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Materials and manufacturing labour variances, standard costs

Materials and manufacturing labour variances, standard costs. Consider the following selected data regarding the manufacture of a line of upholstered chairs:
Direct materials 2 square metres of input at $10 per square metre
Direct manufacturing labour 0.5 hour of input at $20 per hour

The following data were compiled regarding actual performance: actual output units (chairs)
produced, 20,000; square metres of input purchased and used, 37,000; price per square metre, $10.20; direct manufacturing labour costs, $176,400; actual hours of input, 9,000; labour price per hour, $19.60.

Required
1. Show your computations on the price and efficiency variances for direct materials and for direct manufacturing labour. Give a plausible explanation of why the variances occurred.
2. Suppose 60,000 square metres of materials were purchased (at $10.20 per square meter) even though only 37,000 square metres were used. Suppose further that variances are identified with their most likely control point; accordingly, direct materials price variances are isolated and traced to the purchasing department rather than to the production department. Compute the price and efficiency variances under this approach.

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1. Direct Materials
In order to calculate price variance, we can compute by using the following equation:
Price variance = Actual quantity purchased x difference between actual and
standard costs per unit of input purchased
Price variance = 37,000 x (10.20 - 10.00)
Price variance = $7,400 U

The price variance might occur due to price change or price fluctuation in the market. There is also the possibility that the manager might not be up to date with the market price in the market when he sets up the standard price per unit.

In order to calculate efficiency variance, we can compute by using the following equation:
Efficiency variance = Difference between actual x Standard cost per unit of ...

Solution Summary

This solution is comprised of a detailed explanation to answer the price and efficiency variances for direct materials and manufacturing direct labour.

$2.19