ACCT 001 Lecture Notes - Lecture 28: Inventory Turnover, Purchase Order, Direct Labor Cost
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Direct Materials Variances
The following data relate to the direct materials cost for theproduction of 2,100 automobile tires:
| Actual: | 60,300 lbs. at $1.75 | $105,525 |
| Standard: | 58,500 lbs. at $1.8 | $105,300 |
a. Determine the direct materials pricevariance, direct materials quantity variance, and total directmaterials cost variance. Enter a favorable variance as a negativenumber using a minus sign and an unfavorable variance as a positivenumber.
| Price variance | $ | |
| Quantity variance | $ | |
| Total direct materials cost variance | $ |
b. The direct materials price variance shouldnormally be reported to the . If lower amounts of direct materialshad been used because of production efficiencies, the variancewould be reported to the . If the favorable use of raw materialshad been caused by the purchase of higher-quality raw materials,the variance should be reported to the .
Portland Company's Ironton Plant produces precast ingots forindustrial use. Carlos Santiago, who was recently appointed generalmanager of the Ironton Plant, has just been handed the plant%u2019scontribution format income statement for October. The statement isshown below: |
| Budgeted | Actual | |||
| Sales (7,000 ingots) | $ | 255,000 | $ | 255,000 |
| Variable expenses: | ||||
| Variable cost of goods sold* | 85,400 | 104,590 | ||
| Variable selling expenses | 15,000 | 15,000 | ||
| Total variable expenses | 100,400 | 119,590 | ||
| Contribution margin | 154,600 | 135,410 | ||
| Fixed expenses: | ||||
| Manufacturing overhead | 64,000 | 64,000 | ||
| Selling and administrative | 79,000 | 79,000 | ||
| Total fixed expenses | 143,000 | 143,000 | ||
| Net operating income (loss) | $ | 11,600 | $ | (7,590) |
| | | | | |
| *Contains direct materials, direct labor, and variablemanufacturing overhead. |
Mr. Santiago was shocked to see theloss for the month, particularly because sales were exactly asbudgeted. He stated, "I sure hope the plant has a standard costsystem in operation. If it doesn't, I won't have the slightest ideaof where to start looking for the problem." |
The plant does use a standard costsystem, with the following standard variable cost per ingot: |
| Standard Quantity or Hours | Standard Price or Rate | Standard Cost | |||
| Direct materials | 4.0 pounds | $ | 2.40 per pound | $ | 9.60 |
| Direct labor | 0.3 hours | $ | 7.00 per hour | 2.10 | |
| Variable manufacturing overhead | 0.2 hours* | $ | 2.50 per hour | 0.50 | |
| Total standard variable cost | $ | 12.20 | |||
| | | ||||
| *Based on machine-hours. |
| During October the plant produced 7,000 ingots and incurred thefollowing costs: |
| a. | Purchased 33,000 pounds of materials at a cost of $2.85 per pound.There were no raw materials in inventory at the beginning of themonth. |
| b. | Used 27,800 pounds of materials in production. (Finished goods andwork in process inventories are insignificant and can beignored.) |
| c. | Worked 2,700 direct labor-hours at a cost of $6.70 per hour. |
| d. | Incurred total variable manufacturing overhead cost of $4,930 forthe month. A total of 1,700 machine-hours was recorded. |
| It is the company%u2019s policy to close all variances to cost ofgoods sold on a monthly basis. |
| 1. | Compute the following variances for October: |
| a. | Direct materials price and quantity variances. (Input all amounts aspositive values. Leave no cells blank - be certain to enter "0"wherever required. Indicate the effect of each variance byselecting "F" for favorable, "U" for unfavorable, and "None" for noeffect (i.e., zero variance.) |
| Materials price variance | $ | (Click to select)FUNone |
| Materials quantity variance | $ | (Click to select)FNoneU |
| b. | Direct labor rate and efficiency variances. (Input all amounts aspositive values. Leave no cells blank - be certain to enter "0"wherever required. Indicate the effect of each variance byselecting "F" for favorable, "U" for unfavorable, and "None" for noeffect (i.e., zero variance.) |
