ABC Dress Shop produces high quality formal dresses. In July 2018 they produced
ID: 2437136 • Letter: A
Question
ABC Dress Shop produces high quality formal dresses. In July 2018 they produced 16,000 dresses. For the month of July the following standard and actual cost data are available. The normal monthly capacity of the company is 40,000 direct labor hours. All material purchased in July was used in July production.
Standard per Dress
Actual
Direct materials
5.0 yards @ $8.50 per yard
$643,250 for 83,000 yards
Direct labor
2.0 hours @ $12.00 per hour
$425,000 for 34,000 hours
Overhead
hours @ $5.15 per hour
(fixed $3.25; variable $1.90)
$125,000 fixed overhead
$49,000 variable overhead
Overhead is applied on the basis of direct labor hours. At normal capacity, budgeted fixed overhead costs are $130,000 per month and budgeted variable overhead costs are $76,000 per month.
Investiage
QUESTION: Provide a discussion of the tradeoffs that might exist between the direct material and direct labor variances.
Standard per Dress
Actual
Direct materials
5.0 yards @ $8.50 per yard
$643,250 for 83,000 yards
Direct labor
2.0 hours @ $12.00 per hour
$425,000 for 34,000 hours
Overhead
hours @ $5.15 per hour
(fixed $3.25; variable $1.90)
$125,000 fixed overhead
$49,000 variable overhead
Explanation / Answer
The direct material price variance is a measure of how well the price of materials is controlled and the direct material quantity variance is a measure of how efficiently the materials are utilized. The direct material price varianc is favorable indicating that materials were purchased at lower cost. However, the direct material quantity variance is unfavorable indicating that more material was used. Thus, the high quantity of material might be a result of low quality of materials due to lower price.
The direct labor rate variance is a measure of how well the cost of labor is controlled and the direct labor efficiency variance is a measure of how efficiently the workforce utilized. The direct labor rate variance is unfavorable indicating more skilled workers were hired. Even the direct labor efficiency variance is unfavorable indicating that the even the skilled workers did not perform up to the mark.