Read the additional case information and address the questions at the bottom.

Machine hours or direct labor is not always used by companies as it may not be the appropriate cost driver for overhead in all cases, due to the complexity of the manufacturing processes. Some companies consider Activity Based Costing (ABC) as a better alternative. ABC uses multiple cost drivers rather than just one, to apply overhead to the various activities. Using ABC, a company can use the cost driver that has the best cause/effect relationship in its applied overhead costs.

Sweet Wave Bakery looked into ABC as a method of costing because of the variety of items it produces and the many different activities in which it is involved. The activities listed below are a sample of possible cost pools for Waterways.

Assembling

Payroll

Billing

Plant supervision

Mixing

Product design

Janitorial

Purchasing materials

Machine maintenance

Selling

Machine setups

Testing

Dough

Baking

Packaging

Instructions

(a) For each of these cost pools, what would be the likely activity cost driver?

In order to properly track costs, Sweet Wave Bakery uses very stringent standard costs in evaluating efficiency. Management is working hard to make these costs precise, but they have not yet achieved this goal. Currently, they use the following standards:

The January figures for purchasing, production, and labor are:

The company purchased 229,000 pounds of raw materials in January at a cost of 78 a pound.

Production used 229,000 pounds of raw materials to make 115,500 units in January.

Direct labor spent 18 minutes on each product at a cost of $7.80 per hour.

Overhead costs for January totaled $54,673 variable and $73,800 fixed.

Instructions

Answer the following questions about standard costs.

(a) What is the materials price variance?

(b) What is the materials quantity variance?

(c) What is the total materials variance?

(d) What is the labor price variance?

(e) What is the labor quantity variance?

(f) What is the total labor variance?

(g) What is the total overhead variance?

Evaluate the variances for this company for January. What do these variances suggest to management?