Question

One of the practices that you have noted about the operations of Saddleback Farms is that the company depends on historical and actual costs to analyze results. You encouraged Mr. Livingstone to adopt a standard costing system and conducted a study based on which you recommended the following standards for the Coconut water processing system.

Standard Costs for one (1) liter of Coconut Water

               Coconuts                                                          4 @ $1.50 per coconut                  $6.00

               Bottles                                                              1 @ $0.50 per bottle                      0.50

               Machine time                                                  5 minutes @ $30 per hour            2.50

               Labels                                                                1 @ $0.75 per label                        0.75

               Direct labor                                                     20 minutes @ $12 per hour          4.00

               Total standard costs                                                                                               $13.75

At the end of June 2019, one month after implementation, you discovered that Saddleback Farms processed 1,200 liters of coconut water and incurred the following costs:

Actual Costs incurred for the Month

                              Coconuts used                  6,000                                   $ 9,600

                              Bottles used                      1,300                                         676

                              Machine time                    7,200 minutes                    3,744

                              Labels                                  1,400                                          980

                              Direct labor                       18,000 minutes                   3,750

                              Total cost                                                                        $18,750

Required: Prepare all material and labor variances for Saddleback Farms for June (include price, quantity, rate and efficiency variances) and explain to Mr. Livingstone what happened.

Answer 1

Material Price variance = Actual cost - Actual Quantity x Standard Price
Coconut = $9600 - 6000 x 1.50 = $600 (U)
Bottles = $676 - 1300 x 0.50 = $26 (U)
Labels = $980 - 1400 x 0.75 = $70 (F)
Total Material Price Variance = $556 (U)

Material Quantity Variance = (Actual Quantity - Standard Quantity) x Standard Price
Coconut = (6000 - 4800) x 1.50 = $1800 (U)
Bottles = (1300-1200) x 0.50 = $50 (U)
Labels = (1400-1200) x 0.75 = $150 (U)
Total Material Quantity Variance = $2000 (U)

Total Material Variance = $2556 (U)
Coconut = $2400 (U)
Bottles = $76 (U)
Labels = $80 (U)

Labor Rate Variance = Actual Cost - Standard rate x Actual hours
= $3750 - 300 x 12 = $150 (U)

Labor efficiency variance = (Actual hours - standard hours) x Standard rate
= (300 - 400) x 12 = $1200 (F)

Total Labor variance = $1050 (F)

If you have any query regarding this, comment with your query and kindly mark thumbs up