All-Star Fender, which uses a standard cost accounting system, manufactured 20,0

Question

All-Star Fender, which uses a standard cost accounting system, manufactured 20,000 boat fenders during the year, using 146,000 feet of extruded vinyl purchased at $1.15 per square foot. Production required 480 direct labor hours that cost $15.00 per hour. The materials standard was 7 feet of vinyl per fender, at a standard cost of $1.20 per square foot. The labor standard was 0.026 direct labor hour per fender, at a standard price of $14.00 per hour.

Requirement

Compute the price and efficiency variances for direct materials and direct labor. Does the pattern of variances suggest All-Star Fender’s managers have been making trade-offs? Explain.

Explanation / Answer

Direct Material Price Variance = Actual Quantity * (Actual Price - Standard Price)

= 146000 * (1.15 - 1.20) = 7300 (F)

Direct Material Quantity Variance = (Standard Quantity Actual Quantity) × Standard Price

= [(20000*7) - 146000] * 1.20 = 7200 (U)

Direct Labor Rate Variance = Actual Hours * (Actual Rate - Standard Rate)

= 480 * (15 - 14) = 480 (U)

Direct Labor Efficiency Variance = (Actual Hours - Standard Hours) * Standard Rate

= (480 - (20000*.026)) * 14 = 560 (F)

The material price variance and labour efficiency variance is favorable while material quantity variance and labour rate variance are unfavorable. The managers are purchasing materials efficiently at low rates but usage is inefficient. Similarly, labour is efficient only if paid at higher rate. Yes managers are making trade offs. They are compromising of rate of labour for increasing their efficiency. Similarly, buying cheaper material may imply there is a compromise in quality and more wastage which leads to unfavorable material quantity variance.

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