Question

Global corporation has developed the following cost standards for the production of leather backpacks:

Leather 0.9 yards x $22 per yard = $19.80

Direct labor 1.3 hours x $9.00 per hour = $11.70

Variable overhead 1.3 hours x $15.00 per hour = $19.50

Variable overhead is applied on the basis of direct labor hours. The actual results for last month were as follows:

Number of backpacks produced	15,000
Direct labor hours incurred	18,800
Yards of leather purchased	14,500
Yards of leather used in the production	14,100
Cost of leather purchased	$306,675
Direct labor cost	$159,800
Variable overhead cost	$285,760

The direct materials purchases variance is computed when the materials are purchased.

compute the following variances

1. materials price variance

2. materials quantity variance

3. labor efficiency variance

4. variable overhead rate variance

Answer 1

Ans:

a. Material price variance = = Standard rate * Actual materials - Actual rate * Actual materials Used

= $ 22 per yard * 14,100 - ( $ 306,675/ 14,500 ) * 14,100

= $ 310,200 - $ 298,215

= 11,985 Favourable

(b)Material quantity variance = Standard cost * Actual output - Standard rate * Actual materials Used

= $ 19.8 * 15,000 - $ 22 * 14,100

= $ 297,000 - $ 310,200

= - 13,200 Unfavourable

(c) Labour Efficiency variance

= Standard cost * Actual output - Standard rate * Actual hours worked

= $ 11.7 * 15,000 - $ 9 * 18,800

= $ 175,500 - $ 169,200

= 6,300 Favourable

(d) Variable Overhead Rate Variance

= Standard rate * Labour hours - Actual variable Overheads

= $ 15 per hour * 18,800 - $ 285,760

= $ 282,000 - $ 285,760

= - 3,760 Unfavourable