Chapter 9, Problem 38P

Ingles Company manufactures external hard drives. At the beginning of the period, the following plans for production and costs were revealed:

During the year, 24,800 units were produced and sold. The following actual costs were incurred:

There were no beginning or ending inventories of direct materials. The direct materials price variance was $10,168 unfavorable. In producing the 24,800 units, a total of 12,772 hours were worked, 3 percent more hours than the standard allowed for the actual output. Overhead costs are applied to production using direct labor hours.

Required:

1. 1. Prepare a performance report comparing expected costs to actual costs.
2. 2. Determine the following:
   1. a. Direct materials usage variance
   2. b. Direct labor rate variance
   3. c. Direct labor usage variance
   4. d. Fixed overhead spending and volume variances
   5. e. Variable overhead spending and efficiency variances
3. 3. Use T-accounts to show the flow of costs through the system. In showing the flow, you do not need to show detailed overhead variances. Show only the over- and underapplied variances for fixed and variable overhead.

To determine

Prepare a performance report by comparing the expected costs to actual costs.

Explanation of Solution

Flexible budget performance report: This report associates actual performance and budgeted performance on par with actual sales volume. Flexible budget performance report gains the management attention to the cost or revenues that differ from budgeted amount.

A flexible budget performance report is used for analyzing the difference between actual performance and budgeted performance. It is also called as variance analysis. Its usefulness comes from the budgeted and actual results that are based on similar level of activity.

Prepare a performance report by comparing the expected costs to actual costs:

Particulars	Actual Cost	Flexible Budget Cost	Variance
Direct materials	264,368	248,000	16,368 U
Direct labor	204,352	198,400	5,952 U
Variable overhead	107,310	99,200	8,110 U
Fixed overhead	73,904	75,000	1,096 F
Total cost	$649,934	$620,600	$29,334 U

Table (1)

Working note 1: Calculate the budgeted cost for direct materials:

$\begin{array}{c}\text{Budgeted cost for direct materials = }\left(\begin{array}{l}\text{Unit produced}\times \\ \text{Direct materials price per unit}\end{array}\right)\\ \text{= }\left(\text{24,800 units}\times \$10\text{ per unit}\right)\\ =\$248,000\end{array}$

Working note 2: Calculate the budgeted cost for direct labor:

$\begin{array}{c}\text{Budgeted cost for direct labor = }\left(\begin{array}{l}\text{Unit produced}\times \\ \text{Direct labor rate per unit}\end{array}\right)\\ \text{= }\left(\text{24,800 units}\times \$8\text{ per unit}\right)\\ =\$198,400\end{array}$

Working note 3: Calculate the budgeted cost for variable overhead:

$\begin{array}{c}\text{Budgeted cost for variable overhead = }\left(\begin{array}{l}\text{Unit produced}\times \\ \text{Variable overhead cost per unit}\end{array}\right)\\ \text{= }\left(\text{24,800 units}\times \$4\text{ per unit}\right)\\ =\$99,200\end{array}$

Working note 4: Calculate the budgeted cost for fixed overhead:

$\begin{array}{c}\text{Budgeted cost for fixed overhead = }\left(\begin{array}{l}\text{Unit produced}\times \\ \text{Variable overhead cost per unit}\end{array}\right)\\ \text{= }\left(\text{25,000 units}\times \$3\text{ per unit}\right)\\ =\$75,000\end{array}$

Note: Fixed overhead unit is based on 25,000.

To determine

Calculate the followings:

1. a. Direct materials usage variance.
2. b. Direct labor rate variance.
3. c. Direct labor usage variance.
4. d. Fixed overhead spending and volume variances.
5. e. Variable overhead spending and efficiency variances.

Explanation of Solution

a.

Direct material usage (efficiency) variance: It is a measure that determines the variation in between actual and standard quantity of input multiplied by the standard unit price is called material usage variance.

The following formula is used to calculate direct material usage variance:

$\text{Direct materials usage variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Quantity}-\\ \text{Standard Quantity}\end{array}\right)\\ \times \text{Standard Price}\end{array}\right]$

Calculate direct materials usage variance by using total variance formula:

$\begin{array}{c}\text{Total variance = MPV + MUV}\\ \text{\$16,368 =\$10,168+ MUV}\\ \text{MUV=\$16,368}-\text{\$10,168}\\ =\$6,200\text{ U}\end{array}$

b.

Direct Labor Rate Variance: The direct labor rate variance is a measure to determine the variation in the estimated cost of the direct labor and the actual cost of the direct labor and is multiplied by the actual hours is called direct labor rate variance.

The following formula is used to calculate the direct labor rate variance:

$\text{Direct labor rate variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Rate}-\\ \text{Standard Rate}\end{array}\right)\\ \times \text{Actual Hours}\end{array}\right]$

Calculate direct labor rate variance:

Step 1: Calculate standard hour.

$\begin{array}{c}\text{Standard hours = }\left(\frac{\text{Total hours}}{1.03}\right)\\ \text{= }\left(\frac{12,772}{1.03}\right)\\ =12,400\end{array}$

Step 2: Calculate standard rate.

