Question

Direct Materials and Direct Labor Variances - Review Hikin' and Trekkin' manufactures various outdoor apparel. Hikin' and Trekkin' wants to analyze production costs for one line of rain jackets. The direct materials and direct labor standards for one rain jacket are given below. Standard Quantity or hours Standard Price or rate Standard Cost per jacket Direct material Direct labor 2.5 yards 1.5 hours $7.50 per yard $9.00 per hour $18.75 $13.50 During the most recent month, the following activity was recorded: a. b. c. 14,000 yards of material were purchased at a cost of $8.00 per yard. 12,250 yards of material were used to produce 5,000 jackets. 7,300 hours of direct labor time were recorded at a total labor cost of $69,350. Required: 1. Calculate the direct materials price and quantity variances for the month. 2. 3. Calculate the direct labor rate and efficiency variances for the month. Explain the significance of each variance.

Answer 1

1 Calculation of Direct Material Price Variance and Direct Material Quantity Variance

Direct Material Price Variance = (Std. Price -Actual Price ) * Actual Qty.
= ($7.5 per yard - $ 8 per yard)* 14,000 yards
= - $7,000 ( Unfavourable)

Direct Materials Quantity Variance = (Std. Qty. -Actual Qty. ) * Std. Price
= ((5,000 jackets* 2.5 yards per jacket)-14,000 yards)* $ 7.5 per yard
= - $11,250 ( Unfavourable)

2 Calculation of Direct Labor rate variance and Direct Labor efficiency variance  

Direct Labor Rate Variance = Actual Hours * Std. Rate -   Actual Hours * Actual Rate?
= (7,300 hours *$ 9 per hour) -(7,300 hours * $ 9.5 per hour)
= - $3,650 ( Unfavourable)
  [Here Actual Rate $9.5 is derived as $ 69,350/7,300 Hours)

Direct Labor Efficiency Variance   = (Std. Hours × Std. Rate) - (Actual Hours × Std. Rate)
= (7,500 hours * $ 9 per hour)-(7,300 hours * $ 9 per hour)
= $1,800 ( Favourable)

3 Significane of each variance:

Direct Material Price Variance: Unfavourable variance means that produrement at higher price resulted increase in the costs by $7,000.

Direct Materials Quantity Variance: Unfavourable variance means that the use of 1,500 additional yards ( 14,000 yards - 5,000 jackets * 2.5 yards per jacket) increased costs by $11,250

Direct Labor Rate Variance: Actual Direct Labour rate $ 9.50 per hour is higher than the standard direct labor rate of $ 9.0 per hour. Clearly, this is unfavorable since the actual rate worked was higer than the standard rate. Financial impact is $ -3,650.

Direct Labor Efficiency Variance: 7,300 actual hours worked is lower than the 7,500 standard hours. Clearly, this is favorable since the actual hours worked was lower than the standard hours. Financial Impact is $ 1,800.