Question

Softlux Inc. is a carpet manufacturer. For June 2020, the company had the following standards for one of its product lines: decorative mats.

Units produced 2,000

Direct materials per mat (in kilograms) 3

Cost per kilograms of direct materials $22.50

Standard direct manufacturing labour cost (per hour) $20.00

Standard manufacturing labour time (hours per mat) 2

The following data were compiled regarding actual performance:

Direct materials used (in kilograms) 6,400

Direct materials purchased (in kilograms) 6,500

Cost per kilogram of direct materials $24.00

Direct manufacturing labour hours 3,900

Total direct manufacturing labour cost $87,750

Required:

(A) Compute the materials price variance and the materials usage variance, and indicate whether the variance is favourable or unfavourable.

(B) Compute the labour rate variance and the labour efficiency variance, and indicate whether the variance is favourable or unfavourable.

(C) For each variance, provide a plausible explanation of why the variance occurred.

Answer 1

1. Material Price Variance = (standard price - actual price) * actual quantity(used)

= (22.50-24) * 6400= $9600 unfavourable

Material Usage Variance= ( Standard quantity - Actual quantity(consumed)) * Standard price

=(6000-6400) * 22.5= $9000 unfavourable

2. Labour Rate variance= (standard rate - actual rate)* actual hours (paid)

=(20-19.5") * 3900 = 1950 favaourable

" $20/4000 hours *3900 hours = $19.5

Labour efficiency variance= (Standard hours - actual hours(worked)) * Standard rate

= (4000-3900)*20= 200 favourable

3. Material cost variance is unfavourable because standard price set for the materials was $22.5 but materials were actually purchased for a higher price of $24. And also, standard quantity estimated to be purchased for materials 6000kgs but in actual it is purchased more, which lead to high expenses than budgeted.

On the other hand, Labour cost variance turns out to be favourable because standard rate set up for labour was $20 per hour but in actual it was given $19.5 which results in savings and also standard hours worked set up for labour was 4000 hours but it completed the work in 3900 hours which also results in savings and hence, it turns out favourable to the company.