Chapter 9, Problem 21P

Multiple Products. Materials, and Processes
Mickley Corporation produces two products. Alpha’s and Zeta’s, which pass through two operations. Sintering and
Finishing. Each of the products uses two raw materials−X442 and Y661. The company uses a standard cost system, with the following standards for each product (on a per unit basis):

Information relating to materials purchased and materials used in production during May follows:

The following additional information is available:
a. The company recognizes price variances when materials are purchased.
b. The standard labor rate is $19.80 per hour in Sintering and $19.20 per hour in Finishing.
c. During May, 1,200 direct labor-hours were worked in Sintering at a total labor cost of $27,000, and 2,850 direct labor-hours were worked in Finishing at a total labor cost of $59.850.
d. Production during May was 1,500 Alpha6s and 2.000 Zeta7s.
Required:
1. Prepare a standard cost card for each product, showing the standard cost of direct materials and direct labor.
2. Compute the materials price and quantity variances for each material.
3. Compute the labor rate and efficiency variances for each operation.

.

To determine

$

Standard cost card

A standard cost card contains all the information regarding standard quantities, rates, hours etc. It shows total cost of producing one unit.

To prepare: Standard cost card for both the given products, showing cost of direct materials and labor.

Answer to Problem 21P

Total standard cost of alpha6s is determined as $28.42 and of zeta7s is $41.01.

Explanation of Solution

Standard cost card of Alpha6s:

Particulars	Standard Quantity or standard hours		Standard price or standard rate		Standard cost (in $)
Direct material (X442)	1.8	Kilos	$3.5	Per kilo	6.3
Direct material (Y661)	2.0	Liters	$1.4	Per liter	2.8
Direct labor (Sintering)	0.2	Hours	$19.8	Per hour	3.96
Direct labor (Finishing)	0.8	Hours	$19.2	Per hour	15.36
Total					28.42

Standard cost card of zeta7s:

Particulars	Standard Quantity or standard hours		Standard price or standard rate		Standard cost (in $)
Direct material (X442)	3.0	Kilos	$3.5	Per kilo	10.5
Direct material (Y661)	4.5	Liters	$1.4	Per liter	6.3
Direct labor (Sintering)	0.35	Hours	$19.8	Per hour	6.93
Direct labor (Finishing)	0.9	Hours	$19.2	Per hour	17.28
Total					41.01

So, total standard cost of Alpha6s is $28.42 and of zeta7s is $41.01.

To determine

Variances

A variance shows difference between actual amount of cost incurred and the budgeted cost. Variances can either be favorable or unfavorable.

To calculate: Amount of material price variance and quantity variance.

Answer to Problem 21P

Material price variance for material X442 is $1,450 unfavorable and for material Y661 is $775 favorable.

material quantity variance for material X442 is $700 favorable and for material Y661 is $1,400 unfavorable.

Explanation of Solution

Formula to calculate material price variance is:

  $\text{Material price variance = (Standard price - Actual price)}\times \text{Actual quanity }$

For material X442, actual price will be:

  $\begin{array}{l}\text{Actual price = }\frac{\text{Purchases cost}}{\text{Purchases}}\\ \text{Actual price = }\frac{\$52,200}{14,500}\\ \text{Actual price}=\$3.6\end{array}$

Standard price is given as $3.5 per kilo and actual quantity purchased is 14,500. So, material price variance will be:

  $\begin{array}{l}\text{Material price variance = (3}\text{.5 - 3}\text{.6)}\times 14,500\\ \text{ = 1450 Unfavorable }\end{array}$

For material Y661, actual price will be:

  $\begin{array}{l}\text{Actual price = }\frac{\text{Purchases cost}}{\text{Purchases}}\\ \text{Actual price = }\frac{\$20,925}{15,500}\\ \text{Actual price}=\$1.35\end{array}$

Standard price is given as $1.4 per liter and actual quantity purchased is 15,500. So, material price will be:

  $\begin{array}{l}\text{Material price variance = (1}\text{.4 - 1}\text{.35)}\times 15,500\\ \text{ = \$775 Favorable }\end{array}$

