Question

ABC Dress Shop produces high quality formal dresses. In July 2018 they produced 16,000 dresses. For the month of July the following standard and actual cost data are available. The normal monthly capacity of the company is 40,000 direct labor hours. All material purchased in July was used in July production.

	Standard per Dress	Actual
Direct materials	5.0 yards @ $8.50 per yard	$643,250 for 83,000 yards
Direct labor	2.0 hours @ $12.00 per hour	$425,000 for 34,000 hours
Overhead	hours @ $5.15 per hour (fixed $3.25; variable $1.90)	$125,000 fixed overhead $49,000 variable overhead

Overhead is applied on the basis of direct labor hours. At normal capacity, budgeted fixed overhead costs are $130,000 per month and budgeted variable overhead costs are $76,000 per month.

Variance	Standard	Actual	Variance	% Variance	>5%
Direct Materials Price	136000	124000	12000	8.82%	Yes	Investiage
Direct Materials Quantity	680000	705500	25500	3.75%	No
Direct Labor Rate	408000	425000	17000	4.17%	No
Direct Labor Efficiency	384000	408000	24000	6.25%	Yes	Investiage
Variable Overhead Spending	64600	49000	15600	24.15%	Yes	Investiage
Variable Overhead Efficiency	64600	63080	1520	2.35%	No
Fixed Overhead Spending	130000	125000	5000	3.85%	No
Fixed Overhead Production Volume	130000	110500	19500	15.00%	Yes	Investiage

QUESTION: Provide a discussion of the tradeoffs that might exist between the direct material and direct labor variances.

Answer 1

The direct material price variance is a measure of how well the price of materials is controlled and the direct material quantity variance is a measure of how efficiently the materials are utilized. The direct material price varianc is favorable indicating that materials were purchased at lower cost. However, the direct material quantity variance is unfavorable indicating that more material was used. Thus, the high quantity of material might be a result of low quality of materials due to lower price.

The direct labor rate variance is a measure of how well the cost of labor is controlled and the direct labor efficiency variance is a measure of how efficiently the workforce utilized. The direct labor rate variance is unfavorable indicating more skilled workers were hired. Even the direct labor efficiency variance is unfavorable indicating that the even the skilled workers did not perform up to the mark.