Question

Computing standard cost variances and reporting to management

Hear Smart manufactures headphone cases. During September 2018, the company produced and sold 105,000 cases and recorded the following cost data:

Standard Cost Information

	Quantity	Cost
Direct Materials	2 parts	\( 0.15 per part
Direct Labor	0.02 hours	8.00 per hour
Variable Manufacturing Overhead	0.02 hours	10.00 per hour
Fixed Manufacturing Overhead (\)28,500 for static budget volume of 95,000 units and 1,900 hours, or \(15 per hour)

Actual Cost Information

Direct Materials (209,000 parts @ \)0.20 per part) \( 41,800 Direct Labor (1,600 hours @ \)8.15 per hour) 13,040 Variable Manufacturing Overhead 9,000 Fixed Manufacturing Overhead 26,000

Requirements

1. Compute the cost and efficiency variances for direct materials and labor.

2. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances.

3. Hear Smart’s management used better quality materials during September. Discuss the tradeoff between the two direct material variances.

Short answer

1. Direct material cost variance is $10,450(U)

Direct material efficiency variance is $150(F)

Direct labor cost variance is $240(U)

Direct labor efficiency variance is $4,000 (F)

1. Variable overhead cost variance is $7,000(F)

Variable overhead efficiency variance is $5,000 (F)

Fixed overhead cost variance is $2,900 (F)

Fixed overhead volume variance is $3,000(F)

1. Using high-quality products will produce better-quality output, which will increase consumer happiness

Step-by-step solution

Meaning of Manufacturing Overhead

The phrase "direct materials" alludes to one or more things, things, or substances that physically alter into an item that may be utilized or become a part of that item. Materials' costs are regarded as direct or product costs since they can be connected to each manufactured product unit.

Computing cost and efficiency variances

Direct material cost variance

$\begin{array}{c}\mathbf{Direct}\mathbf{material}\mathbf{cost}\mathbf{variance}\mathbf{=}\left(\mathrm{Actual}\mathrm{Price}-\mathrm{Standard}\mathrm{Price}\right)\mathbf{\times }\mathbf{Actual}\mathbf{quantity}\\ \mathbf{=}\left(\$0.20-\$0.15\right)\mathbf{\times }\mathbf{209}\mathbf{,}\mathbf{000}\\ \mathbf{=}\mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{450}\mathbf{Unfavourable}\end{array}$

Direct material efficiency variance

$\begin{array}{c}\mathbf{Direct}\mathbf{material}\mathbf{efficiency}\mathbf{variance}\mathbf{=}\left(\mathrm{Actual}\mathrm{quantity}-\mathrm{Standard}\mathrm{quantity}\right)\mathbf{\times }\mathbf{Standard}\mathbf{price}\\ \mathbf{=}\left(\$209,000-\left(105,000\times 2\right)\right)\mathbf{\times }\mathbf{\$}\mathbf{0}\mathbf{.}\mathbf{15}\\ \mathbf{=}\mathbf{\$}\mathbf{150}\mathbf{Favourable}\end{array}$

Direct labor cost variance

$\begin{array}{c}\mathbf{D}\mathbf{i}\mathbf{r}\mathbf{e}\mathbf{c}\mathbf{t}\mathbf{l}\mathbf{a}\mathbf{b}\mathbf{o}\mathbf{r}\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{v}\mathbf{a}\mathbf{r}\mathbf{i}\mathbf{a}\mathbf{n}\mathbf{c}\mathbf{e}\mathbf{=}\left(Actualrate-Standardrate\right)\mathbf{\times }\mathbf{A}\mathbf{c}\mathbf{t}\mathbf{u}\mathbf{a}\mathbf{l}\mathbf{H}\mathbf{o}\mathbf{u}\mathbf{r}\mathbf{s}\\ \mathbf{=}\left(\$8.15-\$8.00\right)\mathbf{\times }\mathbf{1}\mathbf{,}\mathbf{600}\\ \mathbf{=}\mathbf{\$}\mathbf{240}\mathbf{U}\mathbf{n}\mathbf{f}\mathbf{a}\mathbf{v}\mathbf{o}\mathbf{u}\mathbf{r}\mathbf{a}\mathbf{b}\mathbf{l}\mathbf{e}\end{array}$

