Question

Earlene’s Eyewear manufactures eyeglass frames.  The company uses a standard cost system.  Earlene has set the following standards for frame model 19841.

Direct Material                        4.5 oz. plastic per frame at $3.65 per oz.                 $16.425 per frame

Direct Labor                            .8 hours at $28 per hour                                             $22.40 per frame

In April, Earlene’s made 2,500 frames with a material cost of $48,000.  Earlene’s Eyewear purchased 12,000 oz. of plastic but only used 10,000 oz. of plastic for frame 19841.  

What is the Material Price Variance?

Which of the following could explain the material price variance calculated above?

a.   Earlene’s Eyewear paid less per oz because the material was purchased in bulk to receive a discount.

b.   Earlene’s Eyewear earned less per frame because more materials were purchased than used.

c.    Earlene’s Eyewear earned more per frame because there were no machine breakdowns and fewer labor hours were required than planned.

d.   Earlene’s Eyewear paid more per oz because the company decided to go with a higher quality material.       

Answer 1

1. Computation of Material Price Variance:

Note: It is given that Earlene’s made 2,500 frames with a material cost of $48,000 and the company has used 10,000 oz of material and hence Actual price per oz = $48,000 / 10,000 = $4.80 per oz of plastic frame.

2. Option d.Earlene’s Eyewear paid more per oz because the company decided to go with a higher quality material can be the only correct answer.

Option a is incorrect as the company has paid $4.80 per oz which is more than standard cost i.e. $3.65 per oz and hence the statement that company paid less per oz is incorrect.

Option b is incorrect as it is given that Earlene’s Eyewear earned less per frame because more materials were purchased than used whereas when we calculate earnings actual quantity used is taken rather than quantity purchased.

Option c is incorrect as the company has earned less as the material price variance was unfavorable which means company has underperformed but it is given that Earlene’s Eyewear earned more per frame which is incorrect.

Option d is correct as the company has paid more than the standard as the variance is unfavorable and the reason can be the company decided to go with a higher quality material which has lead to higher cost.