Question

On December 1, 2016, the company began manufacturing a new widget splitter known as the Widgetron. The company uses a standard costing system to account for manufacturing costs. The standard cost for one Widgetron is as follows:

Direct Materials	3lbs at $5 per lb	$15.00
Direct Labor	1/2 hour at $20 per hour	$10.00
Manufacturing Overhead	75% of Direct Labor Cost	$7.50
		$32.50

The following data is available from the company's general ledger records for the month of December:

	Debit	Credit
Revenues		$125,000
Accounts Payable (for December purchases of direct materials)		$68,250
Direct Materials Price Variance	$3,250
Direct Materials Usage Variance	$2,500
Direct Labor Rate Variance	$1,900
Direct Labor Efficiency Variance		$2,000

Actual production during the month was 4,000 units and actual sales were 2,500 units. The amount shown for direct materials price variance applies to materials purchased in December. There was no beginning inventory of materials on December 1, 2016.

Compute each of the following for the month of December:

1) Standard direct labor hours allowed for actual output produced

2) Actual direct labor hours worked

3) Actual direct labor wage rate

4) Standard quantity of direct materials allowed (in pounds)

5) Actual quantity of direct materials used (in pounds)

6) Actual quantity of direct materials purchased (in pounds)

7) Actual direct materials price per pound.

Answer 1

1) Standard direct labour hours for actual units produced = Actual units x Standard direct labour hour per unit = 4000 x 1/2 = 2000 hours

Actual units = 4,000 units

Standard direct labour hour per unit = 1/2 hour

2) Actual direct labour hours worked (AH)

Labour efficiency variance = (Actual hours - Standard hours) x Standard rate

Since this variance is favourable, it means that the actual hours would have been lesser than the standard labour hours

Therefore, (Standard hours - Actual hours) x Standard rate = 2,000

(2,000 - AH) x 20 = 2,000

2,000 - AH = 100

AH = 1,900 hours

3) Actual direct labour wage rate

Labour rate variance = (Standard rate - Actual rate) x Actual hours

Labour rate variance is unfavourable; therefore, Actual rate is greater than standard rate

1,900 = (AR - 20) x 1,900

AR - 20 = 1

Actual labour wage rate = 21 per hour

4) Standard quantity of direct materials allowed = Actual units x Standard quantity per unit = 4,000 x 3 = 12,000 pounds

5) Actual quantity of direct materials used

Direct materials usage variance = (Actual usage - Standard usage) x Standard cost per unit

Since it is unfavourable, the actual usage is greater than the standard usage

(Actual usage - 12000) x 5 = 2,500

Actual usage - 12,000 = 500

Actual usage = 12,500 pounds

6) Direct material rate variance = (Standard price - Actual price) x Actual quantity purchased

(Standard price x Actual quantity purchased) - (Actual price x Actual quantity purchased)

Since the variance is unfavourable , actual cost > standard cost

68,250 - (5 x AQ) = 3,250

5 x AQ = 65,000

Actual quantity purchased = 13,000 pounds

7) Actual direct materials price per pound = Total cost/Pounds purchased = 68,250/13,000 = 5.25 per pound