Direct labor efficiency variance

$\begin{array}{c}\mathbf{Direct}\mathbf{labor}\mathbf{efficiency}\mathbf{variance}\mathbf{=}\left(\mathrm{Actual}\mathrm{hours}-\mathrm{Standard}\mathrm{hours}\right)\mathbf{\times }\mathbf{Standard}\mathbf{rate}\\ \mathbf{=}\left(1,600-2,100\right)\mathbf{\times }\mathbf{\$}\mathbf{8}\mathbf{.}\mathbf{00}\\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{000}\mathbf{Favourable}\end{array}$

Computing variable overhead cost and efficiency variances

Variable Overhead cost variance

$\begin{array}{c}\mathbf{V}\mathbf{a}\mathbf{r}\mathbf{i}\mathbf{a}\mathbf{b}\mathbf{l}\mathbf{e}\mathbf{o}\mathbf{v}\mathbf{e}\mathbf{r}\mathbf{h}\mathbf{e}\mathbf{a}\mathbf{d}\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{v}\mathbf{a}\mathbf{r}\mathbf{i}\mathbf{a}\mathbf{n}\mathbf{c}\mathbf{e}\mathbf{=}\left(Actualrate-Standardrate\right)\mathbf{\times }\mathbf{A}\mathbf{c}\mathbf{t}\mathbf{u}\mathbf{a}\mathbf{l}\mathbf{h}\mathbf{o}\mathbf{u}\mathbf{r}\mathbf{s}\\ \mathbf{=}\left(\frac{\$9,000}{1,600}-\$10\right)\mathbf{\times }\mathbf{1}\mathbf{,}\mathbf{600}\\ \mathbf{=}\mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{000}\mathbf{F}\mathbf{a}\mathbf{v}\mathbf{o}\mathbf{u}\mathbf{r}\mathbf{a}\mathbf{b}\mathbf{l}\mathbf{e}\end{array}$

Variable overhead efficiency variance

$\begin{array}{c}\mathbf{Variable}\mathbf{overhead}\mathbf{\text{}}\mathbf{efficiency}\mathbf{variance}\mathbf{=}\left(\mathrm{Actual}\mathrm{hours}-\mathrm{Standard}\mathrm{hours}\right)\mathbf{\times }\mathbf{Standard}\mathbf{rate}\\ \mathbf{=}\left(1,600-2,100\right)\mathbf{\times }\mathbf{10}\\ \mathbf{=}\mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{000}\mathbf{Favourable}\end{array}$

Fixed overhead cost variance

$\begin{array}{c}\mathbf{Fixed}\mathbf{overhead}\mathbf{cost}\mathbf{variance}\mathbf{=}\left(\mathrm{ActualFixedOverhead}-\mathrm{BudgetedFixedOverhead}\right)\\ \mathbf{=}\left(\$26,000-\$28,900\right)\\ \mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{900}\mathbf{Favourable}\end{array}$

Fixed overhead volume variance

$\begin{array}{c}\mathbf{Fixed}\mathbf{overhead}\mathbf{volume}\mathbf{variance}\mathbf{=}\left(\mathrm{Budgeted}\mathrm{fixed}\mathrm{overhead}-\mathrm{Allocated}\mathrm{Overhead}\right)\\ \mathbf{=}\left(\$28,500-\$31,500\right)\\ \mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}\mathbf{Favourable}\end{array}$

Working notes:

Absorption rate		0.30
Absorbed fixed overhead		31,500
Budgeted fixed overhead		28,500

Additional working note:

$\begin{array}{c}\mathbf{Standard}\mathbf{\text{\hspace{0.33em}}}\mathbf{hour}\mathbf{=}\left(\mathrm{Standard}\mathrm{quantity}\right)\mathbf{\times }\mathbf{Rate}\\ \mathbf{=}\left(105,000\times 2\right)\mathbf{\times }\mathbf{0}\mathbf{.}\mathbf{02}\\ \mathbf{=}\mathbf{2}\mathbf{,}\mathbf{100}\end{array}$

Discussing trade-off between the two direct material variances

In September, Hear Smart's management used higher-quality materials, which caused the Direct Material Cost Variance to produce an unfavorable figure of $10,450. However, the material efficiency variance produced a beneficial variation of $150 due to purchasing better-grade materials.

However, because of Material Cost Variance Surpassed Material Efficiency Variance, the overall Direct Material Variance is now $10,300 (unfavorable) (10,450 - 150). However, using high-quality products will produce better output, increasing consumer happiness. Customer happiness must be considered because it affects the company's income and reputation.