Last year, Milner company budgeted for production and sale of 6760 widgets. Actu
ID: 2471655 • Letter: L
Question
Last year, Milner company budgeted for production and sale of 6760 widgets. Actual production and sales was 7600 widgets for $408 each. Each item was budgeted to use 2 direct labor hour(s) and 6 gram(s) of material Millner expected to pay $7.00 per gram and $13.00 per hour. Actual production required the following: 41040 grams at $7.70 per gram 13680 hours at $10.40 per hour How much should it cost for materials for one widget? How much should it cost for labor for one widget? How many hours should it take to build 7600 widgets? How much should it have cost for materials to build the 7600 widgets? Will the materials price variance be Favorable or Unfavorable (type U or F)? Will the labor efficiency variance (usage variance) be Favorable or Unfavorable {type U or F)?Explanation / Answer
Part 1)
The cost of material for one widget is calculated as follows:
Cost of Material for One Widget = Material Required for 1 Widget (in grams)*Cost of Material (per gram) = 6*7 = $42
_________
Part 2)
The cost of labor for one widget is calculated as follows:
Cost of Labor for One Widget = Number of Hours for 1 Widget (in hours)*Cost of Labor (per hour) = 2*13 = $26
_________
Part 3)
The total number of hours required to produce 7,600 widgets is calculated as follows:
Total Number of Hours for 7,600 Widgets = 7,600*2 = 15,200 hours
_________
Part 4)
The total cost of materials to produce 7,600 widgets is calculated as follows:
Total Cost of Material for 7,600 Widgets = 7,600*42 = $319,200
_________
Part 5)
The material price variance can be calculated with the use of following formula:
Material Price Variance = Actual Material*(Actual Material Rate - Standard Material Rate)
_______
Using the information provided in the question, we get,
Material Price Variance = 41,040*(7.70 - 7) = $28,728 (U)
The variance is unfavorable because the actual cost of material per gram is more than the standard cost of material per gram.
_________
Part 6)
The labor efficiency variance is calculated as follows:
Labor Efficiency Variance = Standard Labor Rate*(Actual Hours - Standard Hours for Actual Production)
_______
Using the information provided in the question, we get,
Labor Efficiency Variance = 13*(13,680 - 2*7,600) = 19,760 (F)
The variance is favorable because the number of actual direct labors (13,680) is less than the standard direct labors (15,200) to produce 7,600 widgets
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