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Chapter 23: Q8SE (page 1307)

Interpreting material and labor variances

Refer to your results from Short Exercises S23颅6 and S23颅7.

Requirements

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

2. Interpret the direct materials and direct labor variances for Martin鈥檚 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 91影视 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 91影视 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

Briefly describe how journal entries differ in a standard cost system.

Office Plus sells its main product, ergonomic mouse pads, for \(13 each. Its variable cost is \)5.10 per pad. Fixed costs are \(205,000 per month for volumes up to 65,000 pads. Above 65,000 pads, monthly fixed costs are \)250,000. Prepare a monthly flexible budget for the product, showing sales revenue, variable costs, fixed costs, and operating income for volume levels of 45,000, 55,000, and 75,000 pads.

Question: What is a static budget performance report?

Murphy Company managers received the following incomplete performance report:

Units Actual Results Flexible Budget Variance Static Budget Flexible Budget Sales Volume Variance Sales Revenue Contribution Margin Fixed Expenses Operating Income 35,000 (a) (b) 5,000 F \( 29,000 \) 14,000 105,000 0 \( 219,000 \) 27,000 F 85,000 13,000 MURPHY COMPANY Flexible Budget Performance Report For the Year Ended July 31, 2018 134,000 14,000 35,000 \( 35,000 100,000 \) 219,000 84,000 135,000 (c) (d) (e) (f) (h) (g) (i) (j) (k) (l)

Complete the performance report. Identify the employee group that may deserve praise and the group that may be subject to criticism. Give your reasoning.

Computing standard cost variances and reporting to management

Hear Smart manufactures headphone cases. During September 2018, the company produced and sold 105,000 cases and recorded the following cost data:

Standard Cost Information

Quantity

Cost

Direct Materials

2 parts

\( 0.15 per part

Direct Labor

0.02 hours

8.00 per hour

Variable Manufacturing Overhead

0.02 hours

10.00 per hour

Fixed Manufacturing Overhead (\)28,500 for static budget volume of

95,000 units and 1,900 hours, or \(15 per hour)

Actual Cost Information

Direct Materials (209,000 parts @ \)0.20 per part) \( 41,800

Direct Labor (1,600 hours @ \)8.15 per hour) 13,040

Variable Manufacturing Overhead 9,000

Fixed Manufacturing Overhead 26,000

Requirements

1. Compute the cost and efficiency variances for direct materials and labor.

2. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances.

3. Hear Smart鈥檚 management used better quality materials during September. Discuss the tradeoff between the two direct material variances.
See all solutions

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