Deskins Clothiers is a small company that manufactures tall-men\'ssuits. The com

Question

Deskins Clothiers is a small company that manufactures tall-men'ssuits. The company has used a standard cost system. In May 2008,11,200 suits were produced. The following standard and actual costdata applied to the month of May when normal capacity was 14,000 direct labor hours. All materials purchased were used.

CostElement

Standard (per unit)

Actual

CostElement

Standard (per unit)

Actual

Direct materials 8 yards at $4.30 per yard $371,050 for 90,500 yards
     ($4.10 per yard) Direct labor 1.2 hours at $13.50 per hour $201,630 for 14,300 hours
     ($14.10 per hour) Overhead 1.2 hours at $6.00 per hour $49,000 fixed overhead
$37,000 varibale overhead    (fixed $3.30; variable $2.50)

Explanation / Answer

labour rate(price) variance Any deviation from standard in the average hourly rate paid to workers: For example, assume that the standard cost of direct labor per unit of product A is 2.5 hours X $14 = $35. Assume further that during the month of March the company recorded 4,500 hours of direct labor time. The actual cost of this labor time was $64,800, or an average of $14.40 per hour. The company produced 2,000 units of product A during the month. The labor rate variance is ($14.40 - $14.00) X 4,500 hours = $1,800, which is unfavorable since the actual hourly rate exceeded the standard rate. This may be the result of unavoidable increases in labor rates, or it may reflect excessive labor costs due to use of higher skilled labor commanding higher wages. Price variance Difference between actual unit price and standard unit price, multiplied by actual quantity of input used. It reflects a change between the expected price and actual price of input. Price Variance = (Actual Price - Standard Price) X Actual Quantity where a positive result indicates an increase in costs (i.e., an unfavorable variance), while a negative result means a reduction in costs (i.e., a favorable variance). See also labor rate (price) variance ; materials price variance ; sales price variance Direct Material Price Variance Direct material price variance (also called the direct material spending/rate variance) is the product of actual quantity of direct material used and the difference between standard price and actual price per unit of direct material. It is calculated using the following formula: DM Price Variance = ( SP ? AP )

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