variance analysis 457645

Terry Co. manufactures a commercial solvent that is used for industrial maintenance. This solvent is sold by the drum and generally has a stable selling price. Due to a decrease in demand for this product, Terry produced and sold 60,000 drums in December. The following information is available regarding Terry’s operations for December:

Standard costs per drum of product manufactured were as follows:

Materials

10 gallons of raw materials $20

1 empty drum $1

Total Materials Costs $21

Direct labor (1 hour) $7

Fixed factory overhead (per direct

labor hour) $4

Variable factory overhead (per

direct labor hour) $6

Costs incurred during December were as follows:

Raw materials: 600,000 gallons were purchased at a cost of $1,150,000

700,000 gallons were used

Empty drums: 85,000 drums were purchased at a cost of $85,000

60,000 drums were used

Direct Labor: 65,000 hours were worked at a cost of $470,000

Factory overhead:

Depreciation of building and machinery: $230,000

Supervision and indirect labor: $360,000

Other factory overhead; $76,500

Total factory overhead: $666,500

The fixed overhead budget for the December level of production was $275,000

Normal capacity is $68,750 direct labor hours

Prepare a schedule computing the following variances for December:

(1) Materials price variance (computed at the time of purchase)

(2) Materials usage variance (quantity)

(3) Labor rate variance

(4) Labor usuage (efficiency) variance

(5) Factory overhead,using the three way method

Indicate whether each variance is favorable or unfavorable