Question

PROBLEM 11-2 Compute variances, and prepare income statement. AAABest Corporation accumulates the following data relative to jobs started and finished during the month of June 2017 Costs and Production Data Actual Standard Raw materials unit cost $2.25 $2.10 Raw materials units used 10.600 10.000 Direct labor payroll $120,960 $120.000 Direct labor hours worked 14,400 15,000 Manufacturing overhead incurred $189,500 Manufacturing overhead applied $193,500 Machine hours expected to be used at normal capacity 42,500 Budgeted fixed overhead for June $55,250 Variable overhead rate per machine hour $3.00 Fixed overhead rate per machine hour $1.30 Overhead is applied on the basis of standard machine hours. Three hours of machine time are required for each direct labor hour. The jobs were sold for $400,000. Selling and administrative expenses were $40,000. Assume that the amount of raw materials purchased equaled the amount used. Instructions (a) Compute all of the variances for (1) direct materials and (2) direct labor. (b) Compute the total overhead variance.

Answer 1

Solution a:

Direct Material Cost Variance
Actual Cost					Standard cost for actual quantity					Standard Cost
AQ *	AP =				AQ *	SP =				SQ *	SP =
10600	$2.25	$23,850.00			10600	$2.10	$22,260.00			10000	$2.10	$21,000.00
			$1,590.00	Unfavorable				$1,260.00	Unfavorable
			Direct Material Price Variance					Direct Material Qty variance
Direct material price variance					$1,590.00	Unfavorable
Direct material quantity variance					$1,260.00	Unfavorable
Total direct material variance					$2,850.00	Unfavorable

Direct Labor Cost Variance
Actual Cost					Standard cost for actual quantity					Standard Cost
AH *	AR =				AH *	SR =				SH *	SR =
14400	$8.40	$120,960.00			14400	$8.00	$115,200.00			15000	$8.00	$120,000.00
			$5,760.00	Unfavorable				$4,800.00	Favorable
			Direct Labor rate Variance					Direct Labor Efficiency Variance
Direct Labor Rate variance					$5,760.00	Unfavorable
Direct Labor Efficiency variance					$4,800.00	Favorable
Total direct labor variance					$960.00	Unfavorable

Solution b:

Total overhead variance = Overhead applied - Actual overhead

= $193,500 - $189,500 = $4,000 Favorable

Answer 2