Reed Corp. has set the following standard direct materials and direct labor cost

Question

Reed Corp. has set the following standard direct materials and direct labor costs per unit for the product it manufactures Direct materials (16 lbs. $4 per lb.) Direct labor (4 hrs. $15.00 per hr.) $64 60 During June the company incurred the following actual costs to produce 8,900 units. Direct materials (145,000 lbs. @ $3.75 per ??.) Direct labor (38,800 hrs.$15.15 per hr. $543,750 587,820 AQ Actual Quantity Sa Standard Quantity AP Actual Price SP Standard Price AH Actual Hours SH Standard Hours AR Actual Rate SR Standard Rate (1) Compute the direct materials price and quantity variances. (2) Compute the direct labor rate variance and the direct labor efficiency variance. Indicate whether each variance is favorable or unfavorable.

Explanation / Answer

Answer:-

Requirment 1

Actual price - Standard price) x Actual quantity = Direct material price variance

i.e.. that is

(Actual Price * Actual Quantity ) - ( Standard Price * Actual Quantity)

(3.75 * 146000) - (4.0 * 146000) = 547,500 - 584,000 = 36,500 Favorable variance

as company is able to procure quantity at lower rate than standard rate .

Part B.

Direct Material Quantity Variance :-

Direct materials quantity variance = SP x (SQ – AQ)

standard price = $ 4.00 per LBS

standard Quantity = 8900 units * 16 = 142,400 lbs

actual Quantity = 145,000

so Direct materials quantity variance = SP x (SQ – AQ)

= 4 X ( 142400-145000) = 4 X ( - 2600) = ($ -10,400) an unfavorable variance

as company is utilizing more raw material than required as per standard.

Requirment 2.

1. Direct labour rate variance :-

Direct labor rate variance = (Actual hours worked × Actual rate) – (Actual hours worked × Standard rate)

actual hours = 38,800 hours

actual rate = $ 15.15 per hour

standard rate = $ 15.00 per hour

so Direct labor rate variance = (Actual hours worked × Actual rate) – (Actual hours worked × Standard rate)

= ( 38,800 * 15.15) - ( 38,800 * 15.00) = 587,820 - 582,000 = 5820 an unfavorable labour rate variance.

as company is paying more than standard rate.

Part B

2. Direct labour efficency variance :-

The formula for the labor efficiency variance is:

(Actual hours - Standard hours) x Standard rate = Labor efficiency variance

Actual hours = 38,800

standard hours = 8900 units X 4 hours = 35,600 hours

standard rate = $ 15.0

(Actual hours - Standard hours) x Standard rate = Labor efficiency variance

= ( 38,800 - 35,600) * 15.00 = 3200 * 15.00 = 48000 an unfavorable variance as company is utilizing more direct labour hours towards production than required as per standard.

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