The standard cost sheet of a product provides detail for material and labor as shown below:
Direct material 4 kgs at Rs.7.50 per kg
Direct labor 2 hrs at Rs.16 per hour
Variable costs Rs 4 per direct labor hour
Actual details for the month of May are illustrated below:
Output produced in units 38,000
Direct materials: Rs.
Purchased 180,000 kgs for 1,260,000
Issued to production 154,000 kgs
Direct labor 78,000 hours worked for 1,209,000
Variable costs incurred 318,000
There was no work-in-progress at the starting or end of the month.
problem 1: Compute the variances for materials, labor and variable overheads.
problem 2: State whether in each of the given cases, the comment given and recommended as the possible reason for the variance, is consistent or inconsistent with the variance you have computed in your answer to above, supporting each of your conclusion with a short descriptive comment.
a) Direct materials price variance: the procurement manager has ignored the economic order quantity and, by getting bulk quantities, has purchased material at less than the standard price;
b) Direct materials usage variance: material losses in production were less than had been permitted for in the standard;
c) Direct wages rate variance: the union negotiated wage raise was Rs1.50 per hour lower than expected;
d) Direct labor efficiency variance: the efficiency of labor was commendable.
problem 3: What factors must be considered when investigating the variances?