Chapter 10, Problem 16P

To determine

Standard Cost:

The cost of production predetermined by the business based on budgeted production and past experience is called standard cost.

Material Price Variance:

At the actual quantity, the difference between the actual cost and standard cost is known as material price variance.

Material Quantity Variance:

The material quantity variance measures the efficiency of a production in terms of material utilization. It is computed by determining the difference between the standard quantity to used and actual quantity of material used in the production at the standard rate.

Labor Rate Variance:

At the actual direct labor hours, the variance between the actual direct labor cost based on actual rate incurred and the budgeted direct labor cost based on standard rate is called direct labor cost variance.

Direct Labor Efficiency Variance:

Direct labor efficiency variance measures the efficiency in utilization of direct labor costs by determining the difference between the actual labor hours and the standard labor hours allowed at the standard rate.

Variable Overhead Rate Variance:

The overhead cost which varies with the level of activity is called a variable overhead cost. At the actual hours of allocation base, the difference between the actual variable overhead cost and budgeted variable overhead cost is called variable overhead cost variance. The favorability of variance depends upon whether the actual cost is more or less than the budgeted cost. If the actual cost is less than budgeted cost, it is a favorable variance and if the actual cost is more than the budgeted cost, it is an unfavorable variance.

Variable Overhead Efficiency Variance:

Variable overhead efficiency variance is the difference between the actual hours of allocations base and the budgeted hours of allocation base allowed at the standard rate. If the actual hours of allocations base is less than the budgeted hours of allocation base allowed, the variance is favorable and if the actual hours of allocations base is more than the budgeted hours of allocation base allowed at the standard rate, the variance is termed as unfavorable variance meaning the company hasn’t been efficient.

1. What is the standard cost of a single backpack?

2. What was the actual cost per backpack produced during March?

3. Compute how many yards of material are required at standard per backpack?

4. What was the materials price variance for March if there were no beginning or ending inventories of materials?

5. What is the standard direct labor rate per hour?

6. Compute labor rate and efficiency variance for March.

7. What was the variable overhead rate and efficiency variance for March?

8. Prepare a standard cost card for one backpack.

Answer to Problem 16P

Solution:

1.

The standard cost per single backpack is $42.

2.

The actual cost per backpack produced during March is $41.85.

3.

The direct materials quantity per backpack is 2.80 yards.

4.

Material Price Variance	$3,000 F
Materials Quantity Variance	$1,200 U
Materials Spending Variance	$1,800 F

5.

The standard direct labor rate per hour is $15 per direct labor hour.

6.

Direct Labor Rate Variance	$750 U
Direct Labor Efficiency Variance	$1,500 U

7.

Manufacturing Overhead Rate Variance	$900 F
Manufacturing Overhead Efficiency Variance	$300 U

8. Standard Cost Card

	Standard Quantity / Hours	Standard Price or Rate	Standard Cost
Direct Materials	2.80 yards	$6 per yard	$16.80
Direct Labor	1.4 hours	$15	$21
Variable Manufacturing Overhead	1.4 hours	$3 per direct labor − hours	$4.20
Total Standard Cost per Unit			$42

Explanation of Solution

1.

Computation of total standard cost
Materials used	$16,800
Direct labor	$21,000
Variable manufacturing overhead	$4,200
Total standard cost	$42,000

  $\begin{array}{l}StandardCostperSingleBackpack=\frac{TotalStandardCost}{NumberofBackpacksProducedduringtheMonth}\hfill \\ =\frac{\$42,000}{1,000backpacks}\hfill \\ =\$42perbackpack\hfill \end{array}$

2.

Computation of actual cost per backpack
Standard Cost per Single Backpack	$42
Less: Favorable difference between standard and actual cost per backpack	$0.15
Actual cost per Backpack	$41.85

3.

4.

Computation of materials price variance
Standard cost of materials	$16,800
Less: Actual cost of materials	$15,000
Materials Spending Variance	$1,800 F
Add: Unfavorable Materials Quantity Variance	$1,200 U
Material Price Variance	$3,000 F

5.

Computation of standard direct labor rate per hour

6.

Computation of actual direct labor cost
Total Actual Cost of Production ($41.85 X 1,000)	$41,850
Less: Actual Direct Materials Cost	$15,000
Actual Variable Manufacturing Overhead Cost	$3,600
Actual Direct Labor Cost	$23,250
Actual Direct Labor Hours	1,500 hours
Actual Direct Labor Rate	$15.50

7.

Conclusion

After analyzing the variances, it is concluded that there is a favorable variance of $150 between the standard cost and actual cost of production of Highland Company.

Material Price Variance	$3,000 F
Materials Quantity Variance	$1,200 U
Direct Labor Rate Variance	$750 U
Direct Labor Efficiency Variance	$1,500 U
Manufacturing Overhead Rate Variance	$900 F
Manufacturing Overhead Efficiency Variance	$300 U
Total Variance	$150 F