| Labor rate variance | $ | (Click to select)FUNone |
| Labor efficiency variance | $ | (Click to select)NoneUF |
| c. | Variable overhead rate and efficiency variances. (Input all amounts aspositive values. Do not round your intermediate calculations. Leaveno cells blank - be certain to enter "0" wherever required.Indicate the effect of each variance by selecting "F" forfavorable, "U" for unfavorable, and "None" for no effect (i.e.,zero variance.) |
| Variable overhead rate variance | $ | (Click to select)FNoneU |
| Variable overhead efficiency variance | $ | (Click to select)FUNone |
| 2a. | Summarize the variances that you computed in (1) above by showingthe net overall favorable or unfavorable variance for October.(Input the amount as apositive value. Leave no cells blank - be certain to enter "0"wherever required. Indicate the effect of variance by selecting "F"for favorable, "U" for unfavorable, and "None" for no effect (i.e.,zero variance.) |
| Net variance | $ | (Click to select)UFNone |
| 3. | Pick out the two most significant variances that you computed in(1) above. (You may select morethan one answer. Single click the box with the question mark toproduce a check mark for a correct answer and double click the boxwith the question mark to empty the box for a wronganswer.) | ||||||||||||
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Helix Company produces several products in itsfactory, including a karate robe. The company uses a standard costsystem to assist in the control of costs. According to thestandards that have been set for the robes, the factory should work780 direct labor-hours each month and produce 2,600 robes. Thestandard costs associated with this level of production are asfollows:
| Total | Per Unit of Product | ||
| Direct materials | $ | 49,920 | $19.20 |
| Direct labor | $ | 8,060 | 3.10 |
Variable manufacturing overhead | $ | 2,340 | 0.90 |
$ 23.20 | |||
| | |||
During April, thefactory worked only 760 direct labor-hours and produced 2,700robes. The following actual costs were recorded during themonth: |
| Total | Per Unit of Product | ||
| Direct materials (8,370 yards) | $ | 50,220 | $18.60 |
| Direct labor | $ | 8,910 | 3.30 |
Variable manufacturing overhead | $ | 5,670 | 2.10 |
| $ 24.00 | |||
| | |||
At standard, each robe should require 3.0 yardsof material. All of the materials purchased during the month wereused in production. |
| Required: | |
| 1. | Compute the materials price and quantityvariances for April: (Input all amounts as positivevalues. Leave no cells blank - be certain to enter "0" whereverrequired. Indicate the effect of each variance by selecting "F" forfavorable, "U" for unfavorable, and "None" for no effect (i.e.,zero variance). Round your intermediate calculations to 2 decimalplaces and final answers to the nearest dollar amount.) |
| Materials price variance | $ | |
| Materials quantity variance | $ | |
| 2. | Compute the labor rate and efficiency variancesfor April: (Inputall amounts as positive values. Leave no cells blank - be certainto enter "0" wherever required. Indicate the effect of eachvariance by selecting "F" for favorable, "U" for unfavorable, and"None" for no effect (i.e., zero variance). Do not round yourintermediate calculations. Round your final answers to the nearestdollar.) |
| Labor rate variance | $ | |
| Labor efficiency variance | $ | |
| 3. | Compute the variable manufacturing overhead rateand efficiency variances for April: (Input all amounts as positivevalues. Leave no cells blank - be certain to enter "0" whereverrequired. Indicate the effect of each variance by selecting "F" forfavorable, "U" for unfavorable, and "None" for no effect (i.e.,zero variance). Round your intermediate calculations to 2 decimalplaces and final answers to the nearest dollar amount.) |
| Variable overhead rate variance | $ | |
| Variable overhead efficiency variance | $ | |
