Alkozay Ltd. Manufactures started production of its new product line (shirts) in the month of November, which it sells to customers for embroidering with various slogans and emblems. The standard cost card for the shirts is as follows. Standard Price Standard Quantity Standard Cost Direct materials AFN 1.60 per yard 1.25 yards AFN 2.00 Direct labor AFN 12 per DLH 0.25 DLH 3.00 Variable overhead AFN 4 per DLH 0.25 DLH 1.00 Fixed overhead AFN 6 per DLH 0.25 DLH 1.50 AFN 7.50 Bilal Nabi, operations manager, was reviewing the results for November when he became upset by the unfavorable variances he was seeing. In an attempt to understand what had happened, Bilal Nabi asked CFO Muhammad Javid for more information. He provided the following overhead budgets, along with the actual results for November. The company purchased and used 112,000 yards of fabric during the month. Fabric purchases during the month were made at AFN 1.45 per yard. The direct labor payroll ran AFN 249,260, with an actual hourly rate of AFN 12.10 per direct labor hour. The annual budgets were based on the production of 1,000,000 shirts, using 250,000 direct labor hours. Though the budget for November was based on 80,000 shirts, the company actually produced 82,000 shirts during the month. Fixed Overhead Budget Annual Budget November—Actual Supervisory salaries AFN 260,000 AFN 22,000 Insurance 350,000 25,500 Property taxes 80,000 6,500 Depreciation 320,000 30,000 Utilities 210,000 21,600 Quality inspection 280,000 29,700 Total AFN 1,500,000 AFN 135,300 Variable Overhead Budget Annual Budget Per Shirt November— Actual Indirect materials AFN 450,000 AFN 0.45 AFN 36,000 Indirect labor 300,000 0.30 33,700 Equipment repair 200,000 0.20 16,400 Equipment power 50,000 0.05 12,300 Total AFN 1,000,000 AFN 1.00 AFN 98,400 Requirement 1. Calculate and determine the direct materials price and quantity variances for the month of November. 2. Calculate and determine the direct labor rate and efficiency variances for the month of November. 3. Calculate and determine the variable overhead spending and efficiency variances for the month of November. 4. Provide a brief explanation of the possible causes of each variance in direct material, direct labor, and overhead variance
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Alkozay Ltd. Manufactures started production of its new product line (shirts) in the month of November, which it sells to customers for embroidering with various slogans and emblems. The
| Standard Price | Standard Quantity | Standard Cost | |
| Direct materials | AFN 1.60 per yard | 1.25 yards | AFN 2.00 |
| Direct labor | AFN 12 per DLH | 0.25 DLH | 3.00 |
| Variable overhead | AFN 4 per DLH | 0.25 DLH | 1.00 |
| Fixed overhead | AFN 6 per DLH | 0.25 DLH | 1.50 |
| AFN 7.50 |
Bilal Nabi, operations manager, was reviewing the results for November when he became upset by the unfavorable variances he was seeing. In an attempt to understand what had happened, Bilal Nabi asked CFO Muhammad Javid for more information. He provided the following overhead budgets, along with the actual results for November.
The company purchased and used 112,000 yards of fabric during the month. Fabric purchases during the month were made at AFN 1.45 per yard. The direct labor payroll ran AFN 249,260, with an actual hourly rate of AFN 12.10 per direct labor hour. The annual budgets were based on the production of 1,000,000 shirts, using 250,000 direct labor hours. Though the budget for November was based on 80,000 shirts, the company actually produced 82,000 shirts during the month.
| Fixed Overhead Budget | ||
| Annual Budget | November—Actual | |
| Supervisory salaries | AFN 260,000 | AFN 22,000 |
| Insurance | 350,000 | 25,500 |
| Property taxes | 80,000 | 6,500 |
| 320,000 | 30,000 | |
| Utilities | 210,000 | 21,600 |
| Quality inspection | 280,000 | 29,700 |
| Total | AFN 1,500,000 | AFN 135,300 |
| Variable Overhead Budget | |||
| Annual Budget |
Per Shirt | November— Actual |
|
| Indirect materials | AFN 450,000 | AFN 0.45 | AFN 36,000 |
| Indirect labor | 300,000 | 0.30 | 33,700 |
| Equipment repair | 200,000 | 0.20 | 16,400 |
| Equipment power | 50,000 | 0.05 | 12,300 |
| Total | AFN 1,000,000 | AFN 1.00 | AFN 98,400 |
Requirement
1. Calculate and determine the direct materials price and quantity variances for the month of November.
2. Calculate and determine the direct labor rate and efficiency variances for the month of November.
3. Calculate and determine the variable overhead spending and efficiency variances for the month of November.
4. Provide a brief explanation of the possible causes of each variance in direct material, direct labor, and overhead variance.
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