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Requirement-1(a):
To calculate: Material Price and Quantity variances
Requirement-1(a):
Answer to Problem 14P
Solution: Material Price and Quantity variances are as follows:
| Direct Material Price Variance | $ 15,000.00 | Favorable |
| Direct Material Quantity Variance | $ 2,500.00 | Unfavorable |
Explanation of Solution
Material Price and Quantity variances are calculated as follows:
| Direct Material Price Variance: | ||
| Actual Price (A) = (225000/12000) | $ 18.75 | Per Ounce |
| Standard Price (B) | $ 20.00 | Per Ounce |
| Actual Quantity (C) | 12000 | Ounces |
| Direct Material Price Variance = (A-B)*C = | $ 15,000.00 | Favorable |
| Direct Material Quantity Variance: | ||
| Actual Quantity (A) (12000-2500) | 9500 | Ounces |
| Standard Quantity (B) (3750 units *2.5) | 9375 | Ounces |
| Standard Price (C) | $ 20.00 | Per Ounce |
| Direct Material Quantity Variance = (A-B)*C = | $ 2,500.00 | Unfavorable |
Material Price and Quantity variances are as follows:
| Direct Material Price Variance | $ 15,000.00 | Favorable |
| Direct Material Quantity Variance | $ 2,500.00 | Unfavorable |
Requirement-1(b):
To state: The decision for purchase of more material from existing supplier
Requirement-1(b):
Answer to Problem 14P
Solution: The Company should sign a long term contract with the existing supplier.
Explanation of Solution
The Company should sign a long term contract with the existing supplier because the rate of material is less than the standard rate and Direct Material Price Variance is favorable.
The Company should sign a long term contract with the existing supplier.
Requirement-2(a):
To calculate: Direct Labor Rate and Efficiency variances
Requirement-2(a):
Answer to Problem 14P
Solution: Direct Labor Rate and Efficiency variances are as follows:
| Direct Labor Rate Variance | $ 2,800.00 | Favorable |
| Direct Labor Efficiency Variance | $ 7,875.00 | Unfavorable |
Explanation of Solution
Direct Labor Rate and Efficiency variances are calculated as follows:
| Direct Labor Rate Variance: | ||
| Actual Rate (A) = (225000/12000) | $ 22.00 | Per hour |
| Standard Rate (B) | $ 22.50 | Per hour |
| Actual hours (C) (35 employees *160 hours) | 5600 | Hours |
| Direct Labor Rate Variance = (A-B)*C = | $ 2,800.00 | Favorable |
| Direct Labor Efficiency Variance: | ||
| Actual hours (A) (35 employees *160 hours) | 5600 | Hours |
| Standard Hours (B) (3750 units *1.4 hours) | 5250 | Hours |
| Standard Rate (C) | $ 22.50 | Per hour |
| Direct Labor Efficiency Variance =(A-B)*C = | $ 7,875.00 | Unfavorable |
Direct Labor Rate and Efficiency variances are as follows:
| Direct Labor Rate Variance | $ 2,800.00 | Favorable |
| Direct Labor Efficiency Variance | $ 7,875.00 | Unfavorable |
Requirement-2(b):
To state: The decision to continue the labor mix
Requirement-2(b):
Answer to Problem 14P
Solution: The Company should continue the labor mix.
Explanation of Solution
The Company should continue the labor mix because the Direct Labor Rate Variance is favorable which means the actual cost of the labor is less than the
The Company should continue the labor mix.
Requirement-3:
To calculate: Variable
Requirement-3:
Answer to Problem 14P
Solution: Variable overhead Rate and Efficiency variances are as follows:
| Variable Overhead Rate Variance | $ 1,400.00 | Favorable |
| Variable Overhead Efficiency Variance | $ 1,225.00 | Unfavorable |
There is a direct positive relation between the Direct Labor Efficiency Variance and Variable overhead Efficiency Variance.
Explanation of Solution
Variable overhead Rate and Efficiency variances are calculated as follows:
| Variable Overhead Rate Variance: | ||
| Actual Rate (A) = (18200/5600 hours) | $ 3.25 | Per hour |
| Standard Rate (B) | $ 3.50 | Per hour |
| Actual hours (C) (35 employees *160 hours) | 5600 | Hours |
| Variable Overhead Rate Variance = (A-B)*C = | $ 1,400.00 | Favorable |
| Variable Overhead Efficiency Variance: | ||
| Actual hours (A) (35 employees *160 hours) | 5600 | Hours |
| Standard Hours (B) (3750 units *1.4 hours) | 5250 | Hours |
| Standard Rate (C) | $ 3.50 | Per hour |
| Variable Overhead Efficiency Variance =(A-B)*C = | $ 1,225.00 | Unfavorable |
There is a direct positive relation between the Direct Labor Efficiency Variance and Variable overhead Efficiency Variance. It means if the Direct Labor Efficiency Variance is unfavorable, then the Variable Overhead Efficiency Variance shall also be unfavorable.
There is a direct positive relation between the Direct Labor Efficiency Variance and Variable overhead Efficiency Variance.
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