P&G company produces large size bags for the use of tourists. Company uses standard costing system to control costs. The standards for materials and labor costs to manufacture 1 bag are as follows:

Direct materials: 7.2 lbs. @ $5 per lb. $36.00
Direct labor: 0.4 hours @ $20 per hour $8.00

During the last month, P&G produced 2,500 large bags. 20,000 lbs. of direct materials were purchased @ $4.8 per lb. There was no direct materials inventory at the beginning and end of the month. 900 direct labor hours were recorded @  $24 per hour.

Required:

  1. Compute direct materials price and quantity variance.
  2. Compute direct labor rate and efficiency variance.

Solution:

(1) Materials variances:

= (20,000 × $4.80) – (20,000 × $5.00)

= $96,000 – $100,000

= $4,000 Favorable

= (20,000 × $5.00) – (18,000 × $5.00)

= $100,000 – $90,000

= 10,000 Unfavorable

(2) Labor Variances:

= (900 × $24) – (900 × $20)

= $21,600 – $18,000

= $3,600 Unfavorable

= (900 × $20) – (1000 × $20)

= $18,000 – $20,000

= $2,000 Favorable

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