Acme Company’s production budget for August is 19,500 units and includes the fol

Question

Acme Company’s production budget for August is 19,500 units and includes the following component unit costs: direct materials, $8.00; direct labor, $12.00; variable overhead, $6.00. Budgeted fixed overhead is $52,000. Actual production in August was 21,450 units, actual unit component costs incurred during August include direct materials, $10.20; direct labor, $11.40; variable overhead, $7.20. Actual fixed overhead was $55,500, the standard direct material cost per unit consists of 10 pounds of raw material at $0.8 per pound. During August, 291,720 pounds of raw material were used that were purchased at $0.75 per pound.

Calculate the materials price variance and materials usage variance for August. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable.) The materials price variance should be favorable and the materials usage variance should be unfavorable.

Acme Company’s production budget for August is 19,500 units and includes the following component unit costs: direct materials, $8.00; direct labor, $12.00; variable overhead, $6.00. Budgeted fixed overhead is $52,000. Actual production in August was 21,450 units, actual unit component costs incurred during August include direct materials, $10.20; direct labor, $11.40; variable overhead, $7.20. Actual fixed overhead was $55,500, the standard direct material cost per unit consists of 10 pounds of raw material at $0.8 per pound. During August, 291,720 pounds of raw material were used that were purchased at $0.75 per pound.

Explanation / Answer

Materiual price variance = ( Actual price - Standard price ) x Actual quantity

                                         = ($0.75 - $0.80 ) x 291720 pounds

                                         = $0.05 x 291720 pounds

                                         = $14586 F ( favourable variance since actual price is less than standard price.

Material usage variance   = ( Actual quantity - Standard quantity ) x Standard price.

                                         = ( 291720 pounds - 10 pounds x actual production) x Standard price

                                         = ( 291720 pounds - 10 pounds x 21450 ) x$ 0.8 per pound

                                         = ( 291720-214500) x $ 0.8 / pound

                                       = $ 61776 U ( unfavourable variance since actual consumption is higher than standard consumption )

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