Question

Page Break 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 Standard Cost Product Actual Cost $10.00 Metres 5 5.2 Hours 3 $11.44 Materials Standard Actual Direct labour Standard Actual Variable overhead Standard Actual Total unit cost Unit Price Per Metre $2.00 $2.20 Hourly Rate $5.00 $5.50 $15.00 3.2 $17.60 Hours Hourly Rate 4 $12.00 $3.00 $3.10 4.2 $13.02 $42.06 $37.00 Required: I Given the information above, compute the following variances. Also indicate if the variances are favorable or unfavorable. 1. Materials price variance

Answer 1

Solution :

(1) Material Price Variance = (SR - AR) * Actual Quantity

= ($ 2.00 - $ 2.20) * (600 * 5.20)

= ($ 2.00 - $ 2.20) * 3,120

= $ 624 Unfavorable.

(2) Material Quantity Variance = (SQ - AQ) * SR

= [(600 * 5) - (600 * 5.2)] * $ 2.0

= [3,000 - 3,120] * $ 2.0

= $ 240 Unfavorable.

(3) Direct Labor Rate Variance = (SR - AR) * AH

= ($ 5.0 - $ 5.50) * (600 * 3.20)

= ($ 5.0 - $ 5.50) * (1,920)

= $ 960 Unfavorable

(4) Direct Labor Efficiency Variance = (SH - AH) * SR

= [(600 * 3.0) - (600 * 3.2) ] * $ 5

= [1,800 - 1,920] * $ 5

= $ 600 Unfavorable.

(5) Variable OH Rate Variance = (SR - AR) * AH

= ($ 3.0 - $ 3.10) * (600 * 4.20)

= ($ 3.0 - $ 3.10) * (2,520)

= $ 252 Unfavorable

(6) Variable OH Efficiency Variance = (SH - AH) * SR

= [(600 * 4.0) - (600 * 4.2) ] * $ 3

= [2,400 - 2,520] * $ 3

= $ 360 Unfavorable

(7) Since all the Variances are Unfavorable, Management must first identy if there is any error while setting the standarad. If Standard set are correct Management must identify the reason of variances, Material Price Variance is can be because of Higher Quality of Raw Material purchaed. Material Quantity Variance can be because of not using the matreial properly in process. Managemeent should also check why the labor has been paid more and also check check the labor idle time. Also check the why variable OH per hour has been incurred more and excess time taken more in Variable OH.  After checking the reaon, if managment finds there is permanent change in costing managment must change the standard. However if the change is not permanent management must improve the overall process.

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