Question

*Problem 6-30 Lexi Belcher picked up the monthly report that Irvin Santamaria left on her desk. She smiled as her eyes went straight to the bottom line of the report and saw the favorable variance for operating income, confirming her decision to push the workers to get those last 350 cases off the production line before the end of the month. But as she glanced over the rest of numbers, Lexi couldn't help but wonder if there were errors in some of the line items. She was puzzled at how most of the operating expenses could be higher than the budget since she had worked hard to manage the production line to improve efficiency and reduce costs. Yet the report, shown below, showed a different story. Actual 10,250 $1,928,000 Budget 9,900 $1,851,300 Variance 350 Favorable $76,700 Favorable Cases produced and sold Sales revenue Less variable expenses Direct material Direct labor Variable manufacturing overhead Variable selling expenses Variable administrative expenses Total variable expense Contribution margin Less fixed expenses Fixed manufacturing overhead Fixed selling expenses Fixed administrative expenses Total fixed expense Operating income 555,390 264,974 282,162 92,199 41,323 1,236,048 691,952 544,500 257,400 277,200 89,100 39,600 1,207,800 643,500 10,890 Unfavorable 7,574 Unfavorable 4,962 Unfavorable 3,099 Unfavorable 1,723 Unfavorable 28,248 Unfavorable 48,452 Favorable 109,890 68,805 128,502 307,197 $384,755 108,900 69,300 128,700 306,900 $336,600 990 Unfavorable (495 Favorable) (198 Favorable) 297 Unfavorable $48,155 Favorable Lexi picked up the phone and called Irvin. "Irvin, I don't get it. We beat the budgeted operating income for the month, but look at all the unfavorable variances on the operating costs. Can you help me understand what's going on?" "Let me look into it and I'll get back to you," Irvin replied. Irvin gathered the following additional information about the month's performance. • Direct materials purchased: 100,980 pounds at a total of $555,390 • Direct materials used: 100,980 pounds • Direct labor hours worked: 26,235 at a total cost of $264,974 • Machine hours used: 40,541 Irvin also found the standard cost card for a case of product.

Answer 1

Answer with detailed working is given below

Direct Material Variances a) Direct Material Price Variance $0 b) Direct Material Quantity Variance | $8,360 Favourable Direct Material Price Variance = (Standard Rate - Actual Rate) * Actual Quantity Direct Material Quantity Variance = ( Standard Quantity for Actual production - Actual Quantity) * Standard Rate Working note Actual price Actual Quantity Actual Rate Actual Quantity Standard Rate Standard cost Standard Quantity Standard Rate 100,980 Actual Quantity at Actual Rate $5.50 100,980 $555,390 Actual Qty at Standard rate $5.50 102,500 $555,390 Standard Qty at Std rate $5.50 $563,750 Direct Material price variance Direct Material Quantity variance $8,360 Favourable Total Direct Material cost Variance $8,360 Favourable Direct Labor Variance c) Direct Labor Rate Variance -$2,624 Unfavourable d) Direct Labor Efficiency Variance $1,075 Favourable Direct Labor Rate Variance = ( Standard Rate - Actual Rate) * Actual hours Direct Labor Efficiency Variance = ( Standard hours for Actual production - Actual hours) * Standard Rate Working note Actual price Actual Rate Standard Rate Standard cost Standard I hours Standard Rate Actual Hours Actual Hours 26,235 Actual labor hours at actual rate $10.100 26,235 $264,974 Actual labor hours at std rate $10.00 26,342.50 $262,350 Standard hours at std rate $10.00 $263,425 Direct Labor Rate Variance Direct Labor Efficiency Variance -$2,624 Unfavourable $1,075 Favourable Total Direct Labor Cost variance $1,549 Unfavourable Variable Overhead variance e) Variable Overhead Spending variance $1,625 Favourable f) Variable Overhead Efficiency variance $3,213 Favourable Variable Overhead Rate Variance = (Standard Rate - Actual Rate) * Actual hours Variable Overhead Efficiency Variance = ( Standard hours for Actual production - Actual hours) * Standard Rate Working note Actual price Actual Rate Standard Rate Standard cost Standard hours Standard Rate Actual Hours Actual Hours 40,541 Actual Variable OH at actual rate $6.96 40,541 $282,162 Actual Variable OH at std rate $7.00 41,000 $283,787 Standard Variable OH at std rate $7.00 $287,000 Variable OH Spending Variance Variable Overhead Efficiency Variance $1,625 Favourable $3,213 Favourable Total Variable Overhead variance $4,838 Favourable $990 Unfavourable g) Fixed Overhead Spending variance for the month (Budgeted Fixed Overhead - Actual Fixed Overhead) Budgeted Fixed Overhead Actual Fixed Overhead Variance $108,900 $109,890 -$990 Unfavourable Price/Rate/Spending Variance $0 Direct Material Direct Labor Variable Overhead Fixed Overhead Total Quantity/Efficiency Variance $8,360 Favourable $1,075 Favourable $3,213 Favourable -$2,624 $1,625 -$990 $1,989 Unfavourable Favourable Unfavourable Unfavourable $12,648 Favourable Yes Overall variance is favourable