The CEO of Baxter Company is particularly concerned about the Direct Materials and Direct Labor spending variances and asks the Production Manager to further investigate what caused them.

Upon further review, it was determined that the company purchased 40,000 pounds of raw materials in the first month at a cost of $.38 a pound. All of the materials purchased were used to make the 12,900 units produced that month. The standard materials quantity and cost for each unit is 3 pounds per unit at a cost of $.50 per pound.

Additionally, it was discovered that the direct laborers spent, on average, 30 minutes on each product and were paid a rate of $9.00 per DL hour. The standard activity is 20 minutes per product at a rate of $12.00 per DL hour. Total (variable plus fixed) manufacturing overhead was applied at a rate of $20.85 per direct labor hour.

The Production Manager thought that he had done a good job of containing the material and labor costs for the month and was surprised that the CEO was concerned about the production costs.

1. Compute the following variances:
2. Materials Price Variance (AQ X AP) vs (AQ X SP)
3. Materials Quantity Variance. (AQ X SP) vs. (SQ X SP)
4. Labor Rate Variance. (AH X AR) vs (AH X SR)
5. Labor Quantity (Efficiency) Variance (AH X SR) vs. (SH X SR)
6. Total Overhead Variance (Actual MOH vs Applied MOH).

*Hint: The net of each price/quantity variance for DM and DL should equal your spending variance for each item.

2. Looking at these variances as a whole, what are some possible explanations as to what caused these variances? (Your answer must include possible explanations for each of the labor/materials variances). What are some things management can do to improve these variances?