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.

1. Caro