Question

Acme Inc. has the following information available:

Actual price paid for material $1.00
Standard price for material $0.90
Actual quantity purchased and used in production 100
Standard quantity for units produced 110
Actual labor rate per hour $ 15
Standard labor rate per hour $ 16
Actual hours 200
Standard hours for units produced 220
1. Compute the material price and quantity, and the labor rate and efficiency variances.
2. Describe the possible causes for this combination of favorable and unfavorable variances.

Answer 1

1. Computation of variances

a. Material Price Variance = (Actual Price - Standard Price) x Actual Quantity

= ($1 - $0.9) x 100

= $10 U

b. Material Quantity Variance = (Actual Quantity - Standard Quantity) x Standard Price

= (100 - 110) x $0.9

= $9 F

c. Labor Rate Variance = (Actual Rate - Standard Rate) x Actual hours

= ($15 - $16) x 200

= $200 F

d. Labor Efficiency Variance = (Actual hours - Standard hours) x Standard Rate

= (200 - 220) x $16

= $320 F

2. Description of the possible causes for this combination of these variances

a. This could be due to scarcity of resources or major demand for this material, thus prices increasing in the market. Or could be purchase of high quality material than budgeted.

b. This could be because of purchase of higher quality material thus lower damages and could also be due to the efficiency of manufacturing plants.

c.This could be because of the use of less qualified cheap labor.

d.This could be due to good management of labors and strict overseeing, co-ordination of their work activities.