Question

Reed Corp. has set the following standard direct materials and direct labor costs per unit for the product it manufactures.

Direct materials (15 lbs. @ $4 per lb.)			$60
Direct labor (3 hrs. @ $15 per hr.)			45

During June the company incurred the following actual costs to produce 8,500 units.

Direct materials (130,400 lbs. @ $3.70 per lb.)		$	482,480
Direct labor (29,700 hrs. @ $15.15 per hr.).			449,955

AQ = Actual Quantity
SQ = Standard Quantity
AP = Actual Price
SP = Standard Price

AH = Actual Hours
SH = Standard Hours
AR = Actual Rate
SR = Standard Rate

(1) Compute the direct materials price and quantity variances.
(2) Compute the direct labor rate variance and the direct labor efficiency variance. Indicate whether each variance is favorable or unfavorable.

Answer 1

Answers

• Requirement 1

Actual Cost								Standard Cost
AQ	x	AP		AQ	x	SP		SQ	x	SP
130,400	x	$                     3.70		130,400	x	$            4.00		127,500	x	$               4.00
	$          482,480.00				$      521,600.00				$      510,000.00
Price Variance - Material			$ 39,120.00	Quantity Variance - Material			$            11,600.00

Direct material Price Variance	$ 39,120.00	Favourable
Direct material Quantity Variance	$ (11,600.00)	Unfavourable
Total Direct material Variance	$     27,520.00	Favourable

• Requirement 2

Actual Cost								Standard Cost
AH	x	AR		AH	x	SR		SH	x	SR
29,700	x	$                15.15		29,700	x	$    15.00		25,500	x	$              15.00
	$   449,955.00				$     445,500.00				$    382,500.00
Rate Variance - Labor			$         4,455.00	Efficiency Variance - Labor			$       63,000.00

Labor Rate Variance	$         4,455.00	Unfavourable
Labor Efficiency Variance	$       63,000.00	Unfavourable
Total Labor Cost Efficiency	$       67,455.00	Unfavourable