Question

Williams uses a standard cost accounting system and reported the following results with respect to direct materials. The company analyzes is standards on a regular basis and considers them to be very good measures of cost and efficiency. The company records the purchase price variance at the time the material is purchased. It records all materials issued to WIP at standard cost at which time all other material variances other than the purchase price variance are recorded. Information for April is presented below

Price of direct materials purchased: $30,960

Budgeted production: 5,000 finished units

Budgeted direct materials usage at standard: 10,000 pounds

Budgeted direct material cost at standard: $21,000

Actual production: 5,300 finished units

Pounds of direct materials purchased: 12,000 pounds

Pounds of direct materials used in production: 11,700 pounds

Evaluate how well the company managed its raw material costs and usage during April. Support your discussion with calculations.

Answer 1

Answer:

The company has not managed its raw material cost and usage in an optimum manner. From the calculations below, it can be seen that the material total cost variance, material price variance, and material usage variance are negative (unfavorable).

Explanation:

Direct Material cost variance = Standard material cost (-) actual material cost

= $ 22,260 (-) $ 30,186

= $ 7,926 (Unfavorable)

Direct Material price variance = Standard material price (-) actual material price * actual quantity

= [$ 2.1 (-) $ 2.58] * 11,700

= $ 5,616 (Unfavorable)

Direct Material quantity variance = Standard material quantity (-) actual material quantity * standard price

= [10,600 (-) 11,700] * 2.1

= 2,310 (Unfavorable)

Note:

Particulars	Standard (5000)			Revised Standard (5300)			Actual (5300)
	Units	Rate	Amount	Units	Rate	Amount	Units	Rate	Amount
Material	10,000.00	$      2.10	$ 21,000.00	10,600.00	$      2.10	$ 22,260.00	11,700.00	$      2.58*	$ 30,186.00

*Rate is calculated as 30,960/12,000 = $ 2.58

In case of any doubt, please comment.