Chapter 23, Problem 1PB

Direct materials and direct labor variance analysis

Lenni Clothing Co. manufactures clothing in a small manufacturing facility. Manufacturing has 25 employees. Each employee presently provides 40 hours of productive labor per week. Information about a production week is as follows:

Instructions

Determine (A) the standard cost per unit for direct materials and direct labor; (B) the price variance, quantity variance, and total direct materials cost variance; and (C) the rate variance, time variance, and total direct labor cost variance.

To determine

Ascertain the standard cost per unit for direct materials, and direct labor.

Explanation of Solution

Direct material variances:

The difference between the actual material cost per unit and the standard material cost per unit for the direct material purchased is known as direct material cost variance. The direct material variance can be classified as follows:

• v Direct materials price variance.
• v Direct materials quantity variance.

Direct labor variances:

The difference between the actual labor cost in the production and the standard labor cost for actual production is known as direct labor cost variance. The direct labor variance can be classified as follows:

• v Labor rate variance.
• v Labor time variance.

Determine the standard cost per unit for direct materials, and direct labor.

Particulars	Standard materials and labor cost per unit
Direct materials     (1)	$25.00
Direct labor           (2)	$2.40
	$27.40

Table (1)

Working Note (1):

$\begin{array}{c}\left(\begin{array}{l}\text{Standard direct }\\ \text{materials cost}\end{array}\right)\text{=Standard price per yd}\text{.}\times \text{Standard number of yds}\text{.}\\ \text{=\$5}\text{.00}\times 5.\text{0 yds}\text{.}\\ \text{=\$25}\text{.00}\end{array}$

Working Note (2):

$\begin{array}{c}\left(\begin{array}{l}\text{Standard direct labor}\\ \text{cost}\end{array}\right)=\left(\begin{array}{l}\text{Standard wage per hour}\times \text{Standard labor time}\\ \text{ per minute}\end{array}\right)\\ =\$12.00\times \frac{12\text{minutes}}{60\text{minutes}}\\ =\$2.40\end{array}$

Conclusion

The standard cost per unit for direct materials, and direct labor is $27.40.

To determine

Ascertain the direct materials price variance.

Explanation of Solution

Determine the direct materials price variance.

  $\begin{array}{c}\text{Direct materials price variance = }\left[\left(\begin{array}{l}\text{Actual price}-\\ \text{Standard price}\end{array}\right)\text{× Actual quantity}\right]\\ =\left[\begin{array}{l}\left(\text{\$5}\text{.10}\text{per yd}\text{.}-\text{\$5}\text{.00 per yd}\text{.}\right)\\ \text{×26,200 yds}\text{.}\end{array}\right]\\ \text{=\$}\text{0}\text{.10}\text{×26,200}\text{(4) yds}\text{.}\\ \text{=\$2,620}\end{array}$

Hence, the direct materials price variance is $2,620, and it is an unfavorable variance, since the actual price is more than the standard price.

Working note (3):

Ascertain the direct materials quantity variance.

  $\begin{array}{c}\left[\begin{array}{l}\text{Direct materials }\\ \text{quantity variance}\end{array}\right]\text{ = }\left[\left(\begin{array}{l}\text{Actual quantity}-\\ \text{Standard quantity }\end{array}\right)\text{× Standard price}\right]\\ =\left[\left(26,200\text{yds}\text{.}-26,100\text{yds}\text{.}\right)\text{× \$5}\text{.00}\text{per yd}\text{.}\right]\\ \text{=\$}100\text{×\$5}\text{.00}\\ \text{=\$500}\end{array}$

Working note (4):

$\begin{array}{c}\text{Standard quantity=}\left(\begin{array}{l}\text{Number of faucets produced}\times \text{Standard}\\ \text{number of lb}\text{.}\end{array}\right)\\ =5,220\text{units}\times 5.\text{0}\text{lbs}\text{.}\\ \text{=26,100}\text{yds}\text{.}\end{array}$

Conclusion

Hence, the quantity variance is $500, and it is an unfavorable variance. Since the actual quantity is more than the standard quantity.

To determine

Ascertain the direct labor rate variance, direct labor time variance, and total direct labor cost variance.

Explanation of Solution

Determine the direct labor rate variance.

$\begin{array}{c}\text{Direct labor rate variance = }\left[\left(\begin{array}{l}\text{Actual rate per hour}-\\ \text{Standard rate per hour}\end{array}\right)\text{× Actual hours }\right]\\ =\left[\left(\text{\$11}\text{.80}-\text{\$12}\text{.00}\right)\text{×1,000 hours}\right]\\ \text{=\$}-0.20\text{×1,000}\text{(5) hours}\\ \text{=\$}\left(200\right)\end{array}$

The direct labor rate variance is $(200) and it is a favorable variance, since the actual rate per hour is lesser than the standard rate per hour.

Determine the direct labor time variance.

$\begin{array}{c}\begin{array}{l}\text{Direct labor }\\ \text{time variance}\end{array}\}\text{ = }\left[\left(\begin{array}{l}\text{Actual direct labor hours }-\\ \text{Standard direct labor hours }\end{array}\right)\text{× Standard rate per hour}\right]\\ =\left[\left(1,000\text{hours}-1,044\text{ (6)hours}\right)\text{× \$12}\text{.00 per hour}\right]\\ \text{=}\left[\left(44\right)\text{ hours× \$12}\text{.00}\text{per hour}\right]\\ \text{=\$}\left(528\right)\end{array}$

Determine the total direct labor cost time variance.

$\begin{array}{c}\text{Total direct labor cost variance = }\left(\begin{array}{l}\text{Direct labor rate variance +}\\ \text{Direct labor time variance}\end{array}\right)\\ \text{= \$(200)+\$}\left(528\right)\\ \text{=\$}\left(728\right)\end{array}$

The direct labor cost variance is $(728) and it is a favorable variance, since the direct labor rate variance is lesser than the direct labor time variance.

Working note (5):

$\begin{array}{c}\text{Actual labor hours=}\left(\begin{array}{l}\text{Number of employees}\times \text{Number of labor}\\ \text{ hours per week}\end{array}\right)\\ =25\text{employees}\times 40\text{hours}\\ \text{=1,000}\text{hours}\end{array}$

Working note (6):

$\begin{array}{c}\left(\begin{array}{l}\text{Standard direct }\\ \text{labor hours}\end{array}\right)=\left(\begin{array}{l}\text{Number of units produced}\times \text{Standard labor }\\ \text{ time per minute}\end{array}\right)\\ =5,220\text{units}\times \frac{12\text{minutes}}{60\text{minutes}}\\ =1,044\text{hours}\end{array}$