Question

Marvel Parts, Inc., manufactures auto accessories. One of the company’s products is a set of seat covers that can be adjusted to fit nearly any small car. The company has a standard cost system in use for all of its products. According to the standards that have been set for the seat covers, the factory should work 1,010 hours each month to produce 2,020 sets of covers. The standard costs associated with this level of production are:

	Total		Per Set of Covers
Direct materials	$	36,360	$	18.00
Direct labor	$	7,070		3.50
Variable manufacturing overhead (based on direct labor-hours)	$	3,030		1.50
			$	23.00

During August, the factory worked only 1,080 direct labor-hours and produced 2,700 sets of covers. The following actual costs were recorded during the month:

	Total		Per Set of Covers
Direct materials (8,100 yards)	$	46,980	$	17.40
Direct labor	$	9,990		3.70
Variable manufacturing overhead	$	4,590		1.70
			$	22.80

At standard, each set of covers should require 2.0 yards of material. All of the materials purchased during the month were used in production.

Required:

1. Compute the materials price and quantity variances for August.

2. Compute the labor rate and efficiency variances for August.

3. Compute the variable overhead rate and efficiency variances for August.

(Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

F, None, or U

1.	Materials price variance
	Materials quantity variance
2.	Labor rate variance
	Labor efficiency variance
3.	Variable overhead rate variance
	Variable overhead efficiency variance

Answer 1

Concepts and reason

Variance analysis: Variance analysis is the process of analysing the difference or variance between the standard and the actual process. It is the quantitative investigation used to control the activities performed.

Favorable and unfavorable variance: When the actual price is lesser than that of budgeted price the variance is favorable. If the standard price is lesser than actual price, the variance is unfavorable.

Budget variance: Budget variance is known as the difference between the expected amount and the actual amount. Here, when the actual amount of income is higher than the expected, it is favourable. In case of expense it is unfavourable.

Fundamentals

Material price variance: The difference between actual price of materials and budgeted price of materials is the material price variance. If the actual price of materials is lesser than budgeted price of materials the variance is favorable. If the actual price of materials is more than budgeted price of materials the variance is unfavorable.

Material quantity variance: Material quantity variance is the difference between actual quantity of materials and budgeted quantity of materials. If the actual quantity of materials is lesser than budgeted quantity of materials the variance is unfavorable. If the actual quantity is more than budgeted quantity the variance is favorable.

Labor price variance: Labor price variance is the difference between actual price of labor and budgeted price of labor. If the actual price of labor is lesser than budgeted price of labor the variance is favorable. If the actual price is more than budgeted price the variance is unfavorable.

Labor quantity variance: Labor quantity variance is the difference between actual quantity of labor and budgeted quantity of labor. If the actual quantity of labor is lesser than budgeted quantity of labor the variance is unfavorable. If the actual quantity is more than budgeted quantity the variance is favorable.

Overhead variance: The difference between actual overhead and budgeted overhead is the overhead variance. If the actual overhead is lesser than budgeted overhead the variance is favorable. It the actual overhead is more than budgeted overhead the variance is unfavorable.

1.a)

Calculate the material price variance of “M” Incorporation:

\begin{array}{c}\\{\rm{Material price variance = Actual quantity }} \times {\rm{ }}\left( {{\rm{Standard price }} - {\rm{ Actual price}}} \right)\\\\ = {\rm{ 8,100 }} \times {\rm{ }}\left( {{\rm{\$ 9 }} - {\rm{ \$ 5}}{\rm{.8}}} \right)\\\\ = {\rm{ 8,100 }} \times {\rm{ \$ 3}}{\rm{.2}}\\\\{\rm{ = \$ 25,920}}\\\end{array}Materialpricevariance=Actualquantity×(Standardprice−Actualprice)=8,100×($9−$5.8)=8,100×$3.2=$25,920​

Therefore the material price variance is $25,920 favorable.

Working notes:

Calculate the standard material quantity:

\begin{array}{c}\\{\rm{Standard material quantity = Material produced }} \times {\rm{ Required material}}\\\\{\rm{ = 2,020 }} \times {\rm{ 2}}{\rm{.00}}\\\\{\rm{ = 4,040}}\\\end{array}Standardmaterialquantity=Materialproduced×Requiredmaterial=2,020×2.00=4,040​

Therefore the standard material quantity is 4,040.

Calculate the standard price of “M” incorporation:

\begin{array}{c}\\{\rm{Standard price = }}\frac{{{\rm{Standard material cost}}}}{{{\rm{Standard material quantity}}}}\\\\ = {\rm{ }}\frac{{\$ 36,360}}{{4,040}}\\\\ = \$ 9\\\end{array}Standardprice=StandardmaterialquantityStandardmaterialcost​=4,040$36,360​=$9​

Therefore the standard price of “M” is $9.

