Question

Question 3 HeadSound manufactures headphone cases During September 2014, the company produced and sold 107.000 cases and recorded the following co Standard Cost Information Quantity Price $ Direct Manais Direct Labor Vanable Manufacturing Overhead 2 parts 0.02 hours 0.02 hours 0.15 per part 8.00 per hour 11.00 per hour Fixed Manufacturing Overhead (531,040 for static budget volume of 97.000 units and 1.940 hours, or $16 per hour) Actual Cost Information Direct Materials Direct Labor Vanable Manufacturing Overhead Fured Manufacturing Overhead (209.000 parts@ (1.640 hours @ $ 0.20 per part) $ 8.15 per hour) $41.800 13.366 8.000 30.000 1. 2. 3. Compute the cost and efficiency variances for direct materials and direct labor. For manufacturing overhead compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variance HeadSound's management used better quality materials during September. Discuss the trade-off between the two direct material variances

Answer 1

1. Direct materials

Cost variance = (Actual cost per unit- Standard cost per unit)*actual consumption

= (0.20-0.015)*209000 = 10,450

Efficiency variance = (Actual consumption - standard consumption) * standard cost per unit

= (209000- (107000*2) ) * 0.15

= (750)

Direct Labour

Cost variance = (Actual cost per hour- Standard cost per hour)*actual hours

= (8.15-8.0)* 1640 = 246

Efficiency variance = (Actual hours - standard hours) * standard cost per hour

= (1640- (107000*0.02) ) * 8.00

= (4000)

2. Variable manufacturing overheads

Cost variance = (Actual cost per hour- Standard cost per hour)*actual hours

= ((8000/1640)-11.0)* 1640 = (10040)

Efficiency variance = (Actual hours - standard hours) * (standard hourly rate)

= (1640- (107000*0.02) ) * 11

= (5500)

Fixed manufacturing overheads

Cost variance = Actual fixed overheads - Absorbed fixed overheads

= 30000 - (1640*16)

=3760

Volume variance = ( Actual hours- Budgeted hours ) * Standard absorption rate

= (1640-1940)*16 = (4800)

3. Quality and price of materials are usually connected. Better quality is generally associated with a higher price and inferior quality with lower price. When a Company attempts to reduce variance on efficiency, it tries to buy better quality product, so it can save on wastage and rejections. However, this strategy can result into purchasing at prices higher than budgeted, resulting into higher cost variance. Similarly, if it attempts to lower cost variance by sourcing materials at lower prices, it could effect the quality of the materials, and thereby can inflate efficiency variance.