- Chowhound Corporation prepares freeze dried meals for hikers. Chowhound has a very wide variety of products. Its best seller is a meal of bear meat, baked beans, and collard greens. Last week, the company prepared 4,800 of these meals using 1,400 direct labor-hours.Chowhound paid these direct labor workers a total of $18,200 for this work, or $13.00 per hour.
According to the standard cost card for this particular meal, it should require 0.30 direct labor-hours at a cost of $12.50 per hour.
Required:
1. According to the standards, what direct labor cost should have been incurred to prepare 4,800 meals? How much does this differ from the actual direct labor cost? (Round labor-hours per meal and labor cost per hour to 2 decimal places.)
Number of meals prepared 4,800
Standard direct labor-hours per meal 0.30
Total direct labor-hours allowed 1,440
Standard direct labor cost per hour $12.50
Total standard direct labor cost $18,000
Actual cost incurred $18,200
Total standard direct labor cost 18,000
Total direct labor variance $200 Unfavorable
- Chowhound Corporation prepares freeze dried meals for hikers. Chowhound has a very wide variety of products. Its best seller is a meal of bear meat, baked beans, and collard greens. Last week, the company prepared 4,800 of these meals using 1,400 direct labor-hours.Chowhound paid these direct labor workers a total of $18,200 for this work, or $13.00 per hour.
According to the standard cost card for this particular meal, it should require 0.30 direct labor-hours at a cost of $12.50 per hour.
2. Break down the difference computed in (1) above into a labor rate variance and a labor efficiency variance. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)
Labor rate variance $700 U
Labor efficiency variance $500 F
Explanation:
2.
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)
1,400 hours ×
$13.00 per hour 1,400 hours ×
$12.50 per hour
1,440 hours ×
$12.50 per hour
= $18,200 = $17,500 = $18,000
Rate Variance,
$700 U
Efficiency Variance,
$500 F
Spending Variance,
$200 U
Alternatively, the variances can be computed using the formulas:
Labor rate variance = AH(AR - SR)
= 1,400 hours ($13.00 per hour - $12.50 per hour)
= $700 U
Labor efficiency variance = SR(AH - SH)
= $12.50 per hour (1,400 hours - 1,440hours)
= $500 F
- Dynamic Solutions provides supply chain services such as warehousing, order picking and shipping services for Ebay merchants. As part of this service, the company maintains warehouses that stock items sold by its clients. When a client merchant receives an order from a customer, Dynamic Solutions receives a real time copy of that order. Using the order information, Dynamic pulls the item from storage, packs it, and ships it to the customer. Dynamic Solutions uses a predetermined variable overhead rate based on direct labor-hours.
In the most recent month, 195,000 items were shipped to customers using 8,600 direct labor-hours. The company incurred a total of $30,530 in variable overhead costs.
According to the company's standards, 0.04 direct labor-hours are required to fulfill an order for one item and the variable overhead rate is $3.60 per direct labor-hour.
Required:
1. According to the standards, what variable overhead cost should have been incurred to fill the orders for the 195,000 items? How much does this differ from the actual variable overhead cost? (Round labor-hours per item and overhead cost per hour to 2 decimal places.)
Number of items shipped 195,000
Standard direct labor-hours per item 0.04
Total direct labor-hours allowed 7,800
Standard variable overhead cost per hour $3.60
Total standard variable overhead cost $28,080
Actual variable overhead cost incurred $30,530
Total standard variable overhead cost 28,080
Total variable overhead variance $2,450 Unfavorable
- Dynamic Solutions provides supply chain services such as warehousing, order picking and shipping services for Ebay merchants. As part of this service, the company maintains warehouses that stock items sold by its clients. When a client merchant receives an order from a customer, Dynamic Solutions receives a real time copy of that order. Using the order information, Dynamic pulls the item from storage, packs it, and ships it to the customer. Dynamic Solutions uses a predetermined variable overhead rate based on direct labor-hours.
In the most recent month, 195,000 items were shipped to customers using 8,600 direct labor-hours. The company incurred a total of $30,530 in variable overhead costs.
According to the company's standards, 0.04 direct labor-hours are required to fulfill an order for one item and the variable overhead rate is $3.60 per direct labor-hour.
2. Break down the difference computed in (1) above into a variable overhead rate variance and a variable overhead efficiency variance. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)
Variable overhead rate variance $430 F
Variable overhead efficiency variance $2,880 U
Explanation:
2.
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)
8,600 hours ×
$3.55 per hour* 8,600 hours ×
$3.60 per hour 7,800 hours ×
$3.60 per hour
= $30,530 = $30,960 = $28,080
Variable Overhead
Rate Variance,
$430 F
Variable Overhead
Efficiency Variance,
$2,880 U
Spending Variance,
$2,450 U
*$30,530 ÷ 8,600 hours = $3.55 per hour
Alternatively, the variances can be computed using the formulas:
Variable overhead rate variance:
AH(AR - SR) = 8,600 hours ($3.55 per hour - $3.60 per hour)
= $430 F
Variable overhead efficiency variance:
SR(AH - SH) = $3.60 per hour (8,600 hours - 7,800 hours)
= $2,880 U
- DOWE Chemical Company produces various chemical compounds for industrial use. DOWE's best selling product, Flubber, is prepared using an elaborate secret distilling process. The table below shows the standard costs for one unit of Flubber:
Standard Quantity Standard Price or Rate Standard Cost
Direct materials:2.00 ounces $30.00 per ounce $60.00
Direct labor:0.50 hours $14.00 per hour 7.00
Variable manufacturing overhead: 0.50 hours $3.40 per hour 1.70
Total Standard Cost $ 68.70
During October, the following activity was recorded relative to production of Flubber:
a. Materials purchased, 10,000 ounces at a cost of $287,000.
b. There was no beginning inventory of materials; however, at the end of the month, 3,000 ounces of material remained in ending inventory.
c. The company employs 20 lab technicians to work on the production of Flubber. During October, they worked an average of 130 hours at an average rate of $12.00 per hour.
d. Variable manufacturing overhead is assigned to Flubber on the basis of direct labor-hours. Variable manufacturing overhead costs during October totaled $4,700.
e. During October, 3,400 good units of Flubber were produced .
