Question

Blue Co. makes a product with the following standard costs:

	Standard Quantity or Hours	Standard Price or Rate
Direct materials	7.4 grams	$8.00 per gram
Direct labor	0.3 hours	$16.00 per hour
Variable overhead	0.3 hours	$7.00 per hour

The company reported the following results concerning this product in July.

Actual output	2,200	units
Raw materials used in production	16,420	grams
Purchases of raw materials	17,900	grams
Actual direct labor-hours	720	hours
Actual cost of raw materials purchases	$141,410
Actual direct labor cost	$12,528
Actual variable overhead cost	$5,112

The company applies variable overhead on the basis of direct labor-hours. The direct materials purchases variance is computed when the materials are purchased.

A) Compute the materials quantity variance.
B) Compute the materials price variance.
C) Compute the labor efficiency variance.

D) Compute the labor rate variance.

Answer 1

Solution :

(A) Material Quantity Variance :

Material Quantity Variance = (AQ - SQ) * SR

= (16,420 - 16,280) * $ 8

= $ 1,120 Unfavorable

(B) Material Price Variance

Material Price Variance = (SR - AR) * Actual Quantity Purchased

= ($ 8 - $ 7.90) * 17,900

= $ 1,790 Favorable

(C) Labor Efficiency Variance

Labor Efficiency Variance = (SH - AH) * SR

= (660 - 720) * $ 16

= $ 960 Unfavorable

(D) Labor Rate Variance

Labor Rate Variance = (SR - AR) * AH

= ( $ 16 - $ 17.4) * 720

= $ 1,008 Unfavorable

Working :

Standard Quantity of Material Required = 2,200 * 7.4 = 16,280

Actual Rate of Material Purchased = $ 141,410 / 17,900 = $ 7.9

Standard Hours = 2,200 * 0.3 = 660 Labor Hours

Actual Rate per Direct Labor Hour = $ 12,528 / 720 = $ 17.4 per direct labor hour

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