Question

Candy Company produces a dark chocolate candy bar. Recently, the company adopted the following standards for one bar of the candy:

Direct Materials (5.5 oz. @ $0.22) $1.21

Direct Labor (0.15 hours @ $10.00) $1.50

Standard Prime Cost $2.71

During the first week of operation, the company experienced the following actual results:

Bars produced: 150,000.

Ounces of direct materials purchased: 823,600 ounces at $0.23 per ounce.

There are no beginning or ending inventories of direct materials.

Direct Labor: 23,200 hours at $9.80.

Required: a. Compute price and usage variances for direct materials

b. Compute the rate variance and efficiency variance for direct labor

c. Explain why each variance was favorable or unfavorable.

Answer 1

• All working forms part of the answer
• We need Actual Data and Standard data for calculating Variances
• Actual data

Actual DATA for		150000	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	823600 ounces	$              0.230	$        189,428.00
Direct labor	23200 hrs	$                9.80	$        227,360.00

• Standard data

Standard DATA for		150000	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	( 5.5oz x 150000 units)=825000 oz	$                   0.22	$     181,500.00
Direct labor	( 0.15hr x 150000 units)=22500 hr	$                10.00	$     225,000.00

• Requirement ‘a’

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                        0.22	-	$                       0.23	)	x	823600
	-8236
	Variance		$              8,236.00			Unfavourable-U

Material Usage Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	825000	-	823600	)	x	$                           0.22
	308
	Variance		$                  308.00			Favourable-F

• Requirement ‘b’

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                     10.00	-	$                       9.80	)	x	23200
	4640
	Variance		$              4,640.00			Favourable-F

Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	22500	-	23200	)	x	$                        10.00
	-7000
	Variance		$              7,000.00			Unfavourable-U

• Requirement ‘c’

--Variances are Favourable if actual cost is LESS than Standard cost.

--Variances are Unfavourable if actual cost is MORE than Standard cost.

--Material Price variance is Unfavourable because Actual Rate per ounce is MORE than standard rate per ounce.

--material usage variance is Favourable because actual quantity used is LESS than standard quantity.

--Labor rate variance is Favourable because actual labor rate is LES than standard rate per hours.

--Labor Efficiency variance is Unfavourable because Actual hours incurred are MORE than Standard hours.