2. The Sterling Company uses a standard cost system in which manufacturing overhead costs are applied to the units of the company's single product on the basis of direct labor-hours (DLHs). The standard cost card for the product follows:
Standard Cost Card-per unit of product:
Direct materials, 4 yards at $3.50 per yard $14
Direct labor, 1.5 DLHs at $8 per DLH 12
Variable overhead, 1.5 DLHs at $2 per DLH 3
Fixed overhead, 1.5 DLHs at $6 per DLH 9
The following data pertain to last year's activities:
- The company manufactured 18,000 units of product during the year. A total of 70,200 yards of material was purchased during the year at a cost of $3.75 per yard. All of this material was used to manufacture the 18,000 units.
- The company worked 29,250 direct labor hours during the year at a cost of $7.80 per hour.
- The denominator activity level was 22,500 direct labor hours.
- Budgeted fixed manufacturing overhead costs were $135,000 while actual manufacturing overhead costs were $133,200.
- Actual variable manufacturing overhead costs were $61,425.
a. Compute the direct materials price and quantity variances for the year.
b. Compute the direct labor rate and efficiency variances for the year.
c. Compute the variable overhead spending and efficiency variances for the year.
d. Compute the fixed overhead budget and volume variances for the year.
e. Discuss some possible reasons for the direct labor variances that you computed.
The solution explains how to calculate material, labor and overhead variances