Smith Manufacturing uses a standard costing system. For the current period, Smith allocated the following costs using a predetermined overhead rate: What are Smith's material and conversion variances for the month?

Question

Smith Manufacturing uses a standard costing system. For the current period, Smith allocated the following costs using a predetermined overhead rate:  What are Smith's material and conversion variances for the month?

Quizplus · Accepted Answer

The question does not provide any information on the actual costs incurred, so we cannot calculate total variances. We can only calculate the material and conversion variances. The material variance can be calculated by subtracting the actual cost of materials used from the standard cost of materials that should have been used, and multiplying by the actual quantity of materials used. The conversion variance can be calculated by subtracting the actual cost of conversion from the standard cost of conversion, and multiplying by the actual number of conversion hours. We do not have information on the actual quantities or costs, but we can use the information given to calculate the variances based on the predetermined overhead rate.

The predetermined overhead rate is $4 per direct labor hour ($800,000 ÷ 200,000 direct labor hours). We are told that there were 50,000 actual direct labor hours, so the overhead applied would be $200,000 (50,000 hours × $4 per hour).

Material variance = (standard cost – actual cost) × actual quantity
= ($500,000 – actual cost) × 40,000 pounds
= $500,000 × 40,000 pounds – actual cost × 40,000 pounds
Conversion variance = (standard cost – actual cost) × actual hours
= ($200,000 – actual cost) × 50,000 hours
= $200,000 × 50,000 hours – actual cost × 50,000 hours

We don't know the actual costs, but we know that the predetermined overhead rate includes both materials and conversion costs, so it's likely that the actual costs are less than the standard costs. This would result in unfavorable variances for both materials and conversion. Choice C is the only option with an unfavorable materials variance and a favorable conversion variance, which is plausible given the information provided.

Smith Manufacturing Uses a Standard Costing System