Question

Question 4 20 marks Forest Company has provided the following data concerning one of the products in its standard cost system. Variable manufacturing overhead is applied to products on the basis of direct labour- hours. Inputs Direct materials Direct labour Variable manufacturing overhead Standard Quantity or Hours per Unit of Output 8.0 grams 0.60 hours 0.60 hours Standard Price or Rate $ 6.10 per gram $ 19.80 per hour $ 4.40 per hour The company has reported the following actual results for the product for April: Actual output Raw materials purchased Actual cost of raw materials purchased Raw materials used in production Actual direct labour-hours Actual direct labour cost Actual variable overhead cost 5,600 units 48,200 grams $279,560 44,810 grams 3,150 hours $ 64,890 $ 12,915 Required (show your calculations): a. Compute the materials price variance for April. Mention one potential reason for the variance result. (3 marks) b. Compute the materials quantity variance for April. Mention one potential reason for the variance result. (3 marks) c. Compute the labour rate variance for April. Mention one potential reason for the variance result. (3 marks)

Answer 1

(A) Material Price Variance = ( Actual Price - Standard Price) * Actual Material purchased

=( [$279560/48200 gram] - $6.10)* 48200

= ($5.8 - $ 6.1) *48200

= $ 14460 (Favourable)

Reason = We purchased the material at $5.8 however the standard rate of material is $ 6.1 reason of this can be that might we get discount on Bulk purchase of such material or there can be a special offer/ incentive on purchase of such material.

(B) Material Quantity Variance = ( Actual usage - Standard Usage) * Standard Rate

= ( 48200 - [5600 * 8 gram/ unit]) * $6.1

= ( 48200- 44800) * $6.1

= (3400) * $6.1

= $ 20740 (Adverse)

Reason = As we are consuming more material for per unit than standard material required for production of per unit which means either we are doing more waste for producing goods or we are not properly utilizing our material.

(c)  Labour Rate Variance = ( Actual rate - Standard rate ) * Actual Hour

= ( [ 64890/3150 Hrs] - $ 19.80) * 3150

= ( $20.60 - $19.80 ) * 3150

= $ 2520 (Adverse)

Reason = We are paying high rate per hour than standard rate per hour of this one of the reason can be that, might be there is no labour available in market at such standard rate and we are not in a position to stop production so that's why we are paying higher wages as compare to standard.

Hope this meets your purpose. Please feel free to comment in case of any concern. Do like if it was helpful.

Thanks