Preble Company manufactures one product. Its variable manufacturing overhead is

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Preble Company manufactures one product. Its variable manufacturing overhead is applied to production based on direct labor-hours and its standard cost card per unit is as follows:

The following Information applies to the questions displayed below.] Preble Company manufactures one product. Its variable manufacturing overhead is applied to production based on direct labor-hours and its standard cost card per unlt Is as follows: Direct materlals: 6 pounds at $8 per pound Direct labor.4 hours at $17 per hour Varlable overhead: 4 hours at $4 per hour S 48 68 16 Total standard cost per unt S 132 The planning budget for March was based on producing and selling 19,000 units. However, during March the company actually produced and sold 24,000 units and Incurred the following costs: a. Purchased 160,000 pounds of raw maternals at a cost of $7.20 per pound. All of this material was used In b. Direct laborers worked 72,000 hours at a rate of $18 per hour. c. Total variable manufacturing overhead for the month was $336,960. 5. If Preble had purchased 187,000 pounds of materials at $7.20 per pound and used 160,000 pounds in production, what would be the materials price variance for March? (Indicate the effect of each variance by selecting "F for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance enals price váriance 2 6. If Preble had purchased 187,000 pounds of materials at $7.20 per pound and used 160,000 pounds in production, what would be the materials quantity variance for March? (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance.).) aterials ariance

Explanation / Answer

Solution:

1) Material Price Variance

Material Price Variance is the variance arises in the material cost due to difference in actual material purchase price from standard material price. Mathematically, it is calculated as below:

Material Price Variance = Actual Quantity (Standard Price – Actual Price)

Note --- Here actual quantity means actual quantity of material PURCHASED. If the question does not provide the information about material purchase, it is taken as equal to material consumed.

Actual quantity of raw material purchased = 187,000 Pounds

Actual price per unit = $7.20

Standard Price per unit = $8

Material Price Variance = Actual Quantity 187,000 (Standard Price 8 - Actual Price 7.2) = $149,600 Favorable

2) Material Quantity/Efficiency/Usage Variance

Material Efficiency (Usage) Variance measures variance in material cost due to usage/consumption of materials. It is calculated as below:

Material Quantity Variance = Standard Price (Standard Quantity for Actual Production – Actual Quantity USED)

Note --- Here actual quantity means actual quantity of material CONSUMED/USED

Actual Quantity Used in production = 160,000 pounds

Standard Quantity for Actual Production = Actual Produced Units 24,000 Units x 6 pounds needed per unit = 144,000 Pounds

Material Quantity Variance = Standard Price $8 (Standard Quantity for Actual Production 144,000 – Actual Quantity USED 160,000)

= $128,000 Unfavorable

3) Labor Rate/Price Variance

Labor Price Variance – It arises due to difference in actual rate paid from standard rate. It is calculated as below:

Labor Price Variance = Actual Time (Standard Rate per hour – Actual Rate per hour)

Here, actual time means time for which wage has been paid.

Actual Rate per hour = $18

Actual Hours worked = 72,000 hours

Standard Rate = $17 per hour

Labor Rate Variance = Actual Time 72,000 (Standard Rate per hour $17 – Actual Rate per hour $18)

= $72,000 Unfavorable

4) Labor Efficiency / Usage Variance

Labor Efficiency Variance – It arises due to variation in the working hours from the set standard.

Standard Hours for Actual Production = Actual Produced Units 24,000 Units x 4 hours needed per unit = 96,000 Hours

Labor Efficiency Variance = Standard Rate $17 (Std. hours for actual production 96,000 – Actual Hours 72,000)

= $408,000 Favorable

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