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Question & Answer: Problem 8-27A Computing standard cost and analyzing variances Spiro Company manufactures molded candles that are finishe…..

ONLY QUESTIONS E, F AND G!!!! Problem 8-27A Computing standard cost and analyzing variances Spiro Company manufactures molded candles that are finished by hand. The company developed the following standards for a new line of drip candles Amount of direct materials per candle Price of direct materials per pound Quantity of labor per unit Price of direct labor per hour Total budgeted fixed overhead 1.6 pounds $1.50 1 hour $20/hour $390,000 CHECK FIGURES During 2017, Spiro planned to produce 30,000 drip candles. Production lagged behind expectations, and it actually produced only 24,000 drip candles. At year-end, direct materials purchased and used amounted to 40,000 pounds at a unit price of $1.35 per pound. Direct labor costs were actually $18.75 per hour and 26,400 actual hours were worked to produce the drip candles. Overhead for the year actually amounted to S330,000. Overhead is applied to products using a predetermined overhead rate based on estimated units e. Usage variance for direct materials: $2,400 U f. Fixed cost volume variance: $78,000U Required Page 385

Problem 8-27A Computing standard cost and analyzing variances Spiro Company manufactures molded candles that are finished by hand. The company developed the following standards for a new line of drip candles Amount of direct materials per candle Price of direct materials per pound Quantity of labor per unit Price of direct labor per hour Total budgeted fixed overhead 1.6 pounds $1.50 1 hour $20/hour $390,000 CHECK FIGURES During 2017, Spiro planned to produce 30,000 drip candles. Production lagged behind expectations, and it actually produced only 24,000 drip candles. At year-end, direct materials purchased and used amounted to 40,000 pounds at a unit price of $1.35 per pound. Direct labor costs were actually $18.75 per hour and 26,400 actual hours were worked to produce the drip candles. Overhead for the year actually amounted to S330,000. Overhead is applied to products using a predetermined overhead rate based on estimated units e. Usage variance for direct materials: $2,400 U f. Fixed cost volume variance: $78,000U Required Page 385

Expert Answer

 

e
1 Direct Material Variance
Price variance=(SR-AR)*AQ 6000 Favourable
Usage variance=(SQ-AQ)*SR -2400 Unfavourable
Total direct material variance 3600 Favourable
2 Direct labour variance
Rate variance=(SR-AR)*AQ 33000 Favourable
Efficiency variance=(SQ-AQ)*SR -48000 Unfavourable
Total direct labour variance -15000 Unfavourable
Material Variance
Actual Cost Actual Rate Actual Quantity Standard Cost Standard Rate Standard Quantity
54000 1.35 40000 57600 1.5 38400
(40000*1.35) (38400*1.5) (24000*1.6)
Labour Var
Actual Cost Actual Rate Actual Quantity Standard Cost Standard Rate Standard Quantity
495000 18.75 26400 480000 20 24000
(26400*18.75) (24000*20) (24000*1)
Usage variance should be investigated for both material and labour since these are unfavourable.
Possible cause of usage variance is inefficient utilisation of resources.
f Fixed Cost Spending
Fixed Overhead Budget Variance =Budgeted Fixed Overhead – Actual Fixed Overhead
=390000-330000
60000 Favourable
Fixed Overhead Volume Variance
Fixed Overhead Application Rate =Budgeted Fixed Cost / Budgeted Production
=390000/30000
13 per unit
Applied fixed overhead=Overhead application rate*Actual no. of units produced=13*24000= 312000
Budgeted Fixed Overhead 390000
Fixed OH Volume Var=Applied OH-Budgeted OH
=312000-390000
-78000 Unfavourable
Since less units are produced than budgeted fixed volume variance is unfavourable.
g
When difference in per unit cost is seen it is very small in cents. But when it is mutiplied with quantity it become a significant amount.
Moreover the ineffecient use of resources further contribute to the vraiances.
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