Question

Variable overhead is applied based on direct labor hours. The variable overhead rate is $220 per direct-labor hour. The fixed overhead rate (at the master budget level of activity) is $110 per unit. All non-manufacturing costs are fixed and are budgeted at $3.2 million for the coming year.Variable overhead is applied based on direct labor hours. The variable overhead rate is $220 per direct-labor hour. The fixed overhead rate (at the master budget level of activity) is $110 per unit. All non-manufacturing costs are fixed and are budgeted at $3.2 million for the coming year. At the end of the year, the costs analyst reported that the sales activity variance for the year was $1,110,000 unfavorable. The following is the actual income statement (in thousands of dollars) for the year. Sales revenue $50,638 Less variable costs Direct materials 5,268 Direct labor 4,010 Variable overhead 13,980 Total variable costs $23,258 Contribution margin $27,380 Less fixed costs Fixed manufacturing overhead 1,250 Non-manufacturing costs 1,430 Total fixed costs $2,680 Operating profit $24,700 During the year, the company purchased 216,000 pounds of material and employed 60,400 hours of direct labor.

Required:
a. Compute the direct material price and efficiency variances.
b. Compute the direct labor price and efficiency variances.
c. Compute the variable overhead price and efficiency variances.

Answer 1

Missing word at inception of the question "Paynesville Corporation manufactures and sells a preservative used in food and drug manufacturing. The company carries no inventories. The master budget calls for the company to manufacture and sell 140000 liters at a budgeted price of $375 per liter this year. The standard direct cost sheet for one liter of preservative follows: Direct materials (2 pounds at $24) $48 Direct labor (0.5 hours at $64) $32"

a . Direct Material Price Variance = (Actual Qty * Std. Price) - (Actual Qty * Actual Price)

= (216,000 * $24) - ($ 5,268,000)

= $5,184,000 - $5,268,000

= $84,000 U

Direct Material Efficiency Variance = (Actual Qty - Std. Qty) * Std. Price

= (216,000 – 280,000) * $24

= -64,000 * $24

= $1,536,000 U

b. Direct Labor Price Variance = (Actual Hrs * Std. Rate) - (Actual Hrs * Actual Rate)

= (60,400 * $ 64) - ($ 4,010,000)

= $3,865,600 - $4,010,000

= $144,400 U

Direct Labor Efficiency Variance = Std. Rate *(Std. Hrs - Actual Hrs)

= $ 64 * (70,000 - 60,400)

= $614,400 F

c. Variable OH Price Variance = (Std. Hrs * Std. Rate) - (Actual Variable OH)

= (70,000 * $220) - 1,398,000

= $ 15,400,000 - $13,980,000

= $1,420,000 F

Variable OH Efficiency Variance = (Std. Hrs - Actual Hrs) * Std. Rate

= (70,000 - 60,400) × $ 220

= $2,112,000 F

Workings

Standard Qty = 140,000 litres × 2 Pound per litre = 280,000 pounds

Standard Hrs = 140,000 litres × 0.5 hrs per litre = 70,000 hrs