Question

Kennedy Inc. has the following data for its operation in August:

Increase in direct materials inventory		100	Sets
Direct materials purchased (AQ)		1,600	Sets
Finished goods manufactured		700	units
Direct materials purchase-price variance	$	560	Favorable
Budgeted
Finished goods to manufacture		800	Units
Direct materials purchases		2,000	Sets
Direct materials per unit of finished goods		2	Sets
Direct materials price per set (SP)	$	4.60

What was the direct materials usage variance in August, rounded to the nearest dollar?

Multiple Choice

• $230 unfavorable.

• $460 unfavorable.

• $690 favorable.

• $690 unfavorable.

• $920 unfavorable.

Answer 1

Answer : $460 unfavorable.

Direct material usage variance = standard price *(standard quantity - actual quantity)

Where,

Standard quantity = standard materials per unit of finished * actual manufactured finished goods

= 2 sets * 700 units

= 1400 sets.

Standard price = $4.6 per set

To calculate the actual quantity used in production, increase in materials inventory is considered.

Increase in direct materials inventory means that the ending inventory of Aug month is more by 100 sets compared to opening inventory of the same Monty.

So, direct materials used in production = opening inventory + direct materials purchased - closing inventory

For calculations purpose, it is assumed that opening inventory is 200 sets, so the closing inventory would be 300 sets (200+100).

Direct materials used in production = 200 + 1600 - 300

= 1500 sets

Therefore,

Material usage variance = $4.6*(1400 - 1500)

= $4.6*(-100)

= -$460

= $460 unfavorable