Question

Furniture Trader Ltd makes cabinets and armchairs. Here are the details of its May production: (i) Cabinets Budgeted Actual Number of cabinets (units) 15,000 16,000 Kilos of material (total) 120,000 140,000 Price per kilo (£) 0.70 0.75 (ii) Armchairs - Budgeted: 600 armchairs at 4 direct labor hour per chair. Labor rate is £4.80 per hour; - Actual production: 700 armchairs for a total of 3,000 hours. Total actual labor cost is £13,500. Required: (a) Calculate direct materials price and quantity variance for cabinets. Indicate whether each variance is favorable or unfavorable. (b) Calculate direct labor rate and efficiency variance for armchairs. Indicate whether each variance is favorable or unfavorable.(c) Identify and explain the possible causes leading to labour efficiency variances.

Answer 1

(a) Cabinets

(1) Direct material price variance of cabinet

AQ= actual quantity

SR= Standard rate

AR = Actual rate

= AQ(SR-AR)

=140,000( £0.70- £0.75)

= £7,000 Unfavorable (As the actual rate is higher than budgeted the variance is unfavorable)

2) Material quantity variance

Standard quantity for actual output

=120,000/15,000 *16,000

=128,000

=SR(AQ-SQ)

=£0.70(140,000-128,000)

=£0.70*12,000

=£8,400 unfavorable (As the actual quantity is more than budgeted the variance is unfavorable)

(b) Arm chairs

(1) direct labor rate variance

AH= actual hours

SR= Standard rate

AR = Actual rate

SH = standard hours

= AH*SR - AH*AR

=(3,000*£4.80)-£13,500

=£900 favorable (As the actual rate is lower than budgeted the variance is favorable)

(2) labor effeciency variance

SR(AH-SH)

£4.8(3,000-700armchairs*4 direct labor hour per chair)

=£4.8 (3000-2,800)

=£4.8*200

=£960 unfavorable (As the hours used are more than budgeted for 700 chairs the variance is unfavorable)

(C) The reason for labor efficiency variance can be:

*Inexperienced /unskilled labors

*old equipment resulting in usage of more hours reducing effeciency

*low quality material resulting in high machine breakdowns

*No proper leadership or supervision to guide laborers in case of issues within the company.

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