Aryasansa Industries uses a standard cost system in which direct materials inven

Question

Aryasansa Industries uses a standard cost system in which direct materials inventory is carried at standard cost. Aryasansa has established the following standards for one unit of product.

A. What is the materials price variance? The price variance for the direct material acquired by Aryasansa Industries during May is:

B. What is the materials quantity variance? The materials quantity variance for May is:

C. What is the labor rate variance? T he labor rate variance for May is:

D. What is the labor efficiency variance? The labor efficiency variance for May is:

E. What explanation can you discern regarding the variances?

Explanation / Answer

Aryansansa Industries All Amounts in $ Actual Cost of material purchased per pound = $ 475,000 / 125,000 = 3.8 $ per pound A. Materials Price Variance = (Standard Rate per pound - Actual Rate per pound) X Actual quantity of materials used =(3.6 - 3.8) X 108,000 = -21600 Unfavorable B. Materials Quantity Variance = (Standard Quantity required - Actual quantity used for production) X Standard Rate per pound = ((22,000 X 5) - 108,000) X 3.6 = 7200 Favorable C. Labor Rate Variance = (Standard Rate per labor hour - Actual Rate per labor hour) X Actual no. of hours worked Actual Rate per labor hour = (364,000 X 90%) / 28,000 = 11.7 $ per labor hour Thus, Labor Rate Variance = (12 - 11.7) X 28,000 = 8400 Favorable D. Labor Efficiency Variance = (Standard Labor Hours - Actual Labor Hours) X Standard Rate per labor hour = ((22000*1.25)-28000)*12 = -6000 Unfavorable E. From the variances, it can be discerned that Aryasansa Industries has got tremendous control on the pricing of labour and materials. However, probably owing to the shortage of both the factors in the market as required for production, the actual material utilisation and labour usage is much higher than the standards as budgeted for a particular level of production.

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