Question

A company produces a industrial chemical. At the start of the year, they had the following cost:

Direct material: (10 pounds at $1.60) - $16.00
Direct labor: (0.75 hours at $18.00) - $13.50
Variable overhead: (0.75 at $4.00) - $3.00
Fixed overhead: (0.75 at $3.00) - $2.25
Standard cost per unit: $34.75
XYZ company computes its overhead rates using practical volume, which is 72,000 units. The actual results are as follows:
a. units produced: 70,000
b. direct materials purchased: 744,000 pounds at $1.50 per pound
c. direct materials used: 736,000 pounds
d. direct labor: 56,000 hours at $17.90 per hour
e. fixed overhead: $214,000
f. variable overhead: $175,400
Calculate the following variances (please show formulas and work)
a. direct materials price and efficiency variances
b. direct labor price and efficiency variances
c. variable overhead price and efficiency variances
d. fixed overhead price and efficiency variances

Answer 1

To calculate the variances, we need to determine the standard cost per unit and then calculate the price and efficiency variances for direct materials, direct labor, variable overhead, and fixed overhead. The direct materials price variance is -$7,360 and the efficiency variance is $3,040. The direct labor price variance is -$560 and the efficiency variance is $180. The variable overhead price variance is $56,000 and the efficiency variance is $28,000. The fixed overhead price variance is $64,500 and there is no efficiency variance.

Step-by-step explanation:

To calculate the variances, we first need to determine the standard cost per unit. The standard cost per unit is the sum of the direct material, direct labor, variable overhead, and fixed overhead costs. In this case, the standard cost per unit is $34.75.

Now we can calculate the variances:

1. Direct materials price variance: (Actual material cost per pound - Standard material cost per pound) x Actual pounds used
   ($1.50 - $1.60) x 736,000 pounds = -$7,360
2. Direct materials efficiency variance: (Actual pounds used - Standard pounds allowed) x Standard material cost per pound
   (736,000 - (70,000 x 10)) x $1.60 = $3,040
3. Direct labor price variance: (Actual labor cost per hour - Standard labor cost per hour) x Actual hours worked
   ($17.90 - $18.00) x 56,000 hours = -$560
4. Direct labor efficiency variance: (Actual hours worked - Standard hours allowed) x Standard labor cost per hour
   (56,000 - (70,000 x 0.75)) x $18.00 = $180
5. Variable overhead price variance: (Actual variable overhead rate per hour - Standard variable overhead rate per hour) x Actual hours worked
   ($4.00 - $3.00) x 56,000 hours = $56,000
6. Variable overhead efficiency variance: (Actual hours worked - Standard hours allowed) x Standard variable overhead rate per hour
   (56,000 - (70,000 x 0.75)) x $4.00 = $28,000
7. Fixed overhead price variance: Actual fixed overhead - Standard fixed overhead
   $214,000 - ($2.25 x 70,000) = $64,500
8. Fixed overhead efficiency variance: None, as there is no standard fixed overhead hours allowed.