Question

In: Accounting

Morry Games developed a new play station called AWESOME. Morry Games has a standard cost system...

Morry Games developed a new play station called AWESOME. Morry Games has a standard cost system to help control its costs. The following standards have been established for AWESOME.

Direct materials 15 grams per AWESOME.
Standard direct material cost per AWESOME is $10.
Direct labour 1.2 hours per AWESOME.
Standard cost of direct labour is $14.40 per AWESOME.
During May the company produced 9,000 AWESOME units.

Production data for May are:

Direct materials: 165,000 grams were purchased at a cost of $104,000; 20,000 grams of this was still in inventory at the end of the month.
Direct labour: 11,400 direct labour hours were worked at a cost of $142,500.

Required:

Calculate Direct materials price and quantity variances.
Calculate Direct labour price and quantity variances.
Are the variances computed in (a) and (b) linked? Provide a brief commentary on the variances computed above, including explanations regarding the price and the quantity variances for Direct materials, and the price and the quantity variances for Direct labours.

Expert Solution

a)

Actual quantity of materials Used (AQ)= 165000 – 20000= 145000 grams

Actual price of materials (AP) = Total price/ quantity purchased

= $104000/ 165000 grams= $0.63/ gram

Standard quantity of direct material (SQ)= Actual production * Standard quantity required per raw material

= 9000 units* 15 grams per unit= 135000 grams

Standard price of direct material (SP) = Standard price per unit /Standard quantity required per raw material = $10/ 15 grams= $ 0.667/ gram

Direct material price variance= (AP- SP) * AQ

= (0.63- 0.667) * 145000= $5365 Favorable

Direct material quantity variance= (AQ- SQ) * SP

= (145000- 135000) * 0.667= $6670 Unfavorable

b)

Standard hours required for actual production (SH)

=Actual units produced * Standard time required per unit

= 9000 * 1.2 hours per unit= 10800 hours

Standard rate (SR) = Standard labor cost per unit/ Standard time required per unit

= $14.40/ 1.2 hours= $12/ hour

Actual hours worked (AH)= 11400 hours

Actual rate (AR)= Total cost/ Actual hours worked

= $142500/ 11400 hours= $12.5 per hour

Labor price (rate) variance= (AR- SR) * AH

= (12.5- 12) * 11400= $5700 Unfavorable.

Labor quantity variance (efficiency variance) = (AH- SH) * SR

= (11400- 10800) * 12= $7200 Unfavorable.

c)

Material price variance is favorable. That is company might have used cheap material. This may lead to usage of low-quality material and more material have been used than the standard. That may be the reason for unfavorable usage variance. Working on low quality material may require more hours than the standard. It may be the reason for unfavorable quantity variance of labor. Working on low quality material may lead to the requirement of more skilled labor hours. That may increase the price of labor and create an unfavorable rate variance. In this situation all variances are linked between each other.

Material price variance is favorable because actual price for material is lower than standard price. Material usage variance is unfavorable because actual material usage is higher than the budgeted.

Labor price variance is unfavorable because actual price paid per labor hour is higher than the budgeted. Actual usage of direct labor hours also higher than the standard usage that’s why labor quantity variance is unfavorable.

ekkarill92 answered 2 years ago

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