Question

Draper, Inc. is a privately held furniture manufacturer. For August 2017, Draper had the following standards for one of its products, a wicker chair: (Click the icon to view the standards per chair.) The following data were compiled regarding actual performance: actual output units (chairs) produced, 2.500; square yards of input purchased and used, 7.200; price per square yard, S5.70; direct manufacturing labor costs, 59,690; actual hours of input, 950; labor price per hour, $10.20. Read the requirements. Requirement 1. Show computations of price and efficiency variances for direct materials and direct manufacturing labor. Give a plausible explanation of why each variance occurred. Let's begin by determining the formula used to calculate the actual costs of direct materials, then enter the amounts in the formula and calculate the cost. Actual cost = = Direct materials x i Requirements i Data Table Direct materials Direct manufacturing labor Standards per Chair 3 square yards of input at $ 5.50 per square yard 0.5 hour of input at S 10.40 per hour 1. Show computations of price and efficiency variances for direct materials and direct manufacturing labor. Give a plausible explanation of why each variance occurred. 2. Suppose 9,700 square yards of materials were purchased (at $5.70 per square yard), even though only 7,200 square yards were used. Suppose further that variances are identified at their most timely control point; accordingly, direct materials price variances are isolated and traced at the time of purchase to the purchasing department rather than to the production department. Compute the price and efficiency variances under this approach. Print Done Print Done

Answer 1

1
	Control point:	Actual input	x	Actual price	=	Actual cost
	Direct materials	7,200	x	$5.70	=	$41,040
	Direct manufacturing labor	950	x	$10.20	=	$9,690
	Control point:	Actual input	x	Budgeted price	=	Cost
	Direct materials	7,200	x	$5.50	=	$39,600
	Direct manufacturing labor	950	x	$10.40	=	$9,880
		Budgeted input for actual output	x	Budgeted price	=	Flexible budget cost
	Direct materials	7,500	x	$5.50	=	$41,250
		(2,500 x 3)
	Direct manufacturing labor	1,250		$10.40		$13,000
		(2,500 x 0.5)
	Note
	Price variance = (Actual price – Budgeted price) * Actual units used
	Efficiency variance = (Actual quantity used – Budgeted quantity of input allowed for actual output) * Budgeted price of input