Chapter 21, Problem 3PSB

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	22,500	15,000	1.50
Indirect labor	90,000	15,000	6.00
Power	22,500	15,000	1.50
Repairs and maintenance	45,000	15,000	3.00
Total variable overhead cost per unit			12.00

Table(1)

Thus, the total variable overhead cost per unit is $12.

(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	72,000
Taxes and insurance	18,000
Supervision	66,000
Total	180,000

Table(2)

Hence, the total fixed cost per month is $180,000.

2.

To determine

The flexible budget.

Explanation of Solution

The flexible budget for the Company S.

S Company
Flexible overhead budgets
For month ended December 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	1.50		19,500	22,500	51,000
Indirect labor	6.00		78,000	90,000	204,000
Power	1.50		19,500	22,500	51,000
Repairs and maintenance	3.00		39,000	45,000	102,000
Total variable cost	12.00		156,000	180,000	204,000
Fixed overhead costs
Depreciation-building		24,000	24,000	24,000	24,000
Depreciation-machinery		72,000	72,000	72,000	72,000
Taxes and insurance		18,000	18,000	18,000	18,000
Supervision		66,000	66,000	66,000	66,000
Total fixed cost		180,000	180,000	180,000	180,000
Total overheads			336,000	360,000	384,000

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 69,000 lbs.
The standard quantity of materials for actual production is 67,500 lbs.
The actual price is $6.10 per lb.
The standard price is $6.00 per lb.

Calculation of direct material cost variance,

Particulars	Amount ($)
Actual units at actual cost $\left(69,000\times \$6.10\right)$	420,900
Standard units at standard cost $\left(67,500\times \$6.00\right)$	405,000
Direct material cost variance	15,900 (unfavorable)

Table(4)

The direct material cost variance is $15,900 (unfavorable).

Calculation of direct material price variance:

The formula to calculate the direct material price variance is,

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

Substitute 69,000 lb. for the actual quantity, $6.10 for the actual price and $6 for the standard price in the above formula.

   $\begin{array}{c}\text{Direct}\text{material}\text{price}\text{variance}=69,000\text{lb}\times \left(\$6.10-\$6.00\right)\text{per}\text{lb}\\ =\text{69,000}\text{lb}\times \left(\$0.10\right)\text{per}\text{lb}\\ =\text{\$6,900}\text{U}\end{array}$

The direct material price variance is $6,900 (unfavorable).

Calculation of 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 69,000 lb for the actual quantity, 67,500 lb for standard quantity and $6.00 for standard price in the above formula.

   $\begin{array}{c}\text{Direct}\text{material}\text{quantity}\text{variance}=\left(69,000-67,500\right)\text{lb}\times \$6\text{per}\text{lb}\\ \text{=1,500}\text{lb}\times \text{\$6}\text{.00}\text{per}\text{lb}\\ \text{=\$9,000}\text{U}\end{array}$

The direct material quantity variance is $9,000 (unfavorable).

Hence, the direct material cost variance, price variance and quantity variance is $15,900 (unfavorable), $6,900 (unfavorable) and $9,000 (unfavorable).

4.

To determine

The direct labor cost, rate and efficiency variances.

Explanation of Solution

Given,

The actual hours used is 22,800 hours.
The standard hours for actual production are 22,500 hours.
The actual rate is $12.30 per hour.
The standard rate is $12.00 per hour.

Calculation of direct labor cost variance:

Particulars	Amount ($)
Actual hours at actual cost $\left(22,800\text{hours}\times \$12.30\right)$	280,440
Standard hours at standard cost $\left(22,500\times \$12.00\right)$	270,000
Direct labor cost variance	10,440 (unfavorable)

Table(5)

The direct labor cost variance is $10,440 (unfavorable).

Calculation of direct labor rate variance:

The formula to calculate the direct labor rate variance is,

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

Substitute 22,800 hours. for the actual hours, $12.30 for the actual rate and $12 for the standard rate in the above formula.

   $\begin{array}{c}\text{Direct}\text{labor}\text{rate}\text{variance}=22,800\text{hours}\times \left(\$12.30-\$12.00\right)\text{per}\text{lb}\\ =22\text{,800}\text{hours}\times \left(\$0.30\right)\text{per}\text{lb}\\ =\text{\$6,840}\text{U}\end{array}$

The direct labor rate variance is $6,840 (unfavorable).

Calculation of 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 22,800 for the actual hours, 22,500 for standard hours and $12.00 for standard rate in the above formula.

   $\begin{array}{c}\text{Direct}\text{labor}\text{efficiency}\text{variance}=\left(22,800-22,500\right)\text{hours}\times \$12\text{per}\text{hour}\\ \text{=300}\text{hours}\times \text{\$12}\text{.00}\text{per}\text{hour}\\ \text{=\$3,600}\text{U}\end{array}$

The direct labor efficiency variance is $3,600 (unfavorable).

Hence, the direct labor cost variance, rate variance and efficiency variance is $10,440 (unfavorable), $6,840 (unfavorable) and $3,600 (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.

S 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	22,500	21,600	900	Favorable
Indirect labor	90,000	82,260	7,740	Favorable
Power	22,500	23,100	600	Unfavorable
Repairs and maintenance	45,000	46,800	1,800	Unfavorable
Total variable costs	180,000	173,760	6,240	Favorable
Fixed overhead costs
Depreciation-building	24,000	24,000	0
Depreciation-machinery	72,000	75,000	3,000	Unfavorable
Taxes and insurance	18,000	16,500	1,500	Favorable
Supervision	66,000	66,000	0
Total fixed costs	180,000	181,500	1,500	Unfavorable
Total overhead costs	360,000	355,260	4,740	Favorable

Table(6)