Question

Problem 10-9 Comprehensive Variance Analysis (LO10-1, LO10-2, LO10-3] Marvel Parts, Inc., manufactures auto accessories. One of the company's products is a set of seat covers that can be adjusted to fit nearly any small car. The company has a standard cost system in use for all of its products. According to the standards that have been set for the seat covers, the factory should work 990 hours each month to produce 1,980 sets of covers. The standard costs associated with this level of production are: Total $ 45,738 $ 6,930 Per Set of Covers $23.10 3.50 Direct materials Direct labor Variable manufacturing overhead (based on direct labor-hours) $ 3,168 1.60 $28.20 During August, the factory worked only 1,000 direct labor-hours and produced 2,500 sets of covers. The following actual costs were recorded during the month: Direct materials (10,000 yards) Direct labor Variable manufacturing overhead Total $ 56,000 $ 9,250 $ 4,500 Per Set of Covers $22.40 3.70 1.80 $27.90

Answer 1

Data for resource variance

Particulars	Standard			Actual
	Quantity	Rate	Total Cost	Quantity	Rate	Total Cost
Direct Material	8,250 yards	$ 7.00 per yard	$ 57,750	10,000 yards	$ 5.60 per yard	$ 56,000
Direct Labour	1,250 labour hours	$ 7.00 per labour hour	$ 8,750	1,000 labour hours	$ 9.25 per labour hour	$ 9,250
Variable Manufacturing overheads	1,250 labour hours	$ 3.20 per labour hour	$ 4,000	1,000 labour hours	$ 4.5 per labour hour	$ 4,500

Answer 1)

Calculation of Material Variances

Material Price Variance = (Standard Price per unit – Actual Price per unit) X Actual Quantity of material consumed

                                            = ($ 7.00 per yard - $ 5.60 per yard) X 10,000 yards

                                            = $ 1.40 per yard X 10,000 yards

                                            = $ 14,000 (favourable)      

Therefore Material price variance is $ 14,000 (Favourable)

Material Quantity Variance = (Standard Quantity– Actual Quantity) X Standard Price per unit of input

                                            = (8,250 yards – 10,000 yards) X $ 7.00 per yard

                                            = $ 12,250 (Unfavourable)

Therefore Material Quantity variance is $ 12,250 (Unfavourable)

Working Notes:

Calculation of Standard Quantity of material for Actual output:

Standard Quantity for Actual output = Actual output in units X Standard Quantity per unit of output

                                                                  = 2,500 sets X 3.30 yards per unit

                                                                  = 7,500 yards

Therefore standard quantity of material for actual output is 7,500 yards.

Calculation of Standard Quantity of material for Standard output:

Standard Quantity for Standard output = Standard output in units X Standard Quantity per unit of output

                                                                  = 1,980 sets X 3.30 yards per unit

                                                                  = 6,534 yards

Therefore standard quantity of material for Standard output is 6,534 yards.

Calculation of standard rate per yard of material:

Standard rate per yard = Standard cost of material/ Standard quantity of material for standard output

                                                     = $ 45,738/ 6,534 yards

                                                     = $ 7.00 per yard

Therefore standard rate for material is $ 7.00 per yard.

Answer 2)

Calculation of Labour Variances

Labour Rate Variance = (Standard labour rate per hour – Actual labour rate per hour) X Actual labour hours consumed

                                            = ($ 7.00 per labour hour - $ 9.25 per Labour hour) X 1,000 labour hours

                                            = $ 2,250 (Unfavourable)      

Therefore Labour rate variance is $ 2,250 (Unfavourable)

Labour Efficiency Variance = (Standard Labour hours– Actual Labour hours) X Standard labour rate per labour hour

                                            = (1,250 Labour hours – 1,000 Labour hours) X $ 7.00 per Labour hour

                                            = $ 1,750 (Favourable)

Therefore Labour Efficiency variance is $ 1,750 (Favourable)

Working Notes:

Calculation of Standard Labour hours required for each unit of output:

Standard labour hours required for each unit of output = Total Standard labour hours/ Standard output

                                                                                      = 990 labour hours/ 1,980 sets

Therefore standard labour hours required for each set of seat cover is 0.50 hours.

Calculation of Standard Labour hours required for Actual output:

Standard Labour hours required for Actual output = Actual output in units X Standard labour hours required per unit of output

                                                                  = 2,500 sets X 0.50 labour hours per unit

                                                                  = 1,250 labour hours

Therefore standard Labour hours required for actual output are 1,250.

Calculation of standard rate per labour hour:

Standard rate per labour hour= Standard cost of labour/ Standard labour hours for standard output

                                                     = $ 6,930/ 990 labour hours

                                                     = $ 7.00 per labour hour.

Therefore standard labour rate is $ 7.00 per labour hour.

Answer 3)

Calculation of Variable manufacturing overhead variances

Variable overhead Rate Variance = (Standard Variable overhead rate per hour – Actual Variable overhead rate per hour) X Actual labour hours consumed

                                            = ($ 3.20 per labour hour - $ 4.50 per Labour hour) X 1,000 labour hours

                                            = $ 1,300 (Unfavourable)      

Therefore Variable overhead rate variance is $ 1,300 (Unfavourable)

Variable overhead Efficiency Variance = (Standard Labour hours– Actual Labour hours) X Standard Variable overhead rate per hour

                                            = (1,250 Labour hours – 1,000 Labour hours) X $ 3.20 per hour

                                            = $ 800 (Favourable)

Therefore Variable overhead Efficiency variance is $ 800 (Favourable)

Working Notes:

Calculation of standard variable overhead rate per labour hour:

Standard variable overhead rate per labour hour= Standard variable overhead cost/ Standard labour hours for standard output

                                                     = $ 3,168/ 990 labour hours

                                                     = $ 3.20 per labour hour.

Therefore standard variable overhead rate is $ 3.20 per labour hour.