Question

Below is the information on the operation of Spice Sdn. Bhd. which manufactures a health product under the brand name SS:

Standard Cost Card                                       RM

            Direct material           0.8kg at RM12 per kg                                       9.60

            Direct labour              3 hours at RM6 per hour                  18.00

            Variable overhead     4 hours at RM2.90 per hour             11.60

                                                                                                             39.20

For the month of July 2020, the company has estimated to manufacture and sell 4,875 units of SS at a standard selling price of RM40 per unit. The actual results for that month were as follows:

A total of 5,200 units of SS was sold for RM197,600.

Direct materials of 4,100 kg were bought with the cost of RM51,250. However, only 3,600 kgs were consumed for production.

Direct labor hours of 9,000 hours were used totaling RM55,800.

Based on the above information, you are required to:

1. Provide the formula and calculate each of the following variances. Then, determine whether each of them is Favourable (F) or Unfavourable (U):
2. direct material price variance
3. direct material quantity variance
4. direct labour rate variance; and
5. direct labour efficiency variance
6. Based on your calculations in (a) above, explain your answers and provide ONE (1) reason each for your answers for (i) and (iii)
7. Discuss how the information from this variance analysis benefits Spice Sdn. Bhd.

Answer 1

1]	Direct material price variance = Actual quantity purchased*(Actual rate-Standard rate) = 4100*(12.50-12.00) =	$                2,050	U
	[Actual price = 51250/4100 = $12.50/kg]
	Material quantity variance = Standard price*(Actual quantity used-Standard quantity) = 12*(3600-5200*.8) =	$                6,720	F
	Labor rate variance = Actual hours*(Actual rate-Standard rate) = 9000*(6.2-6) =	$                1,800	U
	[Actual DLH rate = 55800/9000 = $6.20]
	Labor efficiency variance = Standard rate*(Actual hours-Standard hours) = 6*(9000-5200*3) =	$              39,600	F
2]	EXPLANATION AND REASONS:
	DM price variance is unfavorable indicating that the price paid was higher than the budgeted price.
	The reason should be better prices obtained
	through better purchase process or favorable
	prices.
	DM quantity variance is favorable, indicating savings in material used per unit..
	The reason could be better quality of material or
	higher efficiency of men/machine.
	DL rate variance is unfavorble. Casused by slightly higher wage rate.
	DL efficiency variance is significantly favorable.
	The reason could normally be attributable to the efficiency of labor. But, here, since it is very high, the reason may be wrong standard DLH.
3]	The variance analysis is a pointer only. The firm
	has to further investigate to find the true casue.
	It applies to both favorable and unfavorable
	variances.
	For example, the DL efficiency variance is
	signifcantly high. Though favorable it may be
	due to wrong setting of standard DLH per unit.
	Only through further investigation can be
	correct reason be identified.