Chapter 21 Standard Costs Sample Problem: Smitty Company set the following stand

Question

Chapter 21 Standard Costs Sample Problem:

Smitty Company set the following standard unit costs for its single product:

Direct material (20 lbs. @ $2 per lb.) $40

Direct labor (4 hrs. @ $11 per hr.) $44

During the current quarter, the company produced 80,000 units of product; actual direct labor totaled 300,000 hours. Actual costs incurred during the current quarter follow:

Direct materials (1,580,000 lbs. @ $2.20) $3,476,000

Direct labor (300,000 hrs. @ $11.50) $3,450,000

Required

1. Compute the direct materials price variance.

2. Compute the direct materials quantity variance.

3. Compute the direct labor rate variance.

4. Compute the direct labor efficiency variance.

5. Explain what each of the above variances indicate.

Explanation / Answer

1. Direct Material Price Variance = Actual Cost - Standard Cost

= (Actual Quantity * Actual Rate) - (Actual Quantity * Standard Rate)

= (15,80,000 * 2.2) - (15,80,000 * 2)

= 3,16,000 $

2. Direct Material Quantity Variance = (Actual Quantity - Standard Quantity) * Standard Rate

= ((20 * 80,000 lbs) - 15,80,000) * 2

= 40,000 $

3. Direct Labour Rate Variance = Actual Cost - Standard Cost

= (Actual Hours * Actual Rate) - (Actual Hours * Standard Rate)

= (300000 * 11.5) - (300000 * 11)

= 1,50,000 $

4. Direct Labour Efficiency Variance = (Actual Hours - Standard Hours) * Standard Rate

=(3,00,000 - (4 * 80,000)) * 11

= 2,20,000 $

5 Variance means the difference between actuals over Standards.

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