Question

Pro Fender, which uses a standard cost system, manufactured 20,000 boat fenders during 2018, using 142,000 square feet of extruded vinyl purchased at $1.50 per square foot. Production required 440 direct labor hours that cost $12.00 per hour. The direct materials standard was seven square feet of vinyl per fender, at a standard cost of $1.55 per square foot. The labor standard was 0.027 direct labor hour per fender, at a standard cost of $11.00 per hour. Compute the cost and efficiency variances for direct materials and direct labor. Does the pattern of variances suggest Pro Fender's managers have been making trade-offs? Explain.

Answer 1

Answer)

	Standard	Actual
Quantity	Rate per unit (In $)	Total cost (in $)	Quantity	Rate per unit (In $)	Total cost (in $)
Materials (Sq. feet)	140000	1.55	217,000	142000	1.50	213,000
Labor (hours)	540	11.00	5,940	440	12.00	5,280

Calculation of Direct Material variance

Material cost variance = Standard Material cost for actual output – Actual material cost

                                          = (Standard Quantity for actual output X Standard rate) - (Actual Quantity X Actual rate)

                                                    = (140,000 Sq. feet X $ 1.55) – (142,000 Sq. feet X $ 1.50)

                                                    = $ 4,000 (favorable)

     

Direct Material price variance = (Standard price per Sq. feet- Actual price per sq. feet) X Actual quantity consumed

                                                    = ($ 1.55 - $ 1.50) X 142,000 Sq. feet

                                                    = $ 7,100 (Favorable)

Direct Material quantity variance = (Standard quantity of material allowed for actual output - Actual quantity of material consumed) X Standard cost per sq. feet

                                                                = (140,000 Sq. feet – 142,000 Sq. feet) X $ 1.55 per sq. feet

                                                               = $ =3,100 (Unfavorable)

Calculation of Labor variance

Labor cost variance = Standard labor cost for actual output – Actual material cost

                                     = (Standard labor hours for actual output X Standard rate per labor hour) - (Actual labor hours X Actual rate per labor hour)

                                             = (540 X $ 11) – (440 X $ 12)

                                              = $ 660 (favorable)

Direct Labor rate variance = (Standard Labor rate per hour- Actual labor rate per hour) X Actual labor hours consumed

                                                    = ($ 11.00 per labor hour - $ 12 per labor hour) X 440 labor hours

                                                            = $ 440 (Unfavorable)

Direct Labor efficiency variance = (Standard labor hours allowed for actual output - Actual labor hours consumed) X Standard Labor rate per hour

                                                                = (540 labor hours – 440 labor hours) X $ 11 per labor hour

                                                               = $ 1,100 (favorable)

Working Note:

Calculation of standard labor hours allowed for actual output:

Standard labor hours allowed for actual output = Standard labor hour allowed per unit of output X number of units produced

                                                                                          = 0.027 labor hours per unit X 20,000 units produced

                                                                                          = 540 labor hours

Calculation of standard quantity of material allowed for actual output:

Standard quantity of material allowed for actual output = Standard quantity of material allowed per unit of output X number of units produced

                                                                                          = 7 Sq. feet per unit X 20,000 units produced

                                                                                         = 140,000 sq. feet

Comments:

· Overall the performance of the company has been satisfactory as both material cost variance and labor cost variance has been favorable.

· The production manager has utilized the man power (labor hours) efficiently as the labor efficiency variance is Favorable. However, there has been excessive wastage of material evident from Unfavorable material quantity variance.

· The purchase manage has performed his duties efficiently as the actual cost per sq. feet of raq material is less than standard cost per sq. feet.

· The personnel manager has not hired the manpower in an efficient manner as Actual labor rate is higher than standard labor rate