Problem-1 (Materials, labor and variable overhead variances)

P&G company produces many products for household use. Company sells products to storekeepers as well as to customers. Detergent-DX is one of the products of P&G. It is a cleaning product that is produced, packed in large boxes and then sold to customers and storekeepers.

P&G uses a traditional standard costing system to control costs and has established the following materials, labor and overhead standards to produce one box of Detergent-DX:

  • Direct materials; 1.5 pounds @ $12 per pound: $18.00
  • Direct labor; 0.6 hours $24 per hour: $14.40
  • Variable manufacturing overhead; 0.6 hours @ $5.00: $3.00

During August 2012, company produced and sold 3,000 boxes of Detergent-DX. 8,000 pounds of direct materials were purchased @ $11.50 per pound. Out of these 8,000 pounds, 6,000 pounds were used during August. There was no inventory at the beginning of August. 1600 direct labor hours were recorded during the month at a cost of $40,000. The variable manufacturing overhead costs during August totaled $7,200.

Required:

  1. Compute materials price variance and materials quantity variance. (Assume that the materials price variance is computed at the time of purchase.)
  2. Compute direct labor rate variance and direct labor efficiency variance.
  3. Compute variable overhead spending variance and variable overhead efficiency variance.

Solution:

(1). Materials variances:

a. Materials price variance:

problem-1-scava-img1

b. Materials quantity variance:

problem-1-scava-img2

*3,000 boxes × 1.5 pounds per box = 4,500 pounds

F = Favorable; U = Unfavorable

(2). Labor variances:

a. Direct labor rate variance:

problem-1-scava-img3

b. Direct labor efficiency variance:

problem-1-scava-img4

*3,000 boxes × 0.6 hours per box = 1,800 hours

F = Favorable; U = Unfavorable

(3) Variable overhead variances:

a. Variable overhead spending variance:

problem-1-scava-img5

b. Variable overhead efficiency variance:

problem-1-scava-img6

*3,000 boxes × 0.6 hours per box = 1,800 hours

F = Favorable

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13 Comments on Problem-1 (Materials, labor and variable overhead variances)

  1. zeke

    In number 1 solution, where didi you get the 4,500 standard quantity of materials allowed?

  2. Accounting For Management

    @zeke
    Standard quantity of material per unit × number of units produced
    = 1.5 × 3000
    = 45,000

  3. Riley

    Hi for number 2 direct labor efficiency, where did you get the 1,800 hours?

  4. Accounting For Management

    @Riley

    Direct labor hours allowed for actual production:
    Actual units produced × standard hours per unit
    3,000 units × 0.6 hours
    1,800 hours

  5. sumair

    where did 4.5 accur in variable variance as actual rate

  6. Accounting For Management

    @Sumair
    Actual variable manufacturing overhead costs/actual hours worked
    $7,200/1600 hours
    $4.50

  7. Jai

    please can you explain how you got $5 in the variable overhead spending variance?

    1. Accounting For Management

      It is standard variable overhead rate per hour (given in the problem).

  8. bony

    what was the labour ,material and over head cost for water pollution control

  9. tracy

    thank you so much um sure i have understood

  10. margret gwanyanya

    you helped me ooooo

  11. Abdul Qadoos

    sir. i m glad if you send me all question with solutions of all kind of variance. thanks.

  12. reina

    Im helped thanks a lot

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