Question 1. Topper Toys has developed a new toy called the Brainbuster. The comp

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Question 1. Topper Toys has developed a new toy called the Brainbuster. The company has a standard cost system to help control costs and has established the following standards for the Brainbuster toy:

Direct materials: 8 pieces per toy at $0.30 per piece

Direct labor: 1.2 hours per toy at $7 per hour

During the month of August, the company produced 5,000 Brainbuster toys. Production data for the month on the toy follow:

Direct materials: 50,000 pieces were purchased for use in production at a cost of $0.28 per piece.

Direct labor: 6,400 direct labor-hours were worked at a cost of $48,000.

Required: 1. Compute the following variances for the month

a. Direct materials price and quantity variances.

b. Direct labor price and quantity variances.

2. Prepare a brief explanation of the significance and possible causes of each variance. **BE SURE TO PROVIDE WRITTEN EXPLANTATION**

2. The Worldwide Credit Card Company uses standards to control the labor time involved in opening mail from card holders and recording the enclosed remittances. Incoming mail is gathered into batches, and a standard time is set of opening and recording each batch. The labor standards relating to one batch are given below:

The record showing the time spend last week in opening batches of mail has been misplaced. However, the batch supervisor recalls that 168 batches were received and opened during the week, and the controller recalls the following variance data relating to these batches:

Total labor variance................$330 Unfavorable

Labor price variance.................$150 Favorable

Required:

1. Determine the number of actual labor-hours spent opening batches during the week.

2. Determine the actual hourly rate paid to employees for opening batches last week.

STANDARD HOURS STANDARD RATE STANDARD COST PER BATCH 2.5 6 15

Explanation / Answer

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 ) × AQ

= (0.3 - 0.28)*50,000

= $ 1000 Favorable

Direct material quantity variance (also called the direct material usage/efficiency variance) is the product of standard price of a unit of direct material and the difference between standard quantity of direct material allowed and actual quantity of direct material used. The formula to calculate direct material quantity variance is:

DM Quantity Variance = ( SQ AQ ) × SP

= (40,000 - 50,000) * .3

$3000 unfavorable as the actual quantity used is more than the budgeted quantity

Direct labor rate variance (also called direct labor price/spending variance or wage rate variance) is the product of actual direct labor hours and the difference between the standard direct labor rate and actual direct labor rate. Direct labor rate variance is similar to direct material price variance. The following formula is used to calculate direct labor rate variance:

Where,
   SR is the standard direct labor rate
   AR is the actual direct labor rate
   AH are the actual direct labor hours

= ( 7 - 7.5) * 6400

= 3200 Unfavorable

Direct labor efficiency variance (also called direct labor quantity/usage variance) is the product of standard direct labor rate and the difference between the standard direct labor hours allowed and actual direct labor hours used. The basic concept of direct labor efficiency variance is similar to that of direct material quantity variance. The following formula is used to calculate direct labor efficiency variance:

Where,
   SH are the standard direct labor hours allowed
   AH are the actual direct labor hours used
   SR is the standard direct labor rate per hour

= (6000 - 6400)* 7

= $2800 unfavorable

Direct material quantity Direct materials price Direct Labor Rate Budget                                          8.00                                     0.30                 1.20              7.00 Actual                                50,000.00                                     0.28         6,400.00    48,000.00

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