Chapter 21, Problem 3PSA

1.

(a).

To determine

The cost per unit of each variable overhead item and its total per unit costs.

Explanation of Solution

Calculation of the variable cost per unit:

Variable overhead cost item	Total cost ($)	Expected production volume	Cost per unit ($)
Indirect materials	45,000	15,000	3.00
Indirect labor	180,000	15,000	12.00
Power	45,000	15,000	3.00
Repairs and maintenance	90,000	15,000	6.00
Total variable overhead cost per unit			24.00

Table(1)

Thus, the total variable overhead cost per unit is $24.

(b).

To determine

The total fixed costs per month.

Explanation of Solution

Calculation of the total fixed costs per month.

Fixed overhead cost item	Amount ($)
Depreciation building	24,000
Depreciation machinery	80,000
Taxes and insurance	12,000
Supervision	79,000
Total	195,000

Table(2)

Hence, the total fixed costs per month is $195,000.

2.

To determine

The flexible budget.

Explanation of Solution

The flexible budget for the Company A.

A Company
Flexible overhead budgets
For month ended October 31
Particulars
	Variable cost per unit ($)	Total fixed cost ($)	Budget for unit sales of 13,000	Budget for unit sales of 15,000	Budget for unit sales of 17,000
Variable overhead costs
Indirect materials	3.00		39,000	45,000	51,000
Indirect labor	12.00		156,000	180,000	204,000
Power	3.00		39,000	45,000	51,000
Repairs and maintenance	6.00		78,000	90,000	102,000
Total variable cost	24.00		312,000	360,000	408,000
Fixed overhead costs
Depreciation-building		24,000	24,000	24,000	24,000
Depreciation-machinery		80,000	80,000	80,000	80,000
Taxes and insurance		12,000	12,000	12,000	12,000
Supervision		79,000	79,000	79,000	79,000
Total fixed cost		195,000	195,000	195,000	195,000
Total overheads			507,000	555,000	603,000

Table(3)

Thus, the flexible budget estimates the total variable, fixed and overhead costs as mentioned above.

3.

To determine

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

Explanation of Solution

Given,
The actual material used is 91,000 lbs.
The standard quantity of materials for actual production is 90,000 lbs.
The actual price is $5.10 per lb.
The standard price is $5.00 per lb.

Calculation of direct material cost variance,

Particulars	Amount ($)
Actual units at actual cost $\left(91,000\times \$5.10\right)$	464,100
Standard units at standard cost $\left(90,000\times \$5.00\right)$	450,000
Direct material cost variance	14,100 (unfavorable)

Table(4

The direct material cost variance is $14,100 (unfavorable).

Calculation of direct material price variance:

The formula to calculate the direct material price variance is,

   $\text{Direct}\text{material}\text{price}\text{variance}=\left(\begin{array}{c}\text{Actual}\text{quantity}\\ \times \left(\text{Actual}\text{price}-\text{Standard}\text{price}\right)\end{array}\right)$

Substitute 91,000 lb. for the actual quantity, $5.10 for the actual price and $5 for the standard price in the above formula.

   $\begin{array}{c}\text{Direct}\text{material}\text{price}\text{variance}=91,000\text{lb}\times \left(\$5.10\text{per}\text{lb}-\$5.00\text{per}\text{lb}\right)\\ \text{=91,000}\text{lb}\times \$0.10\text{per}\text{lb}\\ \text{=\$9,100}\end{array}$

The direct material price variance is $9,100 (unfavorable).

Compute direct material quantity variance.

The formula to calculate the direct material quantity variance is,

   $\begin{array}{c}\text{Direct}\text{material}\text{quantity}\text{variance}=\left(\text{Actual}\text{quantity}-\text{Standard}\text{quantity}\right)\\ \times \text{Standard}\text{price}\end{array}$

Substitute 91,000 lb for the actual quantity, 90,000 lb for standard quantity and $5.00 for standard price in the above formula.

