Exercise-5 (Working backward from materials and labor variances)

ABC company manufactures and sells product X. The standards for materials and labor costs to manufacture one unit of product X are as follows:

• Direct materials: 6lbs. @ $2 per lb.
• Direct labor: 1 hour @ $8 per hour

ABC company purchased 26,000 pounds of direct materials for $27,300 and manufactured 4,000 units of product X during January 2012.

The following variances data belong to the January 2012:

• Materials price variance: $2,600 Unfavorable
• Materials quantity variance: $2,000 Unfavorable
• Direct labor rate variance: $1,520 Unfavorable
• Direct labor efficiency variance: $1,600 Favorable

Required:

1. Compute standard quantity of direct materials allowed (in pounds) for January production.
2. Compute the actual quantity of materials used (in pounds) for January production.
3. Compute the standard direct labor hours allowed for January production.
4. Compute actual direct labor hours worked for January production.
5. Compute actual direct labor rate.

Solution:

(1) Standard quantity of direct materials allowed for January production:

Standard quantity of materials allowed = Actual production for January × Standard materials per unit
= 4,000 units × 6 lbs.
= 24,000 lbs.

(2) Actual quantity of direct materials used for January production:

(3) Standard direct labor hours allowed for January production:

Standard hours allowed for January production = Actual production for January × Standard hours per unit
= 4,000 units × 1 hours
= 4,000 hours

(4) Actual direct labor hours worked for January production :

(5) Actual direct labor rate: