The Morgan Restaurant Group manufactures the bags of frozen French fries used at its franchised restaurants. Last week, Morgan's purchased and used 95,000 pounds of potatoes at a price of $0.70 per pound. During the week, 2,000 direct labor hours were incurred in the plant at a rate of $12.05 per hour. The standard price per pound of potatoes is $0.80, and the standard direct labor rate is $11.75 per hour. Standards indicate that for the number of bags of frozen fries produced, the factory should have used 93,000 pounds of potatoes and 1,700 hours of direct labor. x Requirements 1. Determine the direct material price and quantity variances. Be sure to label each variance as favorable or unfavorable. 2. Think of a plausible explanation for the variances found in Requirement 1. 3. Determine the direct labor rate and efficiency variances. Be sure to label each variance as favorable or unfavorable. 4. Could the explanation for the labor variances be tied to the material variances? Explain. Requirement 1. Determine the direct material price and quantity variances. Be sure to label each variance as favorable or unfavorable. (Enter the variances as positive numbers. Enter currency amounts to the nearest cent and your answers to the nearest whole dollar. Label the variances as favorable (F) or unfavorable (U). Abbreviations used: DM = Direct materials.) Begin by determining the formula for the price variance, then compute the price variance for direct materials. Actual quantity purchased * Actual price Standard price DM price variance * $ Determine the formula for the quantity variance, then compute the quantity variance for direct materials Standard price x Actual quantity used Standard quantity allowed DM quantity variance $ x ) $ U Requirement 2. Think of a plausible explanation for the variances found in Requirement 1. One plausible explanation is that Homer bought lower grade potatoes at a cheaper price, which resulted in the favorable price variance. However, because the potatoes were lower grade, some of the potatoes were bad, and could not be used in production . As a result, the manufacturing facility had to use more potatoes than standards allow. This accounts for the unfavorable efficiency variance. Requirement 3. Determine the direct labor rate and efficiency variances. (Enter the variances as positive numbers. Enter currency amounts to the nearest cent and your answers to the nearest whole dollar. Label the variances as favorable (F) or unfavorable (U). Abbreviations used: DL = Direct labor.) Begin wth the the direct labor rate variance. First determine the formula for the rate variance, then compute the rate variance for direct labor Actual hours Actual rate Standard rate DL rate variance ( $ U Now determine the direct labor efficiency variance. First determine the formula for the efficiency variance, then compute the efficiency variance for direct labor. Standard rate Actual hours Standard hours allowed DL efficiency variance U $ x $ Requirement 4. Could the explanation for the labor variances be tied to the material variances? Explain. The unfavorable labor rate and efficiency variances could be tied to the material variances. For example, if the material variances were the result of purchasing lower grade potatoes then the factory would use more labor in sorting the potatoes. As a result, they would have had to pay workers an overtime premium
