Question 4.

Travel Ltd, mass produce "suit cases". These cases are made in a variety of colours, but only in one design. The company Management Accountant has provided the below information which was extracted from the company's standard cost sheet for the month of March. This information was based on the production of 12,000 cases.

Plastic	8 metres at $3.50 per metre
Steel	3 metres at $2.50 per metre
Direct labour	3 hours at $7.00 per hour

Actual costs incurred during the month of March were as follows:

• Purchased 125,000 metres of plastic at $3.45 per metre
• Purchased 85,000 metres of steel at $2.10 per metre
• Direct labour totalled $360,000 for 60,000 hours
• Used 140,000 metres of plastic at $2.45 per metre
• Used 52,000 metres of steel at $3.10 per metre

Required: ALL WORKINGS MUST BE SHOWN. FULL MARKS WILL NOT BE AWRDED IF WORKINGS ARE NOT SHOWN.

Calculate each of the following variances and indicate whether the variance is favourable (F) or unfavourable (U).

1. Calculate the direct material price variance of the steel material USED in making the products.
2. Calculate the direct material quantity (efficiency) variance of the steel material USED in making the products.
3. Calculate the direct labour rate variance for the products.
4. Calculate the direct labour efficiency variance for the products.
5. In a standard costing system, what could be the reasons for an unfavourable Direct Labour Efficiency Variable? Discuss your answer with examples

(1+1+1+1+3 = 7 marks)

Standard Costs Formulas as per your prescribed text book

PQ - Purchased Quantity; AP - Actual Price; SP - Standard Price; AQ - Actual Quantity; SQ- Standard Quantity; AR - Actual Rate; SR - Standard Rate; AH - Actual Hours; SH - Standard Hours

Material Variances

Direct Material Price Variance (based on purchased quantity)= PQ(AP - SP) / (PQ x AP)-(PQ x SP)

Direct Material Quantity Variance = SP(AQ - SQ) / (AQ x SP) - (SQ x SP)

Total Material Variance = Price + Quantity from above

SQ in DMQV means Standard Quantity Allowed given actual output

Labour Variances

Direct Labour Rate Variance = AH(AR - SR) / (AH x AR) - (AH x SR)

Direct Labour Efficiency Variance = SR(AH - SH) / (AH x SR) - (SH x SR)

Total Labour Variance = Rate + Efficiency from above

SH in DLEV means Standard Hours Allowed given actual output