A Company produces a single product. The company has set the following standards

Question

A Company produces a single product. The company has set the following standards for materials and labor:
                         Std qty or hours per unit       Std price or rate
Direct materials ? pounds per unit                   $? per pound
Direct labor        2.0 hours per unit                 $9 per hour
________________________________________
During the past month, the company purchased 8,200 pounds of direct materials at a cost of $18,450. All of this material was used in the production of 2,600 units of product. Direct labor cost totaled $49,000 for the month. The following variances have been computed:
Materials quantity variance $ 1,100 U
Total materials variance $ 3,000 F
Labor efficiency variance $ 1,800 F
For direct materials compute the standard price per pund of materials, the standard qty allowed for materials for the months production and the standard qty of materials allowed per unit of product.

Explanation / Answer

Direct materials price variance (MPV) formula: [Materials Price Variance = (Actual quantity purchased × Actual price) - (Actual quantity purchased × Standard price)] ie MPV= $18450 - (8200*Std Price) ..........(A) Total materials variance (TMV)= $3000F = -3000 = MPV+MQV ie -3000 = $18450 - (8200*Std Price) + 1100 So Std Price = (18450+1100+3000)/8200 = $2.75 ..............(B) ......Ans (1) Materials quantity variance (MQV) Formula: [Materials quantity variance = (Actual quantity used × Standard price) - (Standard quantity allowed × Standard Price)] ie MQV = $1100U = 1100=(8200*2.75) - (Std QTy*2.75) = 1100 So Std QTy allowed = (8200*2.75 - 1100)/2.75 = 7800 pounds ......Ans (2) This is used to make 2600 units. So Std Qty allowed pu = Std QTy allowed/No of units = 7800/2600 = 3 Pound per unit..Ans( 3) Formula of labor efficiency variance (LEV) : [Labor efficiency variance = (Actual hours worked × Standard rate) - (Standard hours allowed × Standard rate)] ie LEV =1800F = -1800 = (Actual hours worked*$9) - (2pu*2600unit*$9) So Actual hours worked= (2*2600*9 -1800)/9 =5000 Hrs ............(C)

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