Question

4. At a sales level of 30,000 the budget data for labor is as follows: 40000 hours at $15 an hour. The actual data was 40000 hours at $11.25 an hour.

1. Compute the Labor Rate Variance.
2. Compute the Labor Efficiency Variance.

5. What do you think could have caused the Direct Materials amount to be so high? List as many reasons as you can. For each reason listed, tell what the company can do to correct the situation. Use complete sentences and good grammar.

6. Ending Finished Goods Inventory was supposed to be $200,000. It was actually $50,000. What could have caused inventory to be so low? What could be done to correct the situation? List as many reasons as you can. Use complete sentences and good grammar.

Answer 1

a) Labor rate variance =AH[AR -SR]

                          = 40000 [11.25 - 15]

                          = 40000* - 3.75

                          = - 150000 F

Labor efficiency variance = SR [AH-SH]

                       = 15[40000- 40000]

                       = 15* 0

                      =0 NA

2)Reason for unfavorable direct material variance : Includes the following

a)Purchase of low quality material (Inferior material) -Purchase of inferior material require more consumption /usage of material in production .

b)Lack of supervision or inefficient workers :If workers are in-efficient in working or there is no proper supervision ,materials are not properly handled

c)Higher purchase cost of material (Inflationary prices)- In case of increased price ,material price variance tends to be unfavorable .

3)

The reason for lower finished goods inventory :Includes the following

a)Higher sales : If actual sales are higher than predicted ,it will make ending inventory to fall below prediction .

b)Carrying cost : Increase in carrying cost of inventory calls for maintaining lower inventory .