Question

Pyre Mills, Inc. is a large producer of men’s and women’s clothing. The company uses a standard costing system. The standard costs and actual costs per unit for one of the company’s products are as follows:

• Direct material:
  • Standard: 4.0 metres at $5.40 per metre
  • Actual: 4.4 metres at $5.05 per metre

Direct Labour:

• Standard: 1.6 hours at $6.75 per hour
• Actual: 1.4 hours at $7.30 per hour

During this period, the company produced 4,800 units of the product.

At the beginning of the period, no inventory of materials was on hand. During the period, 21,120 metres of materials were purchased, all of which were used in production.

Required:

1. For direct materials, compute the price and quantity variances for the period.
2. For direct labour, compute the rate and efficiency variances for the period.
3. Provide a reasonable explanation for the direct labour efficiency variance.

Answer 1

A.

Material variances

                SQ = Standard Quantity = 4800 x 4.0= 19200

                SR = Standard Rate = $5.40

                AQ = Actual Quantity = 21,120

                AR = Actual Rate = $5.05

Material Price variance = AQ x ( SR – AR)

                                                = 21120 X ( $5.40 - $5.05)

                                                = 21120 X $ 0.35

                                                = $ 7392 (Favorable)

Material Quantity Variance = SR X ( SQ – AQ)

                                                = $5.40 x (21120 – 19200 )

                                                = $5.40 x 1920

                                                = $ 10,368 (Unfavorable)

B.

Labor Variances

                SH = Standard Hours = 4800 x 1.6 = 7680

                SR = Standard Rate = $6.75

                AH = Actual Hours = 4800 x 1.4 = 6720

                AR = Actual Rate = $7.30

Labor Rate Variance = AH x ( SR – AR)

                                                = 6720 x ($6.75 - $7.30)

                                                = 6720 x $0.55

                                                =$3696 (Unfavorable)

Labor efficiency Variance = SR x (SH – AH)

                                                = $6.75 x ( 7680 – 6720)

                                                = $6.75 x 960

                                                = $ 6480 (Favorable)

C.

Direct Labor Efficiency Variance is the measure of difference between the standard cost of actual number of direct labor hours utilized during a period and the standard hours of direct labor for the level of output achieved.

Since, the number of hours required to prepare a product has been decreased the efficency of the labor incerased provided favorable efficency variance.