Ford Company Ltd adopted a standard costing system several years ago. The standa

Question

Ford Company Ltd adopted a standard costing system several years ago. The standard costs of its single product are as follows:

Direct material

8 kilograms@ R4,00 per kilogram

R32,00

Direct labour

6 hours@ R7,00 per hour

R42,00

The following operating information was taken from the records for November:

Work in process

inventory on November 1

None units

Work in process inventory on

November 30

800 units (75 per cent complete as to labour; material is issued at the beginning of processing)

Units completed

6000 units

Purchase of materials

50 000 kg for R249 250

Total actual labour costs

36 500 hours R300 760

Direct material quantity variance

R 1 500 unfavourable

Required:

4.1 Prepare a schedule of equivalent units and standard quantities allowed for materials and labour.

4.2. Calculate the following amounts. Indicate whether each variance is favourable or

unfavourable.

(a) Direct labour rate variance for November.

(b) Direct labour efficiency variance for November.

(c) Actual kilograms of material used in the production process during November.

(d) Actual price paid per kilogram of material in November.

(e) Total amount of direct material and direct labour cost transferred to finished goods inventory during November.

(f) The total amount of direct material and direct labour cost in the ending balance of

work in process inventory at the end of November.

Direct material

8 kilograms@ R4,00 per kilogram

R32,00

Direct labour

6 hours@ R7,00 per hour

R42,00

Explanation / Answer

Solution 1 - Calculation of Equivalent units and Standard quantities allowed for material and labour

Solution 2 - Calculation of Variances

Part 1 - Direct labour rate variance

Note - Standard rate per hour = $300760/36500 = $8.24

(Standard rate per hour - Actual rate per hour)*Actual hours

($7 - $8.24) * 36500 hours = $45260 Unfavourable

Part 2 - Direct labour efficiency variance

(Standard hours - Actual hours) * Standard rate per hour

(39600 - 36500) * $7 = $21700 Favourable

Part 3 - Calculation of Actual kilagram used in November production process

Let Actual quantity = 'x'

Material quantity variance = (Standard quantity - Actual quantity) * Standars price per kg

1500 U = (54400 - x) * $4

1500 U = $217600 - $4x

$4x = $219100

Actual Kilogram = $219100/$4 = 54775 kilograms

Part 4 - Actual price paid per kilogram of material in november

Actual price paid = $249250/50000 = $4.985 per kilogram

Part 5 - Total amount of Direct material and Direct labour transferred to Inventory

Total cost of direct material and direct labour transferred

Part 6 - Total amount of direct material and labour in the ending balance of work in process inventory

Particulars Direct Material Direct Labour Units completed 6000 6000 Equivalent units in work in process Direct material (800 * 100%) 800 Direct Labour (800 * 75%) 600 Total Equivalent units 6800 6600 Standard quantities required per unit 8 kilogram 6 hours Total Standard quantities allowed 54400 kilograms 39600 hours

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