Question

The Basket Co. produces intricate baskets. The direct materials and direct labor standards for one basket is as follows:

	Standard Quantity of Hours	Standard Rate or Cost	Standard Cost per Basket
Direct Materials	2 meters of plastic	$2.00/meter	$4.00
Direct Labour	1.5 hours	$12/hour	$18
Variable Overhead	1.5 hours	$4/direct labour hour	$6

The budgeted fixed overhead is $10,000. The allocation base is direct labour hours which was estimated to be 2,100 hours.

During the most recent month, the following activity was recorded:
The company purchased 4,000 meters of plastic during the month at a total cost of $7,600. The company used 3,000 meters of the purchased plastic to make 1,400 baskets during the month.

Direct labor costs totaled $25,480 for hours worked of 1,960.

Overhead costs included $7,448 of variable overhead and $10,500 of fixed overhead.
a. Compute the direct materials price variance. Indicate if it favorable (F) or unfavorable (U).
b. Compute the direct materials quantity variance. Indicate if it is favorable (F) or unfavorable (U).

Answer 1

	AQ* AP	Price Variance	AQ * SP	AQ*SP	Efficiency Variance	SQ for actual production *SP
Direct materials	7600	400	8000	6000	400	5600
		Favorable			Unfavorable

Workings:

a. Actual cost of purchase (AQ* AP)= $7600

Actual Quantity * Standard price = 4000 * 4 = $8000

Price variance = ( 7600- 8000) = 400 Favorable

b. Actual Quantity * Standard Price = 3000 * 2 = $6000

Standard Quantity for actual production * Standard price = 1400 * $2 * 2 = $5600

Efficiency variance = 6000 - 5600 = 400 Unfavorable