Question

Exercise 16-36 (Static) Variable Cost Variances (LO 16-5)

Paynesville Corporation manufactures and sells a preservative used in food and drug manufacturing. The company carries no inventories. The master budget calls for the company to manufacture and sell 100,000 liters at a budgeted price of $75 per liter this year. The standard direct cost sheet for one liter of the preservative follows.

Direct materials	(2 pounds @ $4)	$	8
Direct labor	(0.5 hours @ $24)		12

Variable overhead is applied based on direct labor hours. The variable overhead rate is $20 per direct-labor hour. The fixed overhead rate (at the master budget level of activity) is $10 per unit. All non-manufacturing costs are fixed and are budgeted at $1.2 million for the coming year.
At the end of the year, the costs analyst reported that the sales activity variance for the year was $270,000 unfavorable.

The following is the actual income statement (in thousands of dollars) for the year.

Sales revenue	$	7,238
Less variable costs
Direct materials		748
Direct labor		1,010
Variable overhead		930
Total variable costs	$	2,688
Contribution margin	$	4,550
Less fixed costs
Fixed manufacturing overhead		1,050
Non-manufacturing costs		1,230
Total fixed costs	$	2,280
Operating profit	$	2,270

  During the year, the company purchased 176,000 pounds of material and employed 40,400 hours of direct labor.

Required;

a) Compute the direct material price and efficiency variances

b) Compute the direct labor price and efficiency variances

c) Compute the variable overhead price and efficiency variances

Answer 1

Solution:

Budgeted contribution margin per unit = Selling price - Variable cost per unit

= $75 - ($8 + $12 + $10) = $45 per unit

Actual units sold = Budgeted sales units - Unfavorable sales activity variance / Budgeted contribution margin per unit =  100000 - ($270,000 / $45) = 94000 liters

Direct Material Cost Variance
Actual Cost					Standard cost for actual quantity					Standard Cost
AQ *	AP =				AQ *	SP =				SQ *	SP =
176000	$4.25	$7,48,000.00			176000	$4.00	$7,04,000.00			188000	$4.00	$7,52,000.00
			$44,000.00	Unfavorable				$48,000.00	Favorable
			Direct Material Price Variance					Direct Material Qty variance
Direct material price variance					$44,000.00	Unfavorable
Direct material quantity variance					$48,000.00	Favorable
Total direct material variance					$4,000.00	Favorable
Direct Labor Cost Variance
Actual Cost					Standard cost for actual quantity					Standard Cost
AH *	AR =				AH *	SR =				SH *	SR =
40400	$25.00	$10,10,000.00			40400	$24.00	$9,69,600.00			47000	$24.00	$11,28,000.00
			$40,400.00	Unfavorable				$1,58,400.00	Favorable
			Direct Labor rate Variance					Direct Labor Efficiency Variance
Direct Labor Rate variance					$40,400.00	Unfavorable
Direct Labor Efficiency variance					$1,58,400.00	Favorable
Total direct labor variance					$1,18,000.00	Favorable

Variable Overhead Cost Variance
Actual Cost					Standard cost for actual quantity					Standard Cost
AH *	AR =				AH *	SR =				SH *	SR =
40400	$23.02	$9,30,000.00			40400	$20.00	$8,08,000.00			47000	$20.00	$9,40,000.00
			$1,22,000.00	Unfavorable				$1,32,000.00	Favorable
			Variable overhead spending variance					Variable overhead efficiency variance
Variable overhead Spending variance					$1,22,000.00	Unfavorable
Variable overhead efficiency variance					$1,32,000.00	Favorable
Variable overhad cost variance					$10,000.00	Favorable