Question

P 9-A Variance Analysis (In Class) Pear Company is a manufacturing firm that specializes in the production of a single product. Overhead is applied based on direct labor hours. Standard Cost Card (budget for one unit) The standard cost card shows the manager what the final manufactured cost should be for the company's product. Standard Standard Quantity Price Standard or Hours or Rate Cost Direct Materials 3.5 feet х $ 6 $ 21 Direct labor 2.0 hours х 18 36 Variable overhead 2.0 hours X 4 8 Total standard cost per suit $ 65 5,000 $108,000 Variance Analysis - A variance is the difference between standard price and quantities, and actual prices and quantities. The following actual production data is available: Number of products completed Cost of materials purchased (20,000 feet @ $5.40) Feet of material used 20,000 Cost of direct labor (10,500 hours @ $20) $210,000 Cost of variable overhead 40,950 Compute the following: Material price variance Material quantity variance Labor rate variance Labor efficiency variance Variable overhead rate variance

Can you please explain why it favorable and unfavorable. thank you.

Answer 1

Material price variance =(standard cost per unit - actual cost per unit )*actual quantity purchased

( $6 - $5.40)* 20000= F $12000

The actual price is lower than the estimated standard price hence there is a reduction in cost and therefore it is profitable.

Material Quantity Variance = (standard quantity - actual quantity) * standard price

= ( $17500 -$ 20000)*$6 = A $15000

The actual quantity of material used for the production is more than the standard for the same level of production and hence it is adverse in nature.

Labour rate variance = (standard rate per hr- actual rate per hour ) * actual hours

( 18 - 20)* 10500 = A 21,000

The actual labour rate charged by the labour is higher than the standard rate set,it increases the labour cost per hour and hence it is adverse in nature.

Labour effeciency variance =(standard hours allowed - actual hours worked)*standard rate

= ( 10000-10500)* 18 = A 9000

There is reduction in the efficiency of labourers in comparison to the standard set the labours are taking 500 hours more to complete the job and hence it is unfavourable/adverse.

Variable overheads rate variance = (standard rate per hour - actual rate per hour )* actual hours

( $4 - $ 3.9)* 10500=F 1050

The actual standard rate per hour is less that the standard set and hence there is a reduction in cost and it is favourable