Cole labortories makes and sells a lawn fertilizer called Fastgro. The company h
ID: 2510743 • Letter: C
Question
Cole labortories makes and sells a lawn fertilizer called Fastgro. The company has developed standard costs for one bag of fastgro as follows:
?Standard Quality Standard Cost per Bag
Direct Materials 40kg $16.00 ,
Direct labour 0.2 direct labour hours $2.20
The company had no beginning inventories of any kind on January 1. The results of the company's operation during January are as follows:
Production of Fastgro 4,000 bags
Direct materials purchased 170,000kg at a total cost of $64,600
Direct labour used 780 hours at a total cost of 9,750
Direct materials inventory, January 31 6,000kg
?Required:
?1. Calculate the direct material price and quantity variances?
?2. Calculate the direct labour rate and effeciency variances?
?3. Prepare the journal entry(ies) to record the direct labour rate and efficiency variances.
Explanation / Answer
Part 1
Material Price Variance
Material Price Variance is the variance arises in the material cost due to difference in actual material purchase price from standard material price. Mathematically, it is calculated as below:
Material Price Variance = Actual Quantity (Standard Price – Actual Price)
Note --- Here actual quantity means actual quantity of material PURCHASED. If the question does not provide the information about material purchase, it is taken as equal to material consumed.
Direct Material Price Variance
Actual Price (AP) ($64,600 / 170,000)
$0.38
per kg
Standard Price (SP) ($16 / 40kg)
$0.40
per kg
Variance or Difference in Price
$0.02
per kg
x Actual Quantity PURCHASED
170000
kgs
Material Price Variance
$3,400
Favorable
Material Quantity/Efficiency/Usage Variance
Material Efficiency (Usage) Variance measures variance in material cost due to usage/consumption of materials. It is calculated as below:
Material Quantity Variance = Standard Price (Standard Quantity for Actual Production – Actual Quantity USED)
Note --- Here actual quantity means actual quantity of material CONSUMED/USED
Direct Material Quantity Variance
Standard Quantity Allowed for actual production:
Actual Production/Activity
4000
Bags
x Allowed Standard Quantity Per Unit
40
kgs
Total Standard Quantity Allowed for actual production (SQAP)
160000
Kgs
Actual Quantity USED (AQU)
(Purchased 170,000 kgs - ending inventory 6000 Kgs)
164000
kgs
Variance or Difference in Quantity
4000
kgs
x Standard Price (SP)
$0.40
per kg
Material Quantity Variance
$1,600
Unfavorable
Part 2
Labor Rate Variance
Labor Price Variance – It arises due to difference in actual rate paid from standard rate. It is calculated as below:
Labor Price Variance = Actual Time (Standard Rate per hour – Actual Rate per hour)
Here, actual time means time for which wage has been paid.
Labor Rate Variance
Actual Hourly Rate (AHR) ($9750 / 780 hrs)
$12.50
Per Hour
Standard Hourly Rate (SHR) ($2.20 / 0.2)
$11.00
Per Hour
Variance or Difference in Rate
$1.50
Per Hour
x Actual Labor Hours worked
780
Hours
Labor Rate Variance
$1,170
Unfavorable
Labor Quantity Variance
Labor Efficiency Variance – It arises due to variation in the working hours from the set standard.
Labor Quantity / Efficiency Variance
Standard Hours Allowed for actual production:
Actual Production
4000
Bags
x Allowed Standard Hours Per Unit
0.2
hours
Total Standard Hours Allowed for actual production (SHAP)
800
hours
Actual Labor Hours Worked (AH)
780
hours
Variance or Difference in Hours
20
hours
x Standard Hourly Rate (SHR) ($2.20 / 0.2)
$11.00
per hour
Labor Efficiency Variance
$220
Favorable
Part 3 --- Journal Entry
General Journal
Debit
Credit
Work In Process (Std Hours Allowed 800*SR $11)
$8,800
Labor Rate Variance (780*$1.50 diff. in rate) (Unfavorable)
$1,170
Labor Efficiency Variance (Diff. in hours 20*$11)) (Favorable)
$220
Wages Payable
$9,750
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Direct Material Price Variance
Actual Price (AP) ($64,600 / 170,000)
$0.38
per kg
Standard Price (SP) ($16 / 40kg)
$0.40
per kg
Variance or Difference in Price
$0.02
per kg
x Actual Quantity PURCHASED
170000
kgs
Material Price Variance
$3,400
Favorable