Question

Dawson Toys, Ltd., produces a toy called the Maze. The company has recently established a standard cost system to help control costs and has established the following standards for the Maze toy:________. Direct materials: 6 microns per toy at $0.50 per micron Direct labor: 1.3 hours per toy at $8 per hour During July, the company produced 3,000 Maze toys. Production data for the month on the toy follow:________. Direct materials: 25,000 microns were purchased at a cost of $0.48 per micron. 5,000 of these microns were still in inventory at the end of the month. Direct labor: 4,000 direct labor-hours were worked at a cost of $36,000.Required:1. Compute the following variances for July:________.a. Direct materials price and quantity variances.b. Direct labor rate and efficiency variances.2. Prepare a brief explanation of the possible causes of each variance.

Answer 1

a. Direct materials price and quantity variances.

• Direct materials price variance = -$500 favorable (the materials were purchased at a lower cost than budgeted)
• Direct materials quantity variance = $1,000 unfavorable (since they purchased cheaper materials, they probably were low quality and needed more materials per toy)

b. Direct labor rate and efficiency variances.

• Direct labor rate variance = $4,000 unfavorable (labor costs per hour were higher than budgeted)
• Direct labor efficiency variance = $800 unfavorable (this might be related to the low level materials purchased that resulted in more time per toy)

Step-by-step explanation:

standard rates:

direct materials: 6 microns per toy at $0.50 per micron

direct labor: 1.3 hours per toy at $8 per hour

actual production and costs:

3,000 maze toys

25,000 microns purchased (5,000 microns remaining in inventory, so actual usage was 20,000 microns) at $0.48 per micron

4,000 hours of direct labor at $9 per hour

Direct materials price variance = (AP - SP) x AQ: we have to use total microns purchased for this variance

Direct materials price variance = ($0.48 - $0.50) x 25,000 = -$500 favorable

Direct materials quantity variance = SP x (AQ - SQ) = $0.50 x (20,000 - 18,000) = $1,000 unfavorable

Direct labor rate variance = (AR - SR) x AH = ($9 - $8) x 4,000 = $4,000 unfavorable

Direct labor efficiency variance = SR x (AH - SH) = $8 x (4,000 - 3,900) = $800 unfavorable