Question

Rain Gear, Inc., produces rain jackets. The master budget shows the following standards information and indicates the company expected to produce and sell 28,000 units for the year. Variable manufacturing overhead is allocated based on direct labor hours.

Direct materials	4 yards per unit at $3 per yard
Direct labor	2 hours per unit at $10 per hour
Variable mfg OH	2 direct labor hours per unit at $4 per hour

Rain Gear actually produced and sold 30,000 units for the year. During the year, the company purchased and used 130,000 yards of material for $429,000. A total of 65,000 labor hours were worked during the year at a cost of $637,000. Variable overhead costs totaled $231,000 for the year.

1. Provide a flexible budget of production costs for the year

2. Calculate the materials price variance and materials quantity variance. Enter your calculations into the table below to present your findings:

	Actual	Flexible budget	Budget Variance	Price Variance	Quantity Variance

3. Calculate the labor rate variance and labor efficiency variance. Enter your calculations into the table below to present your findings:

	Actual	Flexible budget	Budget Variance	Rate Variance	Efficiency Variance
DL

4. Calculate the variable overhead spending variance and variable overhead efficiency variance. Enter your calculations into the table below to present your findings:

	Actual	Flexible budget	Budget Variance	Spend Variance	Efficiency Variance
VOH

5. Company policy is to investigate all variances greater than 10 percent of the flexible budget amount for each of the three variable production costs: direct materials, direct labor, and variable overhead. Identify which of the six variances calculated in requirements b through e should be investigated.

6. Provide two possible explanations for each variance identified in requirement e.

Answer 1

Requirement (a) Costs Direct Materials Direct Labor Master Budget Flexible Budget (Units 28000) (Units 30000) $ 3,36,000$ 3,60,000 (4*28000*3) (4*30000*3) $ 5,60,000 $ 6,00,000 (2*28000*10) (2*30000*10) $ 2,24,000 $ 2,40,000 | (2*28000*4) (2*30000*4) $ 11,20,000 $ 12,00,000 Variable Mfg OH Total costs Requirement (b) Material Variances Actual Price Variance Flexible Budget 360000 Budget Variance 24,000 A Quantity Variance 30,000 A 429000 39,000 A Budget Variance = Master Budget - Flexible Budget = (336000-360000) = 24,000 A Price Variance = Actual quantity*Std.price - Actual cost = (130000*3)-429000 = 39,000 A Quantity Variance = Flexible Budget - Actual quantity*Std.price = 360000-(130000*3) = 30,000 A Requirement (c) Labor Variances Actual Flexible Budget Rate Variance Budget Variance 40,000 A Efficiency Variance 50,000 A 637000 600000 13,000 F Budget Variance = Master Budget - Flexible Budget = (560000-600000) = 40,000 A Rate Variance = Actual hours *Std.price - Actual cost = (65000*10)-637000 = 13,000 F Efficency Variance = Flexible Budget - Actual hours*Std.price = 600000-(65000*10) = 50,000 A

Requirement (d) Variable OH Variance Actual Flexible Budget Budget Variance 16,000 A Spend Variance 29,000 F Efficiency Variance 20,000 A 231000 240000 L Budget Variance = Master Budget - Flexible Budget = (224000-240000) = 16,000 A Spend Variance = Actual hours*Std.price - Actual cost = (65000*4)-231000 = 29,000 F Efficency Variance = Flexible Budget - Actual hours* Std.price = 240000-(65000*4) = 20,000 A Requirement (e) Variance Amount Flexible Budget Material Price Material Quantity Labor Rate Labor Efficency Variable OH Rate Variable OH Efficency 39,000 30,000 13,000 50,000 29,000 20,000 $ $ $ $ $ $ 3,60,000 3,60,000 6,00,000 6,00,000 2,40,000 2,40,000 % of Flexible Budget 10.83% 8.33% 2.17% 8.33% 12.08% 8.33% $ Material Price Variance and Variable OH Rate Variance is required to be investigated.