Question

Waterways Continuing Problem 12

At the end of June the manager of the B.C. manufacturing plant was provided with the following variance analysis report:

		Budget		Actual		Variance		Favourable (F)/ Unfavourable (U)
Production in units		332,000		347,000		15,000		F
Production costs:
Direct material		$996,000		$1,017,940		$(21,940)		U
Direct labour		1,411,000		1,442,700		(31,700)		U
Variable overhead costs		166,000		172,957		(6,957)		U
Fixed overhead costs		174,300		168,620		5,680		F
Total production costs		$2,747,300		$2,802,217		$(54,917)		U

The manager immediately called the production supervisor, demanding an explanation for the large unfavourable variance for the quarter. The production supervisor was puzzled. He thought the cost-cutting measures they had incorporated were beginning to work. He certainly wasn’t expecting such a large discrepancy.

The standard rates the plant was using with its normal costing system are summarized below.

		Volume			Cost
Direct material		1.50	kg per unit		$2.00	per kg
Direct labour		0.25	hour per unit		$17.00	per hour
Predetermined overhead rate:
Variable		0.25	hour per unit		$2.00	per hour
Fixed		0.25	hour per unit		$2.10	per hour

Other relevant information:

1.		A total of 528,000 kg of direct materials were purchased during the quarter at a cost of $2.05 per kilogram.
2.		A total of 508,970 kg of direct materials were used in production to manufacture 347,000 units.
3.		Payroll recorded 85,875 direct labour hours at an average cost of $16.80 per hour.

Calculate the following production variances.

Material price variance		$	Unfavourable / Neither favourable nor unfavourable / Favourable
Material quantity variance		$	Unfavourable / Favourable / Neither favourable nor unfavourable
Labour price variance		$	Unfavourable / Neither favourable nor unfavourable / Favourable
Labour efficiency variance		$	Favourable / Neither favourable nor unfavourable / Unfavourable
Variable overhead variance		$	Favourable / Neither favourable nor unfavourable / Unfavourable

Answer 1

Material price variance = (Standard Price – Actual price)*Actual quantity purchased

= (2-2.05)*528000

= $26,400 Unfavorable

Material Quantity Variance = (Standard Quantity – Actual Quantity Used)*Standard Price

= (347000*1.5 – 508,970)*2

= $23,060 Favorable

Labor price variance = (Standard Rate – Actual Rate)*Actual Hours

= (17-16.80)*85875

= $17,175 Favorable

Labor Efficiency variance = (Standard Hours – Actual Hours)*Standard Rate

= (347000*0.25 – 85875)*17

= $14,875 Favorable

Variable overhead variance = Standard Cost – Actual Cost

= 347000*0.25*2 – 172957

= $543 Favorable