This question is on variance analysis in managerial/cost accounting. More specifically, it asks for calculations of direct material price variance, direct material efficiency/usage variance, the flexible budget variance, and determining whether the variances are favorable or unfavorable.
Direct Material Price Variance:
First of all, to answer this question you will need to know the formula used to calculate the direct material price variance:
DM price variance = AQ ( AP - SP)
AQ = Actual quantity
AP = Actual price
SP = standard price
It's important to note that the actual quantity can refer to the quantity purchased, which is most useful for the direct material price variance, or the quantity used, which is most useful when calculating efficiency variances.
We are told that the price variance is (? - 7) x 10,800 = 5,400 unfavorable
Since the price variance is unfavorable, we know that the actual price paid per unit of material was more than the standard price per unit of that material. Therefore, we know that the ? is a number greater than 7. We can now use algebra to solve for the unknown. The steps are as ...
The solution outlines the computation of direct material price variance, direct material efficiency/usage variance, and the flexible budget variance. It also illustrates the determination of whether these variances are deemed favorable or unfavorable.