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Chapter 23: Q8SE (page 1307)

Interpreting material and labor variances

Refer to your results from Short Exercises S23­6 and S23­7.

Requirements

1. For each variance, who in Martin’s organization is most likely responsible?

2. Interpret the direct materials and direct labor variances for Martin’s management.

Short Answer

Expert verified

1. Responsible department-

  1. Direct Material Cost Variance- Purchase department
  2. Direct Material Effeciency variance- Production Department
  3. Direct Labour Cost variance- Human Resources department
  4. Direct Labour Efficiency variance-Production Department

2. Interpretation-

  • Direct Material Cost Variance- The company purchased high quantity at lower rate than the standard price which invariably increase operating income.
  • Direct Material Effeciency variance-Efficiency of the company was low as more materials were used than planned that showing more cost and less profit.
  • Direct Labour Cost variance- Labour cost is lower than expected that results in higher operating income.
  • Direct Labour Efficiency variance- Labour hours were comparatively lower than expected hours that concluded in less cost and more profit.

Step by step solution

01

Responsibility in the organization for each variance-

Purchase department is responsible for direct material cost variance.Production department is responsible for direct material effeciency variance and Direct labour efficiency variance.Human Resources department is responsible for direct labour cost variance.

02

Interpretation for the company’s management-

  • The $1,650 favorable direct material cost variance represents that actual direct materials cost per pound was less than standard cost per pound. This increased operating income by $1,650 of the company.
  • The $650 unfavorable Direct Materials efficiency variance indicates that the actual pounds utilized was more than the total pounds allowed to manufacture 6,500 glasses. This decreased operating income by $650 of the company.
  • The $9,100 favorable direct labor price variance means that the employees were paid less than budgeted. This increased operating income of the company by $9,100.
  • The $11,700 favouravle direct labor efficiency variance shows that it actually took fewer direct labor hours than were budgeted to produce 6,500 glasses. This increased operating income of the company by $11,700.

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Most popular questions from this chapter

Marsh Company uses a standard cost system and reports the following information for 2018:

Standards:

3 yards of cloth per unit at \(1.05 per yard

2 direct labor hours per unit at \)10.50 per hour

Overhead allocated at \(5.00 per direct labor hour

Actual:

2,600 yards of cloth were purchased at \)1.10 per yard

Employees worked 1,800 hours and were paid \(10.00 per hour

Actual variable overhead was \)1,700

Actual fixed overhead was \(7,300

Direct materials cost variance \) 130 U

Direct materials efficiency variance 420 F

Direct labor cost variance 900 F

Direct labor efficiency variance 2,100 F

Variable overhead cost variance 1,500 U

Variable overhead efficiency variance 1,500 F

Fixed overhead cost variance 600 U

Fixed overhead volume variance 1,600 F

Marsh produced 1,000 units of finished product in 2018. Record the journal entries to record direct materials, direct labor, variable overhead, and fixed overhead, assuming all expenditures were on account and there were no beginning or ending balances in the inventory accounts (all materials purchased were used in production, and all goods produced were sold). Record the journal entries to record the transfer to Finished Goods Inventory and Cost of Goods Sold (omit the journal entry for Sales Revenue). Adjust the Manufacturing Overhead account

Question:List the direct materials variances, and briefly describe each.

The May 2018 revenue and cost information for McDonald Outfitters, Inc. follows:

Sales Revenue (at standard) $ 610,000

Cost of Goods Sold (at standard) 348,000

Direct Materials Cost Variance 1,500 F

Direct Materials Efficiency Variance 6,600 F

Direct Labor Cost Variance 4,200 U

Direct Labor Efficiency Variance 2,700 F

Variable Overhead Cost Variance 2,800 U

Variable Overhead Efficiency Variance 1,100

Fixed Overhead Cost Variance 2,300 U

Fixed Overhead Volume Variance 8,300 F

Prepare a standard cost income statement for management through gross profit. Report all standard cost variances for management’s use. Has management done a good or poor job of controlling costs? Explain.

Question:This Try It! continues the previous Try It! for Tipton Company, a shirt manufacturer. During June, Tipton made 1,200 shirts but had budgeted production at 1,400 shirts. Tipton gathered the following additional data:

Variable overhead cost standard \(0.50 per DLHr

Direct labor efficiency standard 2.00 DLHr per shirt

Actual amount of direct labor hours 2,520 DLHr

Actual cost of variable overhead \)1,512

Fixed overhead cost standard \(0.25 per DLHr

Budgeted fixed overhead \)700

Actual cost of fixed overhead $750

Calculate the following variances:

13. Variable overhead cost variance

14. Variable overhead efficiency variance

15. Total variable overhead variance

16. Fixed overhead cost variance

17. Fixed overhead volume variance

18. Total fixed overhead variance

Matching terms

Match each term to the correct definition.

Terms Definitions

a. Benchmarking

b. Efficiency variance

c. Cost variance

d. Standard

1. Measures whether the quantity of materials or laborused to make the actual number of outputs is within thestandard allowed for the number of outputs.

2. Uses standards based on best practice.

3. Measures how well the business keeps unit costs ofmaterials and labor inputs within standards.

4. A price, cost, or quantity that is expected under normalconditions.
See all solutions

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