Response to the following problem:
It certainly is nice to see that small variance on the income statement after all the trouble we've had lately in controlling manufacturing costs,"said Linda White, vice president of Molina Company. "The $12,250 overall manufacturing variance reported last period is well below the 3% limit we have set for variances. We need to congratulate everybody on a job well done."
The company produces and sells a single product. The standard cost card for the product follows:
Standard Cost Card-Per Unit
Direct materials, 4 yards at $3.50 per yard . . . . . . . . . . . . . . . . . . . . . . . . . . . $14
Direct labor, 1.5 direct labor-hours at $12 per direct labor-hour . . . . . . . . . . . . 18
Variable overhead, 1.5 direct labor-hours at $2 per direct labor-hour . . . . . . . . 3
Fixed overhead, 1.5 direct-labor hours at $6 per direct labor-hour . . . . . . . . . . 9
Standard cost per unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $44
The following additional information is available for the year just completed:
a. The company manufactured 20,000 units of product during the year.
b. A total of 78,000 yards of material was purchased during the year at a cost of $3.75 per yard. All of this material was used to manufacture the 20,000 units. There were no beginning or ending inventories for the year.
c. The company worked 32,500 direct labor-hours during the year at a cost of $11.80 per hour.
d. Overhead cost is applied to products on the basis of standard direct labor-hours. Data relating to manufacturing overhead costs follow:
Denominator activity level (direct labor-hours) . . . . . . . . . . . . . . . . 25,000
Budgeted fixed overhead costs (from the flexible budget) . . . . . . . $150,000
Actual fixed overhead costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $148,000
Actual variable overhead costs . . . . . . . . . . . . . . . . . . . . . . . . . . . $68,250
Required:
1. Compute the direct materials price and quantity variances for the year.
2. Compute the direct labor rate and efficiency variances for the year.
3. For manufacturing overhead, compute the following:
a. The variable overhead spending and efficiency variances for the year.
b. The fixed overhead budget and volume variances for the year.
4. Total the variances you have computed, and compare the net amount with the $12,250 mentioned by the vice president. Do you agree that everyone should be congratulated for a job well done? Explain.