Chapter 9, Problem 5E

Calculating Direct Materials and Direct Labor Variances
 
Crystal Charm Company makes handcrafted silver charms that attach to jewelry such as a necklace or bracelet. Each charm is adorned with two crystals of various colors. Standard costs follow:

 

During the month of January Crystal Charm made 1,800 charms. The company used 420 ounces of silver (total cost of $9,240) and 3,650 crystals (total cost of $803), and paid for 2,880 actual direct labor hours (cost of $42,480).
 
Required:
1. Calculate Crystal Charm’s direct materials variances for silver and crystals for the month of January.
2. Calculate Crystal Charm’s direct labor variances for the month of January.
3. 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 silver and crystals for the month of January.

Answer to Problem 5E

Direct material variances for Silver:

Direct material price variance $=\$840\text{ Unfavorable}$.

Direct material quantity variance $=\$600\text{ Favorable}$.

Direct material spending variance $=\$240\text{ Unfavorable}$

Direct material variances for Crystal:

Direct material price variance $=\$109.5\text{ Favorable}$.

Direct material quantity variance $=\$12.5\text{ Unfavorable}$.

Direct material spending variance $=\$97\text{ Favorable}$

Explanation of Solution

Direct material variances for Silver:

Number of charms $=1,800\text{Charms}$

Standard quantity of silver used $=0.25\text{oz}\times 1,800\text{charms}=450\text{oz}$

Standard rate $=\$20$

Actual quantity of silver used $=420\text{oz}$

$\begin{array}{c}\text{Actual rate}=\$9,250÷420\text{oz}\\ \text{=\$22}\end{array}$

Computation of Direct material price variance is as follows:

$\begin{array}{c}\text{Direct material price variance }=\left(\text{Actual price}-S\text{tandard price}\right)\times \text{Actual quantity}\\ \text{=}\left(\$22-\$20\right)\times 420\\ =\$840\text{ Unfavorable}\end{array}$

Computation of Direct material quantity variance is as follows:

$\begin{array}{c}\text{Direct material quantity variance }=\left(\text{Actual quantity}-S\text{tandard quantity}\right)\times \text{Standard price}\\ \text{=}\left(420-450\right)\times \$20\\ =\$600\text{ Favorable}\end{array}$

Computation of Direct material spending variance is as follows:

$\begin{array}{c}\text{Direct material cost variance }=\text{Price variance}+\text{Quantity variance}\\ \text{=}\$840\left(\text{U}\right)+\$600\left(\text{F}\right)\\ =\$240\left(\text{U}\right)\end{array}$

Direct material variances for Crystals:

Number of charms $=1,800\text{Charms}$

Standard quantity of crystals used $=2\text{crystals}\times 1,800\text{charms}=3,600\text{crystals}$

Standard rate $=\$0.25\text{ per crystal}$

Actual quantity of crystal used $=3,650\text{crystals}$

$\begin{array}{c}\text{Actual rate}=\$803÷3,650\text{crystals}\\ \text{=\$0}\text{.22per crystal}\end{array}$

Computation of Direct material price variance is as follows:

$\begin{array}{c}\text{Direct material price variance }=\left(\text{Actual price}-S\text{tandard price}\right)\times \text{Actual quantity}\\ \text{=}\left(\$0.22-\$0.25\right)\times 3,650\\ =\$109.5\text{ Favorable}\end{array}$

Computation of Direct material quantity variance is as follows:

$\begin{array}{c}\text{Direct material quantity variance }=\left(\text{Actual quantity}-S\text{tandard quantity}\right)\times \text{Standard price}\\ \text{=}\left(3,650-3,600\right)\times \$0.25\\ =\$12.5\text{ Unfavorable}\end{array}$

Computation of Direct material spending variance is as follows:

$\begin{array}{c}\text{Direct material cost variance }=\text{Price variance}+\text{Quantity variance}\\ \text{=}\$109.5\left(\text{F}\right)+\$12.5\left(\text{U}\right)\\ =\$97\left(\text{F}\right)\end{array}$

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 5E

Direct labor rate variance $=\$720\text{ Favorable}$.

Direct labor efficiency variance $=\$2,700\text{ Unfavorable}$.

Direct labor spending variance $=\$1,980\text{ Unfavorable}$

Explanation of Solution

Number of charms $=1,800\text{Charms}$

Standard hours $=1.5\text{hours}\times \text{1,800charms}=2,700\text{hrs}$

Standard rate $=\$15$

Actual hours used $=2,880\text{hrs}$

$\begin{array}{c}\text{Actual rate}=\$42,480÷2,880\text{hrs}\\ \text{=\$14}\text{.75}\end{array}$

Computation of Direct labor rate variance is as follows:

$\begin{array}{c}\text{Direct labour rate variance }=\left(\text{Actual rate}-S\text{tandard rate}\right)\times \text{Actual hours}\\ \text{=}\left(\$14.75-\$15\right)\times 2,880\\ =\$720\text{ Favorable}\end{array}$

Computation of Direct labor efficiency variance is as follows:

$\begin{array}{c}\text{Direct labour time variance }=\left(\text{Actual hours}-S\text{tandard hours}\right)\times \text{Standard rate}\\ \text{=}\left(2,880-2,700\right)\times \$15\\ =\$2,700\text{ Unfavorable}\end{array}$

Computation of Direct labor spending variance is as follows:

$\begin{array}{c}\text{Direct labour cost variance }=\text{Rate variance}+\text{Efficiency variance}\\ \text{=\$720 F}+\text{\$2,700 U}\\ =\$1,980\text{ Unfavorable}\end{array}$

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 5E

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

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

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