9.27 Direct cost and overhead variances; decision to automate
Plush pet toys are produced in a largely automated factory in standard lots of 100 toys each. A standard cost system is used to control costs and to assign cost to inventory.
Price standard |
Quantity standard |
|
Plus fabric |
$2 per metre |
15 metres per lot |
Direct labour |
$10 per hour |
2 hours per lot |
Variable overhead, estimated at $5 per lot, consists of miscellaneous items such as thread, a variety of plastic squeakers, and paints that are applied to create features such as eyes and whiskers. Fixed overhead, estimated at $24 000 per month, consists largely of depreciation on the automated machinery and rent for the building. Variable overhead is allocated based on lots produced. The standard fixed overhead allocation rate is based on the estimated output of 1000 lots per month.
Actual data for last month follow.
Production |
2,400 |
lots |
Sales |
1,600 |
lots |
Plus fabric purchased |
30,000 |
metres |
Cost of fabric purchased |
$62,000 |
|
Fabric used |
34,000 |
metres |
Direct labour |
4,200 |
hours |
Direct labour cost |
$39,000 |
|
Variable overhead |
$12,000 |
|
Fixed overhead |
$24,920 |
The entity’s policy is to record materials price variances at the time materials are purchased.
Required
(a) Calculate the commonly used direct cost and overhead variances.
(b) Management is considering further automation in the factory. Robot-controlled forklifts could reduce the standard direct labour per lot to 1.5 hours.
(i) Estimate the savings per lot that would be realised from this additional automation.
(ii) Assume the company would be able to generate the savings as calculated. Considering only quantitative factors, calculate the maximum price the managers would be willing to pay for the robot-controlled forklifts. Assume the company’s management requires equipment costs to be recovered in five years, ignoring the time value of money.
a). direct material cost variance =
standard quantity*standard price - actual quantity*actual price
2400 lots*15*$2 - $62000 = $10000
material usage variance = (SQ- AQ)*SP
= (36000-34000)*$2 = $4000
material price variance = (SP-AP)*AQ = $6000
SQ= STANDARD QUANTITY, SP = STANDARD PRICE
AQ= ACTUAL QUANTITY, AP = ACTUAL PRICE
direct labour variance =
labour cost variance = SH*SP - AH*AP
=2400 LOT*2 hours* $10 - $39000 = $9000
labour efficiency variance = (2400*2-4200)*$10 = $6000
labour price variance = ($10 - $39000/4200)*4200 = $3000
VARIABLE OVERHEAD VARIANCE = 1600 LOT*$5-$12000 = $4000 (A)
FIXED OVERHEAD VARIANCE = $24000- $24920 = $920 (A)
b).
i) saving per lot = 2400 lot*0.5 hrs* $10 = $12000
ii)
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