Materials and manufacturing labor variances, standard costsDunn, 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.

Please see answers below

Explanation:

1. Material price variance = AQ [ AP - SP]

= [ $5.10 - $5.0] × 3,700

= $370 (U)

Material efficiency variance = [AQ - SQ] × SP

= [3,700 - 2,000*2] × $5.0

= - $1,500 (F)

Flexible variance budget variance = Material price variance + Material efficiency variance

= $370(U) + -$1,500(F)

= -$1,130(F)

Reasons for unfavorable price variance

• When the purchase manager is not too skillful at buying materials needed for production

• When there is an unexpected increase in price of materials

Reasons for favorable efficiency variance

• Usage of high quality material

• Skilled labourers use less materials than budgeted

Direct labor rate variance = [AR - SR] × AH

= [$9.80 - $10] × 900

= -$180 (F)

Direct labor efficiency variance = [AH - SH] × SR

= [900 - 2,000*0.5] × $10

= -$1,000(F)

Flexible budget variance = Direct labor rate variance + Direct labor efficiency variance

= -$180(F) + -$1,000(F)

= -$1,180

Reasons for favorable rate variance

• When there is reduction in labor rate due to recession in an economy

• When more of semi skilled or unskilled labor are employed.

Reasons for favorable efficiency variance

• Usage of high quality raw materials

• When plant facilities are restructured, it means that labor would be more effective.

2. Material price variance = [$AP - SP] × AQ

= [$5.10 - $5.0] × 6,000

= $600(F)

Material efficiency variance = [AQ - SQ] × SP

= [6,000 - 2,000 × 0.5] × $5.0

= $25,000(F)