Chapter 23, Problem 4APSA

To determine

Variance:

Variance is the difference between the actual cost and budgeted cost for particular level of activity. It is computed by deducting the budgeted cost from the actual cost of the production.

Direct Material Cost Variance:

The difference between the actual cost incurred on the direct material and the budgeted cost expected to be incurred is called the direct material cost variance. It can either calculated by deducting the budgeted cost from the actual cost or adding the direct material price variance and direct material quantity variance.

Direct Labor Cost Variance:

The variance between the actual labor cost incurred and the budgeted labor cost is termed as direct labor cost variance. It can be computed by deducting the budgeted labor cost from the actual cost. On the contrary, it can also be ascertained by adding the direct labor rate variance and direct labor efficiency variance.

Controllable Variance:

The overall variance which comprises of variable overhead spending and efficiency variance and the fixed overhead spending and volume variance is called the controllable variance. It is basically the combination of variable and fixed overhead which the management of a company can influence.

Volume Variance:

The variance which arises due to difference in the budgeted level of activity and the actual level is called volume variance. The sole reason for this kind of variance is the variation in the level of activity.

1. Computation of direct materials cost variance with its price and quantity variances.

2. Computation of direct labor cost variance with its rate and efficiency variances.

3. Computation of overhead controllable and volume variances.

Answer to Problem 4APSA

Solution:

1. Trico Company has unfavorable variance in direct material cost variance of $141,500 with unfavorable price variance of $161,500 and favorable quantity variance of $20,000.

2. Direct labor cost variance is $136,250 (F) with both favorable variance in rate of $66,250 and efficiency of $70,000.

3. The company has favorable variance of $310,000 in controllable variance and favorable variance of $300,000 in volume variance.

Explanation of Solution

1. Computation of direct materials cost variance with its price and quantity variances.

$\begin{array}{c}\begin{array}{l}DirectMaterialPriceVariance=ActualQuantityX\left(ActualPrice–StandardPrice\right)\hfill \\ =\text{ 1,615},000lbs.X\left(\$4.10-\$4.00\right)\hfill \\ =\$161,500Unfavorable\hfill \\ \hfill \\ DirectmaterialQuantityVariance=StandardPrice\left(ActualQuantity–StandardQuantity\right)\hfill \\ =\$4.00\left(1,615,000lbs.–\text{ 1},620,000lbs.\right)\hfill \\ =\$20,000Favorable\hfill \end{array}\\ \begin{array}{l}DirectMaterialCostVariance\hfill \\ =DirectMaterialPriceVariance+DirectmaterialQuantityVariance\hfill \\ =\$161,500\text{ - }\$20,000\hfill \\ =\$141,500Unfavorable\hfill \end{array}\end{array}$

2. Computation of direct labor cost variance with its rate and efficiency variances.

$\begin{array}{l}DirectLaborRateVariance=ActualHoursX\left(ActualRate–StandardRate\right)\hfill \\ =\text{ 265},000hoursX\left(\$13.75-\$14.00\right)\hfill \\ =\$66,250\text{F}avorable\hfill \end{array}$

$\begin{array}{l}\begin{array}{l}DirectLaborEfficiencyVariance=StandardRateX\left(ActualHours–StandardHours\right)\hfill \\ =\$14.00X\left(265,000hours–\text{ 270},000hours\right)\hfill \\ =\$70,000\text{ F}avorable\hfill \end{array}\\ \begin{array}{l}DirectLaborCostVariance\hfill \\ =DirectLaborRateVariance+DirectLaborEfficiencyVariance\hfill \\ =\$66,250+\$70,000\hfill \\ =\$136,250Favorable\hfill \end{array}\end{array}$

3. Computation of overhead controllable and volume variances.

$\begin{array}{l}OverheadControllableVariance\hfill \\ =ActualFactoryOverheadCost–BudgetedFactoryOverheadCost \hfill \\ =\left(Fixedoverheadcost+Variableoverheadcost\right)–\left(StandardHoursXStandardRate\right)\hfill \\ =\left(\$2,350,000+\$2,200,000\right)–\left(270,000hoursX\$18.00\right)\hfill \\ =\$4,550,000-\$4,860,000\hfill \\ =\$310,000 Favorable\hfill \end{array}$

$\begin{array}{l}OverheadVolumeVariance=BudgetedFixedOverhead–AppliedFixedOverhead\hfill \\ =\$2,400,000–\left(StandardhoursXStandardRate\right)\hfill \\ =\$2,400,000–\left(270,000hoursX\$10\right)\hfill \\ =\$300,000 Favorable\hfill \end{array}$

Conclusion

1. The direct material price variance is $161,500 Unfavorable.

2. The direct material quantity variance is $20,000 Favorable.

3. The direct material cost variance is $141,500 Unfavorable.