Question

Thompson Company uses a standard cost system for its single product The following data is available for the month of May 2017:

Standards per unit of product:

Direct materials 3 pounds at $8 per yard

Direct labor 1.5 hours at $14 per hour

Actual experience for the current year:

Purchases of raw materials (15,000 pounds ) $124,500

Raw materials used $12,000 pounds

Direct labor costs (6,720) $95,760

Units produced 4200

Required: Complete a table and state how well direct material and direct labor costs were controlled in the month of May.

Answer 1

• All working forms part of the answer
• How material and labor cost is controlled can be analysed using Material and Labor Cost Variances.
• Variances are the difference between Standard cost and Actual cost.
• If Actual cost is more than Standard cost, the Variance is Unfavorable.
• If Actual Cost is less than Standard cost, the variance is Favourable.
• Working for calculation of variances:

----Standard data and actual data for 4200 units

Actual DATA for		4200	units
	Quantity (AQ)	Rate (AR)	Actual Cost
	[A]	[B]	[A x B]
Direct Material	12000 pounds used	$              8.30 [$124,500/15000 pounds]	$           99,600.00
Direct labor	6720 hours	$              14.25 [$95,760 / 6720]	$           95,760.00
Standard DATA for		4200	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	12600 pounds [4200 units x 3 pounds]	$                8.00	$        100,800.00
Direct labor	6300 hours [4200 units x 1.5 hours]	$              14.00	$           88,200.00

• Answer - Calculation of Variances:

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                        8.00	-	$                       8.30	)	x	12000
	-3600
	Variance		$              3,600.00			Unfavourable-U
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	12600	-	12000	)	x	$                           8.00
	4800
	Variance		$              4,800.00			Favourable-F
Material Spending Variance
(	Standard Cost	-	Actual Cost	)
(	$           100,800.00	-	$            99,600.00	)
	1200
	Variance		$              1,200.00			Favourable-F
Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                     14.00	-	$                    14.25	)	x	6720
	-1680
	Variance		$              1,680.00			Unfavourable-U
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	6300	-	6720	)	x	$                        14.00
	-5880
	Variance		$              5,880.00			Unfavourable-U
Labor Spending Variance
(	Standard Cost	-	Actual Cost	)
(	$             88,200.00	-	$            95,760.00	)
	-7560
	Variance		$              7,560.00			Unfavourable-U