Exercise 10-1

Flandar Industries Berhad of Malaysia manufactures sporting equipment.

One of the company’s products, a football helmet for the North American
market, requires a special plastic. During the quarter ending June 30, the
company manufactured 35,000 helmets, using 22,500 kilograms of plastic.
The plastic cost the company $171,000.
According to the standard cost card, each helmet should require 0.6
kilograms of plastic, at a cost of $8 per kilogram.
Required: 1. According to the standards, what cost for plastic should
have been incurred to make 35,000 helmets? How much greater or less is
this than the cost that was incurred?
2 . Break down the difference computed in (1) above into a materials
price variance and a materials quantity variance.

Solution

1. Number of helmets............................................ 35,000

Standard kilograms of plastic per helmet.............      × 0.6
Total standard kilograms allowed....................... 21,000
Standard cost per kilogram................................       × $8
Total standard cost............................................ $168,000
Actual cost incurred (given)............................... $171,000
Total standard cost (above)...............................   168,000
Total material variance—unfavorable.................. $    3,000

2 The variances can be computed using the formulas:

Materials price variance = AQ (AP – SP)
22,500 kilograms ($7.60 per kilogram* – $8.00 per kilogram)
= $9,000 F
* $171,000 ÷ 22,500 kilograms = $7.60 per kilogram
Materials quantity variance = SP (AQ – SQ)
$8 per kilogram (22,500 kilograms – 21,000 kilograms)
= $12,000 U
. *35,000 helmets × 0.6 kilograms per helmet = 21,000 kilograms
 EXERCISE 10–2
Direct Labor Variances [LO10–2] SkyChefs, Inc., prepares in-flight meals
for a number of major airlines. One of the company’s products is grilled
salmon in dill sauce with baby new potatoes and spring vegetables. During
the most recent week, the company prepared 4,000 of these meals using
960 direct labor-hours. The company paid these direct labor workers a total
of $9,600 for this work, or $10.00 per hour. A ccording to the standard
cost card for this meal, it should require 0.25 direct labor-hours at a cost of
$9.75 per hour.
Required: 1. According to the standards, what direct labor cost should
have been incurred to prepare 4,000 meals? How much does this differ
from the actual direct labor cost?
2 . Break down the difference computed in (1) above into a labor rate
variance and a labor efficiency variance.

Solution
1. Number of meals prepared.................... 4,000
Standard direct labor-hours per meal..... × 0.25
Total direct labor-hours allowed............. 1,000
Standard direct labor cost per hour........ × $9.75
Total standard direct labor cost............. $9,750
Actual cost incurred.............................. $9,600
Total standard direct labor cost (above).  9,750
Total direct labor variance..................... $  150 Favorable

2. The variances can be computed using the formulas:

Labor rate variance = AH(AR – SR)
= 960 hours ($10.00 per hour – $9.75 per hour)
= $240 U
Labor efficiency variance = SR(AH – SH)
= $9.75 per hour (960 hours – 1,000 hours)
= $390 F

EXERCISE 10–3 Variable Overhead Variances [LO10–3] L ogistics

Solutions provides order fulfillment services for d ot.com merchants. The
company maintains warehouses that stock items carried by its d ot.com
clients. When a client receives an order from a customer, the order is
forwarded to Logistics Solutions, which pulls the item from storage, packs
it, and ships it to the customer. The company uses a predetermined
variable overhead rate based on direct labor-hours. I n the most recent
month, 120,000 items were shipped to customers using 2,300 direct
laborhours. The company incurred a total of $7,360 in variable overhead
costs. According to the company’s standards, 0.02 direct labor-hours are
required to fulfill an order for one item and the variable overhead rate is
$3.25 per direct labor-hour.
Required: 1. According to the standards, what variable overhead cost
should have been incurred to fill the orders for the 120,000 items? How
much does this differ from the actual variable overhead cost?
2. Break down the difference computed in (1) above into a variable
overhead rate variance and a variable overhead efficiency variance.

Solution
1. Number of items shipped................................. 120,000
Standard direct labor-hours per item................  × 0.02
Total direct labor-hours allowed....................... 2,400
Standard variable overhead cost per hour......... × $3.25
Total standard variable overhead cost.............. $ 7,800
Actual variable overhead cost incurred.............. $7,360
Total standard variable overhead cost (above). .  7,800
Total variable overhead variance...................... $  440 Favorable

2. The variances can be computed using the formulas:

Variable overhead rate variance:
AH(AR – SR) = 2,300 hours ($3.20 per hour – $3.25 per hour)
= $115 F
Variable overhead efficiency variance:
SR(AH – SH) = $3.25 per hour (2,300 hours – 2,400 hours)
= $325 F
*$7,360 ÷ 2,300 hours = $3.20 per hour