Dauterive Co. manufactures wooden pen and pencil holders. The following material

Question

Dauterive Co. manufactures wooden pen and pencil holders. The following material and labor standards have been set for one holder.

5 ounces of wood at $0.50 per ounce $2.50
4 minutes of labor times at $9.00 per hour 0.60

During July, the company incurred the following costs to manufacture 46,800 holders.

14,250 pounds of wood at $8.30 per pound $118,275
3,840 hours of labor time at $9.25 per hour 35,520

(a) What is the standard quantity of material allowed for the actual production?
(b) Compute the material price and quantity variance.
(c) What are the standard hours of labor time allowed for the actual production?
(d) Compute the labor rate and efficiency variances.
(e) What relationship might exist between the material price and the material usage and labor efficiency variances?
(f) What relationship might exist between the labor rate variance and the labor efficiency variance?

Explanation / Answer

(a) Standard quantity of material allowed for the actual production = 46800 x 5 ounces x 0.0625 = 14625 pounds (b) Material Price Variance = (Standard Price - Actual price) x Actual Quantity = (0.5/0.0625 - 8.30) x 14250 = $4275 U Material Usage Variance = (Standard Quantity - Actual Quantity) x Standard Price = (14625 - 14250) x 0.5/0.0625 = $3000 F (c) Standard hours of labor time allowed for the actual production = 46800 x 4/60 = 3120 hours (d) Labour Rate Variance = (Standard Rate - Actual Rate) x Actual Hours = (9 - 9.25) x 3840 = $960 U Labour Efficiency Variance = (Standard Hour - Actual Hour) x Standard Rate = (3120 - 3840) x 9 = $6480 U (e) A favourable material price variance may indicate that the material was purchased at a price that is cheaper than the expected standard price. This may be due to a lower quality of material is being purchased. A lower quality material may cause unfavorable variance in material usage as more material will be needed for the production of one unit of product due to inferior material is used. This will also result in an unfavorable labour efficiency variances as labour will need more time to deal with poorer quality materials. (f) Normally. labor rate variance and effiency variance should have an inverse relationship. A favorable labor rate variance means the labour is being employed at a rate which is lower than the expected standard rate. This may be due to the reason such as a lower skills labours are being employed. This will result in an unfavorable labour efficiency variance as unskilled labour tend to be not efficient compared to the skilled one. Hope this helps!

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