Outdoor Company manufactures camping tents from a lightweight synthetic fabric.

Question

Outdoor Company manufactures camping tents from a lightweight synthetic fabric. Each tent has a standard materials cost of $21, consisting of 4 yards of fabric at $5.25 per yard. The standards call for 2 hours of assembly at $10 per hour. The following data were recorded for October, the first month of operations:

Fabric purchased 9,000 yards x $ 5.00 per yard

Fabric used in production of 1,700 tents7,000 yards

Direct labor used3,600 hours x $10.75 per hour

(a) Compute all standard cost variances for materials and labor

(b) Determine the standard variable cost of 1,700 tents produced, separated into direct materials and labor.

Materials Price Variance (usage basis)    Materials Price Variance (purchases basis) Materials quantity variance Labor Rate Variance Labor Efficiency variance

Explanation / Answer

Direct Material Price Variance

Definition

Direct Material Price Variance is the difference between the actual cost of direct material and the standard cost of quantity purchased or consumed.

Direct Material Price Variance:

= Actual Quantity x Actual Price - Actual Quantity x Standard Price

= Actual Cost - Standard Cost of Actual Quantity

Where:

                                    = 1750 Favorable

Since actual price is less than the standard Price so Material Price variance is favorable

Direct Material Quantity Variance

Direct Material Usage Variance is the measure of difference between the actual quantity of material utilized during a period and the standard consumption of material for the level of output achieved.

Direct Material Usage Variance:

= Actual Quantity x Standard Price - Standard Quantity x Standard Price

= Standard Cost of Actual Quantity - Standard Cost of Standard Quantity

= (Actual Quantity - Standard Quantity) x Standard Price

Total Tens Produced during the month = 1700 Tents

Standard Quantity for 1700 tens = 1700 tents * 4 Yards

Standard Qty = 6800

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

=      (7000-6800) * 5.25

= 1050 Unfavorable

Since Actual quantity used is more than the standard quantity allowed

Material Quantity variance is Unfavorable

Direct Labor Rate Variance

Direct Labor Rate Variance is the measure of difference between the actual cost of direct labor and the standard cost of direct labor utilized during a period.

Direct Labor Rate Variance:

= Actual Quantity x Actual Rate - Actual Quantity x Standard Rate

= Actual Cost - Standard Cost of Actual Hours

Labour Rate Variance = 3600*10.75 – 1700*2*10

                                    = 38700- 34000 = 4700 Unfavorable

Since Actual cost is more than the standard cost allowed it is unfavorable

Labour Efficience Variance :

The formula is:

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

= 3600-3400 * 10

= 200 * 10

=2000 Unfavorable

Since Actual Hours are used more than the standard hours allowed

So Labour efficience is unfavorable

B- Standard Variable cost for 1700 Tents Produced

Direct Material = 1700* 21      = 35700

Direct Labour = 1700*2*10    = 34000

Total Standard Variable Cost = 69,700

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