Question
David James is a cost accountant and business analyst for Doorknob Design Company (DDC), which manufactures expensive brass doorknobs. DDC uses two direct cost categories:
David James is a cost accountant and business analyst for Doorknob Design Company (DDC), which manufactures expensive brass doorknobs. DDC uses two direct cost categories: direct materials and direct manufacturing labour. James feels that manufacturing overhead is most closely related to material usage. Therefore, DDC allocates manufacturing overhead to production based upon pounds of materials used.
At the beginning of 2019, DDC budgeted annual production of 400,000 doorknobs and adopted the following standards for each doorknob:
Direct materials (brass)
0.3 lb. @ 10/lb.
3.00
Direct manufacturing labour
1.2 hours @ 20/hour
24.00
Manufacturing overhead:
Variable
6/lb. * 0.3 lb.
1.80
Fixed
15/lb. * 0.3 lb.
4.50
Standard cost per doorknob
33.30
Actual results for April 2019 were as follows:
Production
35,000 doorknobs
Direct materials purchased
12,000 lb. at 11/lb.
Direct materials used
10,450 lb.
Direct manufacturing labour
38,500 hours for 808,500
Variable manufacturing overhead
64,150
Fixed manufacturing overhead
152,000
Requirements for question 2:
a) For the month of April 2019, compute the following variances, indicating whether each is favourable (F) or Adverse (A):
1. Direct materials price variance (based on purchases).
2. Direct materials usage variance.
3. Direct manufacturing labour rate variance.
4. Direct manufacturing labour efficiency variance.
5. Variable manufacturing overhead expenditure variance.
6. Variable manufacturing overhead efficiency variance.
7. Fixed manufacturing overhead expenditure variance.
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