Chapter 23, Problem 8E

To determine

Variance:

Variance is the difference between the actual cost and budgeted cost for particular level of activity. It is computed by deducting the budgeted cost from the actual cost of the production.

Direct Material Cost Variance:

The difference between the actual cost incurred on the direct material and the budgeted cost expected to be incurred is called the direct material cost variance. It can either calculated by deducting the budgeted cost from the actual cost or adding the direct material price variance and direct material quantity variance.

Direct Labor Cost Variance:

The variance between the actual labor cost incurred and the budgeted labor cost is termed as direct labor cost variance. It can be computed by deducting the budgeted labor cost from the actual cost. On the contrary, it can also be ascertained by adding the direct labor rate variance and direct labor efficiency variance.

Overhead Cost Variance:

The difference between the Actual overhead cost incurred on a production or sale and the budgeted or expected overhead cost is termed as the overhead cost variance.

To determine:

1. Computation of standard cost per unit.

2. Compute the total cost variance of June.

Answer to Problem 8E

Solution:

1. Standard Cost per unit

	Standard	Standard cost per unit
Direct material	6 lbs. @ $8 per lb.	$48.00
Direct labor	2 hrs. @ 16 per hr.	$32.00
Overhead	2 hrs. @ $12 per hr.	$24.00
Total Standard Cost per unit		$104.00

2. Total Cost Variance of June

	Variance
Direct Material Cost Variance	$8,850 U
Direct LaboCost Variance	$3,050 U
Overhead Cost Variance	$6,000 U
Total Cost Variance	$17,900 U

Explanation of Solution

Explanation:

1. Computation of Standard Cost per unit

$\begin{array}{l}Directmaterial=StandardpoundsallowedperunitXStandardpriceperpound\hfill \\ =6poundsX\$8perpound\hfill \\ =\$48perunit\hfill \\ \hfill \\ Directlabor=StandardHoursallowedperunitXStandardrateperhour\hfill \\ =2hoursX\$16perhour\hfill \\ =\$32perunit\hfill \\ \hfill \\ Overhead=StandardHoursallowedperunitXStandardrateperhour\hfill \\ =2hoursX\$12perhour\hfill \\ =\$24perunit\hfill \end{array}$

2. Computation of Cost Variance

Direct Material Cost Variance

$\begin{array}{l}DirectMaterialCostVariance=ActualCost–StandardCost\hfill \\ =\$392,850-\$384,000\hfill \\ =\$8,850Unfavorable\hfill \\ \hfill \\ *ActualCost=ActualQuantityXActualPrice\hfill \\ =48,500lbs.X \$8.10\hfill \\ =\$392,850\hfill \\ \hfill \\ *StandardCost=StandardQuantityXStandardPrice\hfill \\ =48,000lbs.X \$8.00\hfill \\ \begin{array}{l} =\$384,000\\ \end{array}\hfill \\ *StandardQuantity=StandardpoundsallowedperunitX\text{ Units manufactured}\hfill \\ =6lbs.perunitX8,000units\hfill \\ =48,000lbs.\hfill \end{array}$

Direct Labor Cost Variance

$\begin{array}{l}DirectLaborCostVariance=ActualCost–StandardCost\hfill \\ =\$259,050-\$256,000\hfill \\ =\$3,050 Unfavorable\hfill \\ \hfill \\ *ActualCost=ActualHoursXActualRate\hfill \\ =15,700hoursX\$16.50\hfill \\ =\$259,050\hfill \\ \hfill \\ *StandardCost=StandardHoursXStandardRate\hfill \\ =16,000hoursX\$16.00\hfill \\ =\$256,000\hfill \\ \hfill \\ *StandardHours=StandardhoursallowedperunitXUnitsManufactured\hfill \\ =2hoursperunitX8,000units\hfill \\ =16,000hours\hfill \\ \hfill \end{array}$

Overhead Cost Variance

$\begin{array}{l}OverheadCostVariance=ActualCost–StandardCost\hfill \\ =\$198,000-\$192,000\hfill \\ =\$6,000 Unfavorable\hfill \\ \hfill \\ *ActualCost=\$198,000\hfill \\ \hfill \\ *StandardCost=StandardHoursXStandardRate\hfill \\ =16,000hoursX\$12\hfill \\ =\$192,000\hfill \\ \hfill \\ *StandardHours=StandardhourallowedperunitXUnitsManufactured\hfill \\ =2hoursperunitX8,000units\hfill \\ =\$16,000\hfill \end{array}$

Conclusion

Conclusion:

Total standard cost per units is $104

The total cost variance is $ 17,900 Unfavorable