Question

Carson Construction Consultants performs cement core tests in its Greenville laboratory. The following standard costs for the tests have been developed by the company’s controller, Landon Carson, based on performing 2,100 core tests per month. Standard Price Standard Quantity Standard Cost Direct materials $0.50 per pound 4 pounds $2.00 Direct labor $10 per DLH .5 DLH 5.00 Variable overhead $9 per DLH .5 DLH 4.50 Fixed overhead $16 per DLH .5 DLH 8.00 Total standard cost per test $19.50 At the end of March, London reported the following operational results: ● The company actually performed 2,250 core tests during the month. ● 8,500 pounds of direct materials were purchased during the month at a total cost of $5,600. ● 6,300 pounds of direct materials were used to conduct the core tests. ● 850 direct labor hours were worked at a total cost of $9,775. ● Actual variable overhead was $7,800. ● Actual fixed overhead was $15,750.

Prepare a memo to Landon Carson providing possible explanations for the direct materials and direct labor variances.

Answer 1

Solution

a) Material Price Variance

(Standard Price - Actual Price)*Actual Quantity

($0.5 - $5600/8500)*6300

($0.5 - $0.66)*6300

($1008) unfavourable

b) Material usage variance

(Standard Quantity - Actual Quantity)*Standard Price

(2250*4 - 6300)*$0.5

(9000 - 6300)*$0.5

$5400 Favourable

c) Labour rate variance

(Standard rate - Actual rate)*Actual hours

Standard rate*actual hours - Actual rate*Actual hours

$10*850 - $9775

$8500 - $9775 = ($1275) Unfavourable

d) Labour efficiency variance

(Standard hours - Actual hours)*standard rate

(0.5*2250 - 850)*$10

(1125 - 850)*$10

$2750 Favourable

e) Memo providing possible explanations

1) Material price variance is unfavourable because material actually purchased at higher rate than material standard price hence variance is unfabourable

2) Material usage variance is favourable because material actual usage for production is less than what standard usage quantity was set hence variance is favourable

3) Labour rate variance is unfavourable because labour were paid at higher rate then the set standard

4) Labour efficiency variance is fabourable because production actually completed in less hours than set standard.