: Variance Analysis for Decision Making

Assume that the Fabrication Company had the standard costs reflected in the table below.

Standard Cost Sheet, Product B-321

The Fabrication Company
Standard Cost Sheet
Product: B-321
Descriptions	Quantity	Cost Rate	Subtotal	Total
Direct materials:
Aluminum	4	pounds	$ 25	per pound	$ 100
PVC	1	pound	40	per pound	40
Direct labor	5	hours	40	per hour	200
Variable factory overhead	5	hours	12	per hour	60
Total variable manufacturing cost						$ 400
Fixed factory overhead*	5	hours	24	per hour	120	120
Standard manufacturing cost per unit				$ 520
Standard variable selling and administrative cost per unit		$ 50

*Budgeted fixed factory overhead cost = $120,000.

In the month of March, the company used 3,480 pounds of aluminum to manufacture 926 units. The company paid $29.10 per pound during the month to purchase aluminum. At the beginning of the month, the company had 56 pounds of aluminum on hand. At the end of the month, the company had only 36 pounds of aluminum in its warehouse. The company used 4,500 direct labor hours during the month, at an average cost of $42.10 per hour.

Required:

Show all calculations in good form. Answers without supporting calculations will earn zero marks.

Compute the following variances for the month:

1. The purchase price variance for aluminum. Indicate whether this variance is favorable or unfavorable.

2. The usage variance for aluminum. Indicate whether this variance is favorable or unfavorable.

3. The direct labor rate variance. Indicate whether this variance is favorable or unfavorable.

4. The direct labor efficiency variance. Indicate whether this variance is favorable or unfavorable.

5. As a manager, how would you use variance analysis in planning and decision-making? Support your comments with appropriate references