Question

Question 1: CNC Company's Budget and actual costs per unit are provided below for the most recent period. During this period, 600 units were actually produced. Product Product Standard Cost Actual Cost Materials Metres Unit Price Per Metre Standard 5 $2.00 $10.00 Actual 5.2 $2.20 $11.44 Direct labour Hours Hourly Rate Standard 3 $5.00 $15.00 Actual 3.2 $5.50 $17.60 Variable overhead Hours Hourly Rate Standard 4 $3.00 $12.00 Actual 4.2 $3.10 $13.02 Total unit cost $37.00 $42.06 Required: Given the information above, compute the following variances. Also indicate if the variances are favorable or unfavorable 1. Materials price variance - 2. Materials quantity variance 3. Direct labour rate variance 4. Direct labour efficiency variance 5. Variable overhead rate variance 6. Variable overhead efficiency variance 7. Please give some managerial suggestions based on your calculation.

Answer 1

1 Material price Variance 2 Material quantity Variance 3 Labor rate variance 4 Labor efficiency variance 5 Variable overhead rate variance 6 Variable overhead efficiency variance $624 Unfavorable $240 Unfavorable $960 Unfavorable $600 Unfavorable $252 Unfavorable $360 Unfavorable 1 All the variances calculated are unfavourable. The actual cost is higher than the standard allowed for actual output Management should investigate the variances and analyse the reasons for unfavourable variance Actions should be taken based on investigation to make the variances favorable The respective department should be held accountable for the variances. For example. Material purchase is purchase department Material usage is production department The department should not be allowed to exceed the standard cost allowed for price or the usage Cost management is one of the important area to be managed in the firm by all the department to achieve cost competitiveness Working notes: Direct material variance: Direct Material Price Variance = (Standard Rate - Actual Rate) * Actual Quantity Direct Material Quantity Variance = (Standard Quantity for Actual production - Actual Quantity) * Standard Rate Actual material cost purchased х Actual Quantity 3,120 (600*5.2) Actual Price $2.20 $6,864 Projected Material cost for actual output Actual Standard Quantity X Price 3,120 $2.00 $6,240 Standard material cost for actual output Standard Standard Quantity х Price 3,000 $2.00 (600*5) $6,000 Direct Material price variance Direct Material Quantity variance $624 Unfavourable $240 Unfavorable Total Direct Material cost Variance $864 Unfavorable Direct labor variance: Direct Labor Rate Variance = (Standard Rate - Actual Rate) * Actual hours Direct Labor Efficiency Variance = (Standard hours for Actual production - Actual hours) * Standard Rate Actual Labor cost X Actual Hours 1,920 (600*3.2) Actual Rate $5.50 $10,560 Projected Labor cost Standard Actual Hours X Rate 1,920 $5.00 $9,600 Standard labor cost Standard hours X 1,800 (600*3) Standard Rate $5.00 $9,000 Direct Labor Efficiency Variance Direct Labor Rate Variance $960 Unfavorable $6001 Unfavorable Total Direct Labor Cost variance $1,560 Unfavorable Variable Overhead variance Variable Overhead Rate Variance = (Standard Rate - Actual Rate) * Actual hours Variable Overhead Efficiency Variance = (Standard hours for Actual production - Actual hours) * Standard Rate Actual rate Actual labor hours 2,520 (600*4.2) X Actual labor hours 2,520 х Actual Rate $3.10 $7,812 Standard cost Standard Standard labor Rate hours $3.00 2,400 $7,560 (600*4) х Standard Rate $3.00 $7,200 Variable OH Rate Variance $252 Unfavourable Variable Overhead Efficiency $360 Variance Unfavourable Total Variable Overhead variance $612 Unfavourable