Problem-1 (Materials, labor and

variable overhead variances)

P&G company produces many products for household use. Company sells products to
storekeepers as well as to customers. Detergent-DX is one of the products of P&G. It is a
cleaning product that is produced, packed in large boxes and then sold to customers and
storekeepers.

P&G uses a traditional standard costing system to control costs and has established the
following materials, labor and overhead standards to produce one box of Detergent-DX:

 Direct materials; 1.5 pounds @ $12 per pound: $18.00

 Direct labor; 0.6 hours $24 per hour: $14.40
 Variable manufacturing overhead; 0.6 hours @ $5.00: $3.00

During August 2012, company produced and sold 3,000 boxes of Detergent-DX. 8,000
pounds of direct materials were purchased @ $11.50 per pound. Out of these 8,000
pounds, 6,000 pounds were used during August. There was no inventory at the beginning of
August. 1600 direct labor hours were recorded during the month at a cost of $40,000. The
variable manufacturing overhead costs during August totaled $7,200.

Required:

1. Compute materials price variance and materials quantity variance. (Assume that the
materials price variance is computed at the time of purchase.)
2. Compute direct labor rate variance and direct labor efficiency variance.
3. Compute variable overhead spending variance and variable overhead efficiency
variance.
Solution:
(1). Materials variances:

a. Materials price variance:

b. Materials quantity variance:

*3,000 boxes × 1.5 pounds per box = 4,500 pounds

F = Favorable; U = Unfavorable

(2). Labor variances:

a. Direct labor rate variance:

b. Direct labor efficiency variance:

*3,000 boxes × 0.6 hours per box = 1,800 hours

F = Favorable; U = Unfavorable

(3) Variable overhead variances:

a. Variable overhead spending variance:

b. Variable overhead efficiency variance:

*3,000 boxes × 0.6 hours per box = 1,800 hours

F = Favorable

Problem-2 (Variance analysis;

journal entries)
The Exide company is a single product company that uses standard costing system to
control its costs. The standard and actual costs data for the most recent month to produce
one unit of product is given below:
During the most recent month, 4,800 units of product were produced. The comparison of
standard and actual cost on the basis of total cost is given below:

During the month, the company purchased 21,120 kilograms of materials from its vendors.
There was no inventory of materials in stock at the start and at the end of month.

Required:

1. (a) Compute direct materials price and quantity variances.

(b) Make journal entries to record direct materials related activities during the month.
2. (a) Compute direct labor rate and efficiency variances.
(b) Make journal entry to record direct labor direct labor cost during the month.
3. Compute variable manufacturing overhead spending and efficiency variances.
4. The total cost variance of $576 is only 0.25% of $235,008 standard cost which
means the company’s costs are well under control. Do you agree? Explain.
5. What are possible causes of variances that you have computed in part 1, 2 and 3.
Solution:
 Solution to requirement 1
  Solution to requirement 2
 Solution to requirement 3
 Solution to requirement 4
 Solution to requirement 5
(1) Variances and journal entries relating to direct materials:

a. Materials price variance:

(Actual quantity purchased × Actual price) – (Actual quantity purchased × Standard price)

= (21,120 kg × $ 6.7) – (21,120 kg × $ 7.2)

= $141,504 – $152,064

= $10,560 Favorable

b. Materials quantity variance:

(Actual quantity used × Standard price) – (Standard quantity allowed × Standard price)

= (21,120 kg × $7.2) – (*19,200 kg × $7.2)

= $152,064 – $138,240

= $13,824 Unfavorable

*4,800 units × $4.0

c. Journal entries:
(2) Variances and journal entry relating to direct labor:

a. Labor rate variance:

(Actual hours worked × Actual rate) – (Actual hours worked × Standard rate)

= (6,720* × $9.70) – (6,720 × $9.00)

= $65,184 – $60,480

= $4,704 Unfavorable

*4,800 units × 1.4 hours per unit

b. Labor efficiency variance:

(Actual hours worked × Standard rate) – (Standard hours allowed × Standard rate)

= (6,720 hours × $9) – (7,680* hours × $9)

= $60,480 – $69,120

= $8,640 Favorable
*4,800 units × 1.6 hours per unit

c. Journal entry:

(3) Variable manufacturing overhead variances:

a. Variable overhead spending variance:

(Actual hours worked × Actual rate) – (Actual hours worked × Standard rate)

= (6,720 hours × $4.3) – (6,720 hours × $3.6)

= $28,896 – $24,192

= $4,704 Unfavorable

b. Variable overhead efficiency variance:

(Actual hours worked × Standard rate) – (Standard hours allowed × Standard rate)

= (6,720 hours × $3.6) – (7,680 hours × $3.6)

= $24,192 – $27,648

= $3,456 Favorable

(4). Do you agree that costs are well under control?

