Chapter 8, Problem 13P

Variance analysis

Cardiff Inc. manufactures men’s sport shirts for large stores. It produces a single quality shirt in lots of a dozen according to each customer’s order and attaches the store’s label. The standard costs for a dozen shirts include the following:

During October, Cardiff worked on three orders for shirts. Job cost records for the month disclose the following:

The following information is also available:

1. a. Cardiff purchased 95,000 yards of materials during October at a cost of $53,200. The materials price variance is recorded when goods are purchased, and all inventories are carried at standard cost.
2. b. Direct labor incurred amounted to $112,750 during October. According to payroll records, production employees were paid $10.25 per hour.
3. c. Overhead is applied on the basis of direct labor hours. Factory overhead totaling $22,800 was incurred during October.
4. d. A total of $288,000 was budgeted for overhead for the year, based on estimated production at the plant’s normal capacity of 48,000 dozen shirts per year. Overhead is 60% fixed and 40% variable at this level of production.
5. e. There was no work in process at October 1. During October, Lots 30 and 31 were completed, and all materials were issued for Lot 32, which was 80% completed as to labor and overhead.

   Required:

   1. 1. Prepare a schedule computing the October total standard cost of Lots 30, 31, and 32.
   2. 2. Prepare a schedule computing the materials price variance for October and indicate whether it is favorable or unfavorable.
   3. 3. For each lot produced during October, prepare schedules computing the following (indicate whether favorable or unfavorable):
      1. a. Materials quantity variance in yards.
      2. b. Labor efficiency variance in hours. (Hint: Don’t forget the percentage of completion.)
      3. c. Labor rate variance in dollars.
   4. 4. Prepare a schedule computing the total flexible-budget and production-volume overhead variances for October and indicate whether they are favorable or unfavorable.
   5. 5. Give some reasons as to why the production-volume variance may be unfavorable and why it is important to correct the situation.