Question

Oakwood Inc. manufactures end tables, armchairs, and other wood furniture products from high-quality materials. The company uses a standard costing system and isolates variances as soon as possible. The purchasing manager is responsible for controlling direct material price variances, and production managers are responsible for controlling usage variances. During November, the following results were reported for the production of American Oak armchairs:
	Unit produced	1540	armchairs
	Direct materials purchased	19000	board feet
	Direct materials issued into production	17350	board feet
	Standard cost per unit (22 board feet * 6.9)	151.8	per unit produced
	Purchase price variance	2870	unfavorable

Required:

1. Calculate the actual price paid per board foot purchased. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
2. Calculate the standard quantity of materials allowed (in board feet) for the number of units produced.
3. Calculate the direct materials usage variance. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)
4. The purchasing manager may have purchased higher-than-standard quality raw material inputs is the most likely explanation for the price and usage variances.

Answer 1

Purchases price variance= (Actual price- Standard price) * Actual quantity purchased= 2870 Unfavorable

(Actual price- $6.9) * 19000= 2870 (Actual quantity purchased= 19000 feet)

Actual price per board of foot purchased = (2870/19000) + 6.9= 7.051

Standard quantity of material allowed for the number of units produced

= Units produced* Standard quantity per unit

= 1540 armchairs* 22 board feet per unit= 33880 board feet

Actual quantity of direct materials used= 17350 board feet

Standard rate of direct material= $6.9 per board feet

Direct materials usage variance= (Actual quantity used – Standard quantity allowed for actual production) * Standard rate

= (17350- 33880) * 6.9= $114057 F

(Material usage variance is favorable because actual quantity used is lower than the standard quantity allowed.)

The purchase manager may have purchased higher than standard quality raw material. It may increase the price of raw material compared to the standard price and it will lead to unfavorable purchase price variance. And usage variance is favorable, that is actual usage is lower than the standard. The decrease in usage of raw material may be due to high quality material has been used.