The answer to requirement 4 is ‘no’. Although the total unfavorable cost variance of $576 is
only 0.25% of the total standard cost, it is made up of many individual variances and some
of them may be large enough to require immediate investigation. A summary of variances
computed in part 1, 2 and 3 is given below:
(5) Reasons of variances:

There are many causes of materials, labor and overhead variances. Some usual causes of
the variances computed in part 1, 2 and 3 of this problem are given below:

1. Favorable direct materials price variance: Decrease in price of raw materials,

discount for bulk purchase, purchase of low grade materials, inaccuracy in setting
direct materials standards etc.
2. Unfavorable direct materials quantity variance: Unskilled or untrained workers,
use of inferior quality materials, faulty or poorly adjusted machines and equipments,
lack of care in using materials, inaccurate standards etc.
3. Unfavorable labor rate variance: Overtime, appointment of highly skilled workers,
change in wage rates, inaccurate standards etc.
4. Favorable labor efficiency variance: Use of new and properly adjusted machines
and equipments, appointment of highly skilled workers, use of high quality materials,
inaccuracy in setting standards.
5. Unfavorable variable overhead spending variance: Increase in costs, purchase
in uneconomical lots, spoilage, wastage, theft, inaccurate standards etc.
6. Favorable variable overhead efficiency variance: Use of new and properly
adjusted machines and equipments, appointment of highly skilled workers, use of
high quality materials, inaccuracy in setting standards. Notice that the causes of
favorable variable overhead efficiency variance are same as that of favorable direct
labor efficiency variance.

Problem-3 (Computation of actual

hours worked by working backward)
Exenco Global is a large company that produces a lot of products. One of the product is a
paint that is stored in containers. The variable standard cost per container is given below:

Quantity / Per liter / Per Standard

Hours hour cost
Direct materials 6 liters $2 $12
Direct labor 1 hour $9 $9
Variable manufacturing
1 hour $6 $6
overhead
——–
$24
——–

The direct materials to produce this product is available in liquid form. During May, 60,000
liters of direct materials were purchased and 38,000 liters were sent to production
department. The production for the month of May was 6,000 containers.

The following costs were incurred during May.

Actual cost of materials purchased $114,000

Actual direct labor cost $55,900
Actual variable manufacturing overhead cost $40,950
Variable manufacturing overhead efficiency
$3,000 Unfavorable
variance

Required:

1. Compute actual direct labor hours worked during the month of May.
2. Compute variable manufacturing overhead spending variance.
3. Prepare journal entries to record materials and labor related activities during May.
Solution:

(1) Actual direct labor hours worked during May:

Standard hours allowed at standard rate (6,000* hours ×

$36,000
$6)
Add unfavorable efficiency variance  $3,000
 ——–
Actual hours worked at standard rate $39,000
——–

Actual hours worked = Actual hours worked at standard rate /

Standard rate= $39,000 / $6= 6,500 hours

*6,000 containers × 1 hour

(2) Variable manufacturing overhead spending variance:

= (6,500 hours × $6.3) – (6,500 hours × $6)

= $40,950 – $39,000

= $1,950 Unfavorable

(3) Journal entries to record materials and labor related activities:

To record direct materials activities:

Direct materials 120,000
     Direct materials price variance(See
6,000
computations below)
     Accounts payable 114,000
———————————-
Work in process  72,000
Direct materials quantity variance (See
4,000
computations below)
     Direct materials  76,000
To record direct labor activities:
Work in process 54,000
Direct labor efficiency variance (See computations
4,500
below)
     Direct labor rate variance (See computations
2,600
below)
     Wages payable 55,900
= $114,000 – (60,000 liters × $2)

= $114,000 – $120,000

= $6,000 Favorable

= (38,000 liters × $2) – (36,000 liters × $2)

= $76,000 – $72,000

= $4,000 Unfavorable

$55,900 – (6,500 hours × $9)

= $55,900 – $58,500

= $2,600 Favorable

= (6,500 hours × $9) – (6,000 hours × $9)

= $58,500 – $54,000

= $4,500 Unfavorable

Problem-4 (Materials and labor

variances; computations from
incomplete data)
Sapna company produces a single product known as product X. The company has set the
following direct materials and direct labor standards for product X:

During the month of August, the company produced 1,400 units of product X. A total of
6,000 pounds of direct materials was purchased at a total cost of $33,000. The total direct
labor cost for the month was $57,000. All materials purchased during the month was used
in production. There was no direct materials inventory on hand at the start and at the end of
August.

