The Correct Answer and Explanation is:
Correct Answer:
To compute the variances, we use the following formulas:
Material Price Variance
MPV=(Actual Price−Standard Price)×Actual Quantity Purchased\text{MPV} = (\text{Actual Price} – \text{Standard Price}) \times \text{Actual Quantity Purchased}
=(5.75−6.00)×61,000= (5.75 – 6.00) \times 61,000
=(−0.25)×61,000=−15,250 (Favorable)= (-0.25) \times 61,000 = -15,250 \text{ (Favorable)}
Material Usage Variance
MUV=(Actual Quantity Used−Standard Quantity Allowed)×Standard Price\text{MUV} = (\text{Actual Quantity Used} – \text{Standard Quantity Allowed}) \times \text{Standard Price}
=(62,000−(12,000×5))×6.00= (62,000 – (12,000 \times 5)) \times 6.00
=(62,000−60,000)×6.00= (62,000 – 60,000) \times 6.00
=2,000×6.00=12,000 (Unfavorable)= 2,000 \times 6.00 = 12,000 \text{ (Unfavorable)}
Labor Rate Variance
LRV=(Actual Rate−Standard Rate)×Actual Hours\text{LRV} = (\text{Actual Rate} – \text{Standard Rate}) \times \text{Actual Hours}
=(12.50−12.00)×22,000= (12.50 – 12.00) \times 22,000
=(0.50)×22,000=11,000 (Unfavorable)= (0.50) \times 22,000 = 11,000 \text{ (Unfavorable)}
Labor Efficiency Variance
LEV=(Actual Hours−Standard Hours Allowed)×Standard Rate\text{LEV} = (\text{Actual Hours} – \text{Standard Hours Allowed}) \times \text{Standard Rate}
=(22,000−(12,000×2))×12.00= (22,000 – (12,000 \times 2)) \times 12.00
=(22,000−24,000)×12.00= (22,000 – 24,000) \times 12.00
=(−2,000)×12.00=−24,000 (Favorable)= (-2,000) \times 12.00 = -24,000 \text{ (Favorable)}
Explanation:
Variance analysis helps businesses identify inefficiencies by comparing actual costs with predetermined standard costs.
The material price variance is favorable because the actual cost per pound of material was lower than expected. This means the company saved money on purchasing materials. The material usage variance is unfavorable since more materials were used than the standard allowed, leading to higher production costs.
Labor rate variance is unfavorable because the actual hourly wage was higher than the standard set in the cost sheet, meaning workers were paid more than expected. However, the labor efficiency variance is favorable, indicating fewer labor hours were used compared to the standard, implying efficiency improvements.
Analyzing these variances allows Test Company to refine its cost management and optimize resource allocation. Reducing material waste and improving labor productivity could further enhance profitability while maintaining production standards.
