Question

Dawson Toys, Ltd., produces a toy called the Maze. The company has recently created a standard cost system to help control costs and has established the following standards for the Maze toy: During July, the company produced 3,000 Maze toys. The toy’s production data for the month are as follows: Direct materials: 25,000 microns were purchased at a cost of $1.48 per micron. 5,000 of these microns were still in inventory at the end of the month. Direct labor: 4,000 direct labor-hours were worked at a cost of $88,000.

Direct materials: 6 microns per toy at $1.50 per micron

Direct labor: 1.3 hours per toy at $21 per hour

Required:

Compute the following variances for July:

a. The materials price and quantity variances.

b. The labor rate and efficiency variances.

c. Prepare a brief explanation of the possible causes of each variance

Answer 1

• All working forms part of the answer
• Workings

Actual DATA for		3000	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	20000 [25000 – 5000]	$              1.480	$           29,600.00
Direct labor	4000	$              22.00	$           88,000.00

Standard DATA for		3000	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	( 6 microns x 3000 units)=18000 microns	$                   1.50	$       27,000.00
Direct labor	( 1.3 hours x 3000 units)=3900 hours	$                21.00	$       81,900.00

• Requirement ‘a’

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                        1.50	-	$                       1.48	)	x	20000
	400
	Variance		$                  400.00 [See Note below]			Favourable-F
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	18000	-	20000	)	x	$                           1.50
	-3000
	Variance		$              3,000.00			Unfavourable-U

Note: If Material Price Variance is to be computed at the time of Purchase, Material Price Variance would be $ 500 (not $ 400 F)

• Requirement ‘b’

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                     21.00	-	$                    22.00	)	x	4000
	-4000
	Variance		$              4,000.00			Unfavourable-U
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	3900	-	4000	)	x	$                        21.00
	-2100
	Variance		$             2,100.00			Unfavourable-U

• Requirement ‘c’

--Material Price Variance exist as F because Actual Price per micron is LESS than standard price

--Material Quantity Variance is U, because Actual quantity used is MORE than standard quantity allowed.

--Labor Rate Variance is U because Actual rates are higher than Standard rates.

--labor Efficiency Variance is also U because of MORE actual hours used than allowed as per standards.