Standard costs
Alex Company developed the following standard costs for its product for 2019:
Cost Elements
Direct materials
Direct labour
Variable overhead
Fixed overhead
Standard Quantity
2 kilograms
1 hours
1 hours
1 hours
Standard Price
$5
10
4
2
Standard t
$10
10
4
2
$26
The company expected to work at the 7,500 direct labour hours level of activity and
produce 7,500 units of product.
Actual results for 2019 were as follows:

7,100 units of product were actually produced.

Direct labour costs were $63,000 for 7,000 direct labour hours actually worked.

Actual direct materials purchased and used during the year cost $64,800 for
14,400 kilograms.

Total actual manufacturing overhead costs were $43,000.
Instructions
Calculate the following variances for Alex Company for 2016 and indicate whether
the variance is favourable or unfavourable.
a.
b.
c.
d.
e.
f.
Direct materials price variance.
Direct materials quantity variance.
Direct labour price variance.
Direct labour quantity variance.
Overhead budget variance.
Overhead volume variance.
Solutions
1. Direct materials price variance = $7,200 favourable.
(AQ × AP) – (AQ × SP)
(14,400 × $4.50) – (14,400 × $5) = $64,800 – $72,000
2. Direct materials quantity variance = $1,000 unfavourable.
(AQ × SP) – (SQ × SP)
((14,400 × $5) – (14,200 × $5) = $72,000 – $71,000
SQ = 7,100 products × 2 = 14,200 kgs.
3. Direct labour price variance = $7,000 favourable.
(AH × AR) – (AH × SR
(7,000 × $9) – (7,000 × $10) = $63,000 – $70,000
4. Direct labour quantity variance = $1,000 favourable.
(AH × SR) – (SH × SR)
(7,000 × $10) – (7,100 × $10) = $70,000 – $71,000
SH = 7,100 units × 1 hrs = 7,100 direct labour hours
5. Overhead budget variance = $400 favourable.
Actual overhead – {Variable Standard costs (SH x SR) + Fixed Budget overhead)
(7,100 × $4) +
$43,000 – ($28,400 + 15,000)
Variable Standard cost
Fixed Budget overhead
(7,500 × $2)
= $400 favourable
(7,100 × $4)
= $28,400
(7,500 x $2) = 15,000
$43,400
6. Overhead volume variance = $800 unfavourable.
Fixed Budget overhead – (Fixed Standard cost = SH x SR)
(7,500 × $2)
Fixed Budget overhead
Fixed Standard cost
(7,100 × $2)
-
(7,500 x $2)
(7,100 × $2)
= 15,000
= $14,200