Diva, Inc. is a privately held furniture manufacturer. For August 2020, Diva had the following standards for one of its products, a wicker chair: B (Click the icon to view the standards per chair.) The following data were compiled regarding actual performance: actual output units (chairs) produced, 2,500; square yards of input purchased and used, 7,100; price per square yard, $6.10; direct manufacturing labor costs, $10,767; actual hours of input, 970; labor price per hour, $11.10. Read the requirements. Requirement 1. Show computations of price and efficiency variances for direct materials and direct manufacturing labor. Give a plausible explanation of why each variance occurred. Let's begin by determining the formula used to calculate the actual costs of direct materials, then enter the amounts in the formula and calculate the cost. Actual input Actual price Actual cost Direct materials 7100 6.10 = 43310 Next we will calculate the actual input at the budgeted price. Actual input = Cost Budgeted price 5.90 Direct materials 7100 41890 II Direct manufacturing labor 970 X 10.90 = 10573 Determine the formula and calculate the costs for the flexible budget. Budgeted input for actual output X Budgeted price = Flexible budget cost Direct materials 7500 5.9 44250 II Direct manufacturing labor 1250 X 10.9 II 13625 - Data table Standards per Chair Direct materials 3 square yards of input at $5.90 per square yard Direct manufacturing labor 0.5 hour of input at $10.90 per hour Now compute the price and efficiency variances for direct materials and direct manufacturing labor. Label each variance as favorable (F) or unfavorable (U). Price Efficiency variances variances Direct materials 1420 U 2360 F Direct manufacturing labor 194 F 3052 F Now give a plausible explanation of why each variance occurred. Begin with the direct material variances. The materials price variance: There was an unexpected increase in materials price per square yard due to decreased competition. The materials efficiency variance: The production manager may have employed higher-skilled workers or the budgeted materials standards were set too loosely The labor price variance: A reduction in labor rates due to a recession The labor efficiency variance: efficient workers being employed or the use of quality materials. Requirement 2. Suppose 9,600 square yards of materials were purchased (at $6.10 per square yard), even though only 7,100 square yards were used. Suppose further that variances are identified at their most timely control point; accordingly, direct materials price variances are isolated and traced at the time of purchase to the purchasing department rather than to the production department. Compute the price and efficiency variances under this approach. Begin with recalculating the costs using the information provided for the alternative approach. Actual input X Actual cost Budgeted price Flexible budget cost Purchasing Production Now compute the direct materials price and efficiency variances. Label each variance as favorable (F) or unfavorable (U). Price Efficiency variance variance Direct materials
