Reference no: EM131632993

Problem - "Fantastic!"  Not only did our salespeople do a good job in meeting the sales budget this year, but our production people did a good job in controlling costs as well," said Kathy Kent, president of Kosak Company.  "Our $60,925 net manufacturing cost variance is only 1.175% of the $5,184,000 standard cost of products made during the year.  Management has established a 3% of total standard costs materiality for variances.  It looks like everyone will be in line for a bonus this year."

Note that "standard cost of products made during the year" means standard cost per unit x actual units produced.

The company produces and sells a single product.  The standard (budgeted) cost per product is as follows:

Direct materials, 3 feet @ $12.68 per foot                             $38.03

Direct labor, 2.1 DL hours @ $24 per DLH                               50.40

Variable OH, 2.1 DLH @ $3.75 per DLH                                      7.88

Fixed OH, 2.1 DLH @ $9 per DLH                                             18.90

Standard Cost per unit                                                          $115.20

The following additional information is available for the year just completed:

The company manufactured 45,000 units of product during the year.

A total of 96,000 feet of material was purchased during the year at a cost of $12.83 per foot. All this material was used to manufacture the 45,000 units.  There was no beginning or ending inventories for the year.

The company worked 65,250 direct labor hours during the year at an actual direct labor cost of $23.70 per hour.

Overhead is applied to costs based on standard direct-labor hours. Data relating to manufacturing overhead costs are as follows:

• Budgeted Denominator level activity (DLH) 52,500 DLH
• Budgeted fixed OH (from the static & flexible budgets) $472,500
• Actual variable OH costs incurred $202,800
• Actual fixed OH costs incurred $475,750

Required (support your work for partial points):

1. Compute the direct materials price and efficiency variances for the year

2. Compute the direct labor price and efficiency variances for the year

3. Compute the variable overhead spending and efficiency variances for the year.

4. Compute the fixed overhead spending and production-volume variances for the year.

5. Total the variances you have computed, and compare the net amount (net favorable and unfavorable variances) with the $60,925 net variance mentioned by Ms. Kent. Did your numbers come out to the same?

6. Do you agree that bonuses should be given to everyone for good cost control during the year?