Final answer:
To compute price and efficiency variances, subtract standard costs from actual costs and multiply by quantities or rates. Price variances occur due to changes in market prices, while efficiency variances arise from differences in productivity or processes.
Step-by-step explanation:
To compute the price and efficiency variances for direct materials and direct manufacturing labor, you need to understand the actual costs compared to the standard or budgeted costs. The variances highlight differences between what was expected and what actually occurred. Variances can be favorable or unfavorable, depending on whether actual costs are lower or higher than standard costs.
Price Variance
Price Variance for direct materials is calculated using the formula:
(Actual Price - Standard Price) x Actual Quantity
For direct labor, the formula is:
(Actual Rate - Standard Rate) x Actual Hours
Efficiency Variance
Efficiency Variance for direct materials is:
(Actual Quantity - Standard Quantity) x Standard Price
For direct labor, it's:
(Actual Hours - Standard Hours) x Standard Rate
A plausible explanation for a price variance might be changes in market prices for materials or wages due to economic fluctuations. An efficiency variance could be due to changes in production processes, employee productivity, or machine functionality.