Materials, Direct Labor, and Factory Overhead Cost Variance Analysis Santiago Inc. processes a base chemical into plastic. Standard costs and actual costs for direct materials, direct labor, and factory overhead incurred for the manufacture of 78,000 units of product were as follows: Line Item Description Standard Costs Actual Costs Direct materials 195,000 lbs. at $5.50 per lb. 193,100 lbs. at $5.40 per lb. Direct labor 19,500 hrs. at $16.80 per hr.
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.
Sub : Accounting
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Direct Materials, Direct Labor, and Factory
Santiago Inc. processes a base chemical into plastic.
| Line Item Description | Standard Costs | Actual Costs |
|---|---|---|
| Direct materials | 195,000 lbs. at $5.50 per lb. | 193,100 lbs. at $5.40 per lb. |
| Direct labor | 19,500 hrs. at $16.80 per hr. | 19,950 hrs. at $17.10 per hr. |
| Factory overhead | Rates per direct labor hr., based on 100% of normal capacity of 20,350 direct labor hrs.: | |
| Factory overhead | Variable cost, $2.90 | $55,980 variable cost |
| Factory overhead | Fixed cost, $4.60 | $93,610 fixed cost |
Each unit requires 0.25 hour of direct labor.
Required:
a. Determine the direct materials price variance, direct materials quantity variance, and total direct materials cost variance. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number.
| Line Item Description | Amount | Variance |
|---|---|---|
| Direct Materials Price Variance |
FavorableUnfavorable |
|
| Direct Materials Quantity Variance |
FavorableUnfavorable |
|
| Total Direct Materials Cost Variance |
FavorableUnfavorable |
b. Determine the direct labor rate variance, direct labor time variance, and total direct labor cost variance. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number.
| Line Item Description | Amount | Variance |
|---|---|---|
| Direct Labor Rate Variance |
FavorableUnfavorable |
|
| Direct Labor Time Variance |
FavorableUnfavorable |
|
| Total Direct Labor Cost Variance |
FavorableUnfavorable |
c. Determine the variable factory overhead controllable variance, fixed factory overhead volume variance, and total factory overhead cost variance. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number.
| Line Item Description | Amount | Variance |
|---|---|---|
| Variable factory overhead controllable variance |
FavorableUnfavorable |
|
| Fixed factory overhead volume variance |
FavorableUnfavorable |
|
| Total factory overhead cost variance |
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