Question

ABC Corporation manufactures lamps. It has set up the following standards per finished unit for direct materials and direct manufacturing labor:

Direct materials: 2 lb. at $7.50 per lb.	$15.00
Direct manufacturing labor: 0.3 hour at $90 per hour	$27.00

The number of finished units budgeted for January 2017 was 20,000; 15000 units were actually produced.

Actual results in January 2017 were as follows:

Direct materials used: 2.2 lb. x 15,000 = 33,000 lbs @ $7.00 / lb.
Direct manufacturing labor: 0.32 hrs x 15,000 = 4,800 hrs @ $95 / hr

Assume that there was no beginning inventory of either direct materials or finished units.

The following data are for January 2017:

	Budgeted	Actual
Number of Lamp sold	20,000 units	15,000
Selling price / unit	$80	$85
Variable cost per unit
Direct material	(2 lbs x $7.50 = $15)	(2.2 lbs x $7 = $15.40)
Direct labor	(0.3 hrs x $90 = $27)	(0.32 hrs x $95 = $30.40)
Fixed cost	$240,000	$240,000

During the month, materials purchased amounted to 40,000 lb. @ $7.00, at a total cost of $280,000. Input price variances are isolated upon purchase. Input-efficiency variances are isolated at the time of usage.

Required:

1.   Compute the Static-Budget variance, Flexible-Budget variance, and Sales-volume variance for January 2018 in the table below:

2.   Compute the price and efficiency variances of direct material and direct manufacturing labor for January 2017 in the table below.

			Answer
	1. DMPV
	2. DMEV
	3. DLRV
	4. DLEV

3.   Please provide 3 possible reasons for the material price variance and material efficiency variance.

	Actual Results (1)	Flexible- Budget Variances (2) = (1) – (3)	Flexible Budget (3)	Sales Volume Variances (4) = (3) – (5)	Static Budget (5)	Static Budget Variance
Units sold
Revenue
Variable costs
DM
DL
Total variable costs
Contribution margin
Fixed costs
Operating income

Answer 1

	1	Budget Variances
			Actual Results	Flexible Budget Variance	Flexible Budget	Sales Volume Variance	Static Budget	Static Budget Variance
			.(1)	.(2)=.(1)-(.3)	.(3)	.(4)=(.3)-.(5)	.(5)	.(6)=.(1)-.(5)
	a	Units Sold	15000		15000		20000
	b	Selling Price	$85		$80		$80
	c=a*c	Revenue	$1,275,000	$75,000	$1,200,000	($400,000)	$1,600,000	($325,000)
		Variable Costs:
	d	Direct material per unit	$15.40		$15.00		$15.00
	e=a*d	Total Direct Materials Costs	$231,000	$6,000	$225,000	($75,000)	$300,000	($69,000)
	f	Direct labor per unit	$30.40		$27.00		$27.00
	g=a*f	TotalDirect Labor Cost	$456,000	$51,000	$405,000	($135,000)	$540,000	($84,000)
	h=e+g	Total Variable Cost	$687,000	$57,000	$630,000	($210,000)	$840,000	($153,000)
	i=c-h	Contribution margin	$588,000	$18,000	$570,000	($190,000)	$760,000	($172,000)
	j	Fixed Costs	$240,000	$0	$240,000	$0	$240,000	$0
	k=i-j	Operating Income	$348,000	$18,000	$330,000	($190,000)	$520,000	($172,000)
	2	Material and Labor Variances
		DIRECT MATERIALS VARIANCES
	SQ	Standard Quantity(Pounds) for actual output	30000	(2*15000)
	SP	Standard Price per Pound	$7.50
	AQ	Actual Quantity of materials used(Pounds)	33000	(2.2*15000)
	AP	Actual Price per unit paid	$7.00	(121000/10000)
DMPV	AQ*(AP-SP)	Direct Materials Price Variance	$16,500	Favorable	(Actual price is lower than Standard Price)
DMEV	SP*(AQ-SQ)	Direct Materials Quantity Variance	$22,500	Un Favorable	(Actual quantity is more than Standard quantity)
		DIRECT LABOR VARIANCES
	SH	Standard Labor hour for actual output	4500	(0.3*15000)
	SR	Standard Labor rate per hour	$90.00
	AH	Actual labor hour used	4800	(0.32*15000)
	AR	Actual Labor rate per hour	$95.00
DLRV	AH*(AR-SR)	Direct labor Rate Variance	$24,000	Unfavorable	(Actual Rate is higher than Standard Rate)
DLEV	SR*(AH-SH)	Direct Labor Efficiency   Variance	$27,000	Un favorable	(Actual hour is more than Standard hour)