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A Comprehensive Problem of all variances
The Spring Mint Company, a manufacturer of chewing gum, uses a standard cost system. Standard product
and cost specifications for 1,000 lbs. of chewing gum are as follows:
Quantity
×
Price
=
Cost
Gum ba
800
$0.25
$200
Corn syrup
200
$0.40
80
Sugar
200
$0.10
20
Input
1,200 lbs
$300
$300 / 1,200 lbs = $0.25 per lb.
*
Output
1,000 lbs
$300
$300 / 1,000 lbs = $0.30 per lb.
*
*Weighted average.
The production of 1,000 lbs. of chewing gum required 1,200 lbs of raw materials. Hence the yield is 1,000 lbs
/ 1,200lbs. or 5/6 of input. Materials records indicate.
Materials
Beginning Inventory
Purchases in January
Ending Inventory
Gum bas
e
10,000 lbs
162,000 lbs@ 0.24
15,000 lbs
Corn Syrup
12,000 lbs
30,000 lbs
@ 0.42
4,000 lbs
Sugar
15,000 lbs
32,000 lbs
@ 0.11
11,000 lbs
To convert 1,200 lbs. of raw materials into 1,000 lbs of finished product required 20 hours at $6.00 per hour
or $0.12 per lbs. of finished product. Actual direct labor hours and cost for January are 3,800 hours at $23,104.
Factory overhead is applied on a direct labor hour basis at a rate of $5 per hour ($3 fixed, $2 variable), or $ 0.1
per lb. of finished product. Normal overhead is $20,000 with 4,000 direct labor hours. Actual overhead for the
month is $22,000, Actual finished production for January is 200,000 lbs.
The standard cost per pound of finished chewing gum is:
Materials
$0.30 per lb.
Labor
$0.12 per
lb.
Factory overhead
$0.10 per lb
.
Required:
Calculate:
1. Materials price, mix, quantity and yield variance.
2. Labor rate, efficiency, and yield variance.
3. Overhead yield variance using two and three variance methods.
Solution to the Comprehensive Problem
Calculation of Materials Variance:
The materials variances for January consists of price variance, mix variance, yield variance, and quantity
variance.
Materials Price Variance:
The company calculates the materials price variance using the procedure explained on “direct materials price
variance” page and recognizes variances when materials are purchased.
Materials
Quantity
Actual Price
Standard
Price
Unit Price
Variance
Price variance
Gum base
$1
62,000
$0.24
$0.25
$(0.01)
)
1,620
$(
Corn syrup
30,000
$0.42
$0.40
$0.02
$600
Sugar
32,000
$0.11
$0.10
$0.01
$320
M
aterials price
variance
$(700) fav.
Materials Mix Variance:
The materials mix variance results from combining materials in a ratio different from the standard materials
specifications. It is computed as follows:
Actual quantities at individual standard materials costs:
Gum base 157,000 @ $0.25
$39,250
Corn syrup 38,000 @ $0.40
$15,200
Sugar 36,000 @ $0.10
$3,6
00
Actual quantity at weighted average of standard materials cost
input 231,000 lbs × $0.25
$57,750
Materials mix variance (unfavorable)
$300U
Materials Yield Variance:
Material yield variance is computed as follows:
Act
ual quantity at weighted average of standard materials cost input 231,000 lbs ×
$0.25
$57,750
Actual
output
quantity at standard materials cost (200,000 lbs × $0.30)
$60,000
Material yield variance (Favorable)
$(2,250)F
F = Favorable
U = Unfavorable
The yield variance occurred because the actual production of 200,000 lbs. exceeded the expected output of
192,500 lbs. (5/6 of 231,000) by 7,500 lbs. The yield difference multiplied by the standard weighted materials
cost of $0.30 per output pound equals the favorable yield variance of $2,250.
The materials quantity variance can be calculated for each item as follows:
Unit
×
Standard
unit cost
=
Amount
Materials quantity
variance
Gum
Actual quantity
157,000
$0.25
$39,250
Standard
160,000
$0.25
40,000
$ (750) Favorable
Corn
Actual quantity
38,000 lbs
$0.40
$15,200
Standard
40,000
$0.40
16,000
$ (800) Favorable
Sugar:
Actual quantity
36,000 lbs
$0.10
$3,600
Standard
4,000
$0.10
4,000
$ (400) Favorable
Total materials
quantity variance
$ (1,950) Favorable