   $\begin{array}{c}\text{Direct}\text{material}\text{quantity}\text{variance}=\left(91,000\text{lb}-90,000\text{lb}\right)\times \$5\text{per}\text{lb}\\ \text{=1,000}\text{lb}\times \text{\$5}\text{.00}\text{per}\text{lb}\\ \text{=\$5,000}\text{U}\end{array}$

The direct material quantity variance is $5,000 (unfavorable).

Hence, the direct material cost variance, price variance and quantity variance is $14,100 (unfavorable), $9,100 (unfavorable) and $5,000 (unfavorable).

4.

To determine

The direct labor cost, rate and efficiency variances.

Explanation of Solution

Given,
The actual hours used is 30,500 hours.
The standard hours for actual production are 30,000 hours.
The actual rate is $17.25 per hour.
The standard rate is $17.00 per hour.

Calculation of direct labor cost variance,

Particulars	Amount ($)
Actual hours at actual cost $\left(30,500\text{hours}\times \$17.25\right)$	526,125
Standard hours at standard cost $\left(30,000\times \$17.00\right)$	510,000
Direct labor cost variance	16,125 (unfavorable)

Table(5)

The direct labor cost variance is $16,125 (unfavorable).

Compute direct labor rate variance.

The formula to calculate the direct labor rate variance is,

   $\text{Direct}\text{labor}\text{rate}\text{variance}=\left(\begin{array}{c}\text{Actual}\text{hours}\\ \times \left(\text{Actual}\text{rate}-\text{Standard}\text{rate}\right)\end{array}\right)$

Substitute 30,500 hours. for the actual hours, $17.25 for the actual rate and $17 for the standard rate in the above formula.

   $\begin{array}{c}\text{Direct}\text{labor}\text{rate}\text{variance}=30,500\text{hours}\times \left(\$17.25\text{per}\text{lb}-\$17.00\text{per}\text{lb}\right)\\ =\text{30,500}\text{hours}\times \$0.25\text{per}\text{lb}\\ =\text{\$7,625}\text{U}\end{array}$

The direct labor rate variance is $7,625 (unfavorable).

Compute direct labor efficiency variance.

The formula to calculate the direct labor efficiency variance is,

   $\begin{array}{c}\text{Direct}\text{labor}\text{efficiency}\text{variance}=\left(\text{Actual}\text{hours}-\text{Standard}\text{hours}\right)\\ \times \text{Standard}\text{rate}\end{array}$

Substitute 30,500 for the actual hours, 30,000 for standard hours and $17.00 for standard rate in the above formula.

   $\begin{array}{c}\text{Direct}\text{labor}\text{efficiency}\text{variance}=\left(30,500-30,000\right)\text{hours}\times \$17\text{per}\text{hour}\\ \text{=500}\text{hours}\times \text{\$17}\text{.00}\text{per}\text{hour}\\ \text{=\$8,500}\text{U}\end{array}$

The direct labor efficiency variance is $8,500 (unfavorable).

Hence, the direct labor cost variance, rate variance and efficiency variance is $16,125 (unfavorable), $7,625 (unfavorable) and $8,500 (unfavorable).

5.

To determine

To prepare: The detailed overhead variance report.

Explanation of Solution

The detailed overhead variance report showing the variances for individual items of overhead.

A Company
Overhead variance report
For month ended October 31
Volume variance
Expected production level				75% of capacity
Production level achieved				75% of capacity
Volume variance				None
Controllable variance	Flexible	Actual	Variances	Favorable or unfavorable
Variable overhead costs
Indirect materials	45,000	44,250	750	Favorable
Indirect labor	180,000	177,750	2,250	Favorable
Power	45,000	43,000	2,000	Favorable
Repairs and maintenance	90,000	96,000	6,000	Unfavorable
Total variable costs	360,000	361,000	1,000	Unfavorable
Fixed overhead costs
Depreciation-building	24,000	24,000	0
Depreciation-machinery	80,000	75,000	5,000	Favorable
Taxes and insurance	12,000	11,500	500	Favorable
Supervision	79,000	89,000	10,000	Unfavorable
Total fixed costs	195,000	199,500	4,500	Unfavorable
Total overhead costs	555,000	560,500	5,500	Unfavorable

Table(6)