Heavy Products, Inc. developed standard costs for direct material and direct lab

Question

Heavy Products, Inc. developed standard costs for direct material and direct labor. In 2017, ll estimated the following standard costs for one of their major products, the 10-gallon plastic container. Budgeted quantity Budgeted price Direct materials 0.80 pounds $60 per pound Direct labor 0.10 hours $20 per hour During June, Heavy Products produced and sold 15,000 containers using 25,000 pounds of direct materials at an average cost per pound of $64 and 12,000 direct manufacturing labor- hours at an average wage of $21.56 per hour. June's direct material flexible-budget variance is A) $18,720 favorable B) $880,000 unfavorable C)$100,000 favorable D) $60,000 unfavorable

Explanation / Answer

Standard Quantity vs Actual Quantity: Heavy Product Inc. uses 0.8 pound of raw material for production of a 10-gallon plastic container. Since Company has produced and sold 15,000 containers which means standard quantity for production comes to 15,000 * 0.8 = 12,000 pounds of raw material. While Heavy Product Inc. Has used 25,000 pounds of raw material.

Standard Price vs Actual Price: Budgeted price of raw material per pound is $60 per pound while heavy Product Inc. has paid a price of $64 per pound.

Direct Material flexible-Budget variance = Standard Qty * Standard Price – Actual Qty * Actual Price

= 12,000 * 60 – 25,000 * 64

= 720,000 – 1,600,000

= 880,000 Unfavourable

Answer is Option B

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