memorandum

to:Lorthen INC. EXECUTIVE COMMITTEE

from:Tim Cooper, James GaWrych, Kycia Spriggins, Matthew Stewart, Andrew Troy

subject:Lorthen INC. Variances Analysis

date:June 14, 2015

The purpose of this memo is to provide the periodic update to Lorthen Inc. Executive Committee on variances reported over the period.

SUMMARY OF PERIOD ANALYSIS:1. Units Produced during the period: 19,000 [units]2. Meters of direct materials purchased and used in production:40,000 [m]3. Actual cost per meter of material:$15.714. Actual direct labor-hours worked during the period:20,000 [hrs]5. Actual rate per direct labor-hour:$15.20 6. Actual variable manufacturing overhead cost incurred during the period:$176,000

There were some positive signs this period but these were tempered by what appears to be a bad material choice. One positive note is that our actual rate for overhead went down from $9.00/hr to $8.80. However, this was not enough to offset the extra cost imposed from the additional 1,000 hours of labor needed over our standard hours for production of 19,000 units. Combined these results yields an unfavorable variable overhead spending variance of $5,000. While we did appreciate saving $11,600 on materials because the price dropped from $16.00 to $15.71 per meter this was tempered by the fact that we used 2000 meters more materials than our standard quantity predicted. The cheaper material is most likely responsible for the extra labor hours required for production. Together the unfavorable rate and efficiency variances added costs of $19,000 extra for the production of 19,000 units. This was partly due to the $4,000 unfavorable labor rate variance we paid just to have the superior crews deal with the inferior materials which is compounded with the extra $15,000 in costs attributable to the added 1,000 hours in manufacturing labor needed for production. All-in-all the negatives outweighed the positives and we ended up spending $44,400 more than we should have to produce 19,000 units. From our findings, we suggest that Lorthen Inc. return to the higher quality materials used to set our standards. This will help to insure we maintain our standard workforce production output and lower both material and labor costs from that which was experienced this period.

SUPPORTING ANALYSIS:

KEY FORMULAS: MQV = SP(AQ SQ) MPV = AQ(AP SP) LEV = SR(AH SH) LRV = AH(AR SR)

1) given the Total Standard Cost Applied = $608,000 for Direct Materials and the Standard Cost per Unit of $32.00/unit we find:Units produced = $608,000/$32.00 = 19,000 (units produced during the period)

Using 2m per unit the Standard Quantity (SQ) is calculated as 19,000 X 2 = 38,000 we find:SQ=38,000 (period Standard Quantity) 2) given the Standard Price, SP=$16.00 and the unfavorable Material Quantity Variance (MQV) of $32,000 and using the formula AQ = MQV/SP + SQ we find:AQ = $32,000/$16 + SQ = 2,000 + 38,000 = 40,000 ... AQ=40,000 (meters of direct materials purchased and used) 3) given there was a favorable Material Price Variance (MPV) of -$11,600 and using the formula AP = MPV/AQ + SP we then findAP= -11,600/40,000 + SP = -$0.29 + $16 = $15.71AP = $15.71 (actual cost per meter of material) 4) given the standard direct labor hours = 1.0hr/unit and having determined that 19,000 units were produced we findSH = 1.0hr/unit * 19,000units =19,000hrs (standard direct labor hours used to produce 19,000 units) given that the Standard Direct Labor Rate SR = $15.00 and the unfavorable Labor Efficiency Variance (LEV) is $15,000 and with using the formula, AH = LEV/SR + SH and using SH=19,000 from above we find thatAH = $15,000/$15.00/hr + 19,000hrs = 1,000 hrs + 19,000 hrs = 20,000hrsAH=20,000hrs (actual direct labor-hours). 5) given the Standard Direct Labor Rate, SR=$15.00 and with the unfavorable Labor Rate Variance (LRV) = $4,000 and using the formula AR = LRV/AH + SR we then findAR = $4,000/20,000hrs + $15.00 = $0.20 + $15.00 = $15.20 AR = $15.20 (actual rate per direct labor hour) 6) given the Standard Variable Manufacturing Overhead Rate, SR=$9.00 and the favorable Variable Overhead Labor Rate Variance (VOLRV) = -$4,000 and using the formula AR = LRV/AH + SR we findAR=-$4,000/20,0000 + $9.00 = -$.20 + $9.00 = $8.80AR = $8.80 (actual variable manufacturing overhead rate) The actual variable manufacturing overhead cost incurred during the period is the 20,000 actual hours AH * $8.80 = $176,000 (variable manufacturing cost for actual hours of input at overhead rate).

ACRONYMS: Standard QuantitySQ Actual QuantityAQ Standard PriceSP Actual PriceAP Standard HoursSH Actual HoursAH Standard RateSR Standard Rate OverheadSRo Actual RateAR Materials Quantity Variance MQV Materials Price VarianceMPV Labor Efficiency VarianceLEV Labor Rate VarianceLRV Variable Overhead LEVVOLEV Variable Overhead LRVVOLRV

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