Problem 12-14

1. Compute the following variances for June:

a. Direct materials price and quantity variances.

Standard Quantity
Actual Quantity of Actual Quantity of Allowed for Actual
Input, at Actual Price Input, at Standard
Output, at Standard
(AQ x AP) Price (AQ x SP)
Price (SQ x SP)

60000 pounds x $1.95 per pound = $117000 60000 pounds x $2.00 per pound = $120000 45000 pounds x $2.00 per pound = $90000

Price variance, $3000 F

49200 pounds x $2.00 = $98400

Quantity variance, $8400 U

b. Direct labor rate and efficiency variances

Standard Hours
Actual Hours of Input, Actual Hours of Input,
Allowed for Actual
at Actual Rate (AH x at Standard Rate (AH x
Output, at Standard
AR) SR)
Rate (SH x SR)

11800 hours x $7.00 per hour = $82600 11800 hours x $6.00 per hour = $70800 12000 hours x $6.00 per hour = $72000

Rate variance, -$11800 U Efficiency variance, -$1200 F

Total Variance, $10,600 U

c. Variable overhead rate and efficiency variances.

Standard Hours
Actual Hours of Input, Actual Hours of Input,
Allowed for Actual
at Actual Rate (AH x at Standard Rate (AH x
AR) SR) Output, at Standard
Rate (SH x SR)

$18,290 5900 hours x $3.00 = $17700 6000 hours x $3.00 = $18000

Rate variance, $590 U Efficiency variance, $300 F

 Total Variance, $890

2. Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for the month. What impact did this
figure have on the company's income statement? Show computations.

Summary of the variances

Material price variances 3,000.00 F

Material quantity variances 8,400.00 U
Labor rate variances 11,800.00 U
Labor effciency variances 1,200.00 F
Variable overhead rate variances 590.00 U
Variable overhead efficiency variances 300.00 F
16,290.00 U

The net unfavorable variance of $16290 has caused to increase the variable costs of good sold from $180000 to $196290. Please see computation below:

Budgeted variable cost of good solds $180000

Add: net unfavorable variance $16290
Actual variable cost of goods sold $196290

The net unfavoriable variance of $16290 also caused the net operating income to decrease from $36000 (budgeted) to $19710 (actual).

Budgeted net operating income $36000

Less: net unfavorable variance $16290
Actual net operating income $19710

3. Pick out the two most significant variances that you computed in (1) above. Explain to Ms. Dunn possible causes of these variances.

The most significant variances would have to be the material quantity variances and labor rate variances. Possible causes of the material quantity variances include
poorly trained workers, poor quality of the materials used and poor or outdated procedures applied. Possible causes for labor rate variances would be over time
payments to workers and non-uniformity in salary where some has increases over the others.
Problem 12-15

1. Compute a materials price variance for the plates purchased last month and a materials quantity variance for the plates used last month.

Blood Tests 1800

Smears 2400
Total tests 4200 x 2 plates per test = 8400 plates used

Standard Quantity
Actual Quantity of Actual Quantity of
Allowed for Actual
Input, at Actual Price Input, at Standard
Output, at Standard
(AQ x AP) Price (AQ x SP)
Price (SQ x SP)

12000 plates x $2.35 per plate = $28200 12000 plates x $2.50 per plate = $30000 8400 plates x $2.50 per pound = $21000

Price variance, $1800 F

10500 plates x $2.50 per plate = $26250

Quantity variance, $5250 U

2. For labor cost in the lab:
a. Compute a labor rate variance and a labor efficiency variance

Standard Hours
Actual Hours of Input, Actual Hours of Input,
Allowed for Actual
at Actual Rate (AH x at Standard Rate (AH
Output, at Standard
AR) x SR)
Rate (SH x SR)

1150 hours x $12 per hour = $13800 1150 hours x $14 per hour = $16100 900 hours x $14 per hour = $12600

Rate variance, $2300 F Efficiency variance, $3500 U

Total Variance, $1200 U

b. In most hospitals, one-half of the workers in the lab are senior technicians and one-half are assistants. In an effort to reduce costs, Valley View Hospital
employs only one-fourth senior technicians, and three-fourths assistants. Would you recommend that this policy continue? Explain

It is not recommend to continue to the policy of employing only one-fourth senior technicians and three-fourths assistants. The reason for that is that despite
being able to save $2 per hour from the standard rate, we can see that the efficiency is affected. The efficiency variance is at $3500 as opposed to the rate
variance of $2300, which gives a net unfavoriable variance for labor of $1200. This means that it takes longer time for the hospital to process the blood tests
and smears compared to employing one-half of senior technicians and one half of assistants in their manpower.
3. Compute the variable overhead rate and efficiency variances. Is there any relation between the variable overhead efficiency variance and the labor efficiency
variance. Explain

Standard Hours
Actual Hours of Input, Actual Hours of Input,
Allowed for Actual
at Actual Rate (AH x at Standard Rate (AH
Output, at Standard
AR) x SR)
Rate (SH x SR)

1150 hours x $6.80 per hour = $7820 1150 hours x $6.00 per hour = $6900 900 hours x $6.00 per hour = $5400

Rate variance, $920 U Efficiency variance, $1500 U

Total Variance, $2420 U

There is a relation between the variable overhead efficiency variance and the labor efficiency variance because both of them are computed by comparing the
actual labor hours to the standard hours. Hence if the labor efficiency variance is favorable, then the variable overhead efficiency variance will also be
favorable. Likewise will happen when it is unfavorable.