PROBLEM I - Materials, Labor, and Overhead Variance Analyses

TYPCO Corp. manufactures changeable typeheads for use on portable typewriters. Each typehead is in a set
consisting of the lead alloy typehead itself, a cover for the key on the typewriter keyboard, and a plastic box to hold
the two items. At the beginning and end of June, there were no materials inventories. The following standards were
developed for each unit:

Item Standard per Unit

Materials:
Lead alloy (3 oz. @ P.22) ...................................................................................................... P .66
Cover materials (6 oz. @ P.04).............................................................................................. .24
Container boxes (1 @ P.10)................................................................................................... .10
Direct labor (1/4 hr. @ P12 per hr.) .............................................................................................. 3.00
Overhead (P10 per direct labor hour)............................................................................................ 2.50
Total cost ............................................................................................................................... P 6.50

Annual production is estimated at 50,000 units, with fixed overhead of P25,000. During the past year, the following
costs were incurred to produce 40,000 units:

Materials:
Lead alloy: 122,000 oz. @ P.20
Cover materials: 235,000 oz. @ P.04
Container boxes: 40,500 @ P.09
Direct labor: 9,500 hrs. @ P12.50
Overhead: P90,000

Required: Compute the variances for each materials and labor item, recording the materials price variance at the
time of usage. Show the overhead variances using the two-variance method. (Indicate whether each variance is
favorable or unfavorable.)

Materials Variances

Lead alloy:
Actual (122,000 oz. @ P.20) ............................................................................................. P 24,400
Actual usage at standard cost (122,000 oz. @ P.22) ....................................................... 26,840
Price variance.................................................................................................................... P (2,440) fav.

Actual usage at standard cost .......................................................................................... P 26,840

Standard usage at standard cost (3 oz. per unit x 40,000 units x P.22) ........................ 26,400
Quantity variance ............................................................................................................. P 440 unfav.

Cover materials:
Actual (235,000 oz. @ P.04) ............................................................................................. P 9,400
Actual usage at standard cost (same) .............................................................................. 9,400
Price variance.................................................................................................................... P 0

Actual usage at standard cost .......................................................................................... P 9,400

Standard usage at standard cost (6 oz. per unit x 40,000 units x P.04) ........................ 9,600
Quantity variance ............................................................................................................. P (200) fav.

Container boxes:
Actual (40,500 @ P.09) ..................................................................................................... P 3,645
Actual usage at standard cost (40,500 @ P.10) .............................................................. 4,050
Price variance.................................................................................................................... P (405) fav.

Actual usage at standard cost .......................................................................................... P 4,050

Standard usage at standard cost (40,000 x P.10)............................................................ 4,000
Quantity variance ............................................................................................................. P 50 unfav.
 Labor Variances

Actual (9,500 hrs. @ P12.50) ................................................................................................... P 118,750

Actual hours at standard rate (9,500 hrs. @ P12.00) ............................................................ 114,000
Labor rate variance ................................................................................................................. P 4,750 unfav.

Actual hours at standard rate ................................................................................................. P 114,000

Standard hours at standard rate (1/4 hr. per unit x 40,000
units x P12.00) ................................................................................................................... 120,000
Labor efficiency variance ........................................................................................................ P (6,000) fav.
 Overhead Variances

Actual overhead .............................................................................................. P 90,000

Budget allowance based on standard hours allowed:
Fixed overhead ......................................................................................... P25,000
Variable overhead [(P2.50 per unit x 50,000 units)
- P25,000] x 80% ............................................................................. 80,000 105,000
Controllable variance ..................................................................................... P (15,000) fav.

Budget allowance ............................................................................................ P 105,000

Standard cost charged in (40,000 units x
1/4 hr. per unit x P10) .............................................................................. 100,000
Volume variance ............................................................................................. P 5,000 unfav.

PROBLEM II - Overhead Variance Analysis, Using the Two-Variance Method

Tuxla Products Co. charges factory overhead into production at the rate of P10 per direct labor hour, based on a
standard production of 15,000 direct labor hours for 15,000 units; 60% of factory overhead costs are variable.
Production data for May and June are:

May June
Production .................................................................................................. 12,000 hrs. 14,200 hrs.
Units produced ........................................................................................... 12,000 15,000
Actual factory overhead ............................................................................. P140,100 P149,300

Required: Prepare a factory overhead variance analysis for May and June, using the two-variance method. (Indicate
whether each variance is favorable or unfavorable

