3. a P&G; company produces many prodacts for housechold use.Company sells produc

Question

3. a P&G; company produces many prodacts for housechold use.Company sells products to storekeepers as well as to customers. Detergent-D.X is one of the products of P&G.; It is a cleaning prodtuct that is produced, packed in large boxes and then sold to customers and P&G; uses a traditional standard costing system to control costs and has established the following materials, labor and overhead standards to produce one box of Detergent-DX: Direct materials; 1.5 pounds@$12 per pound: $18.00 Direct labor, 0.6 hours $24 per hour: $14.40 Variable manufacturing overhead; 0.6 hours@$5.00:$3.00 During August 2012, company produced and sold 3,000 boxes of Detergent-D.X. 8 pounds of direct materials were purchased@$1150 per pound. Out of these 6,000 pounds, 6,000 pounds were used during August. There was no inventory at the beginning of August. 1600 direct labor hours were recorded during the month at a cost of $40,000. The variable manufacturing overhead costs during August totaled $7,200. Required 1. Compute materials price variance and materials quantity variance. b. Compute direct labor rate variance and direct labor efficiency variance.

Explanation / Answer

Question-1(a)

Calculation of Material Price variance:

Material price variance = (Standard price-Actual price) X Actual quantity purchased

= ( 12.00 - 11.50) X 6000 = $3000

Since the price paid by the company for the purchase of direct material is less than the standard price by $3000, the material price variance is favourable variance

Calculation material Quantity variance:

Material quantity variance = (Standard quantity for actual production - Actual Quantity consumed) X Standard price

= (4500 - 6000) X 12 = ($18000)

It is an adverse/ unfavourable variance.

Working - Calculation of standard quantity for actual production:

Standard quantity used to produce 1 box of detergent- DX = 1.5 pounds (Given)

so, Standard quanity used to produce 3000 boxes of detergent- DX = (3000/1) X 1.5 = 4500 pounds

Question-1(b)

Calculation of labour rate variance:

Labour rate variance = (Standard rate - Actual rate) X Actual hours worked

= (24 - 25) X 1600 = ($1600)

It is an adverse/ unfavourable variance.

Working- calcuation of actual labour rate:

a. Total labour cost = $40000

b. Number of hours worked = 1600 hours

c. Actual labour rate (a/b) = 40000/16000 = $25 per hour

Calculation of direct labour efficiency variance;

Labour efficiancy variance = (Standard hours for actual ouput - Actual hours worked) X Standard labour rate

= (1800 - 1600) X 24

= 4800

It is a favourable variance

Working- calculation of standard hours for actual ouput:

Standard hours for 1 box of detergent- DX = 0.6 hours

Standard hours for 3000 boxes of detergent- DX = (3000/1) X 0.6 = 1800 hours

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