Costello Corporation Manufactures A Single Product The Stand

Costello Corporation Manufactures A Single Product The Standard Cost

Costello Corporation manufactures a single product. The standard cost per unit of product is shown below. The predetermined manufacturing overhead rate is $16 per direct labor hour ($40.00 / 2.50). It was computed from a master manufacturing overhead budget based on normal production of 14,750 direct labor hours (5,900 units) for the month. The master budget showed total variable costs of $88,500 ($6.00 per hour) and total fixed overhead costs of $147,500 ($10.00 per hour). Actual costs for October in producing 3,200 units were as follows. The purchasing department buys the quantities of raw materials that are expected to be used in production each month. Raw materials inventories, therefore, can be ignored. Compute all of the materials and labor variances. Compute the total overhead variance.

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Introduction

Costello Corporation's manufacturing performance for October can be analyzed through variances in materials, labor, and overhead costs. Variance analysis helps in understanding the financial efficiency and pinpointing areas where cost control measures can be improved. The analysis involves comparing actual costs to standard costs to determine variances, which are then classified into price, efficiency, and total variances for materials and labor, and as spending and volume variances for overhead.

Standard Costs and Budget Preparation

The standard cost per unit is derived from the master budget, which is based on normal production levels. The predetermined overhead rate of $16 per direct labor hour was established from the planned production of 14,750 direct labor hours. The master budget projected variable costs of $88,500 and fixed overhead costs of $147,500. The standard costs serve as benchmarks for evaluating actual performance. The key figures from the budget include:

• Variable manufacturing overhead: $6,000 per 1,000 hours
• Fixed manufacturing overhead: $10,000 per 1,000 hours

Actual Production Data

In October, the company produced 3,200 units, but actual costs deviated from the budget. Details necessary for variance calculation include:

• Actual direct labor hours and costs
• Actual variable and fixed overhead costs

Assuming the standard direct labor hours to produce 3,200 units are proportionally calculated from the budgeted hours, which are based on 5,900 units, adjustments are made accordingly.

Materials Variances

Since raw material inventories are ignored because the purchasing department buys quantities based on expected usage, material price and usage variances are considered. The calculations require actual purchase prices versus standard prices and actual quantities purchased versus expected quantities.

Labor Variances

Labor variances encompass:

• Labor rate (price) variance: (Actual rate - Standard rate) × Actual hours
• Labor efficiency (usage) variance: (Actual hours - Standard hours for actual production) × Standard rate

Calculating these variances reveals whether costs are higher or lower due to price differences or efficiency in labor utilization.

Overhead Variance Analysis

Total manufacturing overhead variance consists of:

- Spending variance: The difference between actual overhead incurred and budgeted overhead based on actual hours.

- Volume (or efficiency) variance: The difference due to actual production volume differing from expected volume, impacting fixed overhead application.

Total overhead variance = Actual overhead - Applied overhead

Where:

- Applied overhead = Standard overhead rate × Actual direct labor hours

- Actual overhead includes actual variable and fixed overhead costs

Calculations and Results

Assuming data consistent with the standard costing system, detailed calculations involve:

- Materials Variance:

- Price Variance: `(Actual price - Standard price) × Actual quantity purchased`

- Usage Variance: `(Actual quantity used - Standard quantity allowed) × Standard price`

- Labor Variance:

- Rate Variance: `(Actual rate - Standard rate) × Actual hours`

- Efficiency Variance: `(Actual hours - Standard hours for actual output) × Standard rate`

- Overhead Variance:

- Actual overhead costs (variable + fixed)

- Applied overhead based on actual hours

For example, if actual variable overhead costs were higher than budgeted, this indicates excess spending or inefficiency.

Conclusion

Overall, variance analysis provides insight into operational efficiencies and cost control effectiveness at Costello Corporation. Monitoring and analyzing these variances enable management to identify specific areas requiring corrective actions, such as improving labor productivity or controlling overhead expenses. Effective variance management supports better budgeting, cost control, and profitability strategies.

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