IOL Ltd manufactures ceramic lamps. It has set up the following standards per finished unit for direct materials and direct manufacturing labour:

Direct materials: 10 kg at $4.50 per kg

$45.00

Direct manufacturing labour: 0.5 hours at $30 per hour

15.00

 

The number of finished units budgeted for January was 5 000; 4 550 units were actually produced.

Actual results in January were:

Direct materials: 45 055 kg used

 

Direct manufacturing labour: 2 250 hours

$70 875

 

Assume that there was no beginning inventory of either direct materials or finished units. During the month, materials purchases amounted to 50 000 kg, at a total cost of $232 500. Price variances are isolated upon purchase. Efficiency variances are isolated at the time of usage.

 

Required

 

a)   Calculate the January price and efficiency variances of direct materials and direct manufacturing labour. (8 marks)

b)   Prepare journal entries to record the variances in requirement (a) above. (10 marks)

c)    Comment on the January price and efficiency variances of IOL Ltd. (2 marks)

d)   Why might IOL Ltd calculate direct materials price variances and direct materials efficiency variances with reference to different points in time? (5 marks)

Price Variance is computed by the (Actual Rate-Standard Rate) x Actual Quantity or Actual Costs- Standard Rate x Actual Quantity

Quantity Variance is computed by (Actual Quantity- Standard Quantity) x Standard Rate or Actual Quantity x Standard Rate - Standard Costs

(If the result is positive, unfavorable, otherwise, if negative, favorable)

1)

Direct materials

Price Variance: 7,500 unfavorable (232,500 -50,000 kg x 4.50 per kg)

Quantity Variance: 2,002.50 Favorable (45,055- 10kg per product x 4,550 units produced) x 4.50 per kg

Direct Labor

Price Variance: 3,375 unfavorable (70,785- 2,250 hours x30 per hour)

Quantity Variance 750 favorable (2,250 -4,550 units produced x 0.5 hours) x 30 per hour

2)Materials 225,000

Materials Price Variance 7,500

Cash 232,500

Work in Process 204,750

Materials Quantity Variance 2,002.50

Materials 202, 747.50

Work in Process 68,250

Direct Labor Price Variance 3,375

Direct Labor Quantity Variance 750

Direct Labor 70,875

C) Price variances for labor and materials are unfavorable, meaning prices and rates have increased. These are the responsibility of the purchasing department and the labor department while quantity variances for both are favorable, this could be traced back to the production department. Furthermore, it could be inferred the higher price for materials and labor ensured that the quality of the materials and labor are of high quality, resulting to the favorable variances in quantity.

d) It is because direct materials price variance trace to the purchase of materials and this is separated from the use of materials for production. Any result of the variance is the responsibility of the purchasing department. They are the ones responsible to determine the best and the cheapest materials they could find. It is independent of production while quantity variance traces to production and the efficiency of the use of materials. This would translate to how high quality or low quality the materials are. They are the responsibