Question

uyur Styles E10.24: Straightforward calculation of variances; variance diagrams: manufacturer Can the Can Ltd manufactures recyclable soft drink cans. A unit of production is a box of 12 cans. The following standards have been set by the production engineering staff and the factory accountant: Direct material Direct labour Quantity: 4 kilograms Quantity: 0.25 hour Price: $0.90 per kilogram Rate: $33 per hour Actual material purchases amounted to 240 000 kilograms at $0.93 per kilogram. Actual costs incurred in the production of 50 000 units were as follows: Direct material $195 300 for 210 000 kilograms Direct labour $448 500 for 13 000 hours Required: 1. Construct an Excel spreadsheet to calculate the direct material price and quantity variances and the direct labour rate and efficiency variances. Indicate whether each variance is favourable or unfavourable. 2. Use your spreadsheet to show how the solution will change if the following information changes: standard direct material price is $0.885 per kilogram and standard direct labour rate is $36,

Answer 1

1. Computation of Direct material Price Variance and Direct material Quantity Variance

Direct material Price Variance = (Standard Price-Actual Price)*Actual Quantity purchased

Standard price per Kg	A	$0.90
Actual Price per Kg	B	$0.93
Actual Kgs Purchased	C	240,000
Direct material Price Variance	(A-B)*C	-$7,200	i.e. Unfavorable

Direct material Quantity Variance = (Standard Quantity for actual production-Actual quantity used)*Standard Price

Standard Material of Kgs	A = 50,000 Units *4 Kgs	200,000
Actual Kgs used	B	210,000
Standard price per Kg	C	$0.90
Direct material Quantity Variance	(A-B)*C	-$9,000	i.e. Unfavorable

Computation of Labor Rate Variance and Labor Efficiency Variance

Direct Labor Price Variance = (Standard Rate-Actual Rate)*Actual hours worked

Standard Rate per hour	A	$33.00
Actual Rate per hour	B = $448,500/13,000 hours	$34.50
Actual hours worked	C	13000
Direct Labor Price Variance	(A-B)*C	-$19,500	i.e. Unfavorable

Direct labor Efficiency Variance = (Standard hours for actual production -Actual hours)*Standard Rate

Standard hours for actual units produced	A = 50,000 Units * 0.25 Hours	12,500
Actual hours worked	B	13,000
Standard rate per hour	C	$33.00
Direct labor Efficiency Variance	(A-B)*C	-$16,500	i.e. Unfavorable

2. Computation of variances when Standard direct material price is $0.885 per Kg and Direct Labor is $36

Direct material Price Variance = (Standard Price-Actual Price) *Actual Quantity purchased A Standard price per kg Actual Price per kg Actual Kgs Purchased B $0.885 $0.93 240,000 с Direct material Price Variance (A-B)*C -$10,800 i.e. Unfavorable Direct material Quantity Variance = (Standard Quantity for actual production-Actual quantity used)*Standard Price Standard Material of Kgs Actual Kgs used Standard price per kg A = 50,000 Units *4 Kgs B 200,000 210,000 $0.885 C Direct material Quantity Varian (A-B)*C -$8,850 i.e. Unfavorable

Direct Labor Price Variance = (si (Standard Rate-Actual Rate)* Actual hours Unfavourable/Favourable Standard Rate per hour Actual Rate per hour Actual hours worked A B = $448,500/13,000 hours С $36.00 $34.50 13000 Direct Labor Price Variance (A-B)*C $19,500 i.e. Favorable Direct labor Efficiency Variance (Standard hours -Actual hours)* Standard 1 Unfavourable/Favourable Standard hours for actual units A = 50,000 Units * 0.25 Hours Actual hours worked Standard rate per hour B 12,500 13,000 $36.00 C Direct labor Efficiency Variance (A-B)*C $18,000 i.e. Unfavorable