# Computing Cost Variances

Per unit standard costs of the entertainment center, assuming a "normal" volume of 1,000 units per month are as follows:

Direct materials, 100 board-feet of wood at $1.30 per foot................$130.00

Direct labor, 5 hours at $8.00 per hour................................................ 40.00

Manufacturing overhead (applied at $22 per unit)

Fixed ($15.00 divied 1,000 units of normal production)....................$15.00

Variable.............................................................................................. 7.00 22.00

Total standard unit cost.....................................................................................$192.00

During July, 800 entertainment centers were scheduled and produced at the following actual unit costs:

Direct materials, 110 feet at $1.20 per foot.......................................$132.00

Direct labor, 5 1/2 hours at $7.80 per hour......................................... 42.00

Manufacturing overhead, $18,480 divided 800 units............................23.10

Total actual unit cost..........................................................................$198.00

TASKS:

A - Compute the following cost variances for the month of July:

1 - Materials price variance

2 - Materials quantity variance

3 - Labor rate variance

4 - Labor efficiency variance

5 - Overhead spending variance

6 - Volume variance

B - Prepare journal entries to assign manufacturing costs to the Work in Process Inventory account and to record cost variance for July. Use separate entries for (1) direct materials, (2) direct labor and (3) overhead costs.

C - Comment on any significant problems or areas of cost savings revealed by your computation of cost variances. Also comment on any possible causal relationships between significant favorable and unfavorable cost variances.

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#### Solution Preview

Please check the attached excel files for the financial formulas and journal entries in their proper format.

A)

(1) Computation of materials price variance (MPV):

Actual quantity used

Units 800

Feet 110

Actual quantity used 88,000

Standard price per foot $1.30

Actual quantity used $1.20

MPV $8,800

(2) Computation of materials quantity variance (MQV):

Standard price per foot $1.30

Standard quantity

Units 800

Feet 100

Actual quantity 80,000

MQV (10,400) Unfavorable

(3) Computation of labor rate variance (LRV)

Actual ...

#### Solution Summary

The expert computes cost variances of the entertainment centers.