# dAnalysis of variances:Materials variancesEfficiencyTotalPriceinclude formula for materials price variance hereinclude formula for materials efficiency variance hereLabor variancesLabor rateEfficiencyTotalinclude formula for labor rate variance hereinclude formula for labor efficiency variance hereEfficiencyVariable overhead variancesSpendingTotalinclude formula for spending variance hereinclude formula for labor efficiency variance hereAnalysis:

Question

I could use some help with (d) (at the bottom) on this.

Porter Corporation has just hired Bill Harlow as its new controller.  Although Harlow has had little formal accounting training, he professes to be highly experiences, having learned accounting "the hard way" in the field.  At the end of his first month's work, Harlow prepared the following performance report:

 Total Actual Costs Total Budgeted Costs Variances Direct materials \$216,630 \$237,600 \$20,970 F Direct labor 119,340 132,000 12,660 F Variable overhead 63,000 66,000 3,000 Fixed overhead 184,000 184,000 \$582,970 \$619,600 \$36,630 F

In his presentation at Porter's month-end management meeting, Harlow indicated that things were going "fantastically." "The figures indicate," he said, "that the firm is beating its budget in all cost categories."  This good news made everyone at the meeting happy and furthered Harlow's acceptance as a member of the management team.

After the management meeting, Susan Jones, Porter's general manager, asked you, as an independent consultant, to review Harlow's report.  Jones' concern stemmed from the fact that Porter has never operated as favorably as Harlow's report seems to imply, and she cannot explain the apparent significant improvement.

While review Harlow's report, you are provided the following cost and operating data for June: Porter has a monthly normal capacity of 11,000 direct labor hours or 8,800 units of product.  Standard costs per unit for its only product are direct materials 3 pounds at \$9 per pound; direct labor, 1.25 hours at \$12 per hour; and variable overhead rate per direct labor hour of \$6.  During June, Porter produced 8,000 units of product, using 24,900 pounds of materials costing \$8.70 each, 10,200 direct labor hours at an average rate of \$11.70 each, and incurred variable overhead costs of \$63,000 and fixed overhead costs of \$184,000.

After reviewing Porter's June cost data, you tell Harlow that his cost report contains a classic budgeting error, and you explain how he can remedy it.  In response to your suggestion, Harlow revises his report as follows:

 Total Actual Costs Total Budgeted Costs Variances Direct materials \$216,630 \$216,000 \$630 U Direct labor 119,340 120,000 660 F Variable overhead 63,000 60,000 3,000 U Fixed overhead 184,000 184,000 \$582,970 \$580,000 \$2,970 U

Harlow's revised report is accompanied by remarks expressing regret at the oversight in the original report.

Required

d) Further analyze Harlow's revised variances, isolating underlying potential causal factors.  How do your analyses indicate bases for concern to management?  Include the formula for the variance rate and efficiency rate.

Step 1

Working Note:

Step 2

Material Variances

Step 3

Labor Varia...

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