Under management by exception, managers focus their attention on results that deviate from expectations. It is assumed that results that meet expectations do not require investigation.
1)a)Calculate materials quantity variance, which is the difference of standard price (SP) at the standard quantity (SQ) and the SP at the actual quantity of input (AQ).
Calculate materials price variance, which is the difference between AQ and the actual price (AP) and the AQ at the SP.
Calculate labor efficiency variance as the difference of standard rate (SR) at the standard hour (SH) and the SR at the actual hours of input (AH).
Calculate labor rate variance, which is the difference between actual hours (AH) at the actual rate (AR) and the actual hours at the standard rate.
Calculate variable overhead efficiency variance as follows:
Calculate variable rate variance as follows:
Summary of variances is as follows:
The net unfavorable variance of $16,390 caused an increase of $16,390 in the variable cost of goods sold. It also accounts for the difference between the budgeted net operating income and the actual net loss for the month.
The two largest variances are the material price variance and the labor efficiency variance.
Materials price variance: Several issues could've caused the materials price variance. These include outdated standards, uneconomical quantity purchased, higher quality materials, or a high-cost method of transport.
Labor efficiency variance: Several issues could've caused the labor efficiency variance. These include poorly trained workers, faulty equipment, work interruptions, inaccurate standards, insufficient demand or strikes.
Calculate the direct labor cost that incurred to prepare 6,000 meals as follows:
• Calculate total direct labor hours allowed.
• Calculate direct labor cost using direct labor hours allowed.
Firstly, calculate total direct labor hours allowed. It is calculated by multiplying the number of meals prepared with standard direct labor hours per meal.
Calculate total standard direct labor cost.
Calculate the difference of standard direct labor cost and actual labor cost.
Deduct standard direct labor cost from actual labor cost incurred.
Break down the above calculated difference amount into labor efficiency variance and labor efficiency variance.
Calculate labor efficiency variance by multiplying the difference of actual hours and standard hours with standard rate.
Calculate labor rate variance by multiplying the difference of actual rate standard rate with actual hours.
If both labor efficiency variance and labor rate variance are added, the result would be equal to the above calculated difference.