Chapter 21, Problem 3PSA

1.

(a)

To determine

The cost per unit for each variable overhead item and its total per unit costs.

Explanation of Solution

Calculate the variable cost per unit.

Variable overhead cost item	Total cost ($)	Expected production volume	Cost per unit ($)
Indirect materials	45,000	15,000	3.00
Indirect labor	180,000	15,000	12.00
Power	45,000	15,000	3.00
Repairs and maintenance	90,000	15,000	6.00
Total variable overhead cost per unit			24.00

Table (1)

Thus, the total variable overhead cost per unit is $24.

(b)

To determine

The total fixed costs per month.

Explanation of Solution

Calculate the total fixed costs per month.

Fixed overhead cost item	Amount ($)
Depreciation building	24,000
Depreciation machinery	80,000
Taxes and insurance	12,000
Supervision	79,000
Total	195,000

Table (2)

Hence, the total fixed costs per month are $195,000.

2.

To determine

The flexible overheads budget for October 31, 2015.

Explanation of Solution

Prepare the flexible overheads budget for October 31, 2015 as shown below.

Flexible overhead budgets
For month ended October 31
Particulars	Variable cost per unit ($)	Total fixed cost ($)	Budget for unit sales of 13,000	Budget for unit sales of 15,000	Budget for unit sales of 17,000
Variable overhead costs
Indirect materials	3.00		39,000	45,000	51,000
Indirect labor	12.00		156,000	180,000	204,000
Power	3.00		39,000	45,000	51,000
Repairs and maintenance	6.00		78,000	90,000	102,000
Total variable cost	24.00		312,000	360,000	408,000
Fixed overhead costs
Depreciation-building		24,000	24,000	24,000	24,000
Depreciation-machinery		80,000	80,000	80,000	80,000
Taxes and insurance		12,000	12,000	12,000	12,000
Supervision		79,000	79,000	79,000	79,000
Total fixed cost		195,000	195,000	195,000	195,000
Total overheads			507,000	555,000	603,000

Table (3)

Thus, the flexible overheads budget for October 31, 2015 is prepared as above.

3.

To determine

The direct materials cost variance, price variance, and quantity variance.

Explanation of Solution

Actual material used is 91,000 lbs.

Standard quantity of materials for actual production is 90,000 lbs.

Actual price is $5.10 per lbs.

Standard price is $5.00 per lbs.

Calculate the direct material cost variance.

Particulars	Amount ($)
Actual units at actual cost $\left(91,000\times \$5.10\right)$	464,100
Standard units at standard cost $\left(90,000\times \$5.00\right)$	450,000
Direct material cost variance	14,100

Table (4)

Thus, the direct material cost variance is $14,100, which is unfavorable.

Calculate the direct material price variance.

$\begin{array}{c}\text{Direct}\text{material}\text{price}\text{variance}=\left(\begin{array}{c}\text{Actual}\text{quantity}\\ \times \left(\text{Actual}\text{price}-\text{Standard}\text{price}\right)\end{array}\right)\\ =91,000\text{lb}\times \left(\$5.10\text{per}\text{lb}-\$5.00\text{per}\text{lb}\right)\\ \text{=}\text{91,000}\text{lb}\times \$0.10\text{per}\text{lb}\\ \text{=}\text{\$9,100}\end{array}$

Thus, the direct material price variance is $9,100, which is unfavorable.

Calculate the direct material quantity variance.

$\begin{array}{c}\text{Direct}\text{material}\text{quantity}\text{variance}=\left(\text{Actual}\text{quantity}-\text{Standard}\text{quantity}\right)\\ \times \text{Standard}\text{price}\\ =\left(91,000\text{lb}-90,000\text{lb}\right)\times \$5\text{per}\text{lb}\\ \text{=}\text{1,000}\text{lb}\times \text{\$5}\text{.00}\text{per}\text{lb}\\ \text{=}\text{\$5,000}\end{array}$

Thus, the direct material quantity variance is $5,000, which is unfavorable.

Conclusion

Hence, the direct material cost variance, price variance, and quantity variance are $14,100 (unfavorable), $9,100 (unfavorable) and $5,000 (unfavorable) respectively.

4.

To determine

The direct labor cost, its rate, and efficiency variances.

Explanation of Solution

Actual hours used is 30,500 hours.

Standard hours for actual production are 30,000 hours.

Actual rate is $17.25 per hour.

Standard rate is $17.00 per hour.

Calculate the direct labor cost variance.

Particulars	Amount ($)
Actual hours at actual cost $\left(30,500\text{hours}\times \$17.25\right)$	526,125
Standard hours at standard cost $\left(30,000\times \$17.00\right)$	510,000
Direct labor cost variance	16,125

Table (5)

Thus, the direct labor cost variance is $16,125, which is unfavorable.

Calculate the direct labor rate variance.

$\begin{array}{c}\text{Direct}\text{labor}\text{rate}\text{variance}=\left(\begin{array}{c}\text{Actual}\text{hours}\\ \times \left(\text{Actual}\text{rate}-\text{Standard}\text{rate}\right)\end{array}\right)\\ =30,500\text{hours}\times \left(\$17.25\text{per}\text{lb}-\$17.00\text{per}\text{lb}\right)\\ =\text{30,500}\text{hours}\times \$0.25\text{per}\text{lb}\\ =\text{\$7,625}\end{array}$

Thus, the direct labor rate variance is $7,625, which is unfavorable.

Calculate the direct labor efficiency variance.

$\begin{array}{c}\text{Direct}\text{labor}\text{efficiency}\text{variance}=\left(\text{Actual}\text{hours}-\text{Standard}\text{hours}\right)\\ \times \text{Standard}\text{rate}\\ =\left(30,500-30,000\right)\text{hours}\times \$17\text{per}\text{hour}\\ \text{=}\text{500}\text{hours}\times \text{\$17}\text{.00}\text{per}\text{hour}\\ \text{=}\text{\$8,500}\end{array}$

Thus, the direct labor efficiency variance is $8,500, which is unfavorable.

Conclusion

Hence, the direct labor cost variance, rate variance and efficiency variance is $16,125 (unfavorable), $7,625 (unfavorable) and $8,500 (unfavorable).

5.

To determine

To prepare:

The detailed overhead variance report showing the variances for individual items of overhead.

Explanation of Solution

Prepare the detailed overhead variance report showing the variances for individual items of overhead as shown below.

A Company
Overhead variance report
For month ended October 31
Expected production level				75% of capacity
Production level achieved				75% of capacity
Volume variance				None
Controllable variance	Flexible	Actual	Variances	Favorable or unfavorable
Variable overhead costs
Indirect materials	45,000	44,250	750	Favorable
Indirect labor	180,000	177,750	2,250	Favorable
Power	45,000	43,000	2,000	Favorable
Repairs and maintenance	90,000	96,000	6,000	Unfavorable
Total variable costs	360,000	361,000	1,000	Unfavorable
Fixed overhead costs
Depreciation-building	24,000	24,000	0
Depreciation-machinery	80,000	75,000	5,000	Favorable
Taxes and insurance	12,000	11,500	500	Favorable
Supervision	79,000	89,000	10,000	Unfavorable
Total fixed costs	195,000	199,500	4,500	Unfavorable
Total overhead costs	555,000	560,500	5,500	Unfavorable

Table (6)

Conclusion

Hence, the detailed overhead variance report showing the variances for individual items of overhead is prepared as above.