Question
You Better Believe It's Olive Oil Ltd. (Oil Ltd.) has prepared the following standard costs per pillow: Standard Quantity (or Standard Price Standard Cost Hours)
You Better Believe It's Olive Oil Ltd. ("Oil Ltd.") has prepared the following standard costs per pillow: Standard Quantity (or Standard Price Standard Cost Hours) (or Rate) Direct materials 1.0 litre $4.50/litre $4.50 Direct labour 0.2 hours $13.50/hr $2.70 Variable overhead 0.2 hours $2.50/hr $0.50 Total standard cost per pillow $7.70 The company allocates variable overhead based on direct labour hours. Last month, Oil Ltd. produced 1,200 bottles of olive oil and incurred the following actual costs: Direct materials: Purchased 1,500 liters of olive oil at $4.75 per litre. 1,250 litres of olive oil were used in production of the 1,200 bottles. Direct labour: 250 hours worked, for a total cost of $3,500. Variable overhead: Total cost was $550. Required (12 marks): a) Calculate the direct materials price and quantity variances. Label your variances and indicate if favourable or unfavourable. (4 marks). For each variance provide a brief discussion on the factor(s) or reason(s) the variance may have occurred in this situation. This discussion should go more in depth than, "the price went up or down." It should explain why this may have occurred. (2 marks) b) Calculate the direct labour rate and efficiency variances. Label your variances and indicate if favourable or unfavourable. (2 marks) For each variance provide a rief discussion on the factor(s) or reason(s) the variance may have occurred in this situation. This discussion should go more in depth than, "the price went up or down." It should explain why this may have occurred. (2 marks) c) Calculate the variable overhead spending and variable overhead efficiency variances. Label your variances and indicate if favourable or unfavourable. (2 marks)
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