Whakatane Ltd manufactures ceramic mosaic ornaments, all of the same size. Each

Question

Whakatane Ltd manufactures ceramic mosaic ornaments, all of the same size. Each unit requires the same amount of resources. The following information| is from the static budget for 2015: Standard quantities, standard prices and standard unit costs follow for direct materials and direct manufacturing labour: During 2015, actual number of units produced and sold was 52 500. Actual cost of direct materials used was $295 200, based on 82 000 kg purchased at $3.60 per kilogram. Direct manufacturing labour-hours actually used were 25 000, at the rate of $22 per hour. As a result, actual direct manufacturing labour costs were $550 000. Actual fixed costs were $110 000. Required: Calculate the price and efficiency variances for direct materials and for direct manufacturing labour. Indicate whether each variance is favourable (F) or unfavourable (U).

Explanation / Answer

Direct Material Price Variance:

Actual quantity*(Actual price - Standard Price) = (295200/3.6)*(3.6 - 3.7) = 82000 * 0.1 = $8,200 (F)

Direct Material effeciency variance:

Standard price (Actual quantity - Standard quantity) = 3.7*(82000 - 52500*1.5) = 3.7*(82000 - 78750) = $12,025 (A)

Direct Labor rate variance:

Actual hours (Actual rate - Standard rate) = 25000 (22 - 25) = $75,000 (F)

Direct labor efficiency variance:

Standard labor rate (Actual hours - Standard hours) = 25(25000 - 52500*0.5) = $31,250 (F)

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