Question

Copper Bottom Pot Company manufactures one product, The Big Pot. The company has the following standards per unit for the The Big Pot:

Standard quantity Standard price Standard cost

Direct materials 6.0 KGs $14 per KG $84

Direct labour 1.5 Hours $20 per hour $30

The following is recorded by the company for The Big Pot for January 2020:

• The company produced 600 units during the month

• A total of 4000 KGS of material were purchased at a cost of $52,000

• On Jan 1, 2020, there was no beginning inventory of materials on hand, 200 KGs of materials

  remained in the warehouse unused at the end of the month.

• The company employs 12 people to produce The Big Pot. In January, each worked an average of

  65 hours at an average of $21 per hour.

0. Required:

   1. For Direct Materials used in the production of The Big Pot:

      1. Calculate the DM price variance

      2. Calculate the DM quantity variance

      3. The materials were purchased from a new supplier who would like to enter into a long-term

         contract with the company, would you recommend the company enter into this contract? Explain based on your interpretation of the variances for materials.

1. For Direct Labour employed in the production of The Big Pot:

   1. Calculate the DL rate variance

   2. Calculate the DL efficiency variance

   3. In the past, the 12 people employed in the production of The Big Pot consisted of four

      experienced workers and eight inexperienced assistants. During January, the company experimented with shifting the labour mix to six experienced workers and six inexperienced assistants. Would you recommend the new labour mix continue? Explain based on your interpretation of the variances for labour.

Answer 1

• [1]

DM Price Variance

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity purchased
(	$                              14.00	-	$                    13.00	)	x	4000
	4000
	Variance		$              4,000.00			Favourable-F

OR

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity used
(	$                              14.00	-	$                    13.00	)	x	3800
	3800
	Variance		$              3,800.00			Favourable-F

DM Quantity Variance

Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	3600	-	3800	)	x	$                        14.00
	-2800
	Variance		$              2,800.00			Unfavourable-U

Part 2

YES, it is recommended because the prices offered by the seller are LESS than the standard price of material.

• [2]

Part A

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                              20.00	-	$                    21.00	)	x	780
	-780
	Variance		$                  780.00			Unfavourable-U

Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	900	-	780	)	x	$                        20.00
	2400
	Variance		$              2,400.00			Favourable-F

Part B

YES, it is recommended, because this has led to higher efficiencies among workers, as evident by Favourable Efficiency Variance, calculated above.