Exercise-4 (Materials price and quantity variance; labor rate and efficiency variance)

P&G company produces large size bags for the use of tourists. Company uses standard costing system to control costs. The standards for materials and labor costs to manufacture 1 bag are as follows:

• Direct materials: 7.2 lbs. @ $5 per lb.
• Direct labor: 0.4 hours @ $20 per hour

During the last month, P&G produced 2,500 large bags. 20,000 lbs. of direct materials were purchased @ $4.8 per lb. There was no direct materials inventory at the beginning and at the end of the month. 900 direct labor hours were recorded @ $24 per hour.

Required:

1. Compute direct materials price and quantity variance.
2. Compute direct labor rate and efficiency variance.

Solution:

(1) Materials variances

i. Direct materials price variance:

ii. Direct materials quantity variance:

*2,500 bags × 7.2 lbs = 18,000 lbs

(2) Labor Variances

i. Direct labor rate variance:

ii. Direct labor efficiency variance:

*2,500 bags × 0.4 hours = 1,000 hours