Question

Variance Analysis Question The Glass Vessel Company has established the following budget for producing one of its handblown vases: Materials (silica) 2 pounds @ 1.25 per pound Labor 1.5 hours @ $15.00 per hour In March of the most recent year, Glass Vessel produced 300 vases using 650 pounds of materials. Glass Vessel purchased the 650 pounds of materials for $845. Actual total labor costs for March were $7,200, which entailed 480 hours of labor. Please answer both of the following questions:
Materials (silica) 2 pounds @ 1.25 per pound
Labor 1.5 hours @ $15.00 per hour
1. What was Glass Vessel’s flexible budget variance for materials in March? (As part of your answer, please indicate whether this variance was favorable or unfavorable.)
2. What was Glass Vessel’s labor efficiency/usage variance for March? (As part of your answer, indicate whether this variance was favorable or unfavorable.)
Must show work

Answer 1

Answer:

(i) -62.5 (Unfavorable)

(ii) -450 (Unfavorable).

Explanation:

(1) Material variance:

Material cost variance is the difference between standard cost for actual output produced and the actual cost of materials.

Material cost variance = (SQ × SP) – (AQ × AP)

Where SQ = Standard quantity for actual output, AQ = Actual quantity, SP = Standard Price and AP = Actual price.

This material cost variance can be subdivided into material price variance and material usage variance.

Material price variance = AQ × (SP – AP)

Material usage variance = SP (SQ - AQ)

In the problem, it is given that materials 2 pounds @ 1.25 per pound.

Therefore, SP = $1.25 and SQ per unit = 2 pounds.

It is given that Glass vessel produced 300 vases using 650 pounds of material.

Therefore, AQ = 650 pounds and actual output = 300 vases.

Therefore SQ for actual output:

= (SQ per unit) × (Actual output)

= (2 pounds) × (300 vases)

= 600 pounds.

It is given that Glass vessel purchased 650 pounds of material for $845.

Therefore Actual price = $845 ÷ 650 pounds

                                      = $ 1.3

SP = $1.25 and AP = $1.3

SQ = 600 pounds and AQ = 650 pounds.

Material cost variance = (SQ × SP) – (AQ × AP)

Material price variance = AQ × (SP – AP)

Material usage variance = SP × (SQ-AQ)

Material cost variance (MCV):

= (600 × 1.25) – (650 × 1.3)

= -95 (Unfavorable)

Material price variance (MPV):

= 650 × (1.25 – 1.3)

= -32.5 (Unfavorable)

Material usage variance (MUV):

= 1.25 (600-650)

= -62.5 (Unfavorable)

Verification:

MCV = MPV + MUV

        = (-32.5) + (-62.5)

        = -95.

(2) Labor variances:

Labor cost variance is the difference between standard labor cost and the actual cost.

Labor cost variance = (SH × SR) – (AH × AR)

Where SH = Standard hours for actual output, AH = Actual hours, SR = Standard rate and AR = Actual rate.

Labor cost variance can be subdivided into Labor rate variance and Labor efficiency variance.

Labor rate variance = AH × (SR-AR)

Labor efficiency variance = SR × (SH – AH)

It is given that Labor 1.5 hours @ $15 per hour is the standard.

Therefore, SR = $15 and SH per unit = 1.5 hours.

SH for actual output = SH per unit × actual output

                                 = 1.5 × 300

                                 = 450 hours.

It is given that the actual total labor costs for March were $7200, which entailed 480 hours of labor.

Therefore, AH = 480 hours.

AR = Labor cost ÷ labor hours

     = 7,200 ÷ 480

     = $15.

SH = 450 hours, AH = 480 hours, SR = $15 and AR = $15.

Here, standard rate and actual rate are same. Therefore the labor rate variance is NIL. So the entire labor variance will come under labor efficiency variance.

Labor cost variance = (SH × SR) – (AH × AR)

Labor rate variance = AH × (SR-AR)

Labor efficiency variance = SR × (SH – AH)

Labor cost variance = (450 × 15) – (480 × 15)

                                 = -450 (Unfavorable)

Labor rate variance = 480 × (15-15)

                                 = 0

Labor efficiency variance = 15 × (450 - 480)

                                          = -450 (Unfavorable).