Question

The following actual data was given for the firm.

8,000 pounds of material were purchased costing $ 40,000

Four hundred units were produced requiring 900 labor hours costing $5,400 and 1, 000 pounds of material . The standard for labor is 2 hours per unit with a wage rate of $5 per hour and for materials 2 pounds per unit at a price of $6 per unit.

A) 10% - Calculate all labor variances

B) 10%-- Calculate all material variances

C) 4% - Write an analysis of how you would explain the variances to management

Answer 1

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SOLUTION :

Before we start solving the question, we need to first organise the data provided in question. This means we have to sort out all the information as to which is for standard and which is actual data. I personally find that making a table helps me organise the data better. I have enclosed the table as follows:

Now since we have all the data to solve the question, we can easily use the formaula to calculate variances. In order to cross check the variance after calculating the variance do check that the total labour variance = Standard - Actual as per table. This means that total labour variance should be $4000 - $5400 = -$1400 (A). After we have applied the formulas, we can check it this way.

Solution after applying formulas has been enclosed as below.

ANALYSIS :

Variances can usually occur either due to changes in Pricing or changes in Efficiency/Usage. In case of labour there is an adverse variance of $1400, out of which 900 is due to labour rate and 500 due to labour inefficiency. Inefficiency means labour which is hired is not giving quality production. This problem can be traced back to the personnel manager who is either hiring substandard staff to do work or is unable to co-ordinate work properly. Similarly rate variance can be traced back to personnel manager. Sometimes rate difference is due to changes in market or government laws which are beyond control of company.

Similarly we can categorise material variances which may be due to usage or price variance. In the given sum there is positive price variance of $1000 which means that either the prices have fallen or purchase manager has been able to secure the required materials at a cheaper price. Material usage variance of $1200 adverse indicates that the production manager is unable to get production done properly which is resulting in more quantity of raw material being used that standard. This may also be due to the fact that production manager has acquired cheaper material which has in turn lead to substandard quality of raw material. As a result more than standard raw material is being required.