Calculate the actual price of “M” incorporation:

\begin{array}{c}\\{\rm{Actual price = }}\frac{{{\rm{Actual material cost}}}}{{{\rm{Actual material quantity}}}}\\\\ = \frac{{\$ 46,980}}{{8,100{\rm{ yards}}}}\\\\ = {\rm{\$ 5}}{\rm{.8}}\\\end{array}Actualprice=ActualmaterialquantityActualmaterialcost​=8,100yards$46,980​=$5.8​

Therefore the actual price of “M” incorporation is $5.8.

Part 1.a

The material price variance of “M” corporation is $25,920 favorable.

1.b)

Calculate the material quantity variance of “M” Incorporation:

\begin{array}{c}\\{\rm{Material quantity variance = }}\left( {{\rm{Standard Price }} \times \left( \begin{array}{l}\\{\rm{Actual quantity}}\\\\ - {\rm{ Standard quantity}}\\\end{array} \right)} \right)\\\\{\rm{ = \$ 9 }} \times {\rm{ }}\left( {{\rm{8,100 }} - {\rm{ 5,400}}} \right)\\\\ = {\rm{\$ 9 }} \times {\rm{ 2,700}}\\\\ = {\rm{ 24,300}}\\\end{array}Materialquantityvariance=⎝⎜⎜⎛​StandardPrice×⎝⎜⎜⎛​Actualquantity−Standardquantity​⎠⎟⎟⎞​⎠⎟⎟⎞​=$9×(8,100−5,400)=$9×2,700=24,300​

Therefore the material quantity variance is 24,300unfavorable.

Working notes:

Calculate the standard quantity of “M” Incorporation:

\begin{array}{c}\\{\rm{Standard quantity = Direct material produced }} \times {\rm{ Standard quantity allowed}}\\\\{\rm{ = 2,700 }} \times {\rm{ 2}}{\rm{.00}}\\\\{\rm{ = 5,400}}\\\end{array}Standardquantity=Directmaterialproduced×Standardquantityallowed=2,700×2.00=5,400​

Therefore the standard quantity is 5,400.

Part 1.b

The material quantity variance of “M” Incorporation is 24,300.

2.a)

Calculate the labor rate variance of “M” Incorporation:

\begin{array}{c}\\{\rm{Labor rate variance = Actual hours }} \times {\rm{ }}\left( {{\rm{Actual rate }} - {\rm{ Standard rate}}} \right)\\\\ = {\rm{ 1,080 }} \times {\rm{ }}\left( {{\rm{\$ 9}}{\rm{.25 }} - \$ {\rm{7}}} \right)\\\\ = {\rm{ 1,080 }} \times {\rm{ \$ 2}}{\rm{.25}}\\\\{\rm{ = \$ 2,430}}\\\end{array}Laborratevariance=Actualhours×(Actualrate−Standardrate)=1,080×($9.25−$7)=1,080×$2.25=$2,430​

Therefore the labor rate variance of “M” incorporation is $2,430Unfavorable.

Working notes:

Calculate the actual rate of “M” incorporation:

\begin{array}{c}\\{\rm{Actual rate = }}\frac{{{\rm{Actual direct labor cost }}}}{{{\rm{Actual labor hours}}}}\\\\ = \frac{{\$ 9,990}}{{1,080}}\\\\ = {\rm{ \$ 9}}{\rm{.25}}\\\end{array}Actualrate=ActuallaborhoursActualdirectlaborcost​=1,080$9,990​=$9.25​

Therefore the actual rate of “M” incorporation is $9.25.

Calculate the standard rate of “M” incorporation:

\begin{array}{c}\\{\rm{Standard rate = }}\frac{{{\rm{Standard direct labor cost }}}}{{{\rm{Standard labor hours}}}}\\\\ = \frac{{\$ 7,070}}{{1,010}}\\\\ = {\rm{ \$ 7}}\\\end{array}Standardrate=StandardlaborhoursStandarddirectlaborcost​=1,010$7,070​=$7​

Therefore the standard rate of “M” incorporation is $7.

Step 4 of 6

2.b)

Calculate the labor efficiency variance of “M” Incorporation:

\begin{array}{c}\\{\rm{Labor efficiency variance = }}\left( {{\rm{Standard rate }} \times {\rm{ }}\left( \begin{array}{l}\\{\rm{Actual hours worked}}\\\\{\rm{ }} - {\rm{ Standard hours worked }}\\\end{array} \right)} \right)\\\\ = \$ 7{\rm{ }} \times {\rm{ }}\left( {{\rm{1,080 }} - {\rm{ 1,350}}} \right)\\\\ = {\rm{ \$ 7 }} \times {\rm{ 270}}\\\\{\rm{ = \$ 1,890}}\\\end{array}Laborefficiencyvariance=⎝⎜⎜⎛​Standardrate×⎝⎜⎜⎛​Actualhoursworked−Standardhoursworked​⎠⎟⎟⎞​⎠⎟⎟⎞​=$7×(1,080−1,350)=$7×270=$1,890​

Therefore the labor efficiency variance of “M” Incorporation is $1,890favorable.

