Question

Brive plc has the following standards for its only product: Selling price €110/unit Direct labour 2 hours at €5.25/hour Direct materials 3 kg at €14.00/kg Fixed overheads €27.00, based on a budgeted output of 800 units/month During May, there was an actual output of 850 units and the operating statement for the month was as follows: Sales revenue Direct labour (1.780 hours) Direct materials (2.410 kg) Fixed overheads Operating profit 92.930 (9.665) (33.258) (21.365) 28.642 There was no inventory of any description at the beginning and end of May. Required: Prepare the original budget and a budget flexed to the actual volume. Use these to compare the budgeted and actual profits of the business for the month, going into as much detail with your analysis as the information given will allow.

I do not understand how to calculate the variances for the direct material as well as direct labor. I need a general explanation.

Answer 1

As per the student requirement, Direct Material and direct labor variances are computed: Compute the direct material usage variance and Price variance: Given standard direct material is 3kgs Standard output is 800 units Now, actual output is 850 units Actual direct material is 2.410kgs Therefore, now flexed budget quantity for actual output need to be calculated: =(850*3) =2550 kgs Material Usage Variance = [Standard material in terms of actual gtx-Actual material] x Standard Price = [2550-2410] x 14 = $1960 (F) Material price variance= (Actual Quantity Standard Unit Cost). (Actual Quantity * Actual Unit Cost). = (2410*$14) - (2410*Actual unit cost) = ($33740- $33258) = $482 (F) Compute the direct labor efficiency variance and rate variance: Given for one unit the direct labor time required is 2hrs. Therefore, if the rate incurred for 1 labor hour is $5.25. As 2 hrs is required for one unit, the labor cost involved for one unit is $5.25 x 2 hrs= $10.50 Now, compute the hours involved for 850 units in budget products units: - 1hr *850 units=850 hrs - Actual hrs 2 - 1780/2 -890 hrs. Direct labor efficiency variance= (Actual hours - Standard hours) x Standard rate = (890-850) < $10.50 = $420 (F) Direct labor rate variance = (Std rate in terms of actual brs x Actual rate)-(Actual rate x Actual hours) =(890 x $10.50 - $9665) = ($9345 - $9665) =-$320 (A)