3. a. P&G; company produces many products for household use. Company sells produ

Question

3. a. P&G; company produces many products for household use. Company sells products to storekeepers as well as to customers. Detergent-DX is one of the products of P&G.; It is a cleaning product that is produced, packed in large boxes and then sold to customers and storekeepers. P&G; uses a traditional standard costing system to control costs and has established the following materials, labor and overhead standards to produce one box of Detergent-DX: Direct materials; 1.5 pounds @ S12 per pound: $18.00 Direct labor, 0.6 hours $24 per hour: $14.40 Variable manufacturing overhead; 0.6 hours @ $5.00: $3.00 During August 2012, company produced and sold 3,000 boxes of Detergent-DX. 8,000 pounds of direct materials were purchased@ $11.50 per pound. Out of these 6,000 pounds, 6,000 pounds were used during August. There was no inventory at the beginning of August. 1600 direct labor hours were recorded during the month at a cost of $40,000. The variable manufacturing overhead costs during August totaled $7,200. Required: 1. Compute materials price variance and materials quantity variance b. Compute direct labor rate variance and direct labor efficiency variance.

Explanation / Answer

Part-1

Calculation of Material Price Variance-

It can be calculated by two methods-

1. At the time of purchase

Material Price Variance = (Standard Price-Actual Price)Actual Quantity Purchased

= ($12-$11.50)8,000 Pounds

= $4,000 Favorable

2. At the time of consumption

Material Price Variance = (Standard Price-Actual Price)Actual Quantity Used

= ($12-$11.50)6000

= $3,000 Favorable

Calculation of Material quantity variance-

Material Quantity Variance = (Standard Quantity-Actual Quantity)Standard Price

= [(1.5 pounds*3,000 boxes)-6000]$12 per pound

= $18,000 Unfavorable

Part-b

Calculation of direct labor rate variance-

(Standard Rate-Actual Rate)Actual Hours

= [$24-($40000/1600)]1,600 Hours

= $1,600 Unvavorable

Calculation of direct labor efficiency variance-

(Standard Hours-Actual Hours)Standard Rate

= [(0.6 hours per box*3,000 boxes)-1600]*$24 per hour

= $4,800 Favorable

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