## Practical Question 1

The standard product cost card of a product is shown below.

Materials 2 feet length, 1/4 inch thick | @ | $16 | $32 | |

Factory overhead labor 4 hours | @ | $6 | $24 | |

Variable 4 hours | @ | $2 | $8 | |

Fixed 4 hours | @ | $4 | $16 | $24 |

Total standard production cost | $80 |

Fixed overhead was based on 36,000 hours a year.

Total fixed overhead estimated at $144,000 per annum.

Actual data for a month has been ascertained as follows:

- Actual hours worked = 3,800
- Units of product produced = 900
- Material used = 1,900 feet in length
- Price per foot = $15
- Actual labor wage rate = $5.80
- Actual factory overhead: variable = $6,200, fixed = $12,000

**Required: **Calculate two variances for each of the three elements of the production cost.

## Solution

### 1) Material Cost Variance

Standard quantity of output @ standard price:

900 units x 2 x $16 = $28,800

Actual quantity used @ standard price:

1,900 x $16 = $30,400

Actual quantity used @ actual price:

1,900 x $15 = $28,500

Total material cost variance:

$28,800 – $28,500 = $300 (favorable)

### Analysis

Materials usage variance:

28,800 – 30,400 = $1,600 (unfavorable)

Materials price variance:

30,400 – 28,500 = $1,900 (favorable)

## 2) Labor Cost Variance

Standard hours of output at standard wage rate:

900 units x 4 hours x $6 = $21,600

Actual hours for the output at standard wage rate:

3,800 hours x $6 = $22,800

Actual hours at actaul wage rate:

3,800 hours x $5,80 = $22,040

Total labor cost variance:

$21,600 – $22,040 = $440 (unfavorable)

### Analysis

Labor efficiency variance:

$21,600 – $22,800 = $1,200 (unfavorable)

Labor wage rate variance:

$22,800 – $22,040 = $760 (favorable)

## 3) Factory Overhead Variance

Standard hours of output @ standard overhead rate:

900 units x 4 hours x $6 = $21,600

Budget for standard hours produced = 900 units x 4 hours = 3,600 hours

Variable overhead:

3,600 hours x $2 = $7,200

($144,000 / 12 months = $12,000)

Total = $19,200

Actual overhead = $18,200

Total factory overhead variance:

$21,600 – $18,200 = $3,400

Factory overhead volume variance:

$21,600 – $19,500 = $2,400 (favorable)

Factory overhead controllable variance:

$19,200 – $18,200 = $1,000 (favorable)

## Practical Question 2

The data shown below relate to an industrial organization that manufactures household appliances.

Standard quantity required of materials item 0020 | 1 kg. |

Standard price per kg. | $10 |

Product in a month appliances | 100 kgs. |

Actual quantity of materials used | 98 kgs. |

Actual price paid | $11/kg |

The following calculations for variances have been made:

Material usage variance = | 2 kgs. @ $11 = $22 |

Material price variance = | 100 kgs. x $1 = $100 |

**Required: **Do you agree with these calculations? If not, provide a correct calculation for the variances.

## Solution

The above analysis of variances is not correct. The correct calculations are given below:

### Material Usage Variance

= Difference between standard quantity for the output x Standard price

= 100 units x 1 kg. x $10 = $1,000

(-) 98 kgs. x $10 = $980 or 2 kgs. x $10 = 20 (favorable variance)

### Material Price Variance

= Actual quantity used x Difference between standard price and actual price

= 98 kgs. x $1 = $98 (unfavorable)

Total Variance = $78 (unfavorable)

## Practical Question 3

The following data pertains to a company’s first week of operations in June 2011:

**Materials:**

Actual purchased | = 1,500 units @ $3.80 per unit |

Actual usage | = 1,350 units |

Standard usage | = 1,020 units @ $4.00 per unit |

**Direct Labor:**

Actual hours | = 310 hours @ $12.10 per hour |

Standard hours | = 340 hours @ $12.00 per hour |

**Required: Compare the following variances to determine whether they are favorable or unfavorable:**

- (A) Material purchase price variance and quantity variance
- (B) Labor rate efficiency variance.

## Answer

### Requirement (A)

### 1) Material Purchase Price Variance

Actual quantity purchased x Actual rate (1,500 units x $3.80) | = $5,700 |

Actual quantity purchased x Standard rate ( 1,500 units x $4) | = $6,000 |

Favorable |
= $300 |

### 2) Material Usage Price Variance

Actual quantity used x Actual rate ( 1,350 units x $3.80) | = $5,130 |

Actual quantity used x Standard rate (1,350 units x $4) | = $5,400 |

Favorable |
= $270 |

### 3) Material Quantity Variance

Actual quantity used x Standard rate (1,350 units x $4) | = $5,400 |

Standard quantity allowed x Standard rate (1,020 units x $4) | = $4,080 |

Unfavorable |
= $1,320 |

### Requirement (B)

### 1. Labor Rate Variance

Actual labor hours worked x Actual rate (310 hours x $12.10) | = $3,751 |

Actual labor hours worked x Standard rate (310 labor hours x $12) | = $3,720 |

Unfavorable |
= $31 |

### 2. Labor Efficiency Variance

Actual labor hours worked x Standard rate (310 hours x $12) | = $3,720 |

Standard hours allowed x Standard rate (340 hours x $12) | = $4,080 |

Favorable |
= $360 |