Question

Parker Company developed the following standard cost for one of their products:

Materials (9 pounds × $4 per pound)	$36.00
Direct labor (2 hours × $16 per hour)	32.00

The following information is available regarding the company's operations for the period:

Units produced	12,000
Materials purchased	150,000 pounds @ $3.50 per pound
Materials used	120,000 pounds
Direct labor	20,000 hours @ $17.00 per hour

Required:

1. Calculate the price and efficiency variances for direct material  
2. Calculate the rate and efficiency variances for direct labor

Answer 1

Direct Material Price variance

= Actual quantity * (Actual price - Standard price)

Actual Quantity purchased = 150000 pounds

Actual price = 3.50 per pound

Standard price = 4 per pound

= 150000 * (3.50 - 4)

= (75000)

Since the Actual rate is less than standard rate it is favourable

Direct Material efficiency variance

= Actual units usage - Standard units usage *

( Standard rate)

Actual units usage = 120000 pounds

Standard usage for 1 unit = 9 pounds

Standard usage for 12000 units = 12000*9 = 108000 pounds

Standard rate = 4 per pound

Efficiency Variance = (120000 - 108000) *4

= 48000

Actual usage is higher than standard usage. Hence unfavourable

Direct labour Rate variance

=( Standard rate - Actual rate ) * Actual Hours worked

Standard rate = 16 per hour

Actual rate = 17 per hour

Actual Hours worked = 20000 Hours

Direct labour Rate Variance = (16-17)*20000

= (20000)

Since actual rate is higher than anticipated rate unfavourable

Direct labour efficiency Variance

= ( Actual hours - Standard hours) * Standard rate

Actual Hours = 20000

Standard Hours = 2 hours * 12000 unit = 24000

Standard cost = 16 per hour

Efficiency variance = (20000-24000)*16

=( 64000)

Actual hours worked is less than standard hours anticipated. Hence favourable