Part of your company\'s accounting database was destroyed when Godzilla attacked

Question

Part of your company's accounting database was destroyed when Godzilla attacked the city. Through careful recreation of data, you have been able to determine that during the previous period, 20,000 units of product were produced. Raw Materials Inventory increased by 2,000 ounces during the period. Reports show that the direct material price variance was a favorable $120,000 for the period and the total direct material variances was a favorable $40,000. The actual price paid for direct material during the period was $14 per ounce, which was $3 less per ounce than expected The quantity allowed per unit of output was ounces. (round to the nearest hundreth)

Explanation / Answer

Solution:

Direct Material Price Variance = $120,000

Actual price of direct material (AP) = $14 per ounce

Standard price of direct material (SP) = actual price + $3 = 14+3 = $17

Direct material price variance = (SP - AP) * Actual Quantity of Direct material purchased

$120,000 = (17-14) * Actual quantity Purchased

Actual Quantity of Direct material Purchased= $120000/3 = 40000 ounces

Actual quantity of direct material Used (AQ) = Actual quantity Purchased - increment in raw material inventory = 40000-2000 = 38000 Ounces

Direct marerial quantity Variance = Direct material cost variance - Direct material price variance

= $40000 F - $120,000 F = $80000 U

(SQ - AQ) * SP = -$80000

(SQ - 38000) * $17 = -$80,000

SQ = 33294 ounces

Standard quantity allowed per unit of output = 33294/20000 = 1.66 ounce

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