EXERCISE 10-8 Direct Materials and Direct Labor Variances LO10-1, LO10-2 Dawson

Question

EXERCISE 10-8 Direct Materials and Direct Labor Variances LO10-1, LO10-2 Dawson Toys, Ltd., produces a toy called the Maze. The company has recently c cost system to help control costs and has established the following standards for th ard e Mazeto Direct materials: 6 microns per toy at $1.50 per micron Direct labor: 1.3 hours per toy at $21 per hour During July, the company produced 3,000 Maze toys. The toy's production data for the month are as follows Direct materials: 25,000 microns were purchased at a cost of $1.48 per micron. 5,000 of the se microns were still in inventory at the end of the month Direct labor: 4,000 direct labor-hours were worked at a cost of $88,000. Required: 1. Compute the following variances for July: The materials price and quantity variances. The labor rate and efficiency variances. a. b. 2. Prepare a brief explanation of the possible causes of each variance.

Explanation / Answer

1. a. Materials price variance = ( Standard price per micron - Actual price per micron ) x Actual Quantity Purchased = $ ( 1.50 - 1.48 ) x 25,000 microns = $ 500 F.

Materials quantity variance = ( Standard quantity allowed for actual output - Actual Quantity Used) x Standard price per micron = ( 3,000 x 6 - 20,000 ) x $ 1.50 = $ 3,000 U.

b. Labor rate variance = ( Standard labor hour rate - Actual labor hour rate ) x Actual hours used = $ ( 21.00 - 22.00 ) x 4,000 labor hours = $ 4,000 U.

Labor efficiency variance = ( Standard hours allowed for actual output - Actual hours used ) x Standard labor hour rate = ( 3,000 x 1.30 - 4,000 ) x $ 21.00 = $ 2,100 U.

2. Materials price variance : $ 500 F.

Possible causes : Purchasing in bulk and availing of quantity discount, better price negotiation with vendors, purchasing inferior grade of materials than that which was budgeted for.

Materials quantity variance : $ 3,000 U.

Possible causes : Inferior quality raw materials leading to abnormal wastage, loss of materials during transit, inadequate packaging, unskilled labor, machine breakdown, power outage, incorrect standards.

Labor rate variance : $ 4,000 U.

Possible causes : Too much overtime paid, shift premiums, production downtime, using skilled workers in place of semi-skilled workers in some processes, antiquated standards being used not reflective of current wage rates.

Labor efficiency variance : $ 2,100 U.

Possible causes : Unskilled / untrained workforce, overstaffing or understaffing, using the incorrect labor mix, hours of overtime, productivity changes.

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