Exercise-2 (Materials and labor variance, causes of variances)

Alpha Sports Company manufactures high quality sports products. Products are sold in the local as well as international markets. The company uses a well established standard costing system to control costs. One of the products of Alpha Supports Company is a cricket bat. The standard requirements to manufacture one bat are as follows:

Direct materials: 5 feet wood @ $0.60 per foot
Direct labor: 1.2 hours @ $14 per hour

During the last month, Alpha manufactured 4,000 cricket bats. 50,000 feet wood was purchased @ 0.56 per foot. 20,000 feet wood was in stock at the end of the month. 6,400 direct labor hours were worked @ $15 per hour.

Required:

1. Compute direct materials price and quantity variances.
2. Compute direct labor rate and efficiency variances.
3. Explain the significance and possible causes of each variance.

 Solution:

(1) Direct materials price and quantity variances:

*Standard quantity allowed for actual production of 4,000 units:
= 5 feet × 4,000 bats
= 20,000 feet

(2) Direct labor rate and efficiency variance:

*Standard hours allowed for actual production of 4,000 units:
= 1.2 hours × 4,000 bats
= 4,800 hours

(3) Significance and possible causes of variances:

Significance and causes of variances have been explained in “Explanation” section. Please click on “Explanation” from the top horizontal menu and then click on standard costing and variance analysis.