A fiscal period must begin on January 1. Indicate whether the ...

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A fiscal period must begin on January 1.
  Indicate whether the statement is true or false

Question 2

Materials and manufacturing labor variances, standard costs.
 
  Dunn, Inc., is a privately held furniture manufacturer. For August 2014, Dunn had the following standards for one of its products, a wicker chair:
 
  The following data were compiled regarding actual performance: actual output units (chairs) produced, 2,000; square yards of input purchased and used, 3,700; price per square yard, 5.10; direct manufacturing labor costs, 8,820; actual hours of input, 900; labor price per hour, 9.80.
 
  Required:
  1. Show computations of price and efficiency variances for direct materials and direct manufacturing labor. Give a plausible explanation of why each variance occurred.
  2. Suppose 6,000 square yards of materials were purchased (at 5.10 per square yard), even though only 3,700 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.

[b614102004]

Answer to Question 1

F

Answer to Question 2

1. Direct Materials

Actual Costs
Incurred
(Actual Input Qty.
 Actual Price)

Actual Input Qty.
 Budgeted Price Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
 Budgeted Price)

(3,700 sq. yds.  5.10)
18,870
(3,700 sq. yds.  5.00)
18,500 (2,000  2  5.00)
(4,000 sq. yds.  5.00)
20,000

370 U 1,500 F
Price variance Efficiency variance
1,130 F
Flexible-budget variance

The unfavorable materials price variance may be unrelated to the favorable materials efficiency variance. For example, (a) the purchasing officer may be less skillful than assumed in the budget, or (b) there was an unexpected increase in materials price per square yard due to reduced competition. Similarly, the favorable materials efficiency variance may be unrelated to the unfavorable materials price variance. For example, (a) the production manager may have been able to employ higher-skilled workers, or (b) the budgeted materials standards were set too loosely. It is also possible that the two variances are interrelated. The higher materials input price may be due to higher-quality materials being purchased. Less material was used than budgeted due to the high quality of the materials.

Direct Manufacturing Labor

Actual Costs
Incurred
(Actual Input Qty.
 Actual Price)

Actual Input Qty.
 Budgeted Price Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
 Budgeted Price)

(900 hrs.  9.80)
8,820
(900 hrs.  10.00)
9,000 (2,000  0.5  10.00)
(1,000 hrs.  10.00)
10,000

180 F 1,000 F
Price variance Efficiency variance
1,180 F
Flexible-budget variance

The favorable labor price variance may be due to, say, (a) a reduction in labor rates due to a recession, or (b) the standard being set without detailed analysis of labor compensation. The favorable labor efficiency variance may be due to, say, (a) more efficient workers being employed, (b) a redesign in the plant enabling labor to be more productive, or (c) the use of higher quality materials.
2.

Control Point
Actual Costs
Incurred
(Actual Input Qty.
 Actual Price)

Actual Input Qty.
 Budgeted Price Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
 Budgeted Price)
Purchasing (6,000 sq. yds. 5.10)
30,600 (6,000 sq. yds.  5.00)
30,000

600 U
Price variance

Production (3,700 sq. yds. 5.00)
18,500 (2,000  2  5.00)
20,000

1,500 F
Efficiency variance

Direct manufacturing labor variances are the same as in requirement 1.

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