Question

Problem 10-13 (Algo) Basic Variance Analysis: the Impact of Variances on Unit Costs [LO10-1, LO10-2, LO10-3] Koontz Company manufactures a number of products. The standards relating to one of these products are shown below, along with actual cost data for May Standard Cost per Unit Actual Cost per Unit S 3.24 $ 3.85 17.10 Direct materials: Standard: 1.80 feet at $1.80 per foot Actual: 1.75 feet at $2.20 per foot Direct labor: Standard: 0.90 hours at $19.00 per hour Actual: 0.95 hours at $18.40 per hour Variable overhead: Standard: 0.90 hours at $6.40 per hour Actual: 0.95 hours at $6.00 per hour Total cost per unit Excess of actual cost over standard cost per unit 17.48 5.76 5.70 26.10 27.03 $0.93 The production superintendent was pleased when he saw this report and commented: "This $0.93 excess cost is well within the 5 percent limit management has set for acceptable variances. It's obvious that there's not much to worry about with this product" Actual production for the month was 12,000 units. Variable overhead cost is assigned to products on the basis of direct labor hours. There were no beginning or ending inventones of materials Required: 1. Compute the following variances for May a Materials price and quantity variances bLabor rate and efficiency variances c. Vanable overhead rate and efficiency variances 2. How much of the $0.93 excess unit cost is traceable to each of the variances computed in (1) above 3 How much of the $0.93 excess unit cost is traceable to apparent inefficient use of labor time?

Answer 1

1. Computation of following variances for may

a)   Material price variance = (Standard price per unit - Actual price per unit) * Actual raw material used

= ( $1.80 - $2.20) * (1.75*12,000)

= ($0.4)*21,000 = $ 8,400 unfavourable

Material Quantity Variance =(Standard quantity used - Actual quantity used) * standard price per unit

= (1.80*12000 - 1.75*12000) * $1.80

= (21600 - 21000) * $1.80

= 600 * $1.80

= $1080 favourable

b)  Labour rate variance = (Standard labour rate per hour - Actual labour rate hour) * Actual labour hours worked

= ($19 - $18.4)* (0.95*12000)

= $0.6 * 11400

= $ 6840 favourable

Labour efficiency variance = (Standard hours worked - Actual hours worked) * Standard labour rate per hour

= [(0.90*12000) - (0.95* 12000)]* $19

= (10800 - 11400) * $19

= 600 * $19

= $11400 unfavorable

c) Variable overhead rate variance = (standard rate per hour - actual rate per hour) * Actual hours worked

= ($6.4 - $6.00)* (0.95*12000)

= $ 0.4 * 11400

= $ 4,560 favourable

Variable overhead efficiency variance = (Standard hours - actual hours) * Standard rate per hour

=[( 0.90*12000 - 0.95 * 12000)] * $6.4

=(10,800 - 11400) * $ 6.4

= 600 * $6.4

= $ 3,840 unfavourable

2.  How much of the $ 0.93excess unit is traceable to each of the variances computed in (1) above

Particulars	Variance (F / U)	Amount traceable (Variance/ Units)
Material price variance	8400 (U)	$ 0.7 U
Material quantity variance	1080(F)	$ 0.09 F
Labour rate variance	6840(F)	$ 0.57 F
Labour efficiency variance	11400(U)	$ 0.95 U
Variable overhead rate variance	4560(F)	$ 0.38 F
Variable overhead efficiency variance	3840(U)	$ 0.32 U
Total variance		$ 0.93 U

3. How much of the $0.93 excess unit cost is traceable to apparent inefficient use of labor time

From (2), $ 0.95 is unfavourable and is traceable to apparent inefficient use of labor time.