A company isolates its raw material price variance in order to provide the earliest possible information to the manager responsible for the variance. The budgeted amount of material usage for the year was computed as follows: 150,000 units of finished goods × 3 lbs./unit × $2.00/lb. = $900,000 Actual results for the year were the following. Finished goods produced 160,000 units Raw materials purchased 500,000 pounds Raw materials used 490,000 pounds Cost per pound $2.02 The raw material price variance for the year was
Answer (C) is correct. The direct materials price variance, when it is isolated early, is calculated as the quantity purchased times the standard price minus the actual price (this firm has decided that waiting until the quantity actually used is known delays the usefulness of the calculation). The calculation is therefore [500,000 × ($2.00 – $2.02)] = $10,000 unfavorable.
Richter Company has an unfavorable materials efficiency (usage) variance for a particular month. Which one of the following is least likely to be the cause of this variance?
Answer (B) is correct. Shipping employees send out finished products to customers. They are not involved in the production process.
During the month of May, Tyler Company experienced a significant unfavorable material efficiency variance in the production of its single product at one of Tyler’s plants. Which one of the following reasons would beleast likely to explain why the unfavorable variance arose?
Answer (B) is correct. An unfavorable material efficiency variance means that excess materials g inferior quality materials or using workers who were not as skilled in working with the materials. Also, new equipment might damage materials during early production runs.
TwoCo established a standard direct material cost of $20 per finished unit for its main product. The standard is calculated using direct materials of 4 pounds and a standard rate of $5 per pound. For the month of March, TwoCo expected to produce 32,000 units. During the month, TwoCo purchased and used 130,000 pounds of material and produced 31,000 finished units. The actual price paid per pound was $5.40. What was the material quantity variance for the month of March?
Answer (C) is correct. The material quantity variance is equal to the amount of material used, minus the standard amount of material used, multiplied by the standard cost. The standard quantity of material for 31,000 units is 124,000 pounds (4 pounds/unit). Therefore, the material quantity variance is $30,000 U [(130,000 – 124,000) × $5].
Bettis Company began business on January 1 of the current year. The firm’s standard cost system allows for 4 yards of fabric at $1.55 per yard for each finished unit of product. During the year, Bettis produced 20,000 units of finished product and sold 18,000 units. Although there was no work-in-process inventory at the end of the year, there were 2,100 yards of fabric included in the ending raw materials inventory. If the materials quantity variance was $1,240 unfavorable, how many yards of fabric did Bettis buy during the year?
Answer (D) is correct. Since Bettis Company started operations on January 1, there is no beginning inventory of fabric. Bettis produced 20,000 units of finished product at 4 yards of fabric per unit; thus, the finished products used 80,000 yards of fabric. The material quantity variance was $1,240 unfavorable. The firm’s standard cost system allows for $1.55 per yard; thus, the unfavorable material quantity variance comes from using 800 extra yards ($1,240 ÷ $1.55/yard). Therefore, Bettis used 80,800 yards for production (80,000 yards + 800 yards). Direct materials quantity variance = Standard price × (Actual quantity – Standard quantity) $1,240 = $1.55 × (Actual quantity – 80,000 yards) $1,240 = $1.55 × (Actual quantity – $124,000) $125,240 = $1.55 × Actual quantity Actual quantity = 80,800 yards However, this amount is only the direct materials used in production. There were 2,100 yards of fabric included in the ending raw materials inventory that were not used in inventory. Adding these 2,100 yards to 80,800 yards from production yields 82,900 yards purchased during the year.
The inventory control supervisor at Wilson Manufacturing Corporation reported that a large quantity of a part purchased for a special order that was never completed remains in stock. The order was not completed because the customer defaulted on the order. The part is not used in any of Wilson’s regular products. After consulting with Wilson’s engineers, the vice president of production approved the substitution of the purchased part for a regular part in a new product. Wilson’s engineers indicated that the purchased part could be substituted providing it was modified. The units manufactured using the substituted part required additional direct labor hours resulting in an unfavorable direct labor efficiency variance in the Production Department. The unfavorable direct labor efficiency variance resulting from the substitution of the purchased part in inventory is best assigned to the
Answer (D) is correct. An unfavorable direct labor efficiency variance is normally charged to the production manager, the person with the most control over the amount and kinds of direct labor used. However, that individual is not responsible. (S)he was told to use the nonconforming part that required extra labor time. Thus, the variance should be charged to the vice president of production, the individual who most influenced the incurrence of the cost.
Under a standard cost system, direct labor price variances are usually not attributable to
Answer (A) is correct. The direct labor price (rate) variance is the actual hours worked times the difference between the standard rate and the actual rate paid. This difference may be attributable to (1) a change in labor rates since the establishment of the standards, (2) using a single average standard rate despite different rates earned among different employees, (3) assigning higher-paid workers to jobs estimated to require lower-paid workers (or vice versa), or (4) paying hourly rates, but basing standards on piecework rates (or vice versa). The difference should not be caused by a union contract approved before the budgeting cycle because such rates would have been incorporated into the standards.
The static budget for the month of May was for 9,000 units with direct materials at $15 per
unit. Direct labor was budgeted at 45 minutes per unit for a total of $81,000. Actual output
for the month was 8,500 units with $127,500 in direct materials and $77,775 in direct labor
expense. The direct labor standard of 45 minutes was maintained throughout the month.
Variance analysis of the performance for the month of May shows a(n)
Answer (D) is correct. Because direct labor for 9,000 units was budgeted at $81,000, the unit direct labor cost is $9. Thus, the direct labor budget for 8,500 units is $76,500, and the total direct labor variance is $1,275 ($77,775 – $76,500). Because the actual cost is greater than the budgeted amounts, the $1,275 variance is unfavorable. Given that the actual time per unit (45 minutes) was the same as that budgeted, no direct labor efficiency variance was incurred. Hence, the entire $1,275 unfavorable variance must be attributable to the direct labor rate (or price) variance.
An unfavorable direct labor efficiency variance could be caused by a(n)
Answer (B) is correct. An unfavorable direct labor efficiency variance indicates that actual hours exceeded standard hours. Too many hours may have been used because of inefficiency on the part of employees, excessive coffee breaks, machine down-time, inadequate materials, or materials of poor quality that required excessive rework. An unfavorable direct materials usage variance might be related to an unfavorable labor efficiency variance. Working on a greater quantity of direct materials may require more direct labor time.
Tub Co. uses a standard cost system. The following information pertains to direct labor for product B for the month of October: Standard hours allowed for actual production 2,000 Actual rate paid per hour $8.40 Standard rate per hour $8.00 Labor efficiency variance $1,600 U What were the actual hours worked?
Answer (D) is correct. The standard hours allowed equaled 2,000, and the labor efficiency variance was $1,600 unfavorable; i.e., actual hours exceeded standard hours. The labor efficiency variance equals the standard rate ($8 per hour) times the excess hours. Given that the variance is $1,600, 200 excess hours ($1,600 ÷ $8) must have been worked. Thus, 2,200 actual hours (2,000 standard + 200 excess) were worked.