Question

ABC Company uses a standard costing system for production costing and control Standard direct labor hours based on practical capacity are used to compute overhead rates. The standard cost for the one of its products is as follows: Quantity Cost per unit Total Cost 4.0 kilograms $ 10.00 $ 40.00 2.6 hours 31.20 2.6 hours 10.00 26.00 2.6 hours 6.00 15.60 + Raw material Direct labor Variable overhead Fixed overhead 12.00 Annual practical capacity 60,000 units NU UN During the year, the actual results are as follows: Quantity Cost per unit Total Cost Raw materials purchased 130,000 kilograms $ 9.40 $1,222,000 Raw materials, beginning 60,000 kilograms 10.00 600,000 Raw materials, ending kilograms Direct labor 112,000 hours 13.00 1,456,000 Actual fixed overhead costs 756,000 Actual variable overhead costs 860,000 Actual annual production 55,000 units

Answer 1

Direct Material Price Variance: Materials price variance = (Actual price - Standard price) x Actual quantity purchased Direct Material Price Variance = $ ($9.40 - $10) x 130000 units purchased Direct Material Price Variance = $ -78000 It is favourable as actual price is less than the standard price.

Direct Material Efficiency Variance: Direct Material Efficiency Variance = (Actual unit usage - Standard unit usage) x Standard cost per unit Direct Material Efficiency Variance = (190000 units - 220000 units) x $10 Direct Material Efficiency Variance = $-300000 It is favourable since the actual usage is less than the budgeted usage of material. Note: Standard unit usage of direct material = Standard quantity x actual production = 4 x 55000 = 220000 units Actual Unit Usage = Stock of materials at the beginning + Purchased Material - Stock of material at the end = 60000 + 130000 - 0 = 190000 units

Direct Labour Rate Variance: Labor rate variance= (Actual rate - Standard rate) x Actual hours worked Labor rate variance= ($13-$12) x 112000 hours Labor rate variance = $ 112000 It is unfavourable as the actual rate is more than the standard rate of direct labour.

Direct Labour effiency Variance: Labor efficiency variance= (Actual hours worked - Standard hours allowed) x Standard rate Direct Labour effiency Variance = (112000-143000) < $12 Direct Labour effiency Variance = $ -372000 It is favourable since the actual hours worked are less than the budgeted hours. Note: Standard hours allowed = Standard hour per unit x Actual Production = 2.6 hours x 55000 units -143000 hours