Chapter 16, Problem 66P

Variance Computations with Missing Data

The following information is provided to assist you in evaluating the performance of the production operations of Studio Company:

Variable overhead is applied on the basis of direct labor-hours.

Required

Prepare a report that shows all variable production cost price and efficiency variances and fixed production cost price and production volume variances.

To determine

Prepare a report showing variable production cost price and efficiency variances along with fixed production cost price and production volume variances.

Explanation of Solution

Price variance:

The price variance refers to the difference of the actual unit cost and standard unit cost of the product.

Efficiency variance:

The efficiency variance refers to the difference of the actual and budgeted quantities which have been purchased for a specific price.

Variable production cost will include direct material, direct labor, and variable overhead costs so price and efficiency variances will be computed for all three components. For fixed overhead cost variances with variable cost; price and production volume variances need to be calculated.

Compute the variable production cost variances:

For preparing variable product cost variance report, following missing components needs to be calculated first.

Standard Units Produced:

$\begin{array}{c}\text{Units Produced = Standard material total cost }÷\text{ standard material unit cost}\\ \text{= }\left(\text{\$132,000 }÷\text{ \$1}\text{.65}\right)÷\text{ 2 gallons}\\ =\text{ 40,000 units}\end{array}$

Actual direct material unit cost:

$\begin{array}{c}\text{Direct material unit cost=Actual direct material purchased }÷\text{ Actual direct material used}\\ \text{= \$150,960 }÷\text{ 81,600 gallons}\\ \text{= \$1}\text{.85}\end{array}$

Actual labor cost per unit:

$\begin{array}{c}\text{Actual labor cost = Actual total labor cost }÷\text{ Actual total labor hours}\\ \text{= \$111,708 }÷\text{ 8,560 hours}\\ \text{= \$13}\text{.05}\end{array}$

Standard total labor hours:

$\begin{array}{c}\text{Total labor hours}\text{= Standard total labor cost }÷\text{ standard labor rate per hour}\\ \text{= \$112,000 }÷\text{ \$14}\\ \text{= 8,000 hours}\end{array}$

Actual variable overhead per actual labor hour:

$\begin{array}{c}\text{Overhead per actual labor hour = Actual total variable overhead }÷\text{ Actual total labor hour}\\ \text{= 61\% of \$163,200 }÷\text{ 8,560}\\ \text{= \$11}\text{.63}\end{array}$

The report showing variable production cost price and efficiency variances:

Direct Material Variances	Amount
Price Variance $AQ\left(AP-SP\right)$	$16,320
Efficiency Variance $SP\left(AQ-SQ\right)$	$2,6400
Total Variance	$18,960F
Direct Labor Variances
Price Variance $AQ\left(AP-SP\right)$	$8,132
Efficiency Variance $SP\left(AQ-SQ\right)$	$7,840
Total Variance	$2,92F
Variable Overhead Variance:
Price Variance $AQ\left(AP-SP\right)$	$2,311
Efficiency Variance $SP\left(AQ-SQ\right)$	$6,664
Total Variance	$4,353U

Table: (1)

Compute the fixed overhead cost variance:

For calculating fixed production cost price and production volume variances, standard fixed overhead cost and fixed overhead applied to production need to be calculated.

Standard fixed overhead cost:

$\begin{array}{c}\text{Fixed overhead cost}=\text{ Total Master budget overhead - Standard variable overhead}\\ \text{= \$159,200 - (\$11}\text{.90 }\times \text{8,000 labor hours)}\\ \text{= \$64,000}\end{array}$

Applied fixed overhead to production:

$\begin{array}{c}\text{Standard cost per unit = }\frac{\$64,000\text{ standard fixed overhead}}{40,000\text{ units standard activity level}}\\ =\text{ \$1}\text{.6}\\ \text{Applied fixed overhead}=\text{ \$1}\text{.6 }\times \text{ 42,000 units actual units produced}\\ \text{= \$67,200}\end{array}$

The report showing fixed overhead cost variance with price and production volume variances:

Fixed Overhead Variance	Amount
Price Variance $\left(AQ\left(AP-SP\right)\right)$	$       1,280
Production Volume Variance $\left(\text{Applied }-\text{standard}\right)$	$       3,200
Total Variance	$1,920F

Table: (2)

Fixed overhead cost price variance is unfavorable being actual is more than the standard fixed overhead whereas production volume variance is favorable as applied fixed overhead to actual production is less than the budgeted.