Question

Royal Tables Ltd manufactures tables using high quality wood and skilled labor using mainly traditional manual techniques. The manufacturing department is a cost center within the business and operates a standard costing system based on marginal costs.

Standard cost Standard cost

Selling price 68

Materials (2kg at $5/kg) 10

Labor (3hrs at $12 per hour) 36

Marginal cost 46

Contribution 22

In November 2016 the budgeted sales were 19,000 tables and the actual information is as follows:

(i) 40,000 kg of wood was bought for $196,000 which produced 19,200 tables.

(ii) No inventory of raw materials is held.

(iii) The labor was paid for 62,000 hours and the total cost was $682,000.

(iv) The sales price was reduced to protect the sales. However, only 18,000

tables were sold at an average price of $65.

Required:

a) Calculate the following variances for November 2016:

(i) Materialpricevariance (ii) Materialusagevariance (iii) Labor rate variance

(iv) Labor efficiency variance (v) Sales price variance

(vi) Sales volume variance

b) Explain two possible causes of the labor variances you have calculated.

c) Explain three possible causes of material price variances you have calculated.

Answer 1

Answer

a)

i)Material Price Variance = (Budgeted price per unit - Actual price per unit)*Actual quantity of direct material used

= ($5-$4.9)*40000

= $4000 favorable

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

= (40000 kgs - (19200*2 kgs))*$5

= $8000 unfavorable

iii) Labor rate variance = (Actual rate - standard rate) * Actual hours

= ($11-$12)*62000 hours

= $62000 favorable

iv) Labor efficiency variance = (Standard labor hours - actual labor hours) * Standard hourly rate.

= (57600 - 62000) * $12

= $52800 unfavorable

v) Sales price variance = (actual price - budgeted price ) * Actual no of units sold

= ($65-$68)*18000

= $54000 Unfavorable

vi) Sales volume variance = (Actual units sold -budgeted unit sales ) * standard contribution

=(18000 - 19000)*$22

= $22000 unfavorable

b) Two possible causes of Labor variances

1. Labor rate per hour has been decreased hence labor rate variance resulted in favorable

2.Hour rate production has been decreased hence labor efficiency variance resulted in unfavorable.

c) Three possible causes of material price variances

1.Decrease in the material price

2. Better price negotiation by the procurement staff

3. Better implementation of procurement practices.