Rhodes Corporation manufactures a product with the following standard costs: Direct materials (20 yards @ $1.85 per yard) $ 37.00 Direct labor (4 hours @ $12.00 per hour) 48.00 Variable factory overhead (4 hours @ $5.40 per hour) 21.60 Fixed factory overhead (4 hours @ $3.60 per hour) 14.40 Total standard cost per unit of output $121.00 Standards are based on normal monthly production involving

Question

2,00 . direct labor hours (500 units of output). The following information pertains to the month of July: Direct materials purchased (16,00 . yards @ $1.80 per yard) $28,800 Direct materials used (9,400 yards) Direct labor (1,880 hours @ $12.20 per hour) 22,936 Actual factory overhead 16,850 Actual production in July: 460 units
a. Compute the following variances for the month of July, indicating whether each variance is favorable or unfavorable:

(1) Materials purchase price variance
(2) Materials quantity variance
(3) Labor rate variance
(4) Labor efficiency variance

b. Give potential reasons for each of the variances. Be sure to consider inter-relationships among variances.

Answer 1

(a)
Materials purchase price variance = (Actual unit price - standard unit price) x actual quantity of materials purchased
Materials purchase price variance = ($1.80 - $1.85) x 16,00 . = $800 favorable
(actual price less than standard price)

Materials quantity variance = (Actual quantity of materials used - standard quantity of materials allowed) x standard unit price
Materials quantity variance = (9,400 - 9,200*) x $1.85 = $370 unfavorable
(actual quantity exceeds standard quantity)
* 460 units x 20 yards per unit = 9,200

Labor rate variance = (Actual rate per hour - standard rate per hour) x Actual hours worked
Labor rate variance = ($12.20 - $12.00 . x 1,880 = $376 unfavorable
(actual rate exceeds standard rate)

Labor efficiency variance = (Actual hours worked - standard hours allowed) x standard rate
Labor efficiency variance = (1,880 - 1,840**) x $12.00 = $480 unfavorable
(actual hours exceed standard hours allowed)
** 460 units x 4 hours per unit = 1,840

(b) The favorable purchase price variance may have occurred because the purchasing manager purchased materials at a lower price that were of lesser quality. The workers encountered production problems as a result of the lesser quality materials which resulted in using more materials and taking more time than anticipated. The supervisor also had to assign more experienced workers to this production, which resulted in a higher average wage rate.

Note to instructor: If requirement (b) is not assigned, this problem would be moderate in difficulty.