Question

Variance Analysis P 9 - B Asparagus Company manufactures a product known as Stinkweed. 4 Budget Actual Difference Net Income $12,000 $36,900 $24,900 F = sum of six variances Standard Cost Card (budget for one unit) Standard Standard Quantity Price Standard or Hours or Rate Cost Direct Materials 3.0 pounds х $ 8 $ 24.00 Direct labor 2.0 labor hours х 18 36.00 Variable overhead 0.5 machine hours X 2.00 Total standard cost per unit $ 62.00 The following actual data resulted in the production of 20,000 units: a) Materials purchased 62,000 pounds at a cost of $8.10 per pound. b) Used 59,000 pounds of materials in production. c) Worked 41,000 direct labor hours at a cost of $17.00 per hour d) Variable manufacturing overhead costs, during the month, totaled $39,900. A total of 9,500 machine hours were recorded. Compute the following: Material price variance Labor rate variance Variable overhead rate variance Material quantity variance Labor efficiency variance Variable overhead efficiency variance

Answer 1

Given, Particulars Net income Budgeted $ 12,000 Actual $36,900 Let, Adverse variance is shown as 'A' and Favourable variance is shown as 'F' I. Computation of Variances: = a. Material Price Variance (Standard price - Actual Price) * Actual Quantity purchased (note:1) ($ 8.00 - $ 8.10) * 62,000 (- $ 0.10) * 62,000 Material Price Variance = $6,200 A Note:1 The purchasing manager is responsible for rate variance in all the purchases he made, so actual quantity of purchases should be considered while computing the Rate variance b. Material Quantity Variance = (Standard Quantity - Actual Quantity consumed (note:2)) * Standard price (60,000 (WN:1) - 59,000) * $ 8.00 = 1000 * $ 8.00 Material Quantity Variance = $8,000 F Note:2 The production manager is responsible for quantity variance to the extent only for the material used in the production, so material used in the prodution should be considered while computing the Quantity variance c. Labour rate variance (Standard Rate - Actual Rate) * Actual hours ($ 18 - $ 17) * 41,000 = $1* 41,000 Labour rate variance $ 41,000 F = d. Labour efficiency variance (Standard Hours - Actual Hours) * Standard Rate (40,000 (WN:1) - 41,000) * $ 18 1000 * $ 18 $ 18,000 A Labour efficiency variance = e. Variable overhead rate variance (Standard Rate - Actual Rate) * Actual hours ($ 4.00 - $ 4.2 (WN:2)) * 9,500 = (- $ 0.2) * 9500 = $1,900 A 4. Variable overhead efficiency variance = (Standard Hours - Actual Hours) * Standard Rate (10,000 (WN:1) - 9,500) * $ 4.00 500 * $ 4.00 $ 2,000 F Variable overhead efficiency variance =

II. Reconciliation statement Budgeted profit to Actual profit (Absorption costing): Amount ($) Amount ($) 12,000 (6,200) 8,000 1,800 Particulars I. Budgeted profit II. Effect of variances: a. Material Cost Variance Material Price variance Material Quantity variance b. Labour Cost Variance Labour Rate variance Labour Efficiency variance c. Variable Overhead Cost Variance Variable overhead Rate variance Variable overhead Efficiency variance Actual Profit (I + II) 41,000 (18,000) 23,000 (1,900) 2,000 100 36,900 WN.1: Computation of Standard quantity for Actual output (i.e. 20,000 units) Particulars Standard Quantity or Hours Standard Quantity or for one unit Hours for 20,000 units (1) (2) = (1) * 20,000 3.0 pounds 60,000 pounds 2.0 labour hours 40,000 labour hours 0.5 machine hours 10,000 machine hours Direct material Direct Labour Variable Overhead WN.2: Computation of Actual machine rate per hour: Actual variable Variable overhead per machine hour Actual Variable over head Actual Machine hours $ 39,900 9500 machine hours Actual variable Variable overhead per machine hour $ 4.20 per machine hour