Question

Question 3: Variance Analysis (20 marks in total)

You have introduced a standard cost accounting system for FOL. The following standard costs have been developed for the Cattle drench.

Direct materials (1 kilogram)			$ 20
Direct Labour (.25 hours)			$ 15
Overhead (DLH basis)			$ 3
			$ 38

Production and cost information for May was:

Actual direct material purchased			1200	kilograms
Actual direct materials issued			900	kilograms
Actual output			800	kilograms
Actual cost of materials purchased			$ 25,500
Actual direct labur rate			$ 60	per hour
Actual direct labour hours			280
Actual overhad costs			$ 4,500

Required

1. Calculate the following standard cost variances for May and provide general journal entries to record the cost flows for May.

(a) materials price

(b) materials usage

(c) direct labour rate

(d) direct labour efficiency

(e) total overhead

Answer 1

(a) Material price variance = (20-25500/1200)*1200 =1500 unfavorable

(b) Material usage variance = (1*800 - 900)*20 = 2000 unfavorable

(c) Direct labor rate variance = (15/0.25 - 60)*280 = 0

(d) Direct labor efficiency variance = (800*0.25 - 280)*15/0.25 = 4800 unfavorable

(e) Total overhead variance = 3*0.25*800 - 4500 = 3900 unfavorable