## Wednesday, 1 April 2015

### Marvel Parts, Inc., manufactures auto accessories. One of the company’s products is a set of seat covers that can be adjusted to fit nearly any small car.

Marvel Parts, Inc., manufactures auto accessories. One of the company’s products is a set of seat covers that can be adjusted to fit nearly any small car. The company has a standard cost system in use for all of its products. According to the standards that have been set for the seat covers, the factory should work 980 hours each month to produce 1,960 sets of covers. The standard costs associated with this level of production are:

 Total Per Set of Covers Direct materials \$ 32,340 \$ 16.50 Direct labor \$ 6,860 3.50 Variable manufacturing overhead       (based on direct labor-hours) \$ 1,960 1.00 \$ 21.00

 During August, the factory worked only 1,000 direct labor-hours and produced 2,100 sets of covers. The following actual costs were recorded during the month:

 Total Per Set of Covers Direct materials (6,000 yards) \$ 34,020 \$ 16.20 Direct labor \$ 7,770 3.70 Variable manufacturing overhead \$ 3,990 1.90 \$ 21.80

At standard, each set of covers should require 2.50 yards of material. All of the materials purchased during the month were used in production.
Required:
 1 Compute the materials price and quantity variances for August.

2. Compute the labor rate and efficiency variances for August.
3. Compute the variable overhead rate and efficiency variances for August.

Explanation:
1.
 Actual Quantity of Input, at Actual Price Actual Quantity of Input, at Standard Price Standard Quantity Allowed for Output, at Standard Price (AQ × AP) (AQ × SP) (SQ × SP) 6,000 yards × \$6.60 per yard* 5,250 yards** × \$6.60 per yards* \$34,020 = \$39,600 = \$34,650 Price Variance, \$5,580 F Quantity Variance, \$4,950 U Spending variance, \$630 F

 *\$16.50 ÷ 2.50 yards = \$6.60 per yard **2,100 sets × 2.50 yards per set = 5,250 yards

 Alternatively, the variances can be computed using the formulas: Materials price variance = AQ (AP − SP) 6,000 yards (\$5.67 per yard* − \$6.60 per yard) = \$5,580 F *\$34,020 ÷ 6,000 yards = \$5.67 per yard Materials quantity variance = SP (AQ − SQ) \$6.60 per yard (6,000 yards − 5,250 yards) = \$4,950 U

2.
 Many students will miss parts 2 and 3 because they will try to use product costs as if they were hourly costs. Pay particular attention to the computation of the standard direct labor time per unit and the standard direct labor rate per hour.

 Actual Hours of Input, at the Actual Rate Actual Hours of Input, at the Standard Rate Standard Hours Allowed for Output, at the Standard Rate (AH × AR) (AH × SR) (SH × SR) 1,000 hours × \$7.00 per hour* 1,050 hours** × \$7.00 per hour* \$7,770 = \$7,000 = \$7,350 Rate Variance, \$770 U Efficiency Variance, \$350 F Spending variance, \$420 U

 *980 standard hours ÷ 1,960 sets = 0.5 standard hour per set, \$3.50 standard cost per set ÷ 0.5 standard hours per set = \$7 standard rate per hour. **2,100 sets × 0.5 standard hours per set = 1,050 standard hours.

 Alternatively, the variances can be computed using the formulas: Labor rate variance = AH (AR − SR) 1,000 hours (\$7.77 per hour* − \$7.00 per hour) = \$770 U *\$7,770 ÷ 1,000 hours = \$7.77 per hour Labor efficiency variance = SR (AH − SH) \$7.00 per hour (1,000 hours − 1,050 hours) = \$350 F

3.
 Actual Hours of Input, at the Actual Rate Actual Hours of Input, at the Standard Rate Standard Hours Allowed for Output, at the Standard Rate (AH × AR) (AH × SR) (SH × SR) 1,000 hours × \$2.00 per hour* 1,050 hours × \$2.00 per hour* \$3,990 = \$2,000 = \$2,100 Rate Variance, \$1,990 U Efficiency Variance, \$100 F Spending variance, \$1,890 U

 *\$1.00 standard cost per set ÷ .50 standard hours per set = \$2.00 standard rate per hour

 Alternatively, the variances can be computed using the formulas: Variable overhead rate variance = AH (AR − SR) 1,000 hours (\$3.99 per hour* – \$2.00 per hour) = \$1,990 U *\$3,990 ÷ 1,000 hours = \$3.99 per hour Variable overhead efficiency variance = SR (AH − SH) \$2.00 per hour (1,000 hours – 1,050 hours) = \$100 F