Fritz Corp. manufactures and sells a single product. The compan uses a standard

Question

Fritz Corp. manufactures and sells a single product. The compan uses a standard cost system. The standard cost per unit of product Calculation of materials and labor variances follows: 3.00 16.00 4.45 $23.45 Materials-1 lb plastic @$3.00 Factory overhead The charges to the manufacturing department for November, when 5,000 units were produced, follow: 15,900 80,360 ....23,815 $120,075 The Purchasing department normally buys about the same quantity as is used in production during a month. In November, Total. 5,500 lb were purchased at a price of $2.90 per pound. Required: Calculate the following from standard costs for the data given, using the formulas on pages 421-422 and 424: 1. Materials quantity variance. 2. Materials purchase price variance (at time of purchase). 3. Labor efficiency variance. 4. Labor rate variance. 5. Give some reasons as to why both the materials quantity vari- ance and labor efficiency variance might be unfavorable.

Explanation / Answer

Step 1 - Preparation of Flexible budget of Material and labour

Step 2 - Calculation of variances

1) Material Quantity Variance

Material Quantity Variance =

(Standard quantity - Actual quantity) * Standard Price

Material Quantity variance = (5000 lb - 5300 lb) * $3 = $900 U

2) Material Purchase price variance

Material Purchase price variance =

(Standard price - Actual price) * Actual Quantity

($3 - $3)*5300 lb = No variance

3) Labour Efficiency Variance

Standard Hours = (5000 * 1.6) = 8000 hours

Labour Efficiency variance =

(Standard Hours - Actual Hours) * Standard Rate

(8000 - 8200)*$9.8 = $1960 U

4) Labour rate variance

Labour Rate variance =

(Standard Rate - Actual rate) * Actual hours

($10 - $9.8) * 8000 = $1600 F

Step 5 - Reasons as to why Material quantity variance and Labour efficiency variance are unfavourable

Particulars Flexible budget (For 5000 units) Actual Material (5000 units * 1lb) @ $3.00 = $15000 5300 lb @ $3.00 = $15900 Labour (5000 unuts * 1.6 hours) @ $10.00 = $80000 8200 hours @ $9.8 = $80360

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