Question

Kryll Company set the following standard unit costs for its single product.

Direct materials (25 Ibs. @ \(4 per Ib.)	\)100
Direct labor (6 hrs. @ \(8 per hr.)	48
Factory overhead—Variable (6 hrs. @ \)5 per hr.)	30
Factory overhead—Fixed (6 hrs. @ \(7 per hr.)	42
Total standard cost	\)220

The predetermined overhead rate is based on a planned operating volume of 80% of the productive capacity of 60,000 units per quarter. The following flexible budget information is available.

	Operating Levels
	70%	80%	90%
Production in units	42,000	48,000	54,000
Standard direct labor hours	252,000	288,000	324,000
Budgeted overhead
Fixed factory overhead	\(2,016,000	\)2,016,000	\(2,016,000
Variable factory overhead	1,260,000	1,440,000	1,620,000

During the current quarter, the company operated at 70% of capacity and produced 42,000 units of product; direct labor hours worked were 250,000. Units produced were assigned the following standard costs:

Direct materials (1,050,000 Ibs. @ \)4 per Ib.)	\(4,200,000
Direct labor (252,000 hrs. @ \)8 per hr.)	2,016,000
Factory overhead (252,000 hrs. @ \(12 per hr.)	3,024,000
Total standard cost	\)9,240,000

Actual costs incurred during the current quarter follow:

Direct materials (1,000,000 Ibs. @ \(4.25 per lb.)	\)4,250,000
Direct labor (250,000 hrs. @ \(7.75 per hr.)	1,937,500
Fixed factory overhead costs	1,960,000
Variable factory overhead costs	1,200,000
Total actual costs	\)9,347,500

Required

1. Compute the direct materials cost variance, including its price and quantity variances.

2. Compute the direct labor cost variance, including its rate and efficiency variances.

3. Compute the total overhead controllable variance.

Short answer

1. The direct material price variance is unfavorable.
2. The direct material quantity variance isfavorable.
3. The direct labor rate and efficiency variance arefavorable.

Step-by-step solution

Meaning of Variance Analysis

Variance analysis refers to the technique used by managerial accountants for ascertaining thedifferences between actual and standard outputs. It enables the managers to take necessary actions to correct the adverse impact of such variations.

Computation of direct material cost variance 

$\begin{array}{c}\mathbf{\text{Directmaterialquantityvariance}}\mathbf{=}\mathbf{(}\mathbf{\text{Actualquantity}}\mathbf{-}\mathbf{\text{Standardquantity}}\mathbf{)}\mathbf{\times }\mathbf{\text{Standardprice}}\\ \mathbf{=}\mathbf{(}\mathbf{1}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{1}\mathbf{,}\mathbf{050}\mathbf{,}\mathbf{000}\mathbf{)}\mathbf{\times }\mathbf{\$}\mathbf{4}\\ \mathbf{=}\mathbf{\$}\mathbf{200}\mathbf{,}\mathbf{000}\mathbf{\left(}\mathbf{\text{Favorable}}\mathbf{\right)}\end{array}$

Computation of direct labor cost variance 

$\begin{array}{c}\mathbf{\text{Directlaborratevariance}}\mathbf{=}\mathbf{(}\mathbf{\text{Actualrate}}\mathbf{-}\mathbf{\text{Standardrate}}\mathbf{)}\mathbf{\times }\mathbf{\text{Actualhours}}\\ \mathbf{=}\mathbf{(}\mathbf{\$}\mathbf{7}\mathbf{.75}\mathbf{-}\mathbf{\$}\mathbf{8}\mathbf{)}\mathbf{\times }\mathbf{250}\mathbf{,}\mathbf{000}\\ \mathbf{=}\mathbf{\$}\mathbf{62}\mathbf{,}\mathbf{500}\mathbf{\left(}\mathbf{\text{Favorable}}\mathbf{\right)}\end{array}$

$\begin{array}{c}\mathbf{\text{Directlaborefficiencyvariance}}\mathbf{=}\mathbf{(}\mathbf{\text{Actualhours}}\mathbf{-}\mathbf{\text{Standardhours}}\mathbf{)}\mathbf{\times }\mathbf{\text{Standardrate}}\\ \mathbf{=}\mathbf{(}\mathbf{250}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{252}\mathbf{,}\mathbf{000}\mathbf{)}\mathbf{\times }\mathbf{\$}\mathbf{8}\\ \mathbf{=}\mathbf{\$}\mathbf{16}\mathbf{,}\mathbf{000}\mathbf{\left(}\mathbf{\text{Favorable}}\mathbf{\right)}\end{array}$

Computation of total overhead controllable and volume variances 

Total Overhead Controllable Variance
Particulars	Amounts ($)
Direct material price variance (Unfavorable)	(250,000)
Add: Direct material quantity variance (Favorable)	200,000
Add: Direct labor rate variance (Favorable)	62,500
Add: Direct labor efficiency variance (Favorable)	16,000
Controllable variance	28,500 (Favorable)