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.

The production superintendent was pleased when he saw this report and commented: “This $0.13 excess cost is well within the 1 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 10,000 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. (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. Labor rate and efficiency variances. (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).)

c. Variable overhead rate and efficiency variances. (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).)

2. How much of the $0.13 excess unit cost is traceable to each of the variances computed in (1) above. (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). Round your answers to 2 decimal places.)

3. How much of the $0.13 excess unit cost is traceable to apparent inefficient use of labor time? (Input all values as positive amounts. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Do not round intermediate calculations. Round your final answers to 2 decimal places.)

Standard Cost per Unit Actual Cost per Unit Direct materials: Standard: 1.80 feet at $2.40 per foot $ 4.32 Actual: 1.75 feet at $2.60 per foot $ 4.55 Direct labor: Standard: 0.90 hours at $14.00 per hour 12.60 Actual: 0.95 hours at $13.40 per hour 12.73 Variable overhead: Standard: 0.90 hours at $3.00 per hour 2.70 Actual: 0.95 hours at $2.60 per hour 2.47 Total cost per unit $ 19.62 $ 19.75 Excess of actual cost over standard cost per unit $ 0.13

Explanation / Answer

1. a. Materials price and quantity variances

Material Price Variance = (Standard Price per unit - Actual price per unit) x Actual raw material used

......................................= ($2.40 - $2.60) x (1.75 x 10,000)

......................................= $0.20 x 17,500

......................................= $3500 Unfavorable

Material Usage Variance = (Standard Usage - Actual Usage) x Standard Price per unit

........................................= ((1.80 x 10,000) - (1.75 x 10,000)) x $2.40

........................................= (18,000 - 17,500) x $2.40

........................................= $1200 Favorable

1 b. Labor Rate and efficiency variance

Labor Rate Variance = (Standard Rate per hour - Actual Rate per hour) x Actual hours worked

..................................= ($14 - $13.40) x (0.95 x 10,000)

..................................= ($0.60 x 9,500)

..................................= $5700 Favorable

Labor Efficiency Variance = (Standard hours - Actual hours) x Standard Rate per hour

..........................................= ((0.90 x 10,000) - (0.95 x 10,000)) x $14

..........................................= $7,000 Unfavorable

1 c. Variable overhead rate and efficiency variance

Variable overhead rate variance = (Standard Rate per hour - Actual Rate per hour) x Actual hours worked

....................................................= ($3 - $2.60) x 9,500 hour

....................................................= $3,800 Favorable

Variable overhead efficiency variance = (Standard hours - Actual hours) x Standard Rate per hour

.............................................................= (9,000 hour - 9,500 hour) x $3

.............................................................= $1,500 Unfavorable

2. How much of the $0.13 excess unit cost is traceable to each of the variances computed in (1) above.

3. How much of the $0.13 excess unit cost is traceable to apparent inefficient use of labor time?

$0.70 per unit is unfavorable and is traceable to apparent inefficient use of labor time.

Particulars Amount Traceable Material Price Variance ($3,500 / 10,000) $0.35 U Material Usage Variance ($1,200 / 10,000) $0.12 F Labor Rate Variance ($5,700 / 10,000) $0.57 F Labor Efficiency Variance ($7,000 / 10,000) $0.70 U Variable overhead rate variance ($3,800 / 10,000) $0.38 F Variable overhead efficiency variance ($1,500 / 10,000) $0.15 U Total Variance $0.13 U

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