Direct-cost and overhead variances, income statement. The Greenspace Company started business on January 1, 2017. The company adopted a standard costing system for the production of ergonomic backpacks. Greenspace chose direct labor as the application base for overhead and decided to use the proration method to account for variances at year-end. In 2017, Greenspace expected to make and sell 160,000 backpacks; each was budgeted to use 2 yards of fabric and require 0.5 hours of direct labor work. The company expected to pay $2 per yard for fabric and compensate workers at an hourly wage of $12. Greenspace has no variable overhead costs, but budgeted $800,000 for fixed manufacturing overhead in 2017. In 2017, Greenspace actually made 180,000 backpacks and sold 144,000 of them for a total revenue of $2,592,000. The costs incurred were as follows:

1. Compute the following variances for 2017, and indicate whether each is favorable (F) or unfavorable (U):

a. Direct materials efficiency variance

b. Direct materials price variance

c. Direct manufacturing labor efficiency variance

d. Direct manufacturing labor price variance e. Fixed overhead flexible-budget variance f. Fixed overhead production-volume variance

2. Compute Greenspace Company’s gross margin for its first year of operation.

 

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