Question

Preble Company manufactures one product. Its variable manufacturing overhead is applied to production based on direct labor-hours and its standard cost card per unit is as follows:

Direct materials: 5 pounds at $10 per pound	$	50
Direct labor: 4 hours at $16 per hour		64
Variable overhead: 4 hours at $7 per hour		28
Total standard cost per unit	$	142

The planning budget for March was based on producing and selling 20,000 units. However, during March the company actually produced and sold 24,600 units and incurred the following costs:

1. Purchased 164,000 pounds of raw materials at a cost of $7.50 per pound. All of this material was used in production.

2. Direct laborers worked 57,000 hours at a rate of $17 per hour.

3. Total variable manufacturing overhead for the month was $653,220.

   1. What raw materials cost would be included in the company’s planning budget for March?

   2. What raw materials cost would be included in the company’s flexible budget for March?

   3. What is the materials price variance for March? Favorable or Unfavorable?

   4. What is the materials quantity variance for March? Favorable or Unfavorable?

Answer 1

Given,

Direct material	5 pounds @$10 per pound	$50
Direct labors	4 Hours @ $16 per hour	$64
Variable overhead	4 hours @$7 per hour	$28
Standard cost per unit		$142

The planning budget for March was based on producing ans selling 20,000 units . Thus the raw material cost included in the company's planning budget for March is:

Raw Material cost = $50*20,000 = $1,000,000

The company produced and sell 24,600 units and includes the following raw material cost in the flexible budget for march

Raw material cost = $50*24,600 = $1,230,000

Material Price variance= ( standard price - actual price) * actual quantity

Material price variance for March = ( $10 - $7.5) * 164,000 = $410,000 favorable

Material quantity variance = ( standard quantity - actual quantity) * standard price

Material quantity variance for march = ( 123,000 - 164,000) *$10 = $410,000 unfavorable.