Formula to calculate material quantity variance is:

  $\text{Material quantity variance = (Standard quantity - Actual quantity)}\times \text{Standard price}$

For material X442, actual quantity is given as 8,500 kilos and standard price is $3.5 per kilo. Standard quantity will be calculated as:

  $\begin{array}{l}\text{Standard quanitity = (Standard quanity of alpha6s }\times \text{ Produced units) + (standard units of zeta7s }\times \text{Produced units)}\\ \text{ = (1}\text{.8}\times 1,500)\text{ + (3}\times \text{2,000)}\\ =\text{ 2,700 + 6,000}\\ \text{ = 8,700 }\end{array}$

So, Material quantity variance will be:

  $\begin{array}{l}\text{Material quantity variance = (8,700 - 8,500)}\times 3.5\\ \text{ = \$700 Favorable}\end{array}$

For material Y661, actual quantity is given as 13,000 liters and standard price is $1.4 per liter. Standard quantity will be calculated as:

  $\begin{array}{l}\text{Standard quanitity = (Standard quanity of alpha6s }\times \text{ Produced units) + (standard units of zeta7s }\times \text{Produced units)}\\ \text{ = (2}\times 1,500)\text{ + (4}\text{.5}\times \text{2,000)}\\ =\text{ 3,000 + 9,000}\\ \text{ = 12,000}\end{array}$

So, material quantity variance will be:

  $\begin{array}{l}\text{Material quantity variance = (12,000 - 13,000)}\times 1.4\\ \text{ = \$1,400 Unfavorable}\end{array}$

To determine

Variances

Variances related to labor show difference among actual cost incurred on labor and the standard cost. Variances are considered favorable when standard cost is more than that of actual cost.

Amount of labor rate and efficiency variances.

Answer to Problem 21P

Labor rate variance for sintering is $3,240 unfavorable and for finishing is $5,130 unfavorable.

Labor efficiency variance for sintering is $3,960 unfavorable and for finishing is $2,880 favorable.

Explanation of Solution

Formula to calculate labor rate variance is:

  $\text{Labor rate variance = (Standard rate - Actual rate)}\times \text{Actual hours worked}$

For sintering, standard rate is $19.80 per hour, actual hours worked are 1,200 and actual rate will be $22.5 per hour ($27,000/1,200). Labor rate variance will be:

  $\begin{array}{l}\text{Labor rate variance = (Standard rate - Actual rate)}\times \text{Actual hours worked}\\ \text{ = (\$19}\text{.8 - 22}\text{.5)}\times 1,200\\ \text{ = \$3,240 Unfavorable}\end{array}$

For finishing, standard rate is $19.20 per hour, actual hours worked are 2,850 and actual rate will be $21 per hour ($59,850/2,850). So, labor rate variance will be:

  $\begin{array}{l}\text{Labor rate variance = (Standard rate - Actual rate)}\times \text{Actual hours worked}\\ \text{ = (\$19}\text{.2 - 21)}\times 2,850\\ \text{ = \$5,130 Unfavorable}\end{array}$

Formula to calculate labor efficiency variance is:

  $\text{Labor efficiency variance = (Standard hours - Actual hours)}\times \text{Standard rate}$

For sintering, actual hours are 1,200, standard rate is $19.8 and standard hours will be 1,000 ((0.2*1,500)+(0.35*2,000)). So, the labor efficiency variance will be:

  $\begin{array}{l}\text{Labor efficiency variance = (Standard hours - Actual hours)}\times \text{Standard rate}\\ \text{ = (\$1,000 - 1,200)}\times \$19.8\\ \text{ = \$3,960 Unfavorable}\end{array}$

For finishing, actual hours are 2,850, standard rate is $19.2 and standard hours will be 3,000 ((0.8*1,500 + 0.9*2,000))

  $\begin{array}{l}\text{Labor efficiency variance = (Standard hours - Actual hours)}\times \text{Standard rate}\\ \text{ = (\$3,000 - 2,850)}\times \$19.2\\ \text{ = \$2,880 Favorable}\end{array}$