Question

3. Materials and Labor Variance Analysis (40 points) Madzinga's Draperies manufactures curtains. A certain window requires the following: Direct materials standard Direct manufacturing labor standard 5 square yards at $7 per yard 2 hours at $18 During the second quarter, the company purchased 67,000 yards of fabric for $7.50 a yard, made 12,000 curtains and used 56,000 square yards of fabric costing $364,000. Direct labor totaled 23,000 hours for $460,000. a. Compute the direct materials price and efficiency variances for the quarter. b. Compute the direct manufacturing labor price and efficiency variances for the quarter. c. Prepare the journal entries to record direct materials, direct labor and the variances using the standard cost system. Close the variance accounts to cost of goods sold. d. Give at least three good reasons why an unfavorable price variance for direct materials might be reported. e. Give at least three good reasons why a favorable efficiency variance for direct manufacturing labor might be reported.

Answer 1

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Cost per UOM Total Given Information in Question Standard Cost Information Direct Material Direct labour UOM 5 Square Yard 2 Hours 35 18 36 71 Actual Information Direct Material Direct labour UOM 56000 yard 23000 Hours cost per UOM 6.5 20 Total 364000 460000 Actual Quanity Actual Quanity 12000 12000 Direct Material Price Varince = (Standard Prices * Actual Quanity) - (Actual prices * Actual Standard Price Actual Qty Quantity) 28000 Favorable Actual Price Actual Qty 56000 6.50 56000 Material Variance Material Efficiency Ratio = (Standard Price )* (Standard Qty - Actual Quantity) Standard Price Standard Quantity Actual Quantity 60000 56000 12000*5 28000 Favorable

(Note - Standard Hours are calculated on Actual output) Standard Rate Standard Hours Actual Hours 18 24000 23000 18000 Favorable Labour Efficiency Variance = (Standard Rate) * (Standard Hours -* Actual hours) Labour Cost Variances Standard Rate Actual Rate 18 - 46000 Unfavorable Actual Hours 23000 20 Direct Labour Rate Variance = (Standard Rate - Actual Rate ) * Actual Hours

Credit Debit 392000 (56000*7) Accounts Direct Material Inventory A/c Dr To Direct Material Price Varaince To accounts Payable (Being Direct Material cost booked along with varaince) 28000 364000 (56000*6.5) Inventory Finished Goods A/c Dr Direct Material Efficiency Variance A/c Dr. To Direct Material Inventory (Being Direct Material efficeny variance booked) 364000 28000 392000 (18*23000) Direct Labour A/c Dr. Direct Labour Rate Variance A/c Dr. 414000 46000 To Cash A/C 460000 (Being Direct labour rate variance recorded) 432000 Inventory Finished Goods A/c Dr To Direct labour Alc To Direct Material Efficiency Variance A/C (Being Direct labour efficiancy variance recorded) 414000 18000

Reasons for reporting of unfavourable direct material price variance 1. Order size: Some suppliers allow discount on large orders. The materials purchased in large quantities may reduce the the unit price and a favorable price variance may occur 2.Rise in price: The rise in the general price level may increase the input costs of the vendor and as a result vendor may increase the price of the materials. The rise in price is very common reason of an unfavorable variance. 3.Urgent needs: If production department does not indicate the need of materials on time, the purchasing department may have to order on urgent basis that may increase the price of materials and other expenses associated with the order. Reasons for reporting of favourable direct manufacturing labour variance 1. Experienced Workers 2. Use of High Quality Materials 3.Efficient and high quality equipments