MadHatter manufactures baseball caps. The Accounting Faculty of PSU order 150 ca

Question

MadHatter manufactures baseball caps. The Accounting Faculty of PSU order 150 caps for the Accounting 211 students with ALOE imprinted on them. MadHatter has the following set of standards for the manufacture of baseball caps.

DM:    ½ yard of fabric per cap

            $4.00 per yard of fabric

DL:     1 labor hour per cap

            $11.00 per labor hour

After the caps were shipped, MadHatter analyzed the actual data from production and discovered the following results.

DM:    ¾ yard of fabric per cap

            $2.85 per yard of fabric

DL:      1.4 labor hours per cap

            $9..50 per labor hour

1. Determine the DM and DL budgets.  

2. Provide explanations for the variances.

Explanation / Answer

Direct Materials Budget 1/2 yard fabric per cap, $4 per per yard

Direct Materials per cap = 4*1/2 = $2

Direct labour - 1 hour per cap, $11 per hpur

Direct Labor per cap = 11*1 = $11

2. Variances:

The total actual cost is higher than the budgeted cost because:

a. Materials used in the actual production is more than the budget

b. Number of hours required to produce the caps is higher than the budget

However the above factors are partially mitigated because of the favourable rates of materials and labor when compared the budget. The following calculations will explain the variance further:

Favourable variances:

Direct materials price variance = Actual Quantity * (Actual price - Standard price) = (150*3/4)*(2.85-4) = $129.4

Direct labor price variance = Actual hours * (Actual rate - Standard rate) = (150*1.4)*(9.5-11) = $315

Unfavourable variances:

Direct materials quantity variance = Standard price * ( Actual quantity - Standard quantity) = 4*((150*3/4)-(150*1/2))= $150

Direct labor efficiency variance = Standard rate * (Actual hours - Standard hours) = 11*((150*1.4)-(150*1)) = 660

Budget for 150 caps: Direct materials = 150*2         300 Direct Labor = 150*11     1,650 Total     1,950

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