Question

a) The Walter Group provides the following data for June 2019 when 15,000 units were manufactured.

Standard Material cost (per Unit) 8.50kg @ $7.50 per Kg.

Actual Material cost (Per Unit) 6.75Kg @ $13.5 per Kg.

Standard Labour cost (Per Unit) 5.5hrs @ $15 per hour

Actual Labour cost (Per Unit) 6.5hrs @ $12.2 per hour

Calculate the following:

1. Direct Material Variance

2. Direct Material Quantity/Usage Variance

3. Total Material Cost Variance

4. Direct Labour rate Variance

5. Direct Labour efficiency Variance

6. Total Labour Cost Variance

b) Calculate variable overhead spending variance if actual labour hours used are 260, standard variable overhead rate is $10.40 per direct labour hour and actual variable overhead rate is $9.30 per direct labor hour. Also specify whether the variance is favorable or unfavorable.

c) Define the term Variance Analysis and highlight its Advantages and Disadvantages

Answer 1

Data for material variances:

Standard quantity of direct material for 15,000 units = 15,000 units * 8.50 Kg per unit = 127,500 Kgs

Standard rate per Kg of direct material = $7.50 per Kg

Standard cost of direct material = 127,500 Kgs * $7.50 per Kg = $956,250

Actual quantity of direct material for 15,000 units = 15,000 units * 6.75 Kg per unit = 101,250 Kgs

Actual rate per Kg of direct material = $13.50 per Kg

Actual cost of direct material = 101,250 Kgs * $13.50 per Kg = $13,66,875

1. Direct material price variance = (Standard rate per unit - Actual rate per unit) * Actual quantity of direct material

= ($7.50 - $13.50) * 101,250 Kg = $607,500 (U) Unfavorable Variance

2. Direct material usage variance = (Standard quantity of direct material - Actual quantity of direct material) * Standard rate

= (127,500 Kg - 101,250 Kg) * $7.50 = $196,875 (F) Favorable Variance

3. Total Material Cost Variance = Standard cost of direct material - Actual cost of direct material

= $956,250 - $ 13,66,875 = $410,625 (U) Unfavorable Variance

Data for labor variances:

Standard hours of direct labor for 15,000 units = 15,000 units * 5.50 hours per unit = 82,500 hours

Standard rate per hour of direct labor = $15 per hour

Standard cost of direct labor = 82,500 hours * $15 per hour = $12,37,500

Actual hours of direct labor for 15,000 units = 15,000 units * 6.50 hour per unit = 97,500 hours

Actual rate per hour of direct labor = $12.20 per hour

Actual cost of direct labor = 97,500 hours * $12.20 per hour = $11,89,500

4. Direct labor rate variance = (Standard rate per hour - Actual rate per hour) * Actual direct labor hours

= ($15 - $12.20) * 97,500 hours = $273,000 (F)   Favorable Variance

5. Direct labor efficiency variance = (Standard hours - Actual hours) * Standard rate per direct labor hour

= (82,500 hours - 97,500 hours) * $15  = $225,000 (U) Unfavorable Variance

6. Total Labor Cost Variance = Standard cost of direct labor - Actual cost of direct labor

= $12,37,500 - $ 11,89,500 = $48000 (F) Favorable Variance

7. Data for variable overhead spending variance

Actual direct labor hours used (Given) = 260 direct labor hours

Standard variable overhead rate (Given) = $10.40 per labor hour

Actual variable overhead rate (Given) = $9.30 per labor hour

Variable overhead spending variance = (Standard variable overhead rate - Actual variable overhead rate) * Actual direct labor hours

= ($10.40 - $9.30) * 260 direct labor hours

= $286 (F)   Favorable Variance