Question

Problem 10-13 (Algo) Basic Variance Analysis; the Impact of Variances on Unit Costs [LO10-1, LO10-2, LO10-3] 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. Standard Cost per Unit Actual Cost per Unit $ 3.24 $ 3.85 17.10 Direct materials: Standard: 1.80 feet at $1.80 per foot Actual: 1.75 feet at $2.20 per foot Direct labor: Standard: 0.90 hours at $19.00 per hour Actual: 0.95 hours at $18.40 per hour Variable overhead: Standard: 0.90 hours at $6.40 per hour Actual: 0.95 hours at $6.00 per hour Total cost per unit Excess of actual cost over standard cost per unit 17.48 5.76 5.70 $ 27.03 $26.10 $0.93 The production superintendent was pleased when he saw this report and commented: "This $0.93 excess cost is well within the 5 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 12,000 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. b. Labor rate and efficiency variances. c. Variable overhead rate and efficiency variances. 2. How much of the $0.93 excess unit cost is traceable to each of the variances computed in (1) above. 3. How much of the $0.93 excess unit cost is traceable to apparent inefficient use of labor time?

Answer 1

1.

Material price variance = Actual quantity * standard price - Actual quantity * Actual price

Material price variance = 12,000*1.75*$1.80 - 12,000*1.75*$2.20 = $8,400 Unfavorable

Material quantity variance = Standard quantity*Standard price - Actual quantity * standard price

Material quantity variance = 12,000*1.80*$1.80 - 12,000*1.75*$1.80 = $1,080 Favorable

Labor rate variance = Actual hours * standard rate - Actual hours * Actual rate

Labor rate variance = 12,000*0.95*$19 - 12,000*0.95*$18.40 = $6,840 Favorable

Labor efficiency variance = Standard hours*Standard rate - Actual hours * standard rate

Labor efficiency variance = 12,000*0.90*$19 - 12,000*0.95*$19 = $11,400 Unfavorable

Variable overhead rate variance = Actual hours * standard rate - Actual hours * Actual rate

Variable overhead rate variance = 12,000*0.95*$6.40 - 12,000*0.95*$6 = $4,560 Favorable

Variable overhead efficiency variance = Standard hours*Standard rate - Actual hours * standard rate

Variable overhead efficiency variance = 12,000*0.90*$6.40 - 12,000*0.95*$6.40 = $3,840 Unfavorable

2.

Materials:
Price variance (8,400/12,000)	$0.7	U
Quantity variance (1,080/12,000)	0.09	F	$0.61	U
Labor:
Rate variance (6,840/12,000)	0.57	F
Efficiency variance (11,400/12,000)	0.95	U	0.38	U
Variable overhead:
Rate variance (4,560/12,000)	0.38	F
Efficiency variance (3,840/12,000)	0.32	U	0.06	F
Excess of actual over standard cost per unit			$0.93	U

3.

Excess of actual over standard cost per unit			$0.93	U
Less: Portion attributable to labor inefficiency
Labor efficiency variance	$0.95	U
Variable overhead efficiency variance	0.32	U	1.27	U
Portion due to other variances			0.34	F