Question

The Zurich Chocolate Company uses standard cost in the manufacture of its line of fine chocolates. Operating data for the past week is summarize as follows:

            Standard Cost Card – per box:

                        Direct materials, .5 kg at $16 per kg.             $ 8.00

                        Direct labor, 1.5 hours at $15/hour                22.50

                        Variable overhead, 1.5 hours at $10/hour      15.00

                        Standard cost per unit                                     $45.50

The company produced 4,000 boxes of chocolates. Direct materials purchased were 2,150 kg. of chocolate at $15.50 per kg. Direct materials used to produce 4,000 boxes of chocolates were 2,120 kg of chocolate. The company records showed no beginning or ending inventories of the year.

Actual direct labor costs were 6,400 hours at $16.00 per hour.

Actual variable overhead was $69,500 and variable overhead is applied using direct labor hours.

Required:

1. Compute the direct materials price and quantity variances for the year indicating if they are favorable or unfavorable.  
2. Compute the direct labor rate variance and efficiency variances for the year indicating if they are favorable or unfavorable.  
3. Compute the variable overhead spending and efficiency variances for the year indicating if they are favorable or unfavorable.  
4. Give one possible explanation that would explain the following three variances; direct material price variance, direct labor efficiency variance, variable overhead efficiency variance.

Answer 1

1. Material price variance = (Standard price - actual price)*actual quantity

= (16-15.50)*2150 = $1075 Favorable

Material quantity variance = (Standard quantity - actual quantity)*standard rate

= (4000*0.50-2120)*16 = $1920 Unfavorable

2. Labor rate variance = (standard rate - actual rate)*actual hours

= (15-16)*6400= $6400 Unfavorable

Labor efficiency variance = (standard hours - actual hours)*standard rate

= (4000*1.50-6400)*16 = $6400 Unfavorable

3. Variable overhead spending/rate variance = (standard rate - actual rate)*actual hours

= (10-69500/6400)*6400

= $5500 Unfavorable

Variable overhead efficiency variance = (standard hours - actual hours)*standard rate

= (4000*1.50-6400)*10

= $4000 Unfavorable