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Variance calculation for Esther Industries

Esther Industries developed the following standards for one of its products:

Material 6 feet $15/foot $ 90
Labor 10 hours $12/hour 120
Total variable cost $210

Actual results for September were:

Units produced 13,000
Material purchased 40,000 feet for $14.25/foot
Material used 80,000 feet
Direct Labor 127,500 hours at $12.25/hour

(1.) Calculate the following variances
(a.) Material purchase price variance
(b.) Material quantity variance
(c.) Labor rate variance
(d.) Labor efficiency variance

(2.) Why would it be inappropriate to calculate the Material price variance at the time the material is used; might there be a situation when it might be all right to do so?

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Solution Preview

(a.) Material purchase price variance

Material purchase price variance = (Actual Price - Standard Price) X Actual quantity purchased
= (14.25-15) X 40,000 = $30,000 favorable as actual price is less than standard

(b.) Material quantity variance

Material quantity variance = (Actual quantity - standard quantity allowed) X standard price
Standard quantity allowed = units produced X quantity per unit = 13,000 X 6 = 78,000
Quantity ...

Solution Summary

The solution explains how to calculate Material purchase price variance, Material quantity variance, Labor rate variance and Labor efficiency variance.