SOLUTION

May June
Actual factory overhead ....................................................................... P 140,100 P 149,300
Budget allowance based on standard:
Budgeted fixed expense (40% x P10 x
15,000 units) ............................................................................. (60,000) (60,000)
Variable expenses:
12,000 hrs. allowed x P10 x .60 ............................................... (72,000)
15,000 hrs. allowed x P10 x .60 ............................................... (90,000)
Controllable variance ........................................................................... P 8,100 unfav. P (700) fav.
Budgeted allowance based on standard
hours allowed .................................................................................. P 132,000 P 150,000
Standard hours allowed x Standard factory
overhead rate:
12,000 hrs. x P10 ...................................................................... (120,000)
15,000 hrs. x P10 ...................................................................... (150,000)
Volume variance ................................................................................... P 12,000 unfav. 0

PROBLEM III – Mix and Yield Variance Analysis

Dulock Company manufactures a certain product by mixing three kinds of materials in large batches. The
blendmaster has the responsibility for maintaining the quality of the product, and this often requires altering the
proportions of the various ingredients. Standard costs are used to provide material control information. The standard
material inputs per batch are:

Quantity Price Standard Cost

(pounds) (per pound) of Material
Material A 420 P0.06 P25.20
Material B 70 0.12 8.40
Material C 10 0.25 2.50
Total batch 500 P36.10

The finished product is packed in 50-pound boxes; the standard material cost of each box is, therefore, P3.61.

During January, the following materials were put in process:

Material A 181,000 lbs.

Material B 33,000
Material C 6,000
Total 220,000 lbs.

Inventories in process totaled 5,000 pounds at the beginning of the month and 8,000 pounds at the end of the month.
It is assumed that these inventories consisted of materials in their standard proportions. Finished output during
January amounted to 4,100 boxes.

Required: Compute the total material quantity variance for the month and break it down into mix and yield
components.

ANS: Material Quantity Variance:

A (181,000 - 172,200) × P0.06 = P 528 UNF
B (33,000 - 28,700) × P0.12 = 516 UNF
C (6,000 - 4,100) × P0.25 = 475 UNF P1,519

A 181,000 × P0.06 = P10,860 184,800 × P0.06 = P11,076 172,200 × P0.06 = P10,332

B 33,000 × P0.12 = 3,960 30,800 × P0.12 = 3,696 28,700 × P0.12 = 3,444
C 6,000 × P0.25 = 1,500 4,400 × P0.25 = 1,100 4,100 × P0.25 = 1,025
P16,320 P15,872 P14,801

MIX VARIANCE = P 436 UNF

YIELD VARIANCE = P1,083 UNF
Total P1,519 UNF

PROBLEM IV - Journal Entries for Variances

Parrothead Corp. determines that the following variances arose in production during March:

Variance Amount
Materials purchase price ....................................................................................................... P2,400 favorable
Materials quantity ................................................................................................................. 1,000 favorable
Labor efficiency .................................................................................................................... 500 favorable
Labor rate .............................................................................................................................. 750 unfavorable
Factory overhead volume ...................................................................................................... 1,700 favorable
Factory overhead controllable ............................................................................................... 2,950 unfavorable

Materials purchases totaled P90,000 at standard costs, while P77,000 in materials were taken from inventory for use
in production. Labor payroll totaled P144,000, and actual overhead incurred was P256,000.

Required: Prepare the journal entries to record the above variances, including the recording of the actual and
applied factory overhead using a single factory overhead control account.

SOLUTION
Materials ..................................................................................................................... 90,000
Materials Purchase Price Variance ................................................................... 2,400
Accounts Payable ................................................................................................ 87,600

Work in Process ......................................................................................................... 78,000

Materials.............................................................................................................. 77,000
Materials Quantity Variance ............................................................................. 1,000

Work in Process ......................................................................................................... 143,750

Labor Rate Variance ................................................................................................. 750
Payroll.................................................................................................................. 144,000
Labor Efficiency Variance ................................................................................. 500

Factory Overhead Control ........................................................................................ 256,000

Various Credits ................................................................................................... 256,000

Work in Process ......................................................................................................... 254,750

Factory Overhead Controllable Variance ............................................................... 2,950
Factory Overhead Control ................................................................................. 256,000
Factory Overhead Volume Variance ................................................................ 1,700

or

Work in Process ......................................................................................................... 254,750

Factory Overhead Control ................................................................................. 254,750
Factory Overhead Controllable Variance ............................................................... 2,950
Factory Overhead Volume Variance ................................................................ 1,700
Factory Overhead Control ................................................................................ 1,250