Question

Dawson Toys, Ltd., produces a toy called the Maze. The company has recently created a standard cost system to help control costs and has established the following standards for the Maze toy: During July, the company produced 3,000 Maze toys. The toy’s production data for the month are as follows: Direct materials: 25,000 microns were purchased at a cost of $1.48 per micron. 5,000 of these microns were still in inventory at the end of the month. Direct labor: 4,000 direct labor-hours were worked at a cost of $88,000.

Direct materials: 6 microns per toy at $1.50 per micron

Direct labor: 1.3 hours per toy at $21 per hour

Required:

Compute the following variances for July:

a. The materials price and quantity variances.

b. The labor rate and efficiency variances.

c. Prepare a brief explanation of the possible causes of each variance.

Answer 1

Material:
Std qty allowed (3000*6):   18000
Std price per unit: 1.50
Actual Qty purchhased: 25000
Actual qty used: (25000-5000): 20000
Actual price: 1.48
Material price variance: Actuall qty (Std price-Actual price)
		25000 ( 1.50-1.48) = 500 Fav
Material Qty variance = Std price (Std qty-Actual qty)
		1.50 (18000-20000) = 3000 Unfav
Std labouor hourrs: 3000*1.3 = 3900 hours
Std rate per hour: 21
Actual labour hours: 4000 hours
Actual rate per hour: (88000/4000)= 22
Labour rate variance = Actual hours(Std rate-Actual rate)
		4000 (21-22)= 4000 Unfav
Labour efficiency variance= Std rate (Std hours-Actual hours)
		21 (3900-4000)= 2100 Fav
Req c:
Material price variance: The reason might be purchaseof low quality or supplier discount available
Material Qty variance: Reason being low quality raw material purchased or inefficiency of workers using it.
Labour rate variancec= Reason being presence of labour union
Labour efficiency variance= Rreason being emplyment of more skilled workers utilizing the time more efficiently.