Evaluate the direct materials price and efficiency variances
Not only did our salespeople do a superior job in meeting the sales budget this year, but our manufacture people did a good job in controlling costs as well,” said Kim Clark, president of Martell Company. “Our $18,300 overall manufacturing cost variance is only 1.2 percent of the $1,536,000 standard cost of products made in the year. That’s well within the 3 percent parameter set by management for acceptable variances. It looks like everyone may be in line for a bonus this year.”
The company sells and produces a single product. The standard cost per product is as given:
Direct materials, 2 feet at $8.45 per foot $16.90
Direct labor, 1.4 direct labor hours at $16 per DLH 22.40
Variable OH, 1.4 direct labor hours at $2.50 per DLH 3.50
Fixed OH, 1.4 direct labor hours at $6 per DLH 8.40
Standard cost per unit $51.20
The subsequent additional information is required for the year just completed:
The company manufactured 30,000 units of product during the year
A total of 64,000 feet of material was purchased in the year at a cost of $8.55 per foot. All of this material was used to manufacture the 30,000 units. There was no starting or ending inventories for the year.
The company worked 43,500 direct labor hours during the year at a direct labor cost of $15.80 per hour.
Overhead is functional to costs on the basis of standard direct-labor hours. Data relating to manufacturing overhead costs follow:
Budgeted Denominator activity level (DLH) 35,000
Budgeted fixed OH (from the flexible budget) $210,000
Actual variable overhead costs incurred $108,000
Actual fixed overhead costs incurred $211,800
1. Evaluate the direct materials price and efficiency variances for the year
2. Evaluate the direct labor price and efficiency variances for the year
3. Determine the efficiency variances and variable overhead spending for the year
4. Calculate the fixed overhead spending and production-volume variances for the year
5. Total the variances you have evaluated, and compare the net amount with the $18,300 mentioned by Ms. Clark. Do you agree that bonuses could be given to everyone for good cost control during the year? Describe.