Apex Corporation manufactures fencing jackets. The company uses a standard cost system to control costs. In terms of the standards that have been set for the jackets, the factory should work 780 direct labor-hours each month and produce 3,900 jackets. The standard costs at this level of production are as follows:
| Total | Per Unit of Product |
||
| Direct materials | $ | 92,352 | $ 23.68 |
| Direct labor | $ | 13,260 | 3.40 |
| Variable manufacturing overhead (based on direct labor-hours) |
$ | 2,340 | 0.60 |
| $27.68 | |||
During April, the factory worked only 745 direct labor-hours and produced 4,000 jackets. The following actual costs were recorded during the month:
| Total | Per Unit of Product |
||
| Direct materials (14,000 yards) | $ | 98,000 | $ 24.50 |
| Direct labor | $ | 14,400 | 3.60 |
| Variable manufacturing overhead | $ | 7,200 | 1.80 |
| $29.90 | |||
At standard, each jacket should require 3.2 yards of material at $7.40 per yard. All of the materials purchased during the month were used in production.
Required:
1. Compute the (i) Materials Price and (ii) Materials Quantity variances for April.
2. Compute the (i) Labor Rate and (ii) Labor Efficiency variances for April.
Apex Corporation, a manufacturer of fencing jackets, employs a standard cost system to manage costs effectively. By comparing actual costs to predetermined standards, the company can assess the performance of its production processes. In this essay, we will analyze the material price and quantity variances, as well as the labor rate and efficiency variances, for the month of April.
The material price variance measures the difference between the actual cost of materials and the standard cost that was expected. On the other hand, the material quantity variance reflects the variance between the actual quantity of materials used and the standard quantity allowed for production.
Material Price Variance: To compute the material price variance, we use the formula: Material Price Variance = (Actual Price – Standard Price) * Actual Quantity
Given the data, the actual cost of materials was $98,000, and the standard cost based on the expected usage of 14,000 yards at $7.40 per yard was $103,600. Plugging these values into the formula, we get: Material Price Variance = ($98,000 – $103,600) = -$5,600
Material Quantity Variance: The material quantity variance is calculated as: Material Quantity Variance = (Actual Quantity – Standard Quantity) * Standard Price
In this case, the actual usage was 14,000 yards, and the standard quantity allowed for the production of 4,000 jackets at 3.2 yards per jacket was 12,800 yards. Using the formula, we find: Material Quantity Variance = (14,000 – 12,800) * $7.40 = $8,928
Labor Rate and Efficiency Variances: The labor rate variance assesses the difference between the actual labor rate paid and the standard labor rate. The labor efficiency variance, on the other hand, measures the variance between the actual hours worked and the standard hours allowed, multiplied by the standard labor rate.
Labor Rate Variance: The labor rate variance is calculated using the formula: Labor Rate Variance = (Actual Rate – Standard Rate) * Actual Hours
Given that the actual labor cost was $14,400 for 745 hours worked, and the standard labor rate was $3.40 per hour, we can calculate: Labor Rate Variance = ($14,400 – ($3.40 * 745)) = $1,620
Labor Efficiency Variance: The labor efficiency variance is computed as: Labor Efficiency Variance = (Actual Hours – Standard Hours) * Standard Rate
With the standard hours allowed for 4,000 jackets at 780 hours and the standard rate of $3.40 per hour, we find: Labor Efficiency Variance = (745 – 780) * $3.40 = -$119.60
In conclusion, Apex Corporation’s performance in April can be evaluated through the material price and quantity variances, as well as the labor rate and efficiency variances. The unfavorable material price variance of -$5,600 suggests that the company paid more for materials than anticipated. However, the favorable material quantity variance of $8,928 indicates efficient usage of materials. The labor rate variance of $1,620 reflects a higher labor cost, possibly due to fluctuations in wage rates. The unfavorable labor efficiency variance of -$119.60 signals that fewer jackets were produced per labor hour than expected. These variances provide valuable insights for Apex Corporation to make informed decisions and improvements in their production process.
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