Question

Cole labortories makes and sells a lawn fertilizer called Fastgro. The company has developed standard costs for one bag of fastgro as follows:

   ?Standard Quality    Standard Cost per Bag

Direct Materials    40kg    $16.00 ,

Direct labour    0.2 direct labour hours $2.20   

The company had no beginning inventories of any kind on January 1. The results of the company's operation during January are as follows:

Production of Fastgro 4,000 bags

Direct materials purchased 170,000kg at a total cost of $64,600

Direct labour used 780 hours at a total cost of 9,750

Direct materials inventory, January 31    6,000kg

?Required:

?1. Calculate the direct material price and quantity variances?

?2. Calculate the direct labour rate and effeciency variances?

?3. Prepare the journal entry(ies) to record the direct labour rate and efficiency variances.

Answer 1

Solution

Part 1

Material Price Variance

Material Price Variance is the variance arises in the material cost due to difference in actual material purchase price from standard material price. Mathematically, it is calculated as below:

Material Price Variance = Actual Quantity (Standard Price – Actual Price)

Note --- Here actual quantity means actual quantity of material PURCHASED. If the question does not provide the information about material purchase, it is taken as equal to material consumed.

Direct Material Price Variance
Actual Price (AP) ($64,600 / 170,000)	$0.38	per kg
Standard Price (SP) ($16 / 40kg)	$0.40	per kg
Variance or Difference in Price	$0.02	per kg
x Actual Quantity PURCHASED	170000	kgs
Material Price Variance	$3,400	Favorable

Material Quantity/Efficiency/Usage Variance

Material Efficiency (Usage) Variance measures variance in material cost due to usage/consumption of materials. It is calculated as below:

Material Quantity Variance = Standard Price (Standard Quantity for Actual Production – Actual Quantity USED)

Note --- Here actual quantity means actual quantity of material CONSUMED/USED

Direct Material Quantity Variance
Standard Quantity Allowed for actual production:
Actual Production/Activity	4000	Bags
x Allowed Standard Quantity Per Unit	40	kgs
Total Standard Quantity Allowed for actual production (SQAP)	160000	Kgs
Actual Quantity USED (AQU) (Purchased 170,000 kgs - ending inventory 6000 Kgs)	164000	kgs
Variance or Difference in Quantity	4000	kgs
x Standard Price (SP)	$0.40	per kg
Material Quantity Variance	$1,600	Unfavorable

Part 2

Labor Rate Variance

Labor Price Variance – It arises due to difference in actual rate paid from standard rate. It is calculated as below:

Labor Price Variance = Actual Time (Standard Rate per hour – Actual Rate per hour)

Here, actual time means time for which wage has been paid.

Labor Rate Variance
Actual Hourly Rate (AHR) ($9750 / 780 hrs)	$12.50	Per Hour
Standard Hourly Rate (SHR) ($2.20 / 0.2)	$11.00	Per Hour
Variance or Difference in Rate	$1.50	Per Hour
x Actual Labor Hours worked	780	Hours
Labor Rate Variance	$1,170	Unfavorable

Labor Quantity Variance

Labor Efficiency Variance – It arises due to variation in the working hours from the set standard.

Labor Quantity / Efficiency Variance
Standard Hours Allowed for actual production:
Actual Production	4000	Bags
x Allowed Standard Hours Per Unit	0.2	hours
Total Standard Hours Allowed for actual production (SHAP)	800	hours
Actual Labor Hours Worked (AH)	780	hours
Variance or Difference in Hours	20	hours
x Standard Hourly Rate (SHR) ($2.20 / 0.2)	$11.00	per hour
Labor Efficiency Variance	$220	Favorable

Part 3 --- Journal Entry

General Journal	Debit	Credit
Work In Process (Std Hours Allowed 800*SR $11)	$8,800
Labor Rate Variance (780*$1.50 diff. in rate) (Unfavorable)	$1,170
Labor Efficiency Variance (Diff. in hours 20*$11)) (Favorable)		$220
Wages Payable		$9,750

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you