Kwikeze Company set the following standard costs for one unit of its product.
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| Direct materials ((4.0 Ibs. @ $6.0 per Ib.) | $ | 24.00 |
| Direct labor (1.7 hrs. @ $13.0 per hr.) | | 22.10 |
| Overhead (1.7 hrs. @ $18.50 per hr.) | | 31.45 |
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| Total standard cost | $ | 77.55 |
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The
predetermined overhead rate ($18.50 per direct labor hour) is based on
an expected volume of 75% of the factory’s capacity of 20,000 units per
month. Following are the company’s budgeted overhead costs per month at
the 75% level.
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| Overhead Budget (75% Capacity) |
| Variable overhead costs | | | | | |
| Indirect materials | $ | 15,000 | | | |
| Indirect labor | | 75,000 | | | |
| Power | | 15,000 | | | |
| Repairs and maintenance | | 30,000 | | | |
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| Total variable overhead costs | | | | $ | 135,000 |
| Fixed overhead costs | | | | | |
| Depreciation—building | | 24,000 | | | |
| Depreciation—machinery | | 74,000 | | | |
| Taxes and insurance | | 20,000 | | | |
| Supervision | | 218,750 | | | |
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| Total fixed overhead costs | | | | | 336,750 |
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| Total overhead costs | | | | $ | 471,750 |
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| The company incurred the following actual costs when it operated at 75% of capacity in October. |
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| Direct materials (61,500 Ibs. @ $6.20 per lb.) | | | | $ | 381,300 |
| Direct labor (29,000 hrs. @ $13.20 per hr.) | | | | | 382,800 |
| Overhead costs | | | | | |
| Indirect materials | $ | 43,250 | | | |
| Indirect labor | | 177,250 | | | |
| Power | | 17,250 | | | |
| Repairs and maintenance | | 34,500 | | | |
| Depreciation—building | | 24,000 | | | |
| Depreciation—machinery | | 99,900 | | | |
| Taxes and insurance | | 18,000 | | | |
| Supervision | | 218,750 | | | 632,900 |
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| Total costs | | | | $ | 1,397,000 |
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Prepare
flexible overhead budgets for October showing the amounts of each
variable and fixed cost at the 65%, 75%, and 85% capacity levels.
3. Compute the direct materials cost variance, including its price and quantity variances.
Explanation:
| Direct Materials Variances |
| Preliminary computations |
| Actual material used: 61,500 lbs. (given) |
| Standard quantity of materials: 15,000 units × 4.0 lb. / unit = 60,000 lb. |
| Actual price: $6.20 / lb. (given) |
| Standard price: $6.00 / lb. (given) |
| Direct material cost variances | | | |
| Actual units at actual cost [61,500 lbs. @ $6.20] | $ | 381,300 | |
| Standard units at standard cost [60,000 lbs. @ $6.00] | | 360,000 | |
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| Direct material cost variance | $ | 21,300 | U |
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| Direct Materials Price and Quantity Variances |
Actual Costs
AQ × AP | | AQ × SP | | Standard Costs
SQ × SP |
| 61,500 × $6.20 | | 61,500 × $6.00 | | 60,000 × $6.00 |
| lbs. per lb. | | lbs. per lb. | | Lbs. per lb. |
| $381,300 | | $369,000 | | $360,000 |
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| | $12,300 U
(Price variance) | $9,000 U
(Quantity variance)
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| | | | $21,300 U
(Total materials variance) | | |
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Compute the direct labor cost variance, including its rate and efficiency variances.
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Explanation:
| Direct labor variances |
| Preliminary computations |
| Actual hours used: 29,000 hours (given) |
| Standard hours: 15,000 units × 1.7 hrs. / unit = 25,500 hours |
| Actual rate: $13.20 / hr. (given) |
| Standard rate: $13.00 / hr. (given) |
| Direct labor cost variances | | | |
| Actual units at actual cost [29,000 hrs. @ $13.20] | $ | 382,800 | |
| Standard units at standard cost [25,500 hrs. @ $13.00] | | 331,500 | |
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| Direct labor cost variance | $ | 51,300 | U |
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| Direct Labor Rate and Efficiency Variances |
Actual Costs
AH × AR | | AH × SR | | Standard Costs
SH × SR |
| 29,000 × $13.20 | | 29,000 × $13.00 | | 25,500 × $13.00 |
| hours per hr. | | hours per hr. | | hours per hr. |
| $382,800 | | $377,000 | | $331,500 |
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| | $5,800 U
(Rate variance) | $45,500 U
(Efficiency variance)
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| | | | $51,300 U
(Total labor variance) | | |
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Prepare a detailed overhead variance report that shows the variances for individual items of overhead.
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