Question

The High Spirits Company, a maker of Halloween novelties, needs your help immediately. The company accountant resigned without leaving adequate records or explanations for the data collected. In reviewing the records for one product line, you find the following information for last month:

Materials purchased                                        20,000 units @ $.60 each

Materials used                                                 15,000 units

Direct labor costs incurred                              $36,000

Variable overhead costs incurred        $ 6,675

Actual fixed overhead                                                $ 7,200

Completed units                                                  7,000

You learn that the standards for the product are:

Direct materials                                               2 units

                        Direct labor                                                     1 hour

                        Variable overhead                                           $0.95 per direct labor hour

                        Fixed overhead                                               $0.60 per direct labor hour

You find a copy of the budget which shows that $ 6,000 was budgeted for fixed overhead, and that variable overhead is budgeted at $9,500 when 10,000 direct labor hours are worked per month.

                        You also find some handwritten notes among the accountant’s work papers, which indicate the following:

                        Standard price per unit for materials       $ .62          

                        Actual average wage rate                        $4.80 ($.20 less than the standard)

Required:

1. Compute the eight variances that were discussed in class, direct material price and quantity variances, direct labor price and quantity variances, variable overhead price and quantity variances, fixed overhead spending variance and production volume variance.

Maybe this will help, some of the formulas we used in class, thanks.

DM price variance VP=(SR-AP) x AQ ,

DM Quantity Variance VQ= (AQ-SQ) X SR

DM Spending variance (SC-AC)

DL Rate variance VQ=(SR-AR) X ALH

DL Efficiency variance (SH-AH) X SR

DL Spending variance (SC-AC)=
VOH Rate Variance VP=(SR-AR) X ALH

VOH Efficiency variance (SHRS-AHRS) XSR

VOH Spending variance (SC-AC)=
FOH Spending variance SP variance= Actual OH incurred - OH budgeted

FOH production volume variance PVV=OH Budgeted -Standard OH applied

2.Comment on the results.

Answer 1

Please give positive ratings so I can keep answering. Thanks!

High Spirits Company
Direct Material Variance
Actual Price for Actual Quantity of Input	15000*.60	9,000.00	A
Standard Price for Actual Quantity of Input	15000*.62	9,300.00	B
Standard Price for Standard Quantity of Input	7000*2*.62	8,680.00	C
Price Variance (A-B)		(300.00)	Favorable
Quantity Variance (B-C)		620.00	Unfavorable
Total Variance (A-C)		320.00	Unfavorable
Direct Labor Variance
Actual Price for Actual Quantity of Input		36,000.00	D
Standard Price for Actual Quantity of Input	36000/4.8*5	37,500.00	E
Standard Price for Standard Quantity of Input	7000*1*5	35,000.00	F
Rate Variance (D-E)		(1,500.00)	Favorable
Efficiency Variance (E-F)		2,500.00	Unfavorable
Total Variance (D-F)		1,000.00	Unfavorable
Variable Overhead Variance
Actual Variable Overhead		6,675.00	G
Standard Price for Actual Quantity of Input	36000/4.8*.95	7,125.00	H
Standard Price for Standard Quantity of Input	7000*1*.95	6,650.00	I
Spending Variance (G-H)		(450.00)	Favorable
Efficiency Variance (H-I)		475.00	Unfavorable
Total Variance (G-I)		25.00	Unfavorable
Fixed Overhead Variance				Labor Hour used
Actual Fixed Overhead		7,200.00	J	Labor cost	36,000.00
Budgeted Overhead		6,000.00	K	Actual Labor rate	4.80
Standard OH applied (Actual Labor hour* Standard rate)	7500*.6	4,500.00	L	Actual Labor Hour	7,500.00
Spending Variance (J-K)		1,200.00	Unfavorable
Volume Variance (K-L)		1,500.00	Favorable
We can see the variances are more in Labor department and they are offset by the savings in Fixed Overhead department. So the management should check the variances department wise.
Direct Materials price variance is ok but yield variance is unfavorable and needs improvement in production process.
Direct Labor price variance is favorable which means some labor rate negotiations have been done after preparing budgets but efficiency variance is unfavorable. It needs to be checked with labor department.
Variable overhead variance is ok.