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: 6 pounds at $8 per pound $ 48 Direct labor: 4 hours at $17 per hour 68 Variable overhead: 4 hours at $4 per hour 16 Total standard cost per unit $ 132 The planning budget for March was based on producing and selling 19,000 units. However, during March the company actually produced and sold 24,000 units and incurred the following costs: Purchased 160,000 pounds of raw materials at a cost of $7.20 per pound. All of this material was used in production. Direct laborers worked 72,000 hours at a rate of $18 per hour. Total variable manufacturing overhead for the month was $336
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.
Preble Company manufactures one product. Its variable manufacturing
| Direct materials: 6 pounds at $8 per pound | $ 48 |
|---|---|
| Direct labor: 4 hours at $17 per hour | 68 |
| Variable overhead: 4 hours at $4 per hour | 16 |
| Total standard cost per unit | $ 132 |
The planning budget for March was based on producing and selling 19,000 units. However, during March the company actually produced and sold 24,000 units and incurred the following costs:
- Purchased 160,000 pounds of raw materials at a cost of $7.20 per pound. All of this material was used in production.
-
Direct laborers worked 72,000 hours at a rate of $18 per hour.
-
Total variable manufacturing overhead for the month was $336,960.
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? indicate if it is favorable or unfavorable
4. What is the materials quantity variance for March? indicate if it is favorable or unfavorable
5. If Preble had purchased 187,000 pounds of materials at $7.20 per pound and used 160,000 pounds in production, what would be the materials price variance for March? indicate if it is favorable or unfavorable
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