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Question:
Dunn, Inc., is a privately held furniture
manufacturer. For August 2014, Dunn had the
following standards for one of its products, a
wicker chair:
Standards per Chair
Direct materials 2 square yards of input at $5
per square yard
Direct manufacturing labor 0.5 hour of input at
$10 per hour
The following data were compiled regarding
actual performance:
actual output units (chairs) produced, 2,000;
square yards of input purchased and used,
3,700; price per square yard, $5.10; direct
manufacturing labor costs, $8,820; actual hours
of input, 900; labor price per hour, $9.80.
1. Show computations of price and e!ciency
variances for direct materials and direct
manufacturing labor. Give a plausible
explanation of why each variance occurred.
2. Suppose 6,000 square yards of materials
were purchased (at $5.10 per square yard), even
though only 3,700 square yards were used.
Suppose further that variances are identi"ed at
their most timely control point; accordingly,
direct materials price variances are isolated and
traced at the time of purchase to the purchasing
department rather than to the production
department. Compute the price and e!ciency
variances under this approach.
3. Prepare journal entries and post them to T-
accounts for all transactions
Cost Variances
Cost variance is a control tool used in
management accounting to compare the
di#erence between actual costs incurred and
planned budgeted costs. Through this
comparison, management is able to obtain
feedback about its cost performance and
determine if future operational changes are
required. Direct cost variances examine the
di#erence in budgeted and actual costs with
regards to direct materials and direct labor.
These variances highlight the di#erences in
terms of unit cost per input and input quantity
used based on actual output.
" Answer and Explanation:
1.
Direct materials price variance = purchase
quantity x (actual price - standard price) = 3,700
x (5.10 - 5) = 370 U
Direct material quantity variance = Standard
price x (actual quantity used - standard quantity
given actual output) = 5 x (3,700 - 4000) = 1,500
F
An unfavorable direct material price variance of
370 could be the result of the company paying a
higher price per square yard of raw materials
due to a change in supplier. A favorable direct
material quantity variance of 1,500 could be the
result of the company providing additional
training to workers resulting in less wastages or
defects
Direct labor rate variance = actual hours x
(actual rate - standard rate) = 900 x (9.80 - 10) =
180 F
Direct labor e!ciency variance = standard rate x
(actual hours - standard hours given actual
output) = 10 x (900 - 1000) = 1,000 F
A favorable direct labor rate variance of 180
could be the result of the company re-
negotiating with its employees to decrease
wage rate. A favorable direct labor e!ciency
variance of 1,000 could be the result of the
company being able to schedule its workers
e#ectively resulting in less idle time.
2.
Direct materials price variance = purchase
quantity x (actual price - standard price) = 6,000
x (5.10 - 5) = 600 U
Direct material quantity variance = Standard
price x (actual quantity used - standard quantity
given actual output) = 5 x (3,700 - 4000) = 1,500
F
Direct labor rate variance = actual hours x
(actual rate - standard rate) = 900 x (9.80 - 10) =
180 F
Direct labor e!ciency variance = standard rate x
(actual hours - standard hours given actual
output) = 10 (900 - 1000*) = 1,000 F
3.
DR Raw Materials Inventory 18,500
DR Direct materials price variance 370
CR Accounts Payable 18,870
_____
DR Work in Process 20,000
CR Direct material quantity variance 1,500
CR Raw Material Inventory 18,500
_____
DR Work in Process 10,000
CR Direct labor rate variance 180
CR Direct labor e!ciency variance 1,000
CR Wages Payable 8,820
_____
Raw Material Inventory
Accounts Payable 18,500 Work in Process 18,500
Direct Material Price Variance
Accounts Payable 370
Accounts Payable
Raw Materials Inventory 18,500
Direct materials price variance 370
Direct Material Quantity Variance
Work in Process 1,500
Work in Process
Direct Material Quantity Variance 1,500
Raw Materials Inventory 18,500
Direct Labor Rate Variance 180
Direct labor e!ciency variance 1,000
Wages Payable 8,820
Direct Labor Rate Variance
Work in Process 180
Direct labor e!ciency variance
Work in Process 1,000
Wages Payable
Work in Process 8,820
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Learn more about this topic:
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