Question

# Kert Cycles has been a manufacturer of cycles for many years. It has traditionally focused on...

Kert Cycles has been a manufacturer of cycles for many years. It has traditionally focused on the lower end of the market appealing to casual and leisure cyclists. Kert sells their bikes through large department stores. With an increasingly competitive market, Kert management has been trying to manage costs but maintain the same bike features it has always provided. Commencing 2016, management decided to buy slightly higher quality components and materials and pay slightly higher wages to maintain their existing staff.

The current standard (budgeted) cost for one bicycle based on production of 10, 000 units is as follows:

 Direct materials 10 kg per unit \$60 Direct labor 4 hours at \$10 per hour \$40 Variable manufacturing overhead (allocated based on direct labor hours) \$20 Fixed manufacturing overhead (allocated based on direct labor hours) \$8 STANDARD COST PER BICYCLE \$128

Actual data for the current year reveals the following:

1. Due to a slowing of demand, 9 500 bikes were produced and sold.
2. \$585 000 of direct materials was purchased and used representing 90 000 kgs of direct materials
3. Direct labor was \$367 500 for 35 000 direct labor hours
4. Actual variable manufacturing overhead totaled \$189 000
5. Actual fixed manufacturing overhead totaled \$86 000

a)Which of the following most closely reflects the direct materials price variance for the current year for Kert Cycles?

450,000 Unfavourable

45,000 Unfavourable

450,000 Favourable

45,000 Favourable

50,000 Unfavourable

b)Which of the following most closely reflects the variable manufacturing overhead spending variance for the current year for Kert Cycles?

15,200 Unfavourable

14,000 Favourable

9,000 Favourable

15,200 Favourable

14,000 Unfavourable

To calculate variances, we need the following

Actual Price (material) = \$585,000/90,000 = \$6.5

Standard price = SP = \$60/10 = \$6

Actual Quantity = 90,000 kgs

Actual Rate (variable overhead) = \$189,000/35,000 = \$5.4

Standard rate = SR = \$20/4 = \$5

Actual hours = 35,000 hours

(a)

Direct material price Variance = (Standard Price - Actual price) x Actual quantity

= (\$6 - \$6.5) x 90,000

= 45,000 unfavourable

Option B - \$45,000 Unfavourable

(b)

= (Standard rate - Actual rate) x Actual hours

= (\$5 - \$5.4) x 35,000

= 14,000 unfavourable

Option E - 14,000 Unfavourable

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