Working notes:

Calculate the standard hours worked:

\begin{array}{c}\\{\rm{Standard hours worked = }}\frac{{{\rm{Standard direct labor cost per seat cover}}}}{{{\rm{Standard direct labor cost per hour }}}}{\rm{ }} \times {\rm{ Actual output}}\\\\{\rm{ = }}\frac{{\$ 3.5}}{{\$ 7}}{\rm{ }} \times {\rm{ 2,700}}\\\\{\rm{ = 0}}{\rm{.5 }} \times {\rm{ 2,700}}\\\\{\rm{ = 1,350}}\\\end{array}Standardhoursworked=StandarddirectlaborcostperhourStandarddirectlaborcostperseatcover​×Actualoutput=$7$3.5​×2,700=0.5×2,700=1,350​

Therefore the standard hours worked is 1,350.

Part 2.b

The labor efficiency variance of “M” Incorporation is $1,890favorable.

3.a)

Calculate the variable overhead rate variance:

\begin{array}{c}\\{\rm{Variable overhead rate variance = }}\left( {{\rm{Actual hours }} \times {\rm{ }}\left( {{\rm{Actual rate }} - {\rm{ Standard rate}}} \right)} \right)\\\\ = {\rm{ 1,080 }} \times {\rm{ }}\left( {{\rm{\$ 4}}{\rm{.25 }} - {\rm{ \$ 3}}} \right)\\\\ = {\rm{ 1,080 }} \times {\rm{ \$ 1}}{\rm{.25}}\\\\{\rm{ = \$ 1,350}}\\\end{array}Variableoverheadratevariance=(Actualhours×(Actualrate−Standardrate))=1,080×($4.25−$3)=1,080×$1.25=$1,350​

Therefore the variable overhead rate variance is $1,350unfavorable.

Working notes:

Calculate the actual rate of “M” Incorporation:

\begin{array}{c}\\{\rm{Actual rate = }}\frac{{{\rm{Actual variable manufacturing overhead }}}}{{{\rm{Actual labor hours}}}}\\\\ = \frac{{\$ 4,590}}{{1,080}}\\\\ = {\rm{\$ 4}}{\rm{.25}}\\\end{array}Actualrate=ActuallaborhoursActualvariablemanufacturingoverhead​=1,080$4,590​=$4.25​

Therefore the actual rate is $4.25.

Calculate the standard rate of “M” Incorporation:

\begin{array}{c}\\{\rm{Standard rate = }}\frac{{{\rm{Standard variable manufacturing overhead }}}}{{{\rm{Standard labor hours}}}}\\\\ = \frac{{\$ 3,030}}{{1,010}}\\\\ = {\rm{\$ 3}}\\\end{array}Standardrate=StandardlaborhoursStandardvariablemanufacturingoverhead​=1,010$3,030​=$3​

Therefore the standard rate is $3.

Part 3.a

The variable overhead rate variance of”M” Incorporation is $1,350unfavorable.

3.b)

Calculate the variable overhead rate and efficiency variance:

\begin{array}{c}\\{\rm{Variable overhead efficiency variance = }}\left( {{\rm{Standard overhead rate }} \times {\rm{ }}\left( \begin{array}{l}\\{\rm{Actual hours }}\\\\ - {\rm{ Standard hours}}\\\end{array} \right)} \right)\\\\ = \left( {{\rm{ \$ 3 }} \times {\rm{ }}\left( {{\rm{1,080 }} - {\rm{ 1,350}}} \right)} \right)\\\\{\rm{ = 810 }}\\\end{array}Variableoverheadefficiencyvariance=⎝⎜⎜⎛​Standardoverheadrate×⎝⎜⎜⎛​Actualhours−Standardhours​⎠⎟⎟⎞​⎠⎟⎟⎞​=($3×(1,080−1,350))=810​

The variable overhead rate and efficiency variance is 810favorable.

Working notes:

Calculate the standard variable overhead rate:

\begin{array}{c}\\{\rm{Standard variable overhead rate = }}\frac{{{\rm{Variable manufacturing overhead}}}}{{{\rm{Standard hours}}}}\\\\ = \frac{{\$ 3,030}}{{1,010}}\\\\ = \$ 3\\\end{array}Standardvariableoverheadrate=StandardhoursVariablemanufacturingoverhead​=1,010$3,030​=$3​

Therefore the standard variable overhead rate is $3.

Part 3.b

The variable overhead rate and efficiency variance is 810favorable.

Part 1.a

The material price variance of “M” corporation is $25,920 favorable.

Part 1.b

The material quantity variance of “M” Incorporation is 24,300.

Part2.a

The labor rate variance of “M” incorporation is $2,430Unfavorable.

Part 2.b

The labor efficiency variance of “M” Incorporation is $1,890favorable.

Part 3.a

The variable overhead rate variance of”M” Incorporation is $1,350unfavorable.

Part 3.b

The variable overhead rate and efficiency variance is 810favorable.