iRobot Corporation

Suppose a company makes a heavy-duty plastic bag for a 30-pound aerial robot. The bag is made in single cost centre using standard costing system. The standard variable costs for one bag (a unit) are as follow:

Direct materials (3sq. meters @ $12.50 per sq. meter) $37.50
Direct labour (1.2 hours @ $9.00 per hour) $10.80
Variable overhead (1.2 hours @ $5.00 per direct labour hour) $ 6.00
Standard variable cost per unit $54.30
The company’s master budget was based on its normal capacity of 15,000 direct labour hours. Its budgeted fixed overhead costs for the year were $54,000. During the year, the company produced and sold 12,200 bags, and it purchased and used 37,500 square meters of direct materials; the purchase costs was $12.40 per square meter. The average labour rate was $9.20 per hour, and 15,250 direct labour hours were worked. The company actual variable overhead costs for the year were $73,200, and its fixed overhead costs were $55,000.
Required
Using the data given, compute the following using formulas or diagram form: Standard hours allowed for good output
Standard hours allowed = No. of good units produced × Standard direct labour hours per unit = 12,200 units × 1.2 hours = 14,640 hours

Standard fixed overhead rateed
Standard fixed overhead rate = (Budget Fixed Overhead Cost)/(Normal Capacity) = $54,000/(15,000 hours)
= $3.60 per direct labour hour

Direct materials cost variances: Direct materials price variance
Direct materials price variance = (Standard Price – Actual Price) × Actual Quantity = ($12.50 - $12.40) × 37,500 sq. meters = $3,750 (F) Direct material quantity variance
Direct material quantity variance
= (Standard Quantity – Actual Quantity) × Standard Price
= [(12,200 bags × 3 sq. meters) – 37,500 sq. meters)] × $12.50
= (36,600 sq. meters – 37,500 sq. meters) × $12.50
= $11,250 (U) Total direct materials cost variance
Direct material price variance $ 3,750 (F)
Direct material quantity variance $11,250 (U) $ 7,500 (U)

Direct labour cost variances: Direct labour rate variance
Direct labour rate variance = (Standard Rate – Actual Rate) × Actual Hours = ($9.00 - $9.20) × 15,250 hours = $3,050 (U) Direct labour efficiency variance
Direct labour efficiency variance
= (Standard Hours Allowed – Actual Hours Worked) × Standard Rate
= [(1.2 hours × 12,200 bags) – 15,250 hours] × $9
= (14,640 hours – 15,250 hours) × $9
= $5,490 (U) Total direct labour cost variance
Direct labour rate variance $3,050 (U)
Direct labout efficiency variance $5,490 (U) $8,540 (U)

Variable overhead cost variances: Variable overhead spending variance
Variable overhead spending variance
= (Standard variable rate × Actual hours worked) – Actual Variable Overheads
= ($5.00 × 15,250 hours) - $73,200
= $76,250 - $73,200
= $3,050 (F) Variable overhead efficiency variance
Variable overhead efficiency variance
= (Standard Hours Allowed – Actual Hours Worked) × Standard Rate
= (14,640 hours – 15,250 hours) × $5
= $3,050 (U) Total variable overhead cost variance
Variable overhead spending variance $3,050 (F)
Variable overhead efficiency variance $3,050 (U) $___ 0___

Fixed overhead cost variances: Fixed overhead budget variance
Fixed overhead budget variance
= Budgeted Fixed Overhead – Actual Fixed Overheads
= $54,000 - $55,000
= $1,000 (U) Fixed overhead volume variance
Fixed overhead volume variance
= (Standard Fixed Overhead Rate × Standard Hours Allowed) – Budgeted Fixed
Overhead
= ($3.60 × 14,640 hours) - $54,000 = $52,704 - $54,000 = $1,296 (U) Total fixed overhead cost variance
Fixed overhead budget variance $1,000 (U)
Fixed overhead volume variance $1,296 (U) $2,296 (U)