Question

Triple Star Company's standard and actual costs per unit are provided below for the most recent period. During this period, 500 units were actually produced. Product Standard Cost Product Actual Cost $8.00 Metres 4 4.1 Hours 3 3.2 $7.79 Unit Price Per Metre $2.00 $1.90 Hourly Rate $7.00 $6.50 $21.00 Materials Standard Actual Direct labour Standard Actual Variable overhead Standard Actual Total unit cost I 3 $20.80 Hours Hourly Rate 2 2.2 $6.00 $3.00 $3.10 $6.82 $35.41 $35.00 Required: Given the information above, compute the following variances. Also indicate if the variances are favorable or unfavorable. 1. Materials price variance 2. Materials quantity variance 3. Direct labour rate variance 4. Direct labour efficiency variance 5. Variable overhead rate variance 6. Variable overhead efficiency variance 7. Please give some managerial suggestions based on your calculation.

Answer 1

1.

Price Variance =

(Standard Price - Actual Price)*Actual Qty

= ($2-$1.9)*4.1

= $.41 F

2.

Quantity Variance =

(Standard Qty - Actual Qty)*Standard Price

= (4-4.1)*$2

= -$.2 U

3.

Direct Labour Rate Variance

= (Standard Rate - Actual Rate)*Actual Hrs

= ($7-$6.5)*3.2

= $1.6 F

4.

Direcr Labour Efficiency Variance

= (Standard Hr - Actual Hr)*Standard Rate

= (3 - 3.2)*$7

= -$1.4 U

5.

Overhead Rate Variance

= (Standard Rate - Actual Rate) * Actual Hr

= ($3 - $3.1)*2.2

= -$0.22 U

6.

Variable Overhead Efficiency Variance

= (Standard Hr - Actual Hr) * Standard Rate

= (2 - 2.2)*$3

= -$0.6 U

7.

  Here the standard price for Materials is $2. But the purchase manager bought it of $1.9, which is good in point of price i.e he save company's money but while we closely look into that he see that the Material purchased was of less quality which leads to the unfavorable material usage variance. If the materials are not good then the workers has to work more to fix it to the product so the company will also face a unfavorable results in labour efficiency variance. Not only because of materials here the production manager used unskilled labour (labour rate is less than standard) it also lead to the inefficiency. Direct labour efficiency and Variable Overhead efficiency are always interrelated, if one is unfavorable then the other too unfavorable. Management should ensure that the line managers are working as per the standard requirements.