Question

Boat Guard, which used a standard cost accounting system, manufactured 210,000 boat fenders during the year, using 1,780,000 feet of extruded vinyl purchased at $1.30 per foot. Production required 4,900 direct labor hours that cost $13.00 per hour. The materials standard was 8 feet of vinyl per fender at a standard cost of $1.40 per foot. The labor standard was 0.024 direct labor hour per fender at a standard cost of $12.00 per hour.

1. Compute the price and quantity variances for direct materials. Compute the rate and efficiency variances for direct labor.

2. Does the pattern of variances suggest that the company’s managers have been making trade-offs? Explain.

Answer 1

Variance analysis for Boat Guard revealed a favorable price variance for materials, an unfavorable quantity variance for materials, an unfavorable rate variance for labor, and a favorable efficiency variance for labor. These mixed variances may indicate possible trade-offs where purchasing cheaper materials led to increased usage, and higher labor costs were offset by better utilization.

Step-by-step explanation:

To compute the price and quantity variances for direct materials as well as the rate and efficiency variances for direct labor, we will perform the following calculations:

Direct Materials Variance

• Actual Quantity (AQ): 1,780,000 feet
• Actual Price (AP): $1.30 per foot
• Standard Quantity (SQ): 210,000 fenders * 8 feet = 1,680,000 feet
• Standard Price (SP): $1.40 per foot

Price Variance = (AP - SP) * AQ
= ($1.30 - $1.40) * 1,780,000
= - $0.10 * 1,780,000
= - $178,000 (favorable)

Quantity Variance = (AQ - SQ) * SP
= (1,780,000 - 1,680,000) * $1.40
= 100,000 * $1.40
= $140,000 (unfavorable)

Direct Labor Variance

• Actual Hours (AH): 4,900 hours
• Actual Rate (AR): $13.00 per hour
• Standard Hours (SH): 210,000 fenders * 0.024 hours = 5,040 hours
• Standard Rate (SR): $12.00 per hour

Rate Variance = (AR - SR) * AH
= ($13.00 - $12.00) * 4,900
= $1.00 * 4,900
= $4,900 (unfavorable)

Efficiency Variance = (AH - SH) * SR
= (4,900 - 5,040) * $12.00
= -140 * $12.00
= - $1,680 (favorable)

Regarding the second question about trade-offs, the pattern of variances might suggest so. A favorable price variance for materials could be due to purchasing cheaper materials, which may have affected quality leading to the usage of more vinyl than standard, as indicated by the quantity variance. Similarly, the higher actual rate paid for labor suggests either a need for higher skilled labor or overtime costs, but efficiency variance being favorable suggests labor was effectively utilized.

Answer 2

Answer and Explanation:

According to the scenario, computation of the given data are as follow:-

1. Direct Material Price is

= Actual Quantity × (Standard Rate - Actual Rate)

= 1,780,000 × ($1.40 - $1.30)

= 1,780,000 × 0.10

= $178,000 Favorable

Direct Material Quantity Variance is

= Standard Rate × (Standard Quantity - Actual Quantity)

= $1.40 × [(210,000 × 8) - 1,780,000]

= $1.40 × (1,680,000 - 1,780,000)

= $1.40 × -100,000

= -$140,000 Unfavorable

Direct Labor Rate Variance is

= Actual Hour × (Standard Rate - Actual Rate)

= 4,900 hours × ($12 - $13)

= -4,900 hours × $1

= -$4,900 Unfavorable

Direct Labor Efficiency Variance is

= Standard Rate × (Standard Hours - Actual Hours)

= $12 × [(210,000 × 0.024) - 4,900]

= $12 × [5,040 - 4,900]

= $12 × 140 hour

= $1,680 Favorable

2. As we can see that the material price variance and labor efficiency variance comes in favorable while on the other side, the material quantity variance and labor rate variance comes in unfavorable.

And we assume that the managers are purchasing the materials efficiently at lesser rates and the usage is not efficient.

Consequently , labor is efficient if the company paid at higher rate.

Therefore the managers are making trade offs.

Moreover, they are compromising of labor rate so that there would be rise in efficiency.

And at the same time if cheaper material is buyed so the quality is compromised and the changes of wastage is high that reflects the material quantity variance unfavorable