Question

Headset manufactures headphone cases. During September 2018, the company produced 106,000 cases and recorded the following cost data:

Standard Cost Information

	Quantity	Cost
Direct Materials	2 parts	\( 0.16 per part
Direct Labor	0.02 hours	8.00 per hour
Variable Manufacturing Overhead	0.02 hours	11.00 per hour
Fixed Manufacturing Overhead (\)30,720 for static budget volume of 96,000 units and 1,920 hours, or \(16 per hour)

Actual Information

Direct Materials (209,000 parts @ \)0.21 per part) \( 43,890 Direct Labor(1,620 hours @ \)8.10 per hour) 13,122 Variable Manufacturing Overhead 9,000 Fixed Manufacturing Overhead 30,000

Requirements

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

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

3. Headset’s management used better­quality materials during September. Discuss the trade­off between the two direct material variances.

Short answer

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

The direct material efficiency variance is$480(F)

The labor cost variance is $160(U).

The labor efficiency variance is $4,000(F).

2. The variable overhead cost variance is $8,820 (F).

The variable overhead efficiency variance is $6,490(F).

The fixed overhead cost variance is $720(F).

The fixed overhead volume variance is $4,800(F).

3. The sacrifice of the management on acquiring a better quality of materials with a high cost allowed for abetter utilization of the materials.

Step-by-step solution

Given Information:

• Actual cost (AC) is $0.21.
• Standard cost (SC) is $0.16.
• Actual quantity(AQ) is 209,000.
• Standard Quantity (SQ)=106,000 x 2 = 212,000.
• Actual labour cost (AC) is $8.10.
• Standard labour cost (SC) is $8.
• Actual labour hours (AH) is 1,620.
• Standard labour hours (SH) = 106,000 x 0.02 = 2,120.

(1) Computing the cost and efficiency variances for direct materials and direct labor

Calculate the direct material cost variance:

$\begin{array}{rcl}Directmaterialcostvariance& =& \left(Actualcost-Standardcost\right)\times Actualquantity\\ & =& \left(\$0.21-\$0.16\right)\times 209,000\\ & =& \$10,450Unfavourable.\\ & & \end{array}$

Calculate the direct material efficiency variance:

$\begin{array}{rcl}Directmaterialefficiencyvariance& =& \left(Actualquantity-Standardquantity\right)\times Standardcost\\ & =& \left(209,000-212,000\right)\times \$0.16\\ & =& \$480Favourable.\\ & & \end{array}$

Calculate the direct labor cost variance:

$\begin{array}{rcl}Directlaborcostvariance& =& \left(Actualcost-Standardcost\right)\times ActualLaborHours\\ & =& \left(\$8.10-\$8.00\right)\times 1,620\\ & =& \$0.10\times 1,620\\ & =& \$162Unfavourable.\\ & & \end{array}$

Calculate the labor efficiency variances:

$\begin{array}{rcl}Directlaborefficiencyvariance& =& \left(ActualHours-StandardHours\right)\times Standard Cost\\ & =& \left(1,620-2,120\right)\times \$8.00\\ & =& \$4,000Favourable.\\ & & \end{array}$

(2) Computing the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances

Compute the variable overhead cost variance:

$\begin{array}{rcl}VariableOverheadCostVariance& =& Actualvariablecost-\left(Standardprice\times Actualquantity\right)\\ & =& \$9,000-(\$11\times 1,620)\\ & =& \$8,820Favourable.\\ & & \end{array}$

Compute variable overhead efficiency variance:

$\begin{array}{rcl}Variableoverheadefficiencyvariance& =& \left(ActualHours-StandardHours\right)\times Standardprice\\ & =& \left(1,620-2,210\right)\times \$11\\ & =& \$6,490 Favourable.\\ & & \end{array}$

Calculate the fixed overhead cost variance:

$\begin{array}{rcl}Fixedoverheadcostvariance& =& \left(Actualfixedoverhead-Budgetedfixedoverhead\right)\\ & =& \left(\$30,000-\$30,720\right)\\ & =& \$720Favourable.\\ & & \end{array}$

Computefor the allocated fixed overhead:

$\begin{array}{rcl}Allocatedfixed overhead& =& Standardfixedoverheadallocationrate\times Actualquantity\\ & =& \$16\times 1,620\\ & =& \$25,920.\\ & & \end{array}$

Calculatethe fixed overhead volume variance:

$\begin{array}{rcl}Fixedoverheadvolumevariance& =& \left(Budgetedfixedoverhead-Allocatedfixedoverhead\right)\\ & =& \$30,720-\$25,920\\ & =& \$4,800Favourable.\\ & & \end{array}$

(3) Discuss the trade-off between the two direct material variances

A correlation exists between the direct materials efficiency variance and the direct materials cost variance. Contrary variations may occur in the purchasing department and the manufacturing department sectors. Anunfavourable direct materials cost variance resultarises because of higher-quality materials at a higher actual cost,which helps in improving the direct materials efficiency variance.