E23-19 Calculating materials and labor variancesPro Fender, which uses a standar

Question

E23-19 Calculating materials and labor variancesPro Fender, which uses a standard cost system, manufactured 20,000 boat fenders during 2016, using 146,000 square feet of extruded vinyl purchased at $1.05 per square foot. Production required 410 direct labor hours that cost $15.00 per hour. The direct materials standard was seven square feet of vinyl per fender, at a

standard cost of $1.10 per square foot. The labor standard was 0.026 direct labor hour per fender, at a standard cost of $14.00 per hour.The pattern of variances suggest Pro Fender’s managers have been making trade-offs? Explain.  

Explanation / Answer

Direct material Price variance DM Price Variance = ( SP ? AP )*AQ (1.10-1.05)*146000= 7300 F DM Quantity/Usage Variance = ( SQ for actual production ? AQ )*SP ((7*20000)-146000)*1.1= -6600 UF Direct Labor Rate variance (SR ? AR )*AD/L hrs. (14-15)*410= -410 UF DL Efficiency Variance = ( Std. hrs.for actual production ? Actual hrs. )*Std. Rate ((0.026*20000)-410)*14= 1540 F Trade-off is compromising on one factor for the cause/better presentation on some other front. Direct Materials Favourable Direct material rate variance combined with unfavourable material Usage variance suggest that the managers may be buying lower quality materials which lead to more per fender usage (146000/20000=7.3 sq.ft./Fender) as against the std. of 7 sq.ft./fender. Thus, efficiency in usage is compromised for decreased prices. Usage of inferior quality materilas leads to more wastages on the production-floor. Here, the suspected trade-off is injurious to the company. Direct Labor Favourable Direct Labor   Efficiency variance combined with unfavourable Labor Rate variance suggest that the managers may be employing skilled labor at higher costs which led to lesser per fender hrs. (410/20000=0.0205 hrs./Fender) as against the std. of 0.026 hrs./fender. Thus, efficiency in labor is achieved by employing skilled labor at higher rates. Usage of superior quality of labor leads to less wastage of time on the production-floor. Here, the   trade-off is beneficial to the company.

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