Waterways Corporation uses very stringent standard costs in evaluating its manuf

Question

Waterways Corporation uses very stringent standard costs in evaluating its manufacturing efficiency. These standards are not “ideal” at this point, but the management is working toward that as a goal. At present, the company uses the following standards.
Materials Item Per unit Cost Metal 1 lb. 63¢ per lb. Plastic 12 oz. $1.00 per lb. Rubber 4 oz. 88¢ per lb. Direct labor Item Per unit Cost Labor 15 min. $8.00 per hr. Predetermined overhead rate based on direct labor hours = $4.28
The January figures for purchasing, production, and labor are:
The company purchased 229,000 pounds of raw materials in January at a cost of 78¢ a pound. Production used 229,000 pounds of raw materials to make 115,500 units in January. Direct labor spent 18 minutes on each product at a cost of $7.80 per hour. Overhead costs for January totaled $54,673 variable and $73,800 fixed.
Answer the following questions about standard costs.

Explanation / Answer

(1) Material price variance = Actual quantity x (Actual price - Standard price)

12 oz = 0.75 lb

4 oz = 0.25 lb

Standard price per unit ($) = 1 x 0.63 + 0.75 x 1 + 0.25 x 0.88 = 0.63 + 0.75 + 0.22 = 1.6 per unit

So, Material price variance = 229,000 x $(0.78 - 1.6) = 229,000 x $0.82 = $187,780 (favorable)

(2) Material quantity variance = Standard price x (Actual quantity - Standard quantity)

= $1.6 x (229,000 - 231,000) = $1.6 x 2,000 = $3,200 (Favorable)

**Total material per unit = (1 + 0.75 + 0.25) lb = 2 lb

Total material for actual quantity produced = 115,500 units x 2 lb = 231,000 lb

(3) Total material variance = Price variance + Quantity variance

= $187,780 (Unfavorable) + $3,200 (Favorable) = $184,580 (Unfavorable)

(4) Labor price variance = Actual hours x (Actual rate - Standard rate)

= (115,500 x 18 / 60) x $(7.8 - 8) = 34,650 x $0.2 = $6,930 (Favorable)

(5) Labor quantity variance = Standard rate x (Actual hours - Standard hours)

= $8 x [(115,500 x 18 / 60) - (115,500 x 15 / 60)] = $8 x [34,650 - 28,875] = $8 x 5,775

= $46,200 (Unfavorable)

(6) Total labor variance = Price variance + Quantity variance

= $6,930 (Favorable) + $46,200 (Unfavorable) = $39,270 (Unfavorable)

NOTE: First 6 questions are answered.

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