XO-20 is an oil-based product used to remove rust on bolts and nuts that are stu
ID: 2578222 • Letter: X
Question
XO-20 is an oil-based product used to remove rust on bolts and nuts that are stuck. Its accounting system uses standard costs. The standards per 0.50-liter can of solution call for 0.78 liters of material and 4 hours of labor. (0.78 liters of material are needed due to evaporation in the production process.) The standard cost per liter of material is $2.70. The standard cost per hour for labor is $14.00. Overhead is applied at the rate of $16.06 per can. Expected production is 8,800 cans with fixed overhead per year of $44,528 and variable overhead of $11.00 per unit (a 0.50-liter can).
During 2018, 8,400 cans were produced; 12,000 liters of material were purchased at a cost of $56,400; 9,800 liters of material were used in production. The cost of direct labor incurred in 2018 was $370,800, based on an average actual wage rate of $12 per hour. Actual overhead for 2018 was $136,100.
Explanation / Answer
1. Material Price Variance = (Standard price - Actual Price) x Actual quantity used
Standard Price = $2.70 per liter
Actual Price = 56,400 / 12,000 = $4.70 per liter
Actual quantity used = 9,800 liters
Now, Material Price Variance = (2.70 - 4.70) x 9,800 = $19,600 (Unfavorable)
Since Actual price of raw material is more than the standard price, the material price variance is unfavorable.
2. Material Quantity Variance = (Standard quantity for actual output - Actual quantity used) x Standard price
Standard quantity for actual output = Actual output x Standard quantity of material per unit of output
= 8,400 cans x 0.78 liters per can = 6,552 liters
So, Material Quantity Variance = (6,552 - 9,800) x 2.70 = $8,770 (Unfavorable)
Since Actual quantity of raw material used is more than the standard quantity for actual output, the material quantity variance is unfavorable.
3. Labor rate variance = (Standard labor cost per hour - Actual labor cost per hour) x Actual hours worked
Actual hours worked = Cost of direct labor / Average actual wage rate = 370,800 / 12 = 30,900 hours
Now, labor rate variance = (14 - 12) x 30,900 = $61,800 (Favorable)
Since Actual labor cost per hour is less than the standard labor cost per hour, the labor rate variance is favorable.
4. Labour Efficiency Variance = (Standard labor hours for actual output - Actual labor hours) x Standard labor cost per hour
Standard labor hours for actual output = Actual output x Standard labor hours per unit of output
= 8,400 x 4 = 33,600 hours
Now, labor efficiency variance = (33,600 - 30,900) x 14 =$37,800 (Favorable)
Since Actual labor hours are less than the standard labor hours for actual output, the labor efficiency variance is favorable.
5. Controllable overhead variance = Standard overhead for actual output - Actual overhead
Standard overhead for actual output = Budgeted fixed overheads + Actual Output x Standard variable overhead per unit
= 44,528 + 8,400 x 11 = 44,528 + 92,400
= $136,928
Now, controllable overhead variance = 136,928 - 136,100 = 828 (Favorable)
Since Actual overheads are less than the standard overhead for actual output, the controllable overhead variance is favorable.
6. Overhead volume variance = Standard fixed overheads for actual output - Budgeted fixed overheads
Standard fixed overheads for actual output = Actual output x Standard fixed overhead per unit of output
Standard fixed overhead per unit of output = Budgeted fixed overheads / Budgeted output
= 44,528 / 8,800 = $5.06
=> Standard fixed overheads for actual output = 8,400 x 5.06 = 42,504
Now, Overhead volume variance = 42,504 - 44,528 = 2,024 (Unfavorable)
Since the comopany was not able to produce the cans at par with its capacity of 8,800 units (it produces only 8,400 units), the overhead volume variance is unfavorable.
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