actual Hours x Actual Rate)

= (48*13.25) - $675

= 636 – 675

= $39 Unfavorable

Variable Overhead Cost variance = Standard Cost – Actual Cost = 240 – 338 = $98 Unfavorable

Total Cost

Direct materials

$4,731

Direct labor

$675

Variable Overhead

$338

Total Variable Cost (a)

$5,744

Number of Bags Produced (b)

1,000 bag

Actual Variable Cost per Bag (a/b)

$5.744

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