Answered: equirement 1. Show computations of…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter2: Basic Cost Management Concepts

Section: Chapter Questions

Problem 21E: Ellerson Company provided the following information for the last calendar year: During the year,...

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Question

Davidow,

Inc. is a privately held furniture manufacturer. For August

2020,

Davidow

had the following standards for one of its products, a wicker chair:

(Click

the icon to view the standards per chair.)

The following data were compiled regarding actual

performance:

actual output units (chairs) produced,

2,800;

square yards of input purchased and used,

5,300;

price per square yard,

$6.00;

direct manufacturing labor costs,

$9,360;

actual hours of input,

900;

labor price per hour,

$10.40.

Requirement 1. Show computations of price and efficiency variances for direct materials and direct manufacturing labor. Give a plausible explanation of why each variance occurred.

Let's begin by determining the formula used to calculate the actual costs of direct materials, then enter the amounts in the formula and calculate the cost.

		×		=	Actual cost
Direct materials		×		=

Next we will calculate the actual input at the budgeted price.

	Actual input	×	Budgeted price	=	Cost
Direct materials		×		=
Direct manufacturing labor		×		=

Determine the formula and calculate the costs for the flexible budget.

	×	=	Flexible budget cost
Direct materials	×	=
Direct manufacturing labor	×	=

Now compute the price and efficiency variances for direct materials and direct manufacturing labor. Label each variance as favorable (F) or unfavorable (U).

	Price	Efficiency
	variances	variances
Direct materials
Direct manufacturing labor

Now give a plausible explanation of why each variance occurred. Begin with the direct material variances.

The materials price variance: There was an unexpected

▼

decrease

increase

in materials price per square yard due to

▼

decreased

increased

competition.

The materials efficiency variance: The production manager may have employed

▼

higher-skilled

lower-skilled

workers or the budgeted materials standards were set too

▼

loosely

strictly

The labor price variance:

▼

An increase

A reduction

in labor rates due to a

▼

booming economy

recession

The labor efficiency variance:

▼

Less

efficient workers being employed or the use of

▼

higher

lower

quality materials.

Requirement 2. Suppose

7,700

square yards of materials were purchased (at

$6.00

per square yard), even though only

5,300

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.

Begin with recalculating the costs using the information provided for the alternative approach.

		Actual input
		×
	Actual cost	Budgeted price	Flexible budget cost
Purchasing
Production

Now compute the direct materials price and efficiency variances. Label each variance as favorable (F) or unfavorable (U).

	Price	Efficiency
	variance	variance
Direct materials

Choose from any list or enter any number in the input fields and then continue to the next question.

Data Table

	Standards per Chair
Direct materials	2 square yards of input at $5.80 per square yard
Direct manufacturing labor	0.5 hour of input at $10.60 per hour

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