Problem:
Materials and manufacturing labour variances, standard costs. Consider the following selected data regarding the manufacture of a line of upholstered chairs:
Standards per chair
Direct materials 2 square metres of input at $10 per square metre
Direct manufacturing labour 0.5 hour of input at $20 per hour
The following data were compiled regarding actual performance: actual output units (chairs) produced, 20,000; square metres of input purchased and used, 37,000; price per square metre, $10.20; direct manufacturing labour costs, $176,400; actual hours of input, 9,000; labour price per hour, $19.60.
Required to do:
1. Show your computations on the price and efficiency variances for direct materials and for direct manufacturing labour. Give a plausible explanation of why the variances occurred.
2. Suppose 60,000 square metres of materials were purchased (at $10.20 per square meter) even though only 37,000 square metres were used. Suppose further that variances are identified with their most likely control point; accordingly, direct materials price variances are isolated and traced to the purchasing department rather than to the production department. Compute the price and efficiency variances under this approach.