Question

Assume that Schmidt Machinery Company had the standard costs reflected in Exhibit 14.5. In a given month, the company used 3,475 pounds of aluminum to manufacture 925 units. The company paid $29.00 per pound during the month to purchase aluminum. At the beginning of the month, the company had 55 pounds of aluminum on hand. At the end of the month, the company had only 35 pounds of aluminum in its warehouse. Schmidt used 4,450 direct labor hours during the month, at an average cost of $42.00 per hour. Required: Compute the following variances for the month: 1. The purchase price variance for aluminum. Indicate whether this variance is favorable or unfavorable. 2. The usage variance for aluminum. Indicate whether this variance is favorable or unfavorable. 3. The direct labor rate variance. Indicate whether this variance is favorable or unfavorable.

Answer 1

Variance Amount Favorable/Unfavorable

Purchase price variance $3,475.00 Unfavorable

Usage variance $175.00 Favorable

Direct labor rate variance $0 Zero

Variances for Schmidt Machinery Company

1. Purchase Price Variance for Aluminum:

Formula: (Actual Price - Standard Price) x Actual Quantity

Standard price: $28.00 per pound (from Exhibit 14.5)

Actual price: $29.00 per pound

Actual quantity: 3,475 pounds

Purchase price variance: ($29.00 - $28.00) x 3,475 pounds = $3475.00

Favorable/Unfavorable: Since the actual price is higher than the standard price, the variance is unfavorable.

2. Usage Variance for Aluminum:

Formula: (Standard Quantity Allowed - Actual Quantity Used) x Standard Price

Standard quantity allowed: 3.75 pounds per unit x 925 units = 3,478.125 pounds

Actual quantity used: 3,475 pounds

Usage variance: (3,478.125 pounds - 3,475 pounds) x $28.00 per pound = $175.00

Favorable/Unfavorable: Since the standard quantity allowed is higher than the actual quantity used, the variance is favorable.

3. Direct Labor Rate Variance:

Formula: (Actual Rate - Standard Rate) x Actual Hours

Standard rate: $42.00 per hour (given)

Actual rate: $42.00 per hour (given)

Actual hours: 4,450 hours

Direct labor rate variance: ($42.00 - $42.00) x 4,450 hours = $0

Favorable/Unfavorable: Since the actual rate is the same as the standard rate, the variance is zero.

Summary:

Variance Amount Favorable/Unfavorable

Purchase price variance $3,475.00 Unfavorable

Usage variance $175.00 Favorable

Direct labor rate variance $0 Zero