1. For direct materials:
a. Compute the price and quantity variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)
Materials price variance $13,000 F
Materials quantity variance $6,000 U
b. The materials were purchased from a new supplier who is anxious to enter into a long-term purchase contract. Would you recommend that the company sign the contract?
Yes
Explanation:
1.
a.
In the solution below, the materials price variance is computed on the entire amount of materials purchased whereas the materials quantity variance is computed only on the amount of materials used in production:
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)
10,000 ounces ×
$30.00 per ounce 6,800 ounces* ×
$30.00 per ounce
$287,000 = $300,000 = $204,000
Price variance, $13,000 F
7,000 ounces × $30.00 per ounce
= $210,000
Quantity Variance,
$6,000 U
*3,400 units × 2.0 ounces per unit = 6,800 ounces
Materials price variance:
Actual Price = $287,000 ÷ 10,000 ounces = $28.70 per ounce
b.
Yes, the contract probably should be signed. The new price of $28.70 per ounce is substantially lower than the old price of $30.00 per ounce, resulting in a favorable price variance of $13,000 for the month. Moreover, the material from the new supplier appears to cause little or no problem in production as shown by the small materials quantity variance for the month.
- DOWE Chemical Company produces various chemical compounds for industrial use. DOWE's best selling product, Flubber, is prepared using an elaborate secret distilling process. The table below shows the standard costs for one unit of Flubber:
Standard Quantity Standard Price or Rate Standard Cost
Direct materials:2.00 ounces $30.00 per ounce $60.00
Direct labor:0.50 hours $14.00 per hour 7.00
Variable manufacturing overhead: 0.50 hours $3.40 per hour 1.70
Total Standard Cost $ 68.70
During October, the following activity was recorded relative to production of Flubber:
a. Materials purchased, 10,000 ounces at a cost of $287,000.
b. There was no beginning inventory of materials; however, at the end of the month, 3,000 ounces of material remained in ending inventory.
c. The company employs 20 lab technicians to work on the production of Flubber. During October, they worked an average of 130 hours at an average rate of $12.00 per hour.
d. Variable manufacturing overhead is assigned to Flubber on the basis of direct labor-hours. Variable manufacturing overhead costs during October totaled $4,700.
e. During October, 3,400 good units of Flubber were produced .
2. For direct labor:
a. Compute the rate and efficiency variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)
Labor rate variance $5,200 F
Labor efficiency variance $12,600 U
.
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)
2,600 hours* ×
$12.00 per hour 2,600 hours ×
$14.00 per hour 1,700 hours** ×
$14.00 per hour
= $31,200 = $36,400 = $23,800
Rate Variance,
$5,200 F
Efficiency Variance,
$12,600 U
Spending variance, $7,400 U
*20 technicians × 130 hours per technician = 2,600 hours
**3,400 units × 0.50 hours per technician = 1,700 hours
b.
No, the new labor mix probably should not be continued. Although it decreases the average hourly labor cost from $14.00 to $12.00, thereby causing a $5,200 favorable labor rate variance, this savings is more than offset by a large unfavorable labor efficiency variance for the month. Thus, the new labor mix increases overall labor costs.
- DOWE Chemical Company produces various chemical compounds for industrial use. DOWE's best selling product, Flubber, is prepared using an elaborate secret distilling process. The table below shows the standard costs for one unit of Flubber:
Standard Quantity Standard Price or Rate Standard Cost
Direct materials:2.00 ounces $30.00 per ounce $60.00
Direct labor:0.50 hours $14.00 per hour 7.00
Variable manufacturing overhead: 0.50 hours $3.40 per hour 1.70
Total Standard Cost $ 68.70
During October, the following activity was recorded relative to production of Flubber:
a. Materials purchased, 10,000 ounces at a cost of $287,000.
b. There was no beginning inventory of materials; however, at the end of the month, 3,000 ounces of material remained in ending inventory.
c. The company employs 20 lab technicians to work on the production of Flubber. During October, they worked an average of 130 hours at an average rate of $12.00 per hour.
d. Variable manufacturing overhead is assigned to Flubber on the basis of direct labor-hours. Variable manufacturing overhead costs during October totaled $4,700.
e. During October, 3,400 good units of Flubber were produced .
3. Compute the variable overhead rate and efficiency variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)
Variable overhead rate variance $4,140 F
Variable overhead efficiency variance $3,060 U
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)
2,600 hours* ×
$3.40 per hour 1,700 hours** ×
$3.40 per hour
$4,700 = $8,840 = $5,780
Rate Variance,
$4,140 F
Efficiency Variance,
$3,060 U
Spending variance, $1,080 F
* Based on direct labor hours:
20 technicians × 130 hours per technician = 2,600 hours
**3,400 units × 0.50 hours per unit = 1,700 hours
- A flexible budget is a budget that:
is updated to reflect the actual level of activity during the period.
- If the actual level of activity is 4% less than planned, then the variable costs in the static budget should be decreased by 4% before comparing them to actual costs.
True
- Of the following sets of comparisons, which one would best identify the impact that changes in the prices of inputs and outputs have on performance?
flexible budget and actual results
