Chapter 8, Problem 27PSA

a)

To determine

Determine the standard cost per candle for direct material, labor, and overhead

Explanation of Solution

Compute the standard cost per candle:

Excel workings:

Table (1)

Excel spread sheet:

Table (2)

b)

To determine

Determine the total standard cost per drip candle

Explanation of Solution

Compute the standard cost per candle:

Excel workings:

Table (3)

Excel spread sheet:

Table (4)

Hence, the total standard per drip candle is $35.40.

c)

To determine

Determine the actual cost per candle for direct materials, direct labor, and overhead.

Explanation of Solution

Determine the actual cost per candle for direct materials, direct labor, and overhead:

Excel workings:

Table (5)

Excel spread sheet:

Table (6)

d)

To determine

Determine the total actual cost per drip candle

Explanation of Solution

Compute the total actual cost per candle:

Excel workings:

Table (7)

Excel spread sheet:

Table (8)

Hence, the total standard per drip candle is $36.63.

e)

To determine

Determine the usage and price variances for direct materials and direct labor and the variance Company S has to investigate and offer the causes for the variance.

Explanation of Solution

Compute the price and usage variance for direct material:

$\begin{array}{c}\text{Materials price variances}=\left|\left(\text{Actual price}-\text{Standard price}\right)\right|\times \text{Actual quantity}\\ =\left|\left(\$1.35-\text{\$1}\text{.50}\right)\right|\times 40,000\\ =\$60,000\end{array}$

Hence, the material price variance is -$60,000 which is a favorable variance.

$\begin{array}{c}\text{Materials usage variance}=\left|\left(\text{Actual quantity}-\text{Standard quantity}\right)\right|\times \text{Standard price}\\ =\left|\left(\text{40,000}-38,400\right)\right|\times \$1.50\\ =\$2,400\end{array}$

Hence, the material usage variance is $2,400 which is a unfavorable variance.

Compute the price and usage variance for direct labor:

$\begin{array}{c}\text{Labor price variance}=\left|\left(\text{Actual price}-\text{Standard price}\right)\right|\times \text{Actual hours}\\ =\left|\left(\$18.75-\$20.00\right)\right|\times 26,400\\ =\$33,000\end{array}$

Hence, the labor price variance is $33,000 which is a favorable variance.

$\begin{array}{c}\text{Labor usage variance }=\left|\left(\text{Actual hours}-\text{Standard hours}\right)\right|\times \text{Standard price}\\ =\left|\left(26,400-24,000\right)\right|\times \$20\\ =\$48,000\end{array}$

Hence, the labor usage variance is 48,000 which is a unfavorable variance.

The variance Company S has to investigate and offer the causes for the variance:

All the variance is need to be taken for investigation. Investigation must be based on the criteria’s like materiality, capacity to control, and frequency.

Favorable variance denotes that everything is good.

f)

To determine

Determine the fixed cost spending and volume variances:

Explanation of Solution

Determine the fixed cost volume variance and spending variance and identify whether it is unfavorable or favorable:

Table (9)

Hence, the spending variance is $60,000 which is favorable variance.

Table (10)

Table (11)

Hence, the volume variance is $78,000 which is unfavorable variance.

The favorable fixed cost spending variance denotes that lesser amount was spend for the overheads than the planned or budgeted one. The unfavorable fixed cost volume variance denotes that very lesser units were produced than planned.

In order to lower the cost per unit the company should use the facilities to produce a high volume

If units were produced lesser than planned then the company will face underutilizing the facilities which indicates a unfavorable volume variance.

g)

To determine

The reason why the actual cost per unit and standard cost per unit differs by few cents

Explanation of Solution

The favorable usage and price variances are balance by the fact because the volume variances are unfavorable. Thus, the differences are very minimal.