Question

Pyre Mills, Inc. is a large producer of men’s and women’s clothing. The company uses a standard costing system. The standard costs and actual costs per unit for one of the company’s products are as follows:

Direct material:

Standard: 4.0 metres at $5.40 per metre

Actual: 4.4 metres at $5.05 per metre

Direct Labour:

Standard: 1.6 hours at $6.75 per hour

Actual: 1.4 hours at $7.30 per hour

During this period, the company produced 4,800 units of the product.

At the beginning of the period, no inventory of materials was on hand. During the period, 21,120 metres of materials were purchased, all of which were used in production.

Required:

For direct materials, compute the price and quantity variances for the period.

For direct labour, compute the rate and efficiency variances for the period.

Provide a reasonable explanation for the direct labour efficiency variance.

Answer 1

Direct material price variance = (Standard rate - actual rate)*actual quantity

= (5.40-5.05)*21120 = $7392 Favorable

Direct material quantity variance = (Standard quantity - actual quantity)*standard rate

= (4800*4-21120)*5.40 = $10368 unfavorable

Direct labor rate variance = (6.75-7.30)*4800*1.40 = $3696 Unfavorable

Direct labor efficiency variance = (4800*1.60 - 4800*1.40)*6.75

= $6480 Favorable

Direct labor efficiency variance is Favorable because time taken per unit is less than the standard time per unit.