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
Asked Sep 6, 2019
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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

In your role as consultant,

d) Further analyze Harlow's revised variances, isolating underlying potential causal factors.  How do your analyses indicate bases for concern to management?

See the spreadsheet below.

d
Analysis of variances:
Materials variances
Efficiency
Total
Price
include formula for materials price variance here
include formula for materials efficiency variance here
Labor variances
Labor rate
Efficiency
Total
include formula for labor rate variance here
include formula for labor efficiency variance here
Efficiency
Variable overhead variances
Spending
Total
include formula for spending variance here
include formula for labor efficiency variance here
Analysis:
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d Analysis of variances: Materials variances Efficiency Total Price include formula for materials price variance here include formula for materials efficiency variance here Labor variances Labor rate Efficiency Total include formula for labor rate variance here include formula for labor efficiency variance here Efficiency Variable overhead variances Spending Total include formula for spending variance here include formula for labor efficiency variance here Analysis:

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2 Ratings
Step 1

Comparison between Actu...

AI
AJ
AK
AL
7
16
Comparison
Actual
17 Particulars
18 Direct Material
19 Direct Labor hours
20 Variable Cost per labor hour -63000/10200 6
21 Material cost per pound
22 Direct Labor per hour
Budgeted
Variance
24900
-8000* 3
=AK18-AJ18
-8000*1.25
-AK19-AJ19
10200
-AK20-AJ20
-AK21-AJ21
8.7
9
11.7
12
-AK22-AJ22
23
Comparison
Actual Budgeted Variance
Particulars
Direct Material
24900
24000
-900
Direct Labor hours
-200
10200
10000
Variable Cost per labor hour
-0.1765
6.1765
6
Material cost per pound
Direct Labor per hour
8.7
0.3
11.7
12
0.3
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AI AJ AK AL 7 16 Comparison Actual 17 Particulars 18 Direct Material 19 Direct Labor hours 20 Variable Cost per labor hour -63000/10200 6 21 Material cost per pound 22 Direct Labor per hour Budgeted Variance 24900 -8000* 3 =AK18-AJ18 -8000*1.25 -AK19-AJ19 10200 -AK20-AJ20 -AK21-AJ21 8.7 9 11.7 12 -AK22-AJ22 23 Comparison Actual Budgeted Variance Particulars Direct Material 24900 24000 -900 Direct Labor hours -200 10200 10000 Variable Cost per labor hour -0.1765 6.1765 6 Material cost per pound Direct Labor per hour 8.7 0.3 11.7 12 0.3

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