Jake’s Cheese Company produces gourmet cheese for resale at local grocery stores. Jake’s expected to use 3.0 pounds of direct materials to produce one unit (batch) of product at a cost of $8 per pound. Actual results are in for last year, which indicates 45,000 batches of cheese were sold. The company purchased 160,000 pounds of materials at $7.50 per pound and used 145,000 pounds in production. Required: (1) Calculate the materials price variance. (2) Calculate the materials quantity variance. (3) Suggest several possible reasons for the materials price and quantity variances calculated in requirements (1) and (2).
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Problem #9: Standard Costing & Variances
Jake’s Cheese Company produces gourmet cheese for resale at local grocery stores. Jake’s expected to use 3.0 pounds of direct materials to produce one unit (batch) of product at a cost of $8 per pound. Actual results are in for last year, which indicates 45,000 batches of cheese were sold. The company purchased 160,000 pounds of materials at $7.50 per pound and used 145,000 pounds in production.
Required:
(1) Calculate the materials price variance.
(2) Calculate the materials quantity variance.
(3) Suggest several possible reasons for the materials price and quantity variances calculated in requirements (1) and (2).
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