Question

Question 4:

Playful Corporation manufactures a variety of sports items. Its most popular product is a wooden cricket bat that they sell throughout Europe and Asia. The company uses a standard costing system for all its product. Standards for the current year indicate that to make one bat, eight kilograms of direct materials are needed. The standard price for wood is one dollar and seventy-five cents per kilogram. Each bat also requires fifteen minutes of direct labour to make. Employees working on the production of bats are paid eight dollars an hour.

During May, Playful purchased 160,000 kilograms of direct material at a total cost of $304,000. The total direct labour wages for May was $42,000. Playful manufactured 19,000 cricket bats during May, using 142,500 kilograms of direct material and 5,000 direct labour hours.

Required:

Compute the following variances for May, and indicate whether each variance is favourable or unfavourable.

1. The direct-material price variance.

2. The direct-material quantity variance.

3. The direct-labour rate variance.

4. The direct-labour efficiency variance.

Answer 1

Direct Material price variance = (Actual quantity purchased * Actual price) - (Actual quantity purchased * Standard price)

= $304,000 - (160,000 * $1.75)

= $24,000 Unfavorable

Direct Materials quantity variance = (Actual quantity used * Standard price) - (Standard quantity * Standard price)

= (142,500 * $1.75) - (19,000 * 8 * $1.75)

= $16,625 Favorable

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

= $42,000 - (5,000 * $8)

= $2,000 Unfavorable

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

= (5,000 * $8) - (19,000 * 1/4 * $8)

= $2,000 Unavorable