Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 58

All Manufacturing Variances Eastern 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 (DLHs) and uses a flexible-budget system to plan and control departmental overhead costs.

Standard costs for the special transformer are determined annually in September for the coming year. The standard cost of a transformer at its DeCatur plant for the year just completed is $67 per unit, as shown here:

Direct materials:
Iron	5 sheets × $2	$10
Copper	3 spools × $3	9
Direct labor	4 hours × $7	28
Variable overhead	4 hours × $3	12
Fixed overhead	4 hours× $2	8
Total		$67

Overhead rates were based on practical capacity of 4,000 DLHs per month. Variable overhead costs are expected to vary with the number of DLHs actually used.

During October, the plant produced 800 transformers. This number was below expectations because a work stoppage occurred during labor contract negotiations. When the contract was settled, the department scheduled overtime in an attempt to reach expected production levels.

The following costs were incurred in October:

Direct Material
Iron	Purchased 5,000 sheets at $2.00/sheet and used 3,900 sheets
Copper	Purchased 2,200 spools at $3.10/spool and used 2,600 spools
Direct Labor
Regular time	2,000 hours at $7.00 and 1,400 hours at $7.20
Overtime	600 of the 1,400 hours were subject to overtime premium. The total overtime premium of $2,160 is included in variable overhead in accordance with company accounting practices.
Factory Overhead
Variable	$12,000
Fixed	$8,800

Required

1. What is the most appropriate time to record any variance of actual materials prices from standard? Explain.

---

2. What is the total direct labor rate (price) variance for October?

---

3. What is the total direct labor efficiency variance for October?

---

4. What is the total direct materials purchase price variance for October?

---

5. What is the total direct materials usage variance for October?

---

6. What is the variable overhead spending variance for October?

---

7. What is the variable overhead efficiency variance for October?

---

8. What is the budget (spending) variance for fixed overhead for October?

---

9. What is the production-volume variance for October?

Step 1 of 9

All Manufacturing Variances(50-60 minutes)

1.    At the time of purchase. Recording the price variance for materials at time of purchase recognizes the variance at the point it occurs. Further, if the organization in question uses a standard cost system, then this practice results in the materials inventory being carried at standard cost, which is consistent with the way WIP Inventory and Finished Goods Inventory are carried. Finally, recognizing the price variance at point of purchase provides management with timely information that, presumably, can be used to correct any problems that arise.