Dawson Toys, Ltd., produces a toy called the Maze. The company has recently established a standard cost system to help control costs and has established the following standards for the Maze toy:
Direct materials: 6 microns per toy at $0.50 per micron
Direct labor: 1.3 hours per toy at $8 per hour
During July, the company produced 3,000 Maze toys. Production data for the month on the toy follow:
Direct materials:
25,000 microns were purchased at a cost of $0.48 per micron. 5,000 of these microns were still in inventory at the end of the month.
Direct labor:
4,000 direct labor-hours were worked at a cost of $36,000.
Required:
- Compute the following variances for July:
(a) Direct materials price and quantity variances.
(a) Direct labor rate and efficiency variances. - Prepare a brief explanation of the possible causes of each variance.
The Correct Answer and Explanation is :
Here’s an explanation of the variances:
Direct Materials Variances:
- Price Variance (-$500):
The company purchased materials at a lower cost ($0.48 per micron instead of $0.50). This resulted in a favorable variance of $500, indicating cost savings. Possible reasons could include:
- Negotiating better rates with suppliers.
- Bulk purchase discounts.
- A temporary price reduction in raw materials.
- Quantity Variance (+$3,500):
The company used more materials than the standard (25,000 microns vs. 18,000 microns). This resulted in an unfavorable variance of $3,500, meaning excess material was used. Possible reasons:
- Production inefficiencies, such as wastage or defects.
- Poor-quality materials requiring extra usage.
- Errors in machine calibration or human mistakes.
Direct Labor Variances:
- Rate Variance (+$4,000):
The actual labor rate was $9 per hour ($36,000 / 4,000 hours) instead of the standard $8. This resulted in an unfavorable variance of $4,000, meaning higher labor costs. Possible reasons:
- Paying overtime or higher wages than planned.
- Employing more skilled (and expensive) workers.
- Changes in wage agreements or hiring temporary workers at higher rates.
- Efficiency Variance (+$800):
More hours were worked (4,000 instead of the standard 3,900). This resulted in an unfavorable variance of $800, meaning labor took longer than expected. Possible reasons:
- Low worker productivity.
- Poor training or new employees learning the process.
- Machine breakdowns or bottlenecks in production.
These variances indicate the company saved money on material costs but lost more due to inefficiencies and higher labor expenses. The focus should be on improving material usage and optimizing labor productivity.
Now, I will generate an image representing these variances.
The image above visually represents the variance analysis for Dawson Toys, Ltd. Negative (favorable) variances, like the direct materials price variance, are shown in green, while unfavorable variances (higher costs) are in red. This helps highlight key areas for cost control and process improvements. Let me know if you need further insights!
