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