Question

Determining Unit Costs, Variance Analysis, and Interpretation Big Dog Company, a manufacturer of dog food, produces its product in 1,000-bag batches. The standard cost of each batch consists of 7,000 pounds of direct materials at $0.40 per pound, 50 direct labor hours at $8.50 per hour, and variable overhead cost (based on machine hours) at the rate of $10 per hour with 18 machine hours per batch. The following variable costs were incurred for the last 1,000-bag batch produced: Direct materials 7,300 pounds costing $2,778 were purchased and used 45 hours costing $450 Direct labor Variable overhead $250 Machine hours used 20 hours (a) Determine the actual and standard variable costs per bag of dog food produced, separated into direct materials, direct labor, and variable overhead. Round your answers to three decimal places Actual Cost Standard Cost Direct materials 0 5 Direct labor 0 Variable overhead 0 Total variable costs per bag 0 S 0 (b) For the last 1,000-bag batch, determine the standard cost variances for direct materials, direct labor, and variable overhead. Round your answers two decimal places. Materials price variance 0 Materials quantity variance 0 Labor rate variance Labor efficiency variance 0 Variable overhead spending variance 0 Variable overhead efficiency variance (c) Which of the following is the most likely explanation for an unfavorable labor rate variance and a favorable labor efficiency variance? OUse of high efficiency equipment by undertrained employees. OUse of higher skilled employees and high efficiency equipment. OUse of low efficiency equipment by highly skilled employees. OUse of poor quality materials resulting in overtime labor. Check

Answer 1

(a)

	Actual Cost	Standard Cost
Direct Materials	$          2,778	$          2,800
Direct Labor	$              450	$              425
Variable Overhead	$              250	$              180
Total Variable Costs per bag	$          3,478	$          3,405

(b)
Material Price Variance = Actual Price x Actual Material used - Standard Price x Actual material used
= $2778 - 7300 x $0.40 = $142 (F)

Material Quantity Variance = (Actual Quantity - Standard Quantity) x Standard Price
= (7300 - 7000) x $0.40 = $120 (U)

Labor Rate Variance = (Actual rate - standard rate) x Actual Hours used
= ($10 - $8.50) x 45 = $67.50 (U)

Labor Efficiency Variance = (Actual Hours - Standard hours) x Standard Rate
= (45 - 50) x $8.50 = $42.50 (F)

Variable Overhead spending variance = (Actual rate - Standard rate) x Actual machine hours
= ($12.50 - $10) x 20 = $50 (U)

Variable overhead Efficiency Variance = (Actual Hours - Standard hours) x Standard Rate
= (20 - 18) x $10 = $20 (U)

(c)
Answer is b. Use of highly skilled labor and high efficiency equipment

Since highly skilled labor will be paid more and will use less time