Question

Case 12-67

The Kohler Chemical Manufacturing Company produces two primary chemical products to be used as base ingredients for a variety of products. The 2016 budget for the two products (in thousands) was as follows:

		LX-4		ABC-8		Total
Level of production in litres		1,800		1,800		3,600
Direct materials		$4,500		$5,625		$10,125
Direct labour		2,700		2,700		5,400
Total direct manufacturing cost		$7,200		$8,325		$15,525

The following planning assumptions were used for the budget: (1) a direct materials yield of 96%, and (2) a direct labour rate of $6 per hour. The actual results for 2016 were as follows (in thousands):

		LX-4		ABC-8		Total
Total litres produced		1,710		1,974		3,684
Direct materials		$4,104.00		$6,415.50		$10,519.50
Direct labour		2,808.00		3,276.00		6,084.00
Total direct manufacturing cost		$6,912.00		$9,691.50		$16,603.50

The actual production yield was 95% for LX-4 and 94% for ABC-8. The direct labour cost per hour for both products was $6.50.

Calculate for product LX-4: calculate the direct materials price variance, and the direct materials efficiency (yield) variance.

		The direct materials price variance		$
		The direct materials efficiency (yield) variance		$

Answer 1

Direct Material Price Variance = (Standard rate - Actual rate)*Actual output

Standard rate of Direct Material for Product LX-4 = 4500/1800 = 2.5 per litre

Actual rate of Direct Material for Product LX-4 = 4104/1710 = 2.4 per liter   

Actual Output = 1710 liters.

Direct Material Yield Variance for Product LX-4 = (2.5-2.4)*1710 = $ 171     

Direct materials efficiency (yield) variance = (Standard yield-Actual yield)*Standard price

Standard Yield = Actual inputs*Standard Yield ratio = 1710*96% = 1642

Actual Yield = Actual inputs*Actual Yield ratio = 1710*95% = 1625

Standard Price = 4500/1800 = 2.5

Direct materials efficiency (yield) variance for Product LX-4 = (1642-1625)*2.5 = $ 42.5