Chapter 13, Problem 13.5P

Direct materials and direct labor, variance analysis; factory overhead cost variance analysis
Route 66 Tire Co. manufactures automobile tires. Standard costs and actual costs for direct materials, direct labor, and factory overhead incurred for the manufacture of 10.000 tires were as follows:

Instructions

Determine (a) the price variance, quantity variance, and total direct materials cost variance; (b) the rale variance, time variance, and total direct labor cost variance; and (c) Appendix: variable factory overhead controllable variance, the fixed factory overhead volume variance, and total factory overhead cost variance.

To determine

(a)

Concept Introduction:

Price variance:-It is the difference between price per unit in standard and actual price of product and multiplying that with quantity purchased in actual.

Quantity variance:-It is referred to the amount which is computed by multiplying the standard price per unit with the difference between quantity in actual term and standard term of product.

Direct Material cost variance:-This amount is calculated as the difference between standard cost and actual cost of direct material. The result is favorable when price variance is more than quantity variance. The result is unfavorable when price variance is less than quantity variance.

The price variance, quantity variance and total direct materials cost variance.

Answer to Problem 13.5P

Direct material price variance $=-\$6,704\text{ Favorable}$.

Direct material quantity variance $=-\$7,500\text{ Favorable}$.

Direct material cost variance $=-\$14,204\text{ Favorable}$.

Explanation of Solution

Computation of Direct material price variance is as follows:

  $\begin{array}{c}\text{Direct material price variance }=\left(\text{Actual price}-S\text{tandard price}\right)\times \text{Actual quantity}\\ \text{=}\left(\$6.17-\$6.25\right)\times 83,800\\ =-\$6,704\text{ Favorable}\end{array}$

Computation of Direct material quantity variance is as follows:

  $\begin{array}{c}\text{Direct material quantity variance }=\left(\text{Actual quantity}-S\text{tandard quantity}\right)\times \text{Standard price}\\ \text{=}\left(83,800-85,000\right)\times \$6.25\\ =-\$7,500\text{ Favorable}\end{array}$

Computation of Direct material cost variance is as follows:

  $\begin{array}{c}\text{Direct material cost variance }=\text{Price variance}+\text{Quantity variance}\\ \text{=}-\$6,704+\left(-\$7,500\right)\\ =-\$14,204\end{array}$

To determine

(b)

Concept Introduction:

Rate variance:

It is referred to the amount which is computed by multiplying the number of actual hours with the difference between actual rate and standard rate per hour of direct labour.

Time variance:-It is referred to the amount which is computed by multiplying the standard rate per hours with the difference between the number of actual hours and standard hours of direct labour.

Direct labour cost variance:

This amount is calculated as the difference between the actual cost and standard cost of direct labour for production. If answer is in negative than it is favourable. If answer is in positive than it is unfavorable.

The rate variance, time variance and total direct labour cost variance.

Answer to Problem 13.5P

Direct labor rate variance $=\$890\text{ Unfavorable}$.

Direct labor time variance $=\$9,360\text{ Unfavorable}$.

Direct labor cost variance $=\$10,250\text{ Unfavorable}$.

Explanation of Solution

Computation of Direct labor rate variance is as follows:

  $\begin{array}{c}\text{Direct labour rate variance }=\left(\text{Actual rate}-S\text{tandard rate}\right)\times \text{Actual hours}\\ \text{=}\left(\$21-\$20.80\right)\times 4,450\\ =\$890\text{ Unfavorable}\end{array}$

Computation of Direct labor time variance is as follows:

  $\begin{array}{c}\text{Direct labour time variance }=\left(\text{Actual hours}-S\text{tandard hours}\right)\times \text{Standard rate}\\ \text{=}\left(4,450-4,000\right)\times \$20.80\\ =\$9,360\text{ Unfavorable}\end{array}$

Computation of Direct laborcost variance is as follows:

  $\begin{array}{c}\text{Direct labour cost variance }=\text{Rate variance}+\mathrm{va}\text{riance variance}\\ \text{=\$890+\$9,360}\\ =\$10,250\text{ Unfavorable}\end{array}$

To determine

(c)

Concept Introduction:

Volume variance:-It is referred to the amount which is computed by multiplying the fixed standard cost rate per hour with the difference between the actual hours and standard hours of variable factory overhead.

Variable factory overhead cost variance:-This amount is calculated as the difference between the contrallable variance and volume variance of variable factory overhead. If price is in negative, then it is favourable. If price is in positive then it is unfavorable.

The variable factory overhead controlled variance, fixed factory overhead volume variance and total factory overhead cost variance.

Answer to Problem 13.5P

Variable factory overhead controlledvariance $=-\$225\text{ Favorable}$.

Variable factory overhead volume variance $=\$11,400\text{ Unfavorable}$

Variable factory overhead cost variance $=\$11,175\text{ Unfavorable}$.

Explanation of Solution

Computation of Variable factory overhead controlled variance is as follows:

  $\begin{array}{c}\text{Variable factory overhead controlled variance }=\text{Actual cost}-\text{Budgeted cost}\\ =\$11,375-\left(4,000\text{hrs}\times \$2.90\right)\\ =\$11,375-\$11,600\\ =-\$225\text{ Favorable}\end{array}$

Computation of Variable factory overhead volume variance is as follows:

  $\begin{array}{c}\text{Variable factory overhead volume variance }=\left(\text{Actual hours}-\text{Standard hours}\right)\times \text{Standard cost}\\ \text{=}\left(5,000-4,000\right)\times \$11.40\\ =\$11,400\text{ Unfavorable}\end{array}$

Computation of Variable factory overhead cost variance is as follows:

  $\begin{array}{c}\text{Variable factory overhead cost variance }=\text{Controlled variance}+\text{Volume variance}\\ \text{=}-\$225+\$11,400\\ =\$11,175\text{ Unfavorable}\end{array}$