Chapter 8, Problem 26PSA

a)

To determine

Compute the material variance information:

Explanation of Solution

Compute the material variance information:

Table (1)

b)

To determine

Compute the materials price and usage variance and identify whether it is unfavorable or favorable.

Explanation of Solution

Compute the total materials price variances:

$\begin{array}{c}\text{Materials price variances}=\left|\text{Actual price}-\text{Standard price}\right|\times \text{Actual quantity}\\ =\left|\text{\$3}\text{.70}-\text{\$3}\text{.60}\right|\times \left(63,345\text{pounds}\right)\\ =\$6,334.5\end{array}$

Hence the total materials price variances are $6,334.5 which is an unfavorable variance that is actual price is more than the standard price.

Compute the total materials usage variance:

$\begin{array}{c}\text{Materials usage variance}=\left|\text{Actual quantity}-\text{Standard quantity}\right|\times \text{Standard price}\\ =\left|\text{63,345}-61,800\right|\times \$3.60\\ =\$5,562\end{array}$

Hence, the total materials usage variances are $5,562 which is an unfavorable variance that is actual quantity is more than the standard.

c)

To determine

Compute the labor variance information:

Explanation of Solution

Compute the labor variance information:

Table (2)

d)

To determine

Determine the labor price and usage variance and identify whether it is unfavorable or favorable.

Given information:

Refer part a) for the table information

Explanation of Solution

Compute the labor price variance:

$\begin{array}{c}\text{Labor price variance}=\left|\text{Actual price}-\text{Standard price}\right|\times \text{Actual hours}\\ =\left|\$16.20-\$16.00\right|\times \left(89,160\right)\\ =\$17,832\text{Unfavorable}\end{array}$

Hence, the labor price variance is $17,832 which is an unfavorable variance that is actual price is more than the standard price.

Compute the labor usage variance:

$\begin{array}{c}\text{Labor usage variance}=\left|\text{Actual hours}-\text{Standard hours}\right|\times \text{Standard price}\\ =\left|\left(89,160\right)-\left(92,700\right)\right|\times \$16\\ =\$56,640\text{Favorable}\end{array}$

Hence, the labor usage variance is $56,640 which is a favorable variance that is actual hours is less than the standard hours.

e)

To determine

Determine the predetermined overhead rate, assuming that Company W uses the allocation base as number of units

Explanation of Solution

Calculate the the predetermined overhead rate:

$\begin{array}{c}\text{Predetermined overhead rate}=\frac{\text{Total planned overhead costs}}{\text{Total expected units}}\\ =\frac{\text{\$1,404,000}}{\text{30,000}}\\ =\text{\$46}\text{.80 per unit}\end{array}$

Hence, the predetermined overhead rate is $46.80 per unit.

f)

To determine

Compute the fixed cost spending and variance and specify whether it is unfavorable or favorable variance.

Explanation of Solution

Compute the fixed cost spending variance:

$\begin{array}{c}\text{Spending variance}=\left|\text{Actual overhead}-\text{Budgeted overhead }\right|\\ =\left|\text{\$1,476,000}-\text{\$1,404,000 }\right|\\ =\$72,000\text{Unfavorable}\end{array}$

Hence, the fixed cost spending variance is $72,000 which is the unfavorable variance that is actual fixed overhead is greater than the budgeted fixed overhead.

Compute the fixed cost volume variance:

$\begin{array}{c}\text{Volume variance}=\left|\text{Budgeted overhead}-\text{Applied overhead }\right|\\ =\left|\text{\$1,404,000}-\left(\text{\$46}\text{.80}\times 30\text{,900}\right)\right|\\ =\left|\text{\$1,404,000}-\$1,446,120\right|\\ =\$42,120\text{Favorable}\end{array}$

Hence, the fixed cost spending variance is $42,120 which is the favorable variance as the company produced more units than actually planned which leads to decrease in fixed cost per unit

g)

To determine

Determine the gross margin of Company W

Explanation of Solution

Determine the gross margin of Company W:

Table (3)