The Omaha Company manufactures special electrical equipment and parts. The company uses a...
Question:
The Omaha Company manufactures special electrical equipment and parts. The company uses a standard cost system with separate standards established for each product.
The transformer department manufactures a special transformer. This department measures production volume in terms of direct labor hours (DL hours) and allocates both variable and fixed overhead on the basis of direct labor hours.
The standard and budget cost information of a transformer at its DeCatur plant is as follows:
| Direct materials (Iron) | 5 sheets x $12 ea. |
| Direct labor | 4 hours x $27/hr. |
| Variable overhead | $120,000 |
| Fixed overhead | $80,000 |
| Units | 1,000 |
Direct material purchase variances are evaluated separately from direct material usage variances. During October, the plant produced 800 transformers. A work stoppage occurred during labor contract negotiations causing the department to schedule overhead in an attempt to reach expected production levels.
The following costs were incurred in October:
| Direct Materials: | |
|---|---|
| Iron | Purchased 5,000 sheets at $12.35/sheet and used 3,900 sheets |
| Direct Labor: | |
|---|---|
| Wages | $102,600 at $28.50 per hour |
| Overhead: | |
|---|---|
| Variable | Utilities $30,000, Indirect labot $20,000, Maintenance $30,000, Inspections $30,000, Supplies $16,000 |
| Fixed | Lease $40,000, depreciation $30,000, taxes and insurance $18,000 |
Calculate the direct materials usage variance. (Show work. Provide labels and descriptions of amounts. Provide fav/unfav designations.)
Variance Analysis:
Variance analysis is a technique that assesses the costs that need improvement in the future under cost accounting. The variance calculates as the difference between the actual and expected or budgeted costs.
Answer and Explanation: 1
Direct materials usage variance calculation is as follows.
- Direct materials usage variance = Standard price x (actual quantity used - standard quantity allowed)
- Direct materials usage variance = $12 x (3,900 - (800 x 5))
- Direct materials usage variance = $12 x (3,900 - 4,000)
- Direct materials usage variance = -1,200, or $1,200 Favorable
The variance is $1,200 Favorable because the actual quantity used is lower than the standard quantity allowed.
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Variance Analysis Model in Accounting
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Chapter 6 / Lesson 6
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Variance analysis modeling tracks the changes or trends of different costs over time to better inform budgeting decisions. Learn how this model can be used with direct materials, direct labor, and overhead variances.
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