Question

1 Preble Company manufactures one product. Its variable manufacturing overhead is applied to production based on direct labor- hours and its standard cost card per unit is as follows: 2 3 4. 5 6 7 (1) (2) Standard Standard Quantity Price or Hours or Rate 5 pounds $8.00 per pound 2 hours $14 per hour 2 hours $5 per hour 8 Inputs Direct materials Direct labor Variable overhead Total standard cost per unit Standard Cost (1) (2) $40.00 28.00 10.00 $78.00 9 10 11 The planning budget for March was based on producing and selling 25,000 units. However, during March the company actually produced and sold 30,000 units and incurred the following costs: 12 13 14 15 16 17 18 a. Purchased 160,000 pounds of raw materials at a cost of $7.50 per pound. All of this material was used in production. b. Direct laborers worked 55,000 hours at a rate of $15.00 per hour. c. Total variable manufacturing overhead for the month was $280,500. 19 20 21 22 23 24 Required: 1. What raw materials cost would be included in the company's planning budget for March? 25 26 27 28 29 30 31 82 33 34 35 36 2. What raw materials cost would be included in the company's flexible budget for March? 3. What is the materials price variance for March? 4. What is the materials quantity variance for March? 5. If Preble had purchased 170,000 pounds of materials at $7.50 per pound and used 160,000 pounds in production, what would be the materials price variance for March? 6. If Preble had purchased 170,000 pounds of materials at $7.50 per pound and used 160,000 pounds in production, what would be the materials quantity variance for March? 7. What direct labor cost would be included in the company's planning budget for March? 8. What direct labor cost would be included in the company's flexible budget for March? 9. What is the labor rate variance for March? 10. What is the labor efficiency variance for March? 11. What is the labor spending variance for March? 12. What variable manufacturing overhead cost would be included in the company's planning budget for March? 13. What variable manufacturing overhead cost would be included in the company's flexible budget for March? 14. What is the variable overhead rate variance for March? 15. What is the variable overhead efficiency variance for March? 37 38 39 40 41 42 13 14 45 46 47

Answer 1

1., 2., and 3.

The raw materials cost included in the flexible budget (SQ × SP = $1,200,000), the materials quantity variance ($80,000 U), and the materials price variance ($80,000 F) can be computed using the general model for cost variances as follows:

Standard Quantity Allowed for Actual Output, at Standard Price (SQ × SP)	Actual Quantity of Input, at Standard Price (AQ × SP)	Actual Quantity of Input, at Actual Price (AQ × AP)
150,000 pounds* × $8.00 per pound = $1,200,000	160,000 pounds× $8.00 per pound = $1,280,000	160,000 pounds × $7.50 per pound = $1,200,000
	Materials quantity variance = $80,000 U	Materials price variance = $80,000 F
	Spending variance = $0

      *30,000 units × 5 pounds per unit = 150,000 pounds

      Alternatively, the variances can be computed using the formulas:

            Materials quantity variance = SP (AQ – SQ)

                = $8.00 per pound (160,000 pounds – 150,000 pounds)

                = $80,000 U

            Materials price variance = AQ (AP – SP)

                = 160,000 pounds ($7.50 per pound – $8.00 per pound)

                = $80,000 F

4. and 5.

The materials quantity variance ($80,000 U), and the materials price variance ($85,000 F) can be computed as follows:

Standard Quantity Allowed for Actual Output, at Standard Price (SQ × SP)	Actual Quantity of Input, at Standard Price (AQ × SP)	Actual Quantity of Input, at Actual Price (AQ × AP)
150,000 pounds* × $8.00 per pound = $1,200,000	160,000 pounds × $8.00 per pound = $1,280,000	170,000 pounds × $7.50 per pound = $1,275,000
	Materials quantity variance = $80,000 U
		170,000 pounds × $8.00 per pound = $1,360,000
		Materials price variance = $85,000 F
*30,000 units × 5 pounds per unit = 150,000 units

      Alternatively, the variances can be computed using the formulas:

            Materials quantity variance = SP (AQ – SQ)

                = $8.00 per pound (160,000 pounds – 150,000 pounds)

                = $80,000 U

            Materials price variance = AQ (AP – SP)

                = 170,000 pounds ($7.50 per pound – $8.00 per pound)

                = $85,000 F

6., 7., and 8.

The direct labor cost included in the flexible budget (SH × SR = $840,000), the labor efficiency variance ($70,000 F), and the labor rate variance ($55,000 U) can be computed using the general model for cost variances as follows:

Standard Hours Allowed for Actual Output, at Standard Rate (SH × SR)	Actual Hours of Input, at Standard Rate (AH × SR)	Actual Hours of Input, at Actual Rate (AH × AR)
60,000 hours* × $14.00 per hour = $840,000	55,000 hours × $14.00 per hour = $770,000	55,000 hours × $15 per hour = $825,000
	Labor efficiency variance = $70,000 F	Labor rate variance = $55,000 U
	Spending variance = $15,000 F

            *30,000 units × 2.0 hours per unit = 60,000 hours

      Alternatively, the variances can be computed using the formulas:

            Labor efficiency variance = SR (AH – SH)

                = $14.00 per hour (55,000 hours – 60,000 hours)

                = $70,000 F

            Labor rate variance = AH (AR – SR)

                = 55,000 hours ($15.00 per hour – $14.00 per hour)

                = $55,000 U

9., 10., and 11.

The variable overhead cost included in the flexible budget (SH × SR = $300,000), the variable overhead efficiency variance ($25,000 F), and the variable overhead rate variance ($5,500 U) can be computed using the general model for cost variances as follows:

Standard Hours Allowed for Actual Output, at Standard Rate (SH × SR)	Actual Hours of Input, at Standard Rate (AH × SR)	Actual Hours of Input, at Actual Rate (AH × AR)
60,000 hours* × $5.00 per hour = $300,000	55,000 hours × $5.00 per hour = $275,000	= $280,500
	Variable overhead efficiency variance = $25,000 F	Variable overhead rate variance = $5,500 U
	Spending variance = $19,500 F

            *30,000 units × 2.0 hours per unit = 60,000 hours

      Alternatively, the variances can be computed using the formulas:

            Variable overhead efficiency variance = SR (AH – SH)

                = $5.00 per hour (55,000 hours – 60,000 hours)

                = $25,000 F

            Variable overhead rate variance = AH (AR* – SR)

                = 55,000 hours ($5.10 per hour – $5.00 per hour)

                = $5,500 U

           

            *$280,500 ÷ 55,000 hours = $5.10 per hour

12.       The amounts included in the flexible budget are computed as follows:

PrebleCompany Flexible Budget For the Month Ended March 31
Units sold (q)........................................................................	30,000
Expenses:
Advertising($200,000)......................................................	$200,000
Sales salariesand commissions ($100,000 + $12.00q)....................................................	$460,000
Shipping expenses($3.00q)................................................	90,000

13., 14., and 15.

The spending variances for advertising ($), sales salaries and commissions ($), and shipping expenses ($) are computed as follows:

Preble Company Spending Variances For the Month Ended March 31
	Flexible Budget	Actual Results	Spending Variances
Unitssold(q)...................................................	30,000	30,000
Expenses:
Advertising($200,000)...............................	$200,000	$210,000	$10,000	U
Sales salaries and commissions ($100,000 + $12.00q).............................	$460,000	$455,000	$5,000	F
Shipping expenses($3.00q)........................