Question

Your company makes plastic bottles and has the following standards for materials: 430 million bottles produced and $5.71 cost per 1,000 ozs of plastic. The company budgeted for $196510 in plastic cost for the year. At the end of the year, you realize the firm produced 497 million bottles and used 40 million ozs of plastic. Plastic cost the firm $225740. Ua = ? oz / unit. (Answer to 3 significant digits.)

Find Pa, Ub, Plastic price variance and Plastic efficiency variance. Show steps please.

Answer 1

Standard quantity x Standard price (1)	Actual quantity x Actual price (2)	Actual quantity x Standard price (3)
227,030	225,740	228,400
(39,760,000 x 0.00571)	(40,000,000 x 0.00564)	(40,000,000 x 0.00571)

Plastic price variance = 3-2 => 228,400 - 225,600 => 2,660 Favorable

Plastic efficiency variance = 1-3 => 227,030 - 228,400 => 1,370 Unfavorable

Notes -

1.Standard quantity for actual output = 497 million bottles (Actual production) x 0.08 per bottle (computed below) => 39,760,000 ozs of plastic

Standard quantity for budgeted output = Total Price paid / Price per oz of material

= 196,510 / 0.00571 => 34,415,061 ozs of material

Standard quantity for one bottle = 0.08 oz of plastic per bottle (34,415,061 / 430 million)

2.Standard price per oz = $ 0.00571 ($ 5.70 / 1,000 oz)

3.Actual price per unit = 225,740 / 40 million => 0.00564

4.Actual quantity of plastic used = 40 million ozs (given)

The difference between budgeted cost and the actual cost should not be shown as variances , since the budgeted units to be produced are different from the actual units produced. Hence the budgeted data has to be used to convert the actual data into the budgeted standards and then compared with the actual costs to give meaningful results (This is the reason why the standard quantity for actual output is being found).