Chapter 9, Problem 4E

Calculating Direct Materials and Direct Labor Variances
 
Suds & Cuts is a local pet grooming shop owned by Collin Bark. CoIlin has prepared the following standard cost card for each dog bath given:

 

 
During the month of July, CoIlin's employees gave 360 baths. The actual results ware 725 ounces of shampoo used (cost of $116). 6,500 gallons of water used (cost of $455), and labor costs for 230 hours (cost of $2.300).
 
Required:

1. Calculate Suds & Cuts direct materials variances for both shampoo and water for the month of July.

Calculate Suds & Cuts direct labor variances for the month of July.

Identify’ a possible cause of each variance.

To determine

(a)

Concept introduction:

Price variance:

It is the difference between price per unit in standard and actual price of product and multiplying that with quantity purchased in actual.

Quantity variance:

It is referred to the amount which is computed by multiplying the standard price per unit with the difference between quantity in actual term and standard term of product.

Direct Material spending variance:

This is calculated by combining material price variance and material quantity variance.

To compute:

The direct material variances for shampoo and water for the month of July.

Answer to Problem 4E

Direct material variances for Shampoo:

Direct material price variance $=43.50\text{ Unfavorable}$.

Direct material quantity variance $=\$0.50\text{ Unfavorable}$.

Direct material spending variance $=\$44\text{ Unfavorable}$

Direct material variances for water:

Direct material price variance $=\$130\text{ Unfavorable}$.

Direct material quantity variance $=\$35\text{ Favorable}$.

Direct material spending variance $=\$95\text{ Unfavorable}$

Explanation of Solution

Direct material variances for Shampoo:

Number of baths $=360\text{ Baths}$

Standard quantity of shampoo used $\text{=720oz}$

Standard rate $=\$0.10$

Actual quantity of shampoo used $=725\text{oz}$

$\text{Actual rate}=\$0.16$

Computation of Direct material price variance is as follows:

$\begin{array}{c}\text{Direct material price variance }=\left(\text{Actual price}-S\text{tandard price}\right)\times \text{Actual quantity}\\ \text{=}\left(\$0.16-\$0.10\right)\times 725\\ =\$43.50\text{Unfavorable}\end{array}$

Computation of Direct material quantity variance is as follows:

$\begin{array}{c}\text{Direct material quantity variance }=\left(\text{Actual quantity}-S\text{tandard quantity}\right)\times \text{Standard price}\\ \text{=}\left(725-720\right)\times \$0.10\\ =\$0.50\text{ Unfavorable}\end{array}$

Computation of Direct material spending variance is as follows:

$\begin{array}{c}\text{Direct material cost variance }=\text{Price variance}+\text{Quantity variance}\\ \text{=}\$43.50\left(\text{U}\right)+\$0.50\left(\text{U}\right)\\ =\$44\left(\text{U}\right)\end{array}$

Direct material variances for water:

Number of baths $=360\text{Baths}$

Standard quantity of water used $=7,200\text{gal}$

Standard rate $=\$0.05$

Actual quantity of crystal used $=6,500\text{gal}$

$\text{Actual rate=\$0}\text{.07}$

Computation of Direct material price variance is as follows:

$\begin{array}{c}\text{Direct material price variance }=\left(\text{Actual price}-S\text{tandard price}\right)\times \text{Actual quantity}\\ \text{=}\left(\$0.07-\$0.05\right)\times 6,500\\ =\$130\text{ Unfavorable}\end{array}$

Computation of Direct material quantity variance is as follows:

$\begin{array}{c}\text{Direct material quantity variance }=\left(\text{Actual quantity}-S\text{tandard quantity}\right)\times \text{Standard price}\\ \text{=}\left(6,500-7,200\right)\times \$0.05\\ =\$35\text{ Favorable}\end{array}$

Computation of Direct material spending variance is as follows:

$\begin{array}{c}\text{Direct material cost variance }=\text{Price variance}+\text{Quantity variance}\\ \text{=}\$130\left(\text{U}\right)+\$35\left(\text{F}\right)\\ =\$95\left(\text{U}\right)\end{array}$

To determine

(b)

Concept introduction:

Rate variance:

It is referred to the amount which is computed by multiplying the number of actual hours with the difference between actual rate and standard rate per hour of direct labour.

Time variance:

It is referred to the amount which is computed by multiplying the standard rate per hours with the difference between the number of actual hours and standard hours of direct labour.

Direct labour spending variance:

This is calculated by combining material price variance and material quantity variance.

To compute:

The direct labor variances for the month of January.

Answer to Problem 4E

Direct labor rate variance $=\$230\text{ Unfavorable}$.

Direct labor efficiency variance $=\$360\text{ Favorable}$.

Direct labor spending variance $=\$130\text{ Favorable}$

Explanation of Solution

Standard hours $=270\text{hours}$

Standard rate $=\$9$

Actual hours used $=230\text{hrs}$

$\text{Actual rate}=\$10$

Computation of Direct labor rate variance is as follows:

$\begin{array}{c}\text{Direct labour rate variance }=\left(\text{Actual rate}-S\text{tandard rate}\right)\times \text{Actual hours}\\ \text{=}\left(\$10-\$9\right)\times 230\\ =\$230\text{ Unfavorable}\end{array}$

Computation of Direct labor efficiency variance is as follows:

$\begin{array}{c}\text{Direct labour time variance }=\left(\text{Actual hours}-S\text{tandard hours}\right)\times \text{Standard rate}\\ \text{=}\left(230-270\right)\times \$9\\ =\$360\text{ Favorable}\end{array}$

Computation of Direct laborspending variance is as follows:

$\begin{array}{c}\text{Direct labour cost variance }=\text{Rate variance}+\text{Efficiency variance}\\ \text{=\$230 U}+\text{\$360 F}\\ =\$130\text{ Favorable}\end{array}$

To determine

(c)

Concept introduction:

Rate variance:

It is referred to the amount which is computed by multiplying the number of actual hours with the difference between actual rate and standard rate per hour of direct labour.

Time variance:

It is referred to the amount which is computed by multiplying the standard rate per hours with the difference between the number of actual hours and standard hours of direct labour.

Direct labour spending variance:

This is calculated by combining material price variance and material quantity variance.

The possible causes of each variance.

Answer to Problem 4E

The possible cause of the variances is the difference between the actual and standard or budgeted figures.

Explanation of Solution

The direct material price variance of shampoo is unfavorable, which means the price paid in actual is more than the standard price. The direct material quantity variance of shampoo is also unfavorable which means the quantity used in actual is more than the standard quantity.

The direct material price variance of water is unfavorable which means the price paid in actual is more than the standard price. The direct material quantity variance of water is favorable which means the quantity used in actual is less than the standard quantity.

The direct labor rate variance is unfavorable which means the rate paid in actual is more than the standard rate. The direct labor time variance is favorable which means the hours used in actual is less than the standard hours.