Question

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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 112,000 liters at a budgeted price of $165 per liter this year. The standard direct cost sheet for one liter of the preservative follows. Direct materials Direct labor $20 (2 pounds @ $10) (0.5 hours @ $36) Variable overhead is applied based on direct labor hours. The variable overhead rate is $80 per direct labor hour. The fixed overhead rate (at the master budget level of activity) is $40 per unit. All non-manufacturing costs are fixed and are budgeted at $1.8 million for the coming year. At the end of the year, the costs analyst reported that the sales activity variance for the year was $522.000 unfavorable. The following is the actual income statement in thousands of dollars) for the year. $11.738 1,98 1.910 Sales revenue Less variable costs. Direct materials Direct labor Variable overhead Total variable costs Contribution margin Less fixed costs Fixed manufacturing overhead

Answer 1

For Material and Labor

Standard								Actual
		Qty	Rate	Amount					Qty	Rate	Amount
Material	112,000 X 2	224,000	10.00	2,240,000				Material	188,000	10.362	1,948,000
Labour	112,000 X 0.5	56,000	36	2,016,000				Labour	46,400	41.16	1,910,000
				4,256,000							3,858,000

Here are the calculations

Efficiency variance = (Actual Qty - Standard Qty) X Standard Rate
Rate variance = (Actual Rate - Standard Rate) X Actual Qty

Material
Efficiency variance = (188,000 - 224,000) X 10 = (360,000) Favorable
Rate variance = (10.362 - 10) X 188,000 = 68,000 Unfavorable

Labor
Efficiency variance = (46,400 - 56,000) X 36 = (345,600) Favorable
Rate variance = (41.16 - 36) X 46,400 = 239,600 Unfavorable

Variable Overhead
Efficiency variance = (46,400 - 56,000) X 80 = (768,000) Favorable
Rate variance = (86.85 - 80) X 46,400 = 318,000 Unfavorable