Chapter 9, Problem 26P

Comprehensive Variance Analysis
Highland Company produces a lightweight backpack that is popular with college students. Standard variable costs relating to a single backpack are given below:

Overhead is applied to production on the basis of direct labor-hours. During March. 1,000 backpacks were manufactured and sold. Selected information relating to the months production is given below:

The following additional information is available for March’s production:

Required: (Hint: It may be helpful to complete a general model diagram for direct materials, direct labor, and variable manufacturing overhead before attempting to answer any of the requirements.)
1. What is the standard cost of a single backpack’
2. What was the actual cost per backpack produced during March?
3. How many yards of material arc required at standard per backpack?
4. What was the materials price variance for March if there were no beginning or ending inventories of materials?
5. What is the standard direct labor rate per hour?
6. What was the labor rate variance for March? The labor efficiency variance?
7. What was the variable overhead rate variance for March? The variable overhead efficiency variance?
8. Prepare a standard cost card for one backpack.

To determine

Standard cost

It is the budgeted or estimated cost that a company plan to incur in manufacturing goods. This cost is then compared to the actual incurred cost.

To calculate: Standard cost of one backpack.

Answer to Problem 26P

Standard cost of one backpack is$42.

Explanation of Solution

Standard cost of one backpack will be calculated by dividing total standard cost by total number of backpacks.

Total standard cost is

  $\begin{array}{l}\text{Total standard cost = Material cost + Labor cost + Variable manufacturing overheads}\\ \text{ = \$16,800 + \$21,000 + \$4,200}\\ \text{ = \$42,000 }\end{array}$

And total 1,000 backpacks are produced by the company in the month of march. So, standard cost for one backpack will be:

  $\begin{array}{l}\text{Standard cost for one backpack = }\frac{\text{Total standard cost }}{\text{Total}\text{backpacks}}\\ \text{ = }\frac{\$42,000}{1,000}\\ \text{ = \$42}\text{. }\end{array}$

Standard cost of a single backpack is $42.

To determine

Actual cost

This is the amount of money incurred by a company in the production of products.

To calculate: Actual cost incurred for one backpack.

Answer to Problem 26P

Actual cost for one backpack is $41.25.

Explanation of Solution

Actual cost per backpack can be calculated by deducting difference between standard and actual cost from the standard cost of one backpack. Here, difference is given as 0.15$ (favorable) and standard cost is $42 (computed in subpart 1). So, the actual cost will be:

  $\begin{array}{l}\text{Actual cost for one backpack = Standard cost - Difference between actual and standard cost }\\ \text{ = \$42 - \$0}\text{.15 }\\ \text{ = \$41}\text{.85 }\end{array}$

So, the actual cost of one backpack is $41.85.

To determine

Materials

Materials are used by companies to make their final product. Certain processes are performed on the materials and it is then converted into a finished product.

To calculate: Yards of material required by company for each backpack.

Answer to Problem 26P

Company requires 2.8 yards for each backpack.

Explanation of Solution

Number of yards required for standard per backpack can be calculated by dividing standard material cost (per backpack) by standard material cost of one yard.

Here, standard cost of material per yard is given is $6 and standard cost of material for each backpack will be calculated as:

  $\begin{array}{l}\text{Standard material cost per backpack = }\frac{\text{Standard material cost}}{\text{Total backpacks}}\\ \text{ = }\frac{\$16,800}{1,000}\\ \text{ = \$16}\text{.8 }\end{array}$

Now, number of yards required by the company will be calculated as:

  $\begin{array}{l}\text{Number of yards requitred = }\frac{\text{Standard material cost for one backpack}}{\text{Standard material cost for one yard }}\\ \text{ = }\frac{\$16.8}{\$6}\\ \text{ = 2}\text{.8 yards per backpack}\text{. }\end{array}$

Therefore, 2.8 yards are required for each backpack.

To determine

Material price variance

This variance represents the difference between actual cost incurred and standard cost of acquiring materials.

To calculate: Amount of favorable or unfavorable material price variance.

Answer to Problem 26P

Material price variance is

Explanation of Solution

Material price variance will be calculated by the following formula:

  $\text{Material price variance = Total material variance - Material quantity variance }$

Here, material quantity variance is given as $1,200 (U) and total material variance can be calculated as:

  $\begin{array}{l}\text{Total material variance = Standard cost allowed - Actual cost incurred}\\ \text{ = \$16,800 - \$15,000 }\\ \text{ = \$1,800 (F) }\end{array}$

So, amount of material price variance will be:

  $\begin{array}{l}\text{Material price variance = Total material variance - Material quantity variance }\\ \text{ = \$1,800 F - (\$1,200) U }\\ \text{ = \$ 3,000 F }\end{array}$

So, material price variance is $3,000 F.

To determine

Standard labor rate

These are the labor rates calculated by a company using certain standards. Standard labor hours are compared with the actual labor hours used and any difference found is minimized.

To calculate:Amount of per hour standard rate for direct labor rate.

Answer to Problem 26P

Standard labor rate per hour is $15 per direct labor hour.

