“Wonderful! Not only did our salespeople do a good job in meeting the sales budget this year, but our production people did a good job in controlling costs as well,” said Kim Clark, president of Martell Company.

“Our $18,000 overall manufacturing cost variance is only 1.5% of the $1,200,000 standard cost of products sold during the year. That’s well within the 3% parameter set by management for acceptable variances. It looks like everyone will be in line for a bonus this year.”

The company produces and sells a single product. A standard cost card for the product follows:

Standard Cost Card—Per Unit of Product
Direct materials, 2 metres at $8.45 per metre........................$16.90
Direct labour, 1.4 hours at $8 per hour......................................11.20
Variable overhead, 1.4 hours at $2.50 per hour..........................3.50
Fixed overhead, 1.4 hours at $6 per hour....................................8.40
Standard cost per unit................................................................$40.00

The following additional information is available for the year just completed:

a. The company manufactured 30,000 units of product during the year.

b. A total of 64,000 metres of material was purchased during the year at a cost of $8.55 per metre. All of this material was used to manufacture the 30,000 units. There were no beginning or ending inventories for the year.

c. The company worked 45,000 direct labour-hours during the year at an average cost of $7.80 per hour.

d. Overhead is applied to products on the basis of direct labour-hours. Data relating to manufacturing overhead costs follow:

Denominator activity level (direct labour-hours)................................................35,000
Budgeted fixed overhead costs (from the overhead flexible budget)..........$210,000
Actual variable overhead costs incurred............................................................108,000
Actual fixed overhead costs incurred..................................................................211,800

Required:

1. Compute the direct materials price and quantity variances for the year.

2. Compute the direct labour 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 $18,000 mentioned by the president. Do you agree that bonuses should be given to everyone for good cost control during the year? Explain your answer.