Someone from the company’s management has computed the following three variances:

 Total materials variance: $600 favorable

 Direct materials quantity variance: $2,400 unfavorable
 Direct labor efficiency variance: $9,000 favorable

Required:

1. Compute the standard price per pound of materials.

2. Compute the standard quantity of materials allowed for actual production.
3. Compute the standard quantity of direct materials allowed for one unit of product X.
4. Compute the actual direct labor cost per hour for month of August.
5. Compute the direct labor rate variance. Also indicate whether it is favorable or
unfavorable.
Solution:
(1) Standard price per pound of materials:

This requirement can be completed in three steps – computation of materials price

variance, computation of actual quantity purchased at standard price and computation of
standard price per pound of materials (the actual answer to requirement 1).

Step 1: Computation of materials price variance:

Step 2: Computation of actual quantity purchased at standard price:

Step 3: Computation of standard price per pound of materials:

Standard price per pound of materials = Actual quantity purchased at standard price/Actual
quantity purchased

$36,000/6,000 pounds

= $6 per pound

(2) Standard quantity of materials allowed for actual production:

Standard quantity allowed for actual production = Standard quantity allowed at standard
price/Standard price per pound

= $33,600/$6*

= 5,600 pounds

*See answer to requirement 1

(3) Standard quantity of materials allowed per unit:

Standard quantity allowed per unit = Standard quantity allowed for actual production/Actual
production

= *5,600 pounds/1,400 units

= 4 pounds per unit

*See answer to requirement 2

(4) Actual direct labor rate per hour:

Actual direct labor hours worked = Actual direct labor hours worked at standard
rate/Standard rate per hour

= $54,000/$18

= 3,000 hours

*1,400 units × 2.5 hours

(5) Direct labor rate variance:

(Actual hours worked × actual rate) – (Actual hours worked × standard rate)

= $57,000 – (*3,000 hours × $18)

= $57,000 – $54,000

= $3,000 Unfavorable

Problem-5 (Comprehensive variance

analysis, complex computations)
Fine Electronics, Inc., manufactures a number of electronic products. The following variable
cost standards have been set for product K.
During the month of May, 900 direct labor hours were actually worked and 500 units of
product K were manufactured. The actual cost per unit manufactured during May was $0.28
higher than the standard cost.

The following costs and variances information relates to the month of May:

During the month of May, 900 direct labor hours were actually worked and 500 units of
product K were manufactured. The actual cost per unit manufactured during May was $0.28
higher than the standard cost.

The following costs and variances information relates to the month of May:

Required: Compute the followings:

1. Total standard cost of materials used for actual production during May.
2. Standard quantity of materials per unit of product K.
3. Materials price variance for May.
4. Standard direct labor rate per hour.
5. Direct labor rate and efficiency variance.
6. Variable overhead spending and efficiency variance.
Solution:
(1) Standard cost of materials used:

*$84.00 standard cost per unit × 500 units

(2) Standard quantity of materials per unit:

Standard quantity of materials per unit = Standard cost of materials per unit/Standard cost
of materials per pound

= $45.60/$12

= 3.8 pound per unit

(3) Direct materials price variance:

Total materials variance is made up of materials price variance and materials quantity
variance. Total materials variance is $2,800 favorable and materials quantity variance is
$1,200 unfavorable. Therefore, the materials price variance must be $4,000 as computed

below:
(4) Standard direct labor rate per hour:

In order to compute the standard direct labor rate per hour we need to compute the
standard direct labor hours first. Since variable manufacturing overhead cost is based on
direct labor hours, we can compute standard direct labor hours as follows:

Standard direct labor rate per hour = Total standard direct labor for May/Total standard
direct labor hours for May

= $16,000/800 hours

= $20 per direct labor hour

(5) Direct labor variances:

a. Labor rate variance:

(Actual hours worked × Actual direct labor rate) – (Actual hours worked × Standard direct
labor rate)

= 18,900* – (900 hours × $20**)

= $18,900 – $18,000

= $900 Unfavorable

* Total actual cost – (Actual materials cost + Actual variable overhead cost)

= 500 units × $84.28 – ($20,000 + 3,240)

= 42,140 – 23,240
= $18,900

**See requirement 4

b. Labor efficiency variance:

(Actual hours worked × Standard direct labor rate) – (Standard hours allowed × Standard
direct labor rate)

= (900 hours × $20) – (*800 hours × $20)

= $18,000 – $16,000

= $2,000 Unfavorable

*See requirement 4

(6) Variable overhead variances:

(Actual hours worked × Actual variable overhead rate) – (Actual hours worked × Standard
variable overhead rate)

= $3,240 – (900 hours × $4)

=$3,240 – $3,600

= $360 Favorable

(Actual hours worked × Standard variable overhead rate) – (Standard hours allowed ×
Standard variable overhead rate)

=$3,600 – (800 hours × $4)

= $3,600 – $3,200

= $400 Unfavorable