Olympia Inc.produces small row boats.Standard cost information for each boat is presented below.
$$\begin{array} { l r }
\text { Direct materials } & \$ 325 \
\text { Direct labor } & 210 \
\text { Variable overhead } & \mathbf { 2 0 0 } \
\text { Total } & \mathbf { \$ 7 3 5 }
\end{array}$$
Olympia produced and sold 1,000 boats for the year,and encountered the following production variances.
$$\begin{array} { l r l }
\text { Direct materials price variance } & ( \$ 50,000 ) & \text { Favorable } \
\text { Direct materials quartity variance } & 30,000 & \text { Unfavorable } \
\text { Direct labor rate variance } & 24,500 & \text { Unfavorable } \
\text { Direct labor efficiency variarice } & ( 28,000 ) & \text { Favorable } \
\text { Variable overhead spending variarice } & 19,500 & \text { Unfavorable } \
\text { Variable overhead efficiency variance } & ( 8,000 ) & \text { Favorable } \
\text { Total variable production cost variance } & ( \$ 12,000 ) & \text { Unfavorable }
\end{array}$$
Company policy is to investigate all unfavorable variances above 10 percent of the flexible budget amount for direct materials,direct labor,and variable overhead.
a.Identify the variances that should be investigated according to company policy.Show calculations to support your answer.
b.What potential weakness exists in the company's current policy?

Question

Olympia Inc.produces small row boats.Standard cost information for each boat is presented below.
 $$\begin{array} { l r } 
\text { Direct materials } & \$ 325 \
\text { Direct labor } & 210 \
\text { Variable overhead } & \mathbf { 2 0 0 } \
\text { Total } & \mathbf { \$ 7 3 5 }
\end{array}$$ 
Olympia produced and sold 1,000 boats for the year,and encountered the following production variances.
 $$\begin{array} { l r l } 
\text { Direct materials price variance } & ( \$ 50,000 ) & \text { Favorable } \
\text { Direct materials quartity variance } & 30,000 & \text { Unfavorable } \
\text { Direct labor rate variance } & 24,500 & \text { Unfavorable } \
\text { Direct labor efficiency variarice } & ( 28,000 ) & \text { Favorable } \
\text { Variable overhead spending variarice } & 19,500 & \text { Unfavorable } \
\text { Variable overhead efficiency variance } & ( 8,000 ) & \text { Favorable } \
\text { Total variable production cost variance } & ( \$ 12,000 ) & \text { Unfavorable }
\end{array}$$ 
Company policy is to investigate all unfavorable variances above 10 percent of the flexible budget amount for direct materials,direct labor,and variable overhead. 
a.Identify the variances that should be investigated according to company policy.Show calculations to support your answer.
b.What potential weakness exists in the company's current policy?

Quizplus · Accepted Answer

The Answer of Olympia Inc.produces small row boats.Standard cost information for each boat is presented below.
 $$\begin{array} { l r } 
\text { Direct materials } & \$ 325 \
\text { Direct labor } & 210 \
\text { Variable overhead } & \mathbf { 2 0 0 } \
\text { Total } & \mathbf { \$ 7 3 5 }
\end{array}$$ 
Olympia produced and sold 1,000 boats for the year,and encountered the following production variances.
 $$\begin{array} { l r l } 
\text { Direct materials price variance } & ( \$ 50,000 ) & \text { Favorable } \
\text { Direct materials quartity variance } & 30,000 & \text { Unfavorable } \
\text { Direct labor rate variance } & 24,500 & \text { Unfavorable } \
\text { Direct labor efficiency variarice } & ( 28,000 ) & \text { Favorable } \
\text { Variable overhead spending variarice } & 19,500 & \text { Unfavorable } \
\text { Variable overhead efficiency variance } & ( 8,000 ) & \text { Favorable } \
\text { Total variable production cost variance } & ( \$ 12,000 ) & \text { Unfavorable }
\end{array}$$ 
Company policy is to investigate all unfavorable variances above 10 percent of the flexible budget amount for direct materials,direct labor,and variable overhead. 
a.Identify the variances that should be investigated according to company policy.Show calculations to support your answer.
b.What potential weakness exists in the company's current policy?

Olympia Inc Olympia Produced and Sold 1,000 Boats for the Year,and Encountered