Question

?Bandar Industries Berhad of Malaysia manufactures sporting equipment. One of the company’s products, a football helmet for the North American market, requires a special plastic. During the quarter ending June 30, the company manufactured 3,300 helmets, using 1,914 kilograms of plastic. The plastic cost the company $14,546.

Answer 1

Concepts and reason

Direct material cost variance: It is the difference between the standard cost and actual cost of direct material for the output. If the price variance is more than the quantity variance then the result is favorable and if the price variance is less than the quantity variance then the result is unfavorable.

Direct material Price variance: It is basically the difference between the actual and standard price per unit of a product, the result is then multiplied by the actual quantity of the direct material purchased. It shows the effectiveness of the store's management in purchasing the raw material.

 

Direct material Quantity variance: It is basically the difference between the actual and standard quantity purchased, the result is then multiplied by the standard price of raw material per unit of a product. It shows the efficiency of the production department in using the raw material while producing the final product.

Fundamentals

Cost and Expenses: Cost is the amount expended to any particular product or amount related to any particular product. Whereas, expenses means the cost incurred in order to earn income. Prepaid Expense and Outstanding Expense are its two types. It is shown on the debit side of profit and loss Account

Direct materials: These are the materials which are used in the Production process which constitutes an integral portion of the final product, the cost of which is identifiable and traceable directly to it. The cost of direct material can be directly chargeable to the final product as compared to the indirect material.

Standard quantity: It refers to the material that should have been used to manufacture a certain level of finish products.

Actual quantity: It refers to the material which was actually used to manufacture certain level of finished products.

1. a

Compute the standard cost of helmets using equation as shown below:

$\begin{array}{c}\\{\rm{Standard Cost of Helmets}} = \left( \begin{array}{c}\\{\rm{Number of Helmets}} \times \\\\{\rm{Standard Kilograms of Plastic per Helmet}} \times \\\\{\rm{Cost of Plastic per Kilogram}}\\\end{array} \right)\\\\ = 3,300 \times 0.53 \times \$ 8\\\\ = \$ 13,992\\\end{array}$

1. b

Compute the total material variance using equation as shown below:

$\begin{array}{c}\\{\rm{Total Material Variance}} = {\rm{Actual Cost}} - {\rm{Standard Cost}}\\\\ = \$ 14,546 - \$ 13,992\\\\ = \$ 554\\\end{array}$

2. a

Compute the material price variance using equation as shown below:

$\begin{array}{c}\\{\rm{Material Price Variance}} = \left( \begin{array}{l}\\\left( {{\rm{Actual Price}} \times {\rm{Actual Quantity}}} \right) - \\\\\left( {{\rm{Standard Price}} \times {\rm{Actual Quantity}}} \right)\\\end{array} \right)\\\\ = \left( {\$ 7.6 \times 1,914 - \$ 8 \times 1,914} \right)\\\\ = \$ 14546 - \$ 15,312\\\\ = \left( {\$ 766} \right)\\\end{array}$

Thus the material price variance is $766(Favorable).

Working Note:

Compute the actual price using equation as shown below:

$\begin{array}{c}\\{\rm{Actual Price}} = \frac{{{\rm{Actual Cost}}}}{{{\rm{Actual Quantity Used}}}}\\\\ = \frac{{\$ 14,546}}{{1,914}}\\\\ = \$ 7.6\\\end{array}$

Thus the actual price is $7.6.

2. b

Compute the material quantity variance using equation as shown below:

$\begin{array}{c}\\{\rm{Material Quantity Variance}} = \left( \begin{array}{l}\\\left( {{\rm{Actual Quantity}} \times {\rm{Standard Price}}} \right) - \\\\\left( {{\rm{Standard Quantity}} \times {\rm{Standard Price}}} \right)\\\end{array} \right)\\\\ = \left( {1,914 \times \$ 8} \right) - \left( {1,749 \times \$ 8} \right)\\\\ = \$ 15,312 - \$ 13,992\\\\ = \$ 1,320\\\end{array}$

Thus the material quantity variance is $1,320(Adverse).

Working Note:

Compute the standard quantity using equation as shown below:

$\begin{array}{c}\\{\rm{Standard Quantity}} = \left( \begin{array}{l}\\{\rm{Number of Helmets}} \times \\\\{\rm{Standard Kilograms of Plastic per Helmet}}\\\end{array} \right)\\\\ = 3,300 \times 0.53\\\\ = 1,749\\\end{array}$

Thus the standard quantity is 1,749.

Ans: Part 1.a

The standard costs of helmets are $13,992.

Part 1.b

The total material variance is $554(Adverse).

Part 2.a

The material price variance is $766(Favorable).

Part 2.b

The material quantity variance is $1,320(Adverse).