Question

XYZ uses 1.5 pounds of wood to make baseball bats. The price of wood is $7.00 per pound. 2 direct labor hours are required to make a baseball bat and the direct labor rate is $11.00 per hour. Variable overhead is assigned based on direct labor hours at a rate of $1.50 per direct labor hour. Baseball bats selling price is $55.00. Fixed overhead (selling and administrative expenses) is budgeted to be $400,000.

At the end of year XYZ sold 30,000 units with sales ascending to $1,675,000. Materials used were 46,000 pounds and the materials cost were $7.05 per pound. Direct Labor hours used to produce 30,000 units was 59,800 hours and the rate paid was $10.95 per hour. Variable Overhead was $94,000 and fixed overhead (selling and administrative expenses) was 407,000 for a total overhead incurred of $501,000.

REQUIRED:

Compute Direct Material Quantity Variance,  Direct Labor Rate Variance, and Direct Labor Efficiency Variance.

Answer 1

Direct material quantity variance = (Standard quantity - Actual quantity) * Standard price

Direct material quantity variance = (30,000*1.5 - 46,000) * $7

Direct material quantity variance = (45,000 - 46,000) * $7 = $7,000 Unfavorable

Direct labor rate variance = (Actual rate - Standard rate) * Actual hours

Direct labor rate variance = ($10.95 - $11) * 59,800 = $2,990 Favorable

Direct labor efficiency variance = (Standard hours - Actual hours) * Standard rate

Direct labor efficiency variance = (30,000*2 - 59,800) * $11

Direct labor efficiency variance = (60,000 - 59,800) * $11 = $2,200 Favorable