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CIVIL SERVICE INSTITUTE (csi)

Group Assignment

Course: financial Accounting II


Group: 6
NAMES:
1. Mohamoud Abdi Ibrahim
2. Abdifatah Ali Mouse
3. Ahmed Adam yousuf
4. Shucayb muxumed Ali
5. Farax Idiris Ahmed
6. Asma Abdi sulayman
7. Nimo Abdiqadir Eisa
8. Rooda Abdi hassan
9.

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Variable Overhead Variances
1: Order Up, Inc., provides order fulfillment services for dot.com merchants. The company
maintains warehouses that stock items carried by its dot.com clients. When a client receives an
order from a customer, the order is forwarded to Order Up, which pulls the item from storage,
packs it, and ships it to the customer. The company uses a predetermined variable overhead rate
based on direct labor-hours. In the most recent month, 140,000 items were shipped to customers
using 5,800 direct labor hours. The company incurred a total of $15,950 in variable overhead
costs. According to the company’s standards, 0.04 direct labor-hours are required to fulfill an
order for one item and the variable overhead rate is $2.80 per direct labor-hour. Required:

a) According to the standards, what variable overhead cost should have been incurred to fill the
orders for the 140,000 items? How much does this differ from the actual variable overhead cost?

b) Break down the difference computed in (a) above into a variable overhead rate variance and a
variable overhead efficiency variance.

Solutions:
a) variable overhead cost that should have been incurred =140,000 × 0.04 × $2.80=
$15,680
$15,950−$15,680=$270 U
b) Variable overheard rate variance= 𝐴𝐻(𝐴𝑅 − 𝑆𝑅)
=5800 ($2.8−$2.75) 15950
Note: AR= =$2.75
= 5800(-0.05) 5800
=$290 F SH= 140,000 x 0.04=5600
Variable overheard efficiency variance= 𝑆𝑅 (𝐴𝐻 − 𝑆𝐻) Note: SH= 140,000 x 0.04=5600

= $2.8(5800-5600)

=$2.8(200)

=$560 U

2: Material and Labor Variances


2. Topper Toys has developed a new toy called the Brain buster. The company has a standard
cost system to help control costs and has established the following standards for the Brain buster
toy:

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Direct materials: 8 diodes per toys at $0.30 per diode.

Direct labor: 0.6 hours per toys at $14.00 per hour.

During August, the company produced 5,000 Brain buster toys. Production data on the toy for
August follow:

Direct materials: 70,000 diodes were purchased at a cost of $0.28 per diode. 20,000 of these
diodes were still in inventory at the end of the month. Direct labor: 3,200 direct labor-hours were
worked at a cost of $48,000

Required:
a) Compute the following variances for August:

i. Direct materials price and quantity variances.


ii. Direct labor rate and efficiency variances.

b) Prepare a brief explanation of the possible causes of each variance

Solutions: DM
DM price variance= 𝐴𝑄(𝐴𝑃 − 𝑆𝑃)

= 70,000($0.28−$0.30)

=70,000(-0.02)

=$1400 F
NOTE: SQ = 5000 × 8 = 40,000
DM quantity variance= 𝑆𝑃(𝐴𝑄 − 𝑆𝑄) Note: SQ= 5,000 x 8= 40,000 hours
Total Quantity used = 70,000 − 20,000
=$0.30(50,000−40,000)
= 50,000
=$0.30(10,000)

$3000 U

Solutions: DL
Direct labor rate = 𝐴𝐻(𝐴𝑅 − 𝑆𝑅)

=3200($15−$14)

=3200($1)

=3200 U

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Labor efficiency variance = 𝑆𝑅(𝐴𝐻 − 𝑆𝐻)
Note: SH= 5,000 Toys × 0.6 hours per
=$14(3200 −3000) toy

=$14(200) =3,000

$2800 U

Explanation:
A variance usually has many possible explanations. In particular, we should always keep in mind
that the standards themselves may be incorrect. Some of the other possible explanations for
the variances observed at Topper Toys appear below:
Materials Price Variance: Since this variance is favorable, the actual price paid per unit for the
material was less than the standard price. This could occur for a variety of reasons including the
purchase of a lower grade material at a discount, buying in an unusually large quantity to take
advantage of quantity discounts, a change in the market price of the material, and particularly
sharp bargaining by the purchasing department.
Materials Quantity Variance: Since this variance is unfavorable, more materials were used to
produce the actual output than were called for by the standard. This could also occur for a
variety of reasons. Some of the possibilities include poorly trained or supervised workers,
improperly adjusted machines, and defective materials.
Labor Rate Variance: Since this variance is unfavorable, the actual average wage rate was higher
than the standard wage rate. Some of the possible explanations include an increase in wages that
has not been reflected in the standards, unanticipated overtime, and a shift toward more highly
paid workers.
Labor Efficiency Variance: Since this variance is unfavorable, the actual number of labor hours
was greater than the standard labor hours allowed for the actual output. As with the other
variances, this variance could have been caused by any of a number of factors. Some of the
possible explanations include poor supervision, poorly trained workers, low quality materials
requiring more labor time to process, and machine breakdowns. In addition, if the direct labor
force is essentially fixed, an unfavorable labor efficiency variance could be caused by a
reduction in output due to decreased demand for the company’s products.

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Measures of Internal Business Process Performance:
3: Management of Mittel Rhein AG of Köln, Germany, would like to reduce the amount of time
between when a customer places an order and when the order is shipped. For the first quarter of
operations during the current year the following data were reported:

Days

Inspection time……………………………………………………………………………… 0.3 days

Wait time (from order to start of production)……………………………….. 14.0 days

Process time…………………………………………………………………………………… 2.7 days

Move time……………………………………………………………………………………… 1.0 days

Queue time……………………………………………………………………………………. 5.0 days

Required:
1. Compute the throughput time.

2. Compute the manufacturing cycle efficiency (MCE) for the quarter.

3. What percentage of the throughput time was spent in non-value-added activities?

4. Compute the delivery cycle time

Solutions:
1: throughput time = process time + inspection time + move time + queue time

= 2.7 + 0.3 + 1.0 + 5.0

= 9.0 days

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Value added time
2: MCE =
throughtput time

2.7
= 9

= 0.3

= 30%

3: % spent in non-value-added activities = 100% −30%


= 70%

4: delivery cycle time = wait time + throughput time

= 14.0 days + 9.0 days

= 23.0 days

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