Question

3. (25 marks)
The following is the standard cost card for Xerox Company's only product:

Direct materials, 4 metres at $4.00 $16.00
Direct labour, 5 hours at $10.00 $15.00
Variable overhead, 1.5 hours at $3.00 $4.50
Fixed overhead, 1.5 hours at $7.00 $10.50
Standard cost per unit $46.00

The company manufactured and sold 18,000 units of product during the year. A total of 70,200 metres of material was purchased during the year at cost of $4.20 per metre. All of this material was used to manufacture the 18,000 units. The company records showed no beginning or ending inventories for the year.

The company worked 29,250 direct labour hours during the year at a cost of $9.75 per hour. Overhead cost is applied to products on the basis of direct labour hours. The denominator activity level (direct labour hours) was 22,500 hours. Budgeted fixed overhead costs as shown on the flexible budget were $157,500, while actual fixed overhead costs were $156,000. Actual variable overhead costs were $90,000.

Required:

a) Compute the direct materials price and quantity variances for the year.
b) Compute the direct labour rate and efficiency variances for the year.
c) Compute the variable overhead spending and efficiency variances for the year

Answer 1

Solution-

a) Direct materials price variance = Actual quantity * (Actual price -Standard price)

   = 70200 * ($4.20 - $4.00)

   = $14040 (unfavourable)

Direct materials quantity variance = Standard price * (Actual quantity-Standard quantity)

= $4.00 * (70200 - 72000)

= $7200 (favourable)

Note- Standard quantity = 18000 units * 4 metres per unit = 72000 metres

b) Direct labour rate variance = Actual hours * (Actual rate - Standard rate)

= 29250 * ($9.75 - $10.00)

= $7312.5 (favourable)

Direct labour efficiency variance = Standard rate * (Actual hours - Standard hours)

= $10.00 * (29250 - 27000)

= $22500 (unfavourable)

Note- Standard hours = 18000 units * 1.5 hours per unit = 27000 hours

c) Computation of spending variance -

Actual variable Overhead Cost	$90000
Actual hours * Standard rate [29250 * $3.00]	$87750
Spending Variance	$2250 (unfavourable)

Computation of efficiency variance -

Actual hours * Standard rate [29250 * $3.00]	$87750
Standard hours * Standard rate [27000 * $3.00]	$81000
Efficiency Variance	$6750 (unfavourable)