Discussions

1. What is a standard cost and what are its purposes?

2. Assume variable manufacturing overhead is allocated using machine hours. Give three possible reasons for a favourable overhead efficiency variance.

Exercises

1. The Monroe Corporation manufactures lamps. It has set up the following standards per finished unit for direct materials and direct labour:

Direct material: 10kg @ $4.50 per kg $45.00

Direct labour: 0.5 hour @$30 per hour 15.00

The number of finished units budgeted for January 2019 was 10,000; 9,850 units were actually produced. Actual results in January 2019 were:

Direct materials: 100,000kg purchased @ $4.65 per kg

Direct materials: 98,055 kg used Direct labour: 4,900 hours $154,350

Required:

a) Calculate the January 2019 price and quantity variance of direct materials

b) Calculate the January 2019 rate and efficiency variance of direct labour.

c) Comment on the January 2019 direct materials and direct labour variances.

problems:

1. Monoclean Company manufactures a single product, Glamour. The standard cost specification sheet shows the following standards for one unit of Glamour:

8 kg of material M @ $6.5 per kg $52

4 hours of direct labour @ $7 per hour $28

Fixed Overhead - $6 per direct labour hour $24

Variable Overhead - $3 per direct labour hour $12

The fixed overhead allocation rate is based on normal monthly capacity of 1,350 direct labour hours. Fixed overhead and production are expected to be spread evenly throughout the year. A total of 420 Glamours were produced during July.

Actual costs incurred during July were:

3,200 kg of material M were purchased @ $7.50 per kg

2,000 kg of material M were used.

1,550 direct labour hours were worked at an average wage rate of $9 per hour

Actual overhead costs incurred:

Fixed $7,500 Variable $4,200

Required:

a) Compute the following variances:

Direct material price variance

Direct material quantity variance

Direct labour rate variance

Direct labour efficiency variance

Variable overhead spending variance

Fixed overhead budget variance

b) The company's production manager stated that 'Favourable variances are good news and therefore, require no investigation'. Do you agree? Explain your position.