Question

Budget Variances, Materials and Labour

Mahn Corporation produces high-quality leather belts. The company uses a standard costing system and has set the following standards for materials and labour:

Leather (4 strips @ $4.00)	$16.00
Direct labour (0.25 hr. @ $14.00)	3.50
Total prime cost	$19.50

During the first month of the year, Mahn produced 43,000 belts. Actual leather purchased was 120,000 strips at $3.10 per strip. There were no beginning or ending inventories of leather. Actual direct labour was 35,000 hours at $11.00 per hour.

Answer 1

Actual data :

Units of belt = 43,000

No. Of strips = 1,20,000 @ $3.10 per strip

Labour hours = 35,000 hours @ $11 per hour

Standard data :

No. Of strips = 4 strips per unit * 43,000 units

No. Of strips = 1,72,000 @ $4 per strip

Labour hours = 1,20,000 strips * 0.25 hour

Labour hours = 30,000 hours @ $14 per hour

i) Material total cost vairance = Standard cost - Actual cost

Material total cost variance = (1,72,000 strips * $4) - (1,20,000 * $3.10)

Material total cost variance = $6,88,000 - $3,72,000

Material total cost variance = $3,16,000 (Favourable)

ii) Material price variance = (Standard price - Actual price) * Actual quantity

Material price variance = ($4 - $3.10) * 1,20,000

Material price variance = $1,08,000 (Favourable)

iii) Material usage variance = (Standard quantity - Actual quantity) * Standard price

Material usage variance = (1,72,000 - 1,20,000)*$4

Material usage variance = $2,08,000 (Favourable)

iv) Labour cost variance = Standard cost - Actual cost

Labour cost variance = (30,000 hours * $14) - (35,000 hours * 11)

Labour cost variance = $4,20,000 - $3,85,000

Labour cost variance = $35,000 (Favourable)

v) Labour rate variance = (Standard rate - Actual rate) * Actual hours

Labour rate variance = ($14 - $11) * 35,000 hours

Labour rate variance = $1,05,000 (Favourable)

vi) Labour efficiency variance = (Standard hours - Actual hours) * Standard rate

Labour efficiency variance = (30,000 - 35,000)*$14

Labour efficiency variance = $70,000 (Unfavourable)