Question 1: Materials and manufacturing labor variances. Consider the following data collected for Great Homes, Inc.:
Direct Material Direct Manufacture Material’s
Cost incurred: actual inputs x actual prices $200,000 $90,000
Actual inputs x standard prices 214,000 86,000
Standard inputs allowed for actual
output x standard prices 225,000 80,000
Compute the price, efficiency, and flexible-budget variances for direct materials and direct manufacturing labor.
Question 2: Price and efficiency variances. CellOne is a cellular phone service reseller. CellOne contracts with major cellular operators for airtime in bulk and then resells service to retail customers. CellOne budgeted to sell 7,800,000 minutes in the month ended March 31, 2007. Actual minutes sold totaled only 7,500,000. Due to fluctuations in hourly usage, CellOne “overbuys” airtime from cellular operators. CellOne plans to buy 10% more airtime than it plans to sell. For example, CellOne’s budget called for the purchase of 8,580,000 minutes, based on the plan to sell 7,800,000 minutes. In what follows, think of purchased airtime as direct materials.
CellOne budgets purchased airtime to cost 4.5 cents per minute. Actual purchased airtime in 2007 averaged 5.0 cents per minute.
CellOne incurs direct labor costs due to the employment of technicians. One hour of technical support is required for every 5,000 minutes of airtime sold. In practice, only 1,600 hours of technical support were used. Technical support was planned at $60 per hour. Actual technical support costs averaged $62 per hour.
1. Calculate the flexible-budget variance for direct materials and direct labor costs. [Use the 8,250,000 (7,500 x 1.10) minutes in the flexible budget.]
2. Calculate the price and efficiency variances for direct materials and labor costs.
Question 3: Price and efficiency variances, journal entries. Chemical, Inc., has set up the following standards per finished unit for direct materials and direct manufacturing labor:
Direct materials: 10 lbs. At $3 per lb. $30.00
Direct manufacturing labor: 0.5 hrs. at $20 per hr. 10.00
The number of finished units budgeted for March 2007 was 10,000; 9,810 units were actually produced.
Actual results in March 2007 were:
Direct materials: 98,073 lbs. Used
Direct manufacturing labor: 4,900 hrs. $102,900
Assume that there was no beginning inventory of either direct materials or finished units.
During the month, materials purchases amounted to 100,000 lbs., at a total cost of $310,000. Input-price variances are isolated upon purchase. Input-efficiency variances are isolated at the time of usage.
1. Compute the March 2007 price and efficiency variances of direct materials and direct manufacturing labor.
2. Prepare journal entries to record the variances in requirement 1.
3.Comment on the March 2007 price and efficiency variances of Chemical, Inc.
4. Why might Chemical, Inc., calculate direct materials price variances and direct materials efficiency variances with reference to different points in time?