Question

04) Direct materials and direct manufacturing labor variances. {25 Marks) Rugged Life, Inc., designs and manufactures fleece quarter-zip jackets. It sells its jackets to brand-name outdoor outfitters in lots of one dozen. Rugged Life's May 2017 static budget and actual results for direct inputs are as follows: Statie Budget Number of jacket lots (I lot - 1 300 dozen) Per Lot of Jackets: Direct materials 18 yards at 54.65 per yard = $83.70 Direct manufacturing labor 24 hours at $12.50 per hour $30,00 Actual Results Number of jacket lots sold 325 Total Direct Inputs: Direct materials 6,500 yards a $4.85 per yard $31.525 Direct manufacturing labor 715 hours at $12.60 - 59.009 Rugged Life has a policy of analyzing all input variances when they add up to more than 8% of the total cost of materials and labor in the flexible budget, and this is true in May 2017. The production manager discusses the sources of the variances: "A new type of material was purchased in May. This led to faster cutting and sewing, but the workers used more material than usual as they learned to work with it. For now, the standards are fine." Required: 1. Calculate the direct materials and direct manufacturing labor price and efficiency variances in May 2017 2. What is the total flexible-budget variance for both inputs (direct materials and direct manufacturing labor) combined? 3. What percentage is this variance of the total cost of direct materials and direct manufacturing labor in the flexible budget? 4). Comment on the May 2017 results. Would you continue the "experiment" of using the new material?

Answer 1

Summary of Answer
Material
Material price variance	$     1,300.00	Unfavorable
Material efficiency variance	$     3,022.50	Unfavorable
Labor
Labor price variance	$           71.50	Unfavorable
Labor efficiency variance	$         812.50	Favorable
Total flexible budget variance	$     3,581.50	Unfavorable
Total Material cost variance	$     4,322.50	Unfavorable
Divided by: flexible budget for material	$   27,202.50	(4.65*18*325)
Material variance percentage	15.89%	Unfavorable
Total Labor cost variance	$               741	Favorable
Divided by: flexible budget for labour	$           9,750	(12.50*2.4*325)
Labour variance percentage	7.60%	Favorable
Total flexible budget variance shows the unfavorable variuance. Hence, it suggests the company should not used the new material.

	Minus sign indicate Favorable variance.
	Measure	yard
	Standard price per yard	$            4.65
	Actual price per yard	$            4.85
18*325	Standard quantity in yards	5850
	Actual quantity purchased in yards	6500
	Actual quantity used in yards	6500
	Actual price per yard	4.85
Less	Standard price per yard	-4.65
	Difference	0.20
Multiply	Actual quantity purchased in yards	6500
	Material price variance	$    1,300.00
	Indicate	Unfavorable
	Actual quantity used in yards	6500
Less	Standard quantity in yards	-5850
	Difference	650
Multiply	Standard price per yard	4.65
	Material efficiency variance	$    3,022.50
	Indicate	Unfavorable
	Material cost variance (Total of both variance)	$    4,322.50
	Indicate	Unfavorable

	Minus sign indicate Favorable variance.
	Measure	Hour
	Standard rate per Hour	$            12.50
	Actual rate per Hour	$            12.60
2.4*325	Standard labor Hours	780
	Actual labor Hours	715
	Actual rate per Hour	12.60
Less	Standard rate per Hour	-12.50
	Difference	0.10
Multiply	Actual labor Hours	715
	Labor price variance	$            71.50
	Indicate	Unfavorable
	Actual labor Hours	715
Less	Standard labor Hours	-780
	Difference	-65
Multiply	Standard rate per Hour	12.50
	Labor efficiency variance	$       (812.50)
	Indicate	Favorable
	labor cost variance (Total of both variance)	$       (741.00)
	Indicate	Favorable