Comprehensive Variance Analysis; Journal Entries

Vermont Mills, Inc., is a large producer of men's and women's clothing. The company uses standard costs for all of its products. The standard costs and actual costs for a recent period are given below for one of the company's product lines (per unit of product):

Standard Cost Actual Cost

Direct materials:

Standard: 4.0 yards at $3.60 per yard . . . . . . . . . . . $14.40

Actual: 4.4 yards at $3.35 per yard . . . . . . . . . . . . . $14.74

Direct labor:

Standard: 1.6 hours at $4.50 per hour. . . . . . . . . . . $7.20

Actual: 1.4 hours at $4.85 per hour . . . . . . . . . . . . . $6.79

Variable manufacturing overhead:

Standard: 1.6 hours at $1.80 per hour . . . . . . . . . . . $2.88

Actual: 1.4 hours at $2.15 per hour . . . . . . . . . . . . . $3.01

Total cost per unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24.48 $24.54

During this period, the company produced 4,800 units of product. A comparison of standard and actual costs for the period on a total cost basis is given below:

Actual costs: 4,800 units at $24.54 . . . . . . . . . . $117,792

Standard costs: 4,800 units at $24.48 . . . . . . . . 117,504

Difference in costunfavorable . . . . . . . . . . . . . $ 288

There was no inventory of materials on hand to start the period. During the period, 21,120 yards of materials were purchased and used in production.

Required:

1. For direct materials:

a. Compute the price and quantity variances for the period.

b. Prepare journal entries to record all activity relating to direct materials for the period.

2. For direct labor:

a. Compute the rate and efficiency variances.

b. journal entry to record the incurrence of direct labor cost for the period.

3. Compute the variable manufacturing overhead rate and efficiency variances.

4. On seeing the $288 total cost variance, the company's president stated, "This variance of $288 is only

0.2% of the $117,504 standard cost for the period. It's obvious that our costs are well under control." Do

you agree? Explain.

5. State possible causes of each variance that you have computed.