Problem 8-2 Materials and Labor Variances The following operating data came from
ID: 2515260 • Letter: P
Question
Problem 8-2
Materials and Labor Variances
The following operating data came from the records for the month:
In process, beginning inventory, none.
In process, ending inventory, 800 units, 80% complete as to labor; material is issued at the beginning of processing.
Completed during the month, 5,600 units.
Materials issued to production were 51,680 lb @ $.55 per pound.
Direct labor was $384,000 for 40,000 hours worked.
Required:
Calculate the following variances, using the diagram format in Figure 8-4. (Hint: Before determining the standard quantity for materials and labor, you must first compute the equivalent units of production for materials and labor.)
Use "F" and "U" to indicate favorable and unfavorable variances. Enter all amounts as positive numbers.
* Please correct #3, #5, #6
Explanation / Answer
Step1: Computation of the equivalent units for material and labour.We have,
Equivalent units = Units completed + (Units in ending inventory X percent complete)
Equivalent units for materials = 5,600 + ( 800 x 100%) = 5,600 + 800 = 6,400 units
Equivalent units for Labour = 5,600 + 800 x 80%) = 5,600 + 640 = 6,240 units.
Step2: Computation of material price variance.We have,
Material price variance = (Standard price - Actual price) Actual quantity
Material price variance = (0.50 - 0.55 ) 51,680 = $ 2,584 (U)
Step3: Computation of the material quantity variance.We have,
Material quantity variance = ( Standard quantity - Actual quantity) Standard price
Material quantity variance = ( ( 6,400 x 8) - 51,680 ) 0.50 = (51,200 - 51,680) 0.50 = $ 240 (U)
Step4: Computation of the net material variance.We have,
Net material variance = (Standard Quantity x Standard Price) – (Actual Quantity x Actual Price)
Net material variance = ( 6,400 x 8 x 0.50) - ( 51,680 x 0.55)
Net material variance = 25,600 - 28,424 = $ 2,824 (U)
Step5: Computation of Labor rate variance.We have,
Labor rate variance = (Standard rate - Actual rate ) x Actual hour
Labor rate variance = ( 10.00 - 384,000 / 40,000 ) 40,000
Labor rate variance = ( 10.00 - 9.60 ) 40,000 = $ 16,000 (F)
Step6: Computation of the Labor efficiency variance.We have,
Labor efficiency variance = (Standard hour - Acual hour) x Standard rate
Labor efficiency variance = ( ( 6,240 x 6) - 40,000) 10 = ( 37,440 - 40,000 ) 10 = $ 25,600 (U)
Step7: Computation of the Net labor variance.We have,
Net labor variance = Standard cost of labour - Actual cost of labour
Net labor variance = ( 6,240 x 6 x 10 ) - 384,000 = 374,400 - 384,000 = $ 9,600 (U)