Question

1.

Show computations of price and efficiency variances for direct materials and direct manufacturing labor. Give a plausible explanation of why each variance occurred.

2.

Suppose 7,200 square yards of materials were purchased​ (at $5.10 per square​yard), even though only 4,900 square yards were used. Suppose further that variances are identified at their most timely control​ point; accordingly, direct materials price variances are isolated and traced at the time of purchase to the purchasing department rather than to the production department. Compute the price and efficiency variances under this approach.

Damico, Inc. is a privately held furniture manufacturer. For August, 2017, Damico had the following standards for one of its​ products, a wicker​chair:

Standards per Chair

Direct materials

2 square yards of input at

$5.00

per square yard

Direct manufacturing labor

0.5 hour of input at

$10.20

per hour

The following data were compiled regarding actual performance​: actual output units​ (chairs) produced, 2,600​;square yards of input purchased and​ used, 4,900​; price per square​ yard, $5.10​; direct manufacturing labor​ costs, $9,464​;actual hours of​ input, 910​; labor price per​ hour, $10.40.

Answer 1

Solution 1:

Standard Qty of material (SQ) = 2600*2 = 5200 square yard

Standard Price of material (SP) = $5

Actual quantity of material (AQ) = 4900

Actual Price of material (AR) = $5.10

Material Price Variance = (SP - AP)* AQ = ($5 - $5.10)*4900 = $490 U

Unfavorable Material price variance occured due to increase in material prices, inefficiency of purchase department in negotiation etc.

Material Quantity Variance = (SQ - AQ) * SP = (5200 - 4900)*5 = $1,500 F

Favorable material quantity variance occured due to efficiency of production department as material was used in production effectively.

Standard hours of Labor (SH) = 2600*0.5 = 1300 hours

Standard rate of labor (SR) = $10.20 per hour

Actual hours of labor (AH) = 910 hours

Actual rate of labor (AR) = $10.40

Labor Rate Variance = (SR - AR)* AH = ($10.20- $10.40)*910 = $182 U

Unfavorable labor rate variance occured due to increase in labor rate, inefficiency of purchase department in negotiation with labors etc

Labor efficiency Variance = (SH - AH) * SR = (1300 - 910)*$10.20 = $3,978 F

Favorable labor efficiency variance occured due to efficiency of production department as labor hours were used in production effectively.

Solution 2:

If material price variance is identified at the time of purchase only, therefore material price variannce for purchase of 7200 square yard of material

= (SP - AP)* AQ = ($5 - $5.10)*7200 = $720 U

Material Quantity variance will remain the same i.e. = $1,500 F