$\begin{array}{c}\text{Standard rate = }\left(\frac{\text{Budgeted cost of direct labor}}{\text{Standard hours}}\right)\\ \text{= }\left(\frac{\$198,400}{12,400\text{ hours}}\right)\\ =\$16\end{array}$

Step 3: Calculate direct labor rate variance.

$\begin{array}{c}\text{Direct labor rate variance}=\left[\text{Actual}\text{Rate}-\left(\begin{array}{l}\text{Standard Rate}\\ \times \text{Actual Hours}\end{array}\right)\right]\\ =\left[\text{\$204,352}-\left(\$16\times \text{12,772}\right)\right]\\ =\left[\$204,336-\$204,352\right]\\ =\$0\end{array}$

c.

Direct labor efficiency variance is a measure that determines the difference between the estimated labor hours and the actual labor hours used and is multiplied by the standard rate per hour is called material usage variance.

The following formula is used to calculate direct labor efficiency variance:

$\text{Direct labor efficiency variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Hours}-\\ \text{Standard Hours}\end{array}\right)\\ \times \text{Standard Rate Per Hour}\end{array}\right]$

Calculate the direct labor usage or efficiency variance:

$\begin{array}{c}\text{Direct labor efficiency variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Hours}-\\ \text{Standard Hours}\end{array}\right)\\ \times \text{Standard Rate Per Hour}\end{array}\right]\\ =\left[\begin{array}{l}\left(\text{12,772}-12,400\right)\\ \times \$16\end{array}\right]\\ =\left[372\times \$16\right]\\ =\$5,952\text{U}\end{array}$

d.

Fixed overhead spending variance: It is the difference between actual fixed overhead and the budgeted fixed overhead.

The following formula is used to calculate fixed overhead spending variance:

 $\text{Fixed overhead spending variance = }\left(\begin{array}{l}\text{Actual fixed overhead}\\ -\text{Budgeted fixed overhead}\end{array}\right)$

Calculate the fixed overhead spending variance:

$\begin{array}{c}\text{Fixed overhead spending variance = }\left(\begin{array}{l}\text{Actual fixed overhead}\\ -\text{Budgeted fixed overhead}\end{array}\right)\\ \text{ = }\left(\text{\$73,904}-\$75,000\right)\\ =\$1,096\text{ F}\end{array}$

Fixed overhead volume variance: It is the difference between budgeted fixed overhead and the applied fixed overhead.

The following formula is used to calculate fixed overhead volume variance:

$\text{Volume variance = }\left(\begin{array}{l}\text{Budgeted fixed overhead}\\ -\text{Applied fixed overhead}\end{array}\right)$

Calculate the volume variance:

$\begin{array}{c}\text{Volume variance = }\left(\begin{array}{l}\text{Budgeted fixed overhead}\\ -\text{Applied fixed overhead}\end{array}\right)\\ \text{= }\left[\text{\$75,000}-\$74,400\right]\\ =\$600\text{ U}\end{array}$

Working note 5: Calculate the applied fixed overhead:

$\begin{array}{c}\text{Applied fixed overhead =}\left(\begin{array}{l}\text{ Fixed overhead cost}\\ \times \text{ Producing units}\end{array}\right)\\ \text{=}\left(\text{\$3}\times 24,800\text{units}\right)\\ =\$74,400\end{array}$

Working note 6: Calculate the standard fixed overhead rate:

$\begin{array}{c}\text{Standard fixed overhead rate =}\left(\frac{\text{Applied fixed overhead }}{\text{Standard hours}}\right)\\ =\left(\frac{\text{\$74,400}}{\text{12,400 hours}}\right)\\ =\$6\end{array}$

e.

Spending variances: It arises when management pays an amount which is different from the standard price for purchasing an item. The variable overhead spending variance measures the total effect of differences in the actual variable overhead rate (AVOR) and the standard variable overhead rate (SVOR).

Efficiency variances: It arises when standard direct labor hours expected for actual production different from labor the actual direct labor hours used.

Variable overhead efficiency variance tells managers how much of the total variable manufacturing overhead variance is due to using more or fewer machine hours than anticipated for the actual volume of output.

Calculate variable overhead spending variance:

$\begin{array}{c}\text{Variable overhead spending variance =}\left[\begin{array}{l}\text{ Actual variable overhead}\\ -\left(\text{SVOR}\times \text{AH}\right)\end{array}\right]\\ \text{=}\left[\begin{array}{l}\text{ \$107,310}\\ -\left(\$8\times \text{12,772}\right)\end{array}\right]\\ \text{=}\left[\text{ \$107,310}-\$102,176\right]\\ =\$5,134\text{ U}\end{array}$

Calculate variable overhead efficiency variance:

$\begin{array}{c}\text{Variable overhead efficiency variance =}\left[\left(\begin{array}{l}\text{Actual hours}-\\ \text{Standard hours}\end{array}\right)\text{SVOR}\right]\\ \left[\left(12,772-12,400\right)\times \text{\$8}\right]\\ \text{=}\left[\text{ \$}372\times \$8\right]\\ =\$2,976\text{ U}\end{array}$

To determine

Prepare T-accounts to show the flow of costs through the system.

Explanation of Solution

T-account: The condensed form of a ledger is referred to as T-account. The left-hand side of this account is known as debit, and the right hand side is known as credit.

Prepare T-accounts to show the flow of costs through the system: