The required variances and brief comments are
given below:
a. Price variance for raw materials purchased.
This variance is calculated using the equation
Price variance for raw materials purchased = Actual
quantity of direct
material x (Actual price per unit-Standard price
per unit)
= 9260 x ($7.10-6.80)
= 9260 x $0.30
= 2778 Unfavorable
Actual procurement cost works out to $7.10 ($80940/11400lbs.)
which is higher than the standard price. This
reflects negatively on the purchase agent. Often
though unexpected and sudden price fluctuations
in the market are encountered and to this extent
management has to allow margin for adverse variances.
However the purchaser requires to be vigilant
and if necessary enter into long-term purchase
agreement.
b. Raw materials usage variance.
This variance is calculated using the equation
Raw materials usage variance =Standard Price x(Actual
quantity less
Standard quantity allowed)
= $6.80 x (9260-1900*5)
= $6.80 x (9260-9500)
= $1632 Favorable
The material usage is efficient. This positive
variance is to be commended.
Management can explore the possibilities of further
consolidating such gains. For this a reward (bonus)
scheme for the workers can be considered.
c. Direct labor rate variance.
This variance is calculated using the equation
Direct labor rate variance = Actual direct labor-hrs
x(Actual rate/hr
less Standard rate/hr)
= $4420x ($14.35 less $14.00)
= $4420x.35
= $1547 Unfavorable
This adverse variance needs management attention.
It is important to analyze and pinpoint the reasons
for this negative variance so that necessary corrective
measures can be instituted and labor rate brought
in line with the standards set. It may be that
the labor rate is higher due to excess overtime
which again calls for inquiry. Also the standards
may be studied for any possible inaccuracies.
d. Direct labor efficiency variance.
This variance is calculated using the equation
Direct labor efficiency variance = Standard rate/hr
x (Actual number of hrs
less standard quantity allowed)
= $14x(4420-1900*2.4)
= $14x (4420-4560)
= $14x140
= $1960 Favorable
The deployment and utilization of labor force
shows a positive variance and should be a source
of satisfaction to the management. This trend
needs to be maintained.
e. Variable overhead spending variance.
This variance is calculated using the equation
Variable overhead spending variance=Actual hours
x(Actual rate per hour
less Standard rate per hour)
=2910hrs x ($6.59-$6.75)
=2910hrsx$0.16
= $465.60(Favorable)
(Notes: Actual rate per hr=$12513/1900cases=$6.59)
Standard rate per hr = 1.5x$4.5=$6.75)
Overhead spending indicates satisfactory use of
electric power, gas, repairs and miscellaneous variable
expenses. The controls put in place seem to be working.
f. Variable overhead efficiency variance.
This variance is calculated using the equation
Variable overhead efficiency variance = Standard
rate per hour x (Actual
hours less standard hours allowed)
=$4.50(2910-1900*1.5)
=$4.50(2910-2850)
=$270(Unfavorable)
Direct labor efficiency variance
Direct labor efficiency variance in this illustration
is $1960 which works out to $1.03 per unit of
production. This is because actual labor hours
were 4420 against standard labor hours 4560. The
saving of 140 labor hours @$14(standard) gives
this saving. This could be due to one or more
of the various factors such as the following:
(a)Good training
(b)High level of motivation and work satisfaction
(c)Conducive work atmosphere
(d)Effective supervision
(e)Standard hours set incorrectly at a higher
level
As for the overhead spending variance it is $465.60
favorable in this illustration. This is again
a satisfactory position to be in. Variable overhead
inputs like power, gas, and water are becoming
more expensive. Same is the case with cost of
repairs. Close control over their use is imperative
for achieving cost which allows competitive pricing.
|