Question

The Kohler Chemical Manufacturing Company produces two primary chemical products to be used as base ingredients for a variety of products. The 2016 budget for the two products (in thousands) was as follows: LX-4 ABC-8 Total Level of production in litres 1,800 1,800 3,600 Direct materials $4,500 $5,625 $10,125 Direct labour 2,700 2,700 5,400 Total direct manufacturing cost $7,200 $8,325 $15,525 The following planning assumptions were used for the budget: (1) a direct materials yield of 96%, and (2) a direct labour rate of $6 per hour. The actual results for 2016 were as follows (in thousands): LX-4 ABC-8 Total Total litres produced 1,710 1,974 3,684 Direct materials $4,104.00 $6,415.50 $10,519.50 Direct labour 2,808.00 3,276.00 6,084.00 Total direct manufacturing cost $6,912.00 $9,691.50 $16,603.50 The actual production yield was 95% for LX-4 and 94% for ABC-8. The direct labour cost per hour for both products was $6.50.

Calculate for product LX-4: (1) the direct materials price variance, and (2) the direct materials efficiency (yield) variance. (Round answers to the nearest whole dollar, e.g. 5,275.) (1) The direct materials price variance $ Unfavourable/ Not Applicable/ Favourable (2) The direct materials efficiency (yield) variance $ Favourable/ Not Applicable/ Unfavourable

Calculate for product ABC-8: (1) the direct labour rate variance, and (2) the direct labour efficiency variance. (Round answers to the nearest whole dollar, e.g. 5,275.) (1) The direct labour rate variance $ Unfavourable/ Not Applicable/ Favourable (2) The direct labour efficiency variance $ Unfavourable/ Not Applicable/ Favourable

Answer 1

ANSWER

a

LX-4

1 Direct material price variance

Direct material price variance

= (Standard price - Actual price) x Actual quantity used

= (Standard price x Actual quantity used) – (Actual price x Actual quantity used)

= ($2.40 per litre x 1,710 litres / 95%) - $4,104

= $4,320 - $4.104

= $216 Favorable

Workings:

Standard price of raw material

= Standard material cost / Material required to produce standard quantity

= $4,500 / (1,800 litres / 96%)

= $2.40 per litre of raw material

Actual quantity used

= Actual production / Production yield

= 1,710 litres / 95%

= 1,800 litres

2 Direct material efficiency variances

Direct material efficiency variance

= (Standard quantity for actual output – Actual quantity) x Standard price

= (1,781.25 litres – 1,800) x $2.4 per litre

= $45 Unfavorable

Workings:

Standard quantity for actual output

= Actual output / Budgeted production yield

= 1,710 litres / 96%

= 1,781.25 litres

ABC-8

1 Direct labor rate variance

Direct labor rate variance

= (Standard rate – Actual rate) x Actual hours worked

= (Standard rate x Actual hours worked) – (Actual rate x Actual hours worked)

= ($6 per hour x 504 hours) – $3,276

= $252 Unfavorable

Workings:

Actual hours worked

= Actual labor cost / Direct labor cost per hour

= $3,276 / $6.5 per hour

= 504 hours

2 Direct labor efficiency variances

Direct labor efficiency variance

= (Standard hours for actual output – Actual hours) x Standard rate

= (493.50 hours – 504 hours) x 6 per hour

= $63 Unfavorable

Workings:

Standard hours for actual output

= ($2,700 / $6 per hour) / 1,800 litres x 1.974 litres

= 493.50 hours   

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