Question

Samantha Jones is a cost accountant and business analyst for Doorknob Design Company (DDC), which manufactures expensive brass doorknobs. DDC uses two direct cost categories: direct materials and direct manufacturing labor. Jones feels that manufacturing overhead is most closely related to direct manufacturing labor hours. Therefore, DDC allocates manufacturing overhead to production based upon direct labor hours.

At the beginning of 2018, DDC budgeted annual production of 400,000 doorknobs and adopted the following standards for each doorknob:

Input Cost/Doorknob

Direct materials (brass) 0.3 lb. @ 10/lb. $ 3.00

Direct manufacturing labor 1.2 hours @ $20/hour 24.00

Manufacturing overhead:

Variable $1.50/hr. x 1.2 hours 1.80

Fixed $3.75/hr. x 1.2 hours 4.50

Standard cost per doorknob $ 33.30

Actual results for April 2018 were as follows:

Production 35,000 doorknobs

Direct materials purchased 12,000 lb. at $11/lb.

Direct materials used 10,450 lb.

Direct manufacturing labor 38,500 hours for $808,500

Variable manufacturing overhead $64,150

Fixed manufacturing overhead $152,000

Required:

a) For the month of April, compute the following variances, indicating whether each is favorable (F) or unfavorable (U):

1. Direct materials price variance (based on purchases)

2. Direct materials efficiency variance

3. Direct manufacturing labor price variance

4. Direct manufacturing labor efficiency variance

5. Variable manufacturing overhead spending variance

6. Variable manufacturing overhead efficiency variance

7. Production-volume variance

8. Fixed manufacturing overhead spending variance

b) Discuss the possible explanation for the variances.

Answer 1

As per policy, only four parts of a question is allowed to answer at a time, so answering 1-6 here :

Variances:
1	DMPV	(mat. Actual price - standard price) * Actual usage	(11 - 10)* 10450	10450	U
2	DMEV	(Std. usage for actual output - actual usage)* Std. price	(35000*0.3 - 10450)* 10	500	F
3	DMLPV	(Labor rate - std labor rate)* actual hours used	(808500/38500 - 20)* 38500	38500	U
4	DMLEV	(Std. hours for actual produ - actual usage)* std. rate	(35000*1.2 - 38500)*20	70000	F
5	VMOSV	(Std. rate - actual rate)* actual hours usage	(1.50 - 64150/38500)* 38500	6400	U
6	VMOEV	(std hours allowed - Actual hours)* Std. overhead rate	(35000*1.2 - 38500)*1.5	5250	F