Question

Please equate an equivalent example for all four of the following: materials price variance, materials quantity (usage) variance, labor rate variance, and labor efficiency variance.

Answer 1

Example:

P&G company produces large size bags for the use of tourists. Company uses standard costing system to control costs. The standards for materials and labor costs to manufacture 1 bag are as follows:

• Direct materials: 7.2 lbs. @ $5 per lb.
• Direct labor: 0.4 hours @ $20 per hour

During the last month, P&G produced 2,500 large bags. 20,000 lbs. of direct materials were purchased @ $4.8 per lb. There was no direct materials inventory at the beginning and at the end of the month. 900 direct labor hours were recorded @ $24 per hour.

Required:

1. Compute direct materials price and quantity variance.
2. Compute direct labor rate and efficiency variance.

SOLUTIONS:

(1).Material Variances

Actual Quantity of material purchased at actual price (20,000 lbs x $4.8)	$ 96,000
Actual Quantity of material purchased at standard price (20,000 lbs x $5)	$ 100,000
Direct Material Price Variance	$ 4,000 F

Actual Quantity of materials used at standard price (20,000 lbs x $5)	$ 100,000
Standard quantity of materials allowed at standard price (*18,000 lbs x $5)	$ 90,000
Direct Material Quantity Variance	$ 10,000 U

*Standard quantity = 2500 bags × 7.2 lbs = 18,000 lbs

(2) Labor Variances:

Actual Direct labor hours worked at actual rate (900 Hours x $ 24)	$ 21,600
Actual Direct labor hours worked at standard rate (900 Hours x $ 20)	$ 18,000
Direct labor rate Variance	$ 3,600 U

Actual Direct labor hours worked at standard rate (900 Hours x $ 20)	$18,000
Standard Direct labor hours allowed at standard rate (*1,000 Hours x $ 20)	$20,000
Direct labor efficiency Variance	$2,000 F

*Standard direct labor hours allowed = 2,500 bags × 0.4 hours = 1,000 hours