Kaneohe Corp uses a standard costing system and manufactures hula doll lamps. Standard costs for its largest selling product, a mid-size table lamp, are:

 

Item	Standard cost	$ amount
Variable overhead	0.6 hr @ $8.00/hour	$4.80
Fixed overhead	0.9 hr @ $4.00/hour	3.60
Direct materials	2.0 kg@ $3.25/kg	6.50
Direct labour	0.7 hr @ $12.50/hour	8.75
Standard cost per unit	$23.65

 

                                                                          

 

During the last fiscal year ended December 31, 2023, Kaneohe reported the following information in connection with the production of this table lamp:

 

1.          Actual VOH incurred:                                 $494,000

2.          Actual FOH incurred:                                  $344,000

3.          Production:                                                     100,000 units

4.          Direct material purchases:                           210,000 kg at $3.05/kg

5.          Beginning inventory of direct material:     18,000 kg (carried at standard cost).

6.          Total direct labour used:                            71,000 hours, at a cost of $923,000

 

             No ending inventory

 

The company's factory can produce 120,000 table lamps a year, but a denominator level was set at 90,000 units for the year ended December 31, 2023. Cost driver is direct labour hours.

 

Requirement 1. 

 

Using either the "formula" or the "columnar method", compute the following variances. Include whether variances are favourable (F) or unfavourable (U)

 

1. VOH spending and efficiency variances 
2. FOH spending variance
3. Direct materials price and efficiency variances
4.  Direct labour rate and efficiency variances and production volume variance

 

continued

 

 

ASSIGNMENT #4    continued

 

KEY FIGURES:        VOH efficiency variance    $  88,000 U

                                    PVV                                        $  36,000 F 

                                    DM price variance                $  42,000  F

DL rate variance                  $  35,500 U

 

 

Requirement 2  :

 

It was discovered that, for last year, the purchasing agent purchased a lower-quality direct material from a new supplier. Assuming that the product quality has not been significantly affected, would you recommend that the company continue to use this cheaper material in future? If not, give your reasons. If so, why, and what standards would likely need revising to reflect this decision?