Explanation of Solution

Standard rate per hour direct labor hours will be calculated by the following formula:

  $\text{Standard direct labor rate per hour = }\frac{\text{Total standard cost allowed for direct labors}}{\text{Standard direct labor hours}}$

Here, total standard cost of direct labor is given as $21,000 and standard direct labor hours can be calculated as:

  $\begin{array}{l}\text{Standard direct labor hours = }\frac{\text{Standard variable manufacturing overhead}}{\text{Standard variable manufacturing overhaed rate per labor hour}}\\ \text{ = }\frac{\$4,200}{\$3}\\ \text{ = \$ 1,400 hours}\text{. }\end{array}$

Now, calculation for standard direct labor rate per hour will be done as:

  $\begin{array}{l}\text{Standard direct labor rate per hour = }\frac{\text{Total standard cost allowed for direct labors}}{\text{Standard direct labor hours}}\\ \text{ = }\frac{\$21,000}{1,400}\\ \text{ = \$15 per direct labor hour}\text{. }\end{array}$

Per hour standard rate is $15 per direct labor hour.

To determine

Labor rate variance

This variance represents the difference between actual value incurred on labors and value that was expected to be incurred.

Labor efficiency variance

This variance represents the difference between actual hours of labor used while producing units and hours that were budgeted to be used. It shows how effectively labor hours are utilized.

To calculate:Amount of labor rate and efficiency variances.

Answer to Problem 26P

Labor rate variance is $750 unfavorable and labor efficiency variance is $1,500 unfavorable.

Explanation of Solution

Formula to calculate labor efficiency variance is

  $\text{Labor efficiency variance = (Standard hours - Actual hours)}\times \text{Standard rate}$

Here, actual labor hours are given as 1,500, standard hours are 1,400 (computed under sub part 5) and standard rate is $15 (computed under sub part 5).

So, the variance will be calculated as:

  $\begin{array}{l}\text{Labor efficiency variance = (Standard hours - Actual hours)}\times \text{Standard rate}\\ \text{ = (1,400 - 1,500)}\times \text{\$15}\\ \text{ = 1,500 Unfavorable}\text{. }\end{array}$

For calculating labor rate variance, actual direct labor cost and actual direct labor hours are needed to be calculated.

Calculation of actual direct labor cost:

Particulars	Amount (in $)
Total cost of production (41.85 * 1,000)	41,850
Less: actual material cost	(15,000)
Less: actual variable manufacturing overhead cost	(3,600)
Actual direct labor cost	23,250

Now, actual labor hours will be calculated as:

  $\begin{array}{l}\text{Actual labor rate = }\frac{\text{Total labor cost }}{\text{Actual}\text{labor}\text{hours}}\\ \text{ = }\frac{\$23,250}{1,500}\\ \text{ = \$15}\text{.50 per hour }\end{array}$

Now, labor rate variance will be calculated as:

  $\begin{array}{l}\text{Labor rate variance = (Standard rate - Actual rate)}\times \text{Actual hours}\\ \text{ = (\$15 - \$15}\text{.5)}\times 1,500\\ \text{ = \$750 (U)}\end{array}$

So, labor rate variance is $750 unfavorable and labor efficiency variance is $1,500 unfavorable.

To determine

Variable overhead rate variance

This variance shows the difference between the actual amount incurred by a company on certain variable overheads and the amount that was budgeted to be incurred.

Variable overhead efficiency variance

This variance shows the difference between actual overhead production hours and hours that were budgeted using certain standards.

To calculate:Amount of variable overhead rate and efficiency variances.

Answer to Problem 26P

Variable overhead rate variance is $900 favorable and variable overhead efficiency variance is $300 unfavorable.

Explanation of Solution

Calculation of variable overhead rate variance when actual hours are given as 1,500, standard rate is $3 per hour and actual labor cost is $3,600:

  $\begin{array}{l}\text{Variable overhead rate variance = (Actual hours }\times \text{ Standard rate) - Actual labor cost }\\ \text{ = (1,500 }\times \text{ \$3) - \$3,600}\\ \text{ = \$900 (F)}\end{array}$

Calculation of variable overhead efficiency variance:

  $\begin{array}{l}\text{Variable overhead rate variance = Standard cost allowed - (Actual hours }\times \text{ Standard rate) }\\ \text{ = \$4,200 - (1,500 }\times \text{ \$3)}\\ \text{ = \$4,200 - \$4,500}\\ \text{ = \$300 (U)}\end{array}$

So, variable overhead rate variance is $900 favorable and variable overhead efficiency variance is $300 unfavorable.

To determine

Standard cost card

A standard cost card contains helps in calculating the total standard cost of one unit by showing information about standard rate, price, quantity and hours.

To prepare:A standard cost card showing the total standard cost.

Answer to Problem 26P

Total standard cost per backpack is $42.

Explanation of Solution

Standard cost card will be prepared as follows:

Particulars	Standard quantity or standard hours	Standard price or standard rate	Standard cost
Direct material	2.8	$6	$16.80
Direct labors (calculated below)	1.4	$15	$21
Variable manufacturing overheads for direct labor hours	1.4	$3	$4.2
Total standard cost			$42

Calculation of direct labor hours per backpack:

  $\begin{array}{l}\text{Direct labor hours per backpack = }\frac{\text{Standard hours}}{\text{Total backpacks}}\\ \text{ = }\frac{1,400}{1,000}\\ \text{ = 1}\text{.4 hours }\end{array}$