Londonderry Company’s Widget Plant produces widgets for industrial use. The plan

Question

Londonderry Company’s Widget Plant produces widgets for industrial use. The plant uses a standard cost system with the following standard variable cost per widget.

                                                                                                Standard Qty                      Standard Price                  

                                                                                                   or Hours                              or Rate                             

Standard Cost

Direct Materials…………………………                               4.0 pounds                         $2.50 per pound              

Direct Labor……………………………….                              0.6 hours                             $9.00 per hour                 

During April, the plant produced 5,000 widgets and incurred the following costs:

a. Purchased and used 20,000 pounds of materials at a cost of $2.95 per pound.

b. Worked 3,600 direct labor hours at a cost of $8.70 per hour.

Required: (use the variance analysis template, if desired)

1.       Compute the following variances for April:

a.       Direct materials price and quantity variances.

b.       Direct labor rate and efficiency variances.

2.       Pick out the two most significant variances that you computed above (there are four in total). Explain possible causes for these variances.

Explanation / Answer

Solution-

Widget produced = 5000 widget

A. Given Data,

Standard cost of direct material per widget = $ 2.50 per pound

Actual cost incurred = $ 2.95 per pound

Actual materials used- 20000 pounds

Standard materials used - 5000*4 = 20000 pounds

Direct materials price variance = ( Standard cost ? Actual cost ) × Actual quantity = (2.50 - 2.95)*20000 = -9000

Quantity variance = (Actual quantity used - Standard quantity used) x Standard cost per unit = (20000-20000) * 2.50 = 0

B. Given data,

Actual labour hours worked- 3600 hours

Actual labour cost = $ 8.70 per hour

Standard labour cost = $ 9 per hour

Standard labour hours required = 5000*0.6 = 3000 hours

Labor rate variance = (Actual rate - Standard rate) x Actual hours worked = (8.70 - 9.0) * 3600 = -1080

Direct labor efficiency variance = (Actual hours worked - Standard hours allowed) × Standard rate

= (3600 - 3000) * 9 = 5400

2. Two most significant variances would be the variances with greater value. therefore Direct materials price variance and Direct labor efficiency variance are the two most significant variance.

Possible cause for Direct materials price variance is the large difference between actual material price and standard material price.

Possible cause for direct labour efficiency variance is large difference betweek actual labour hour worked and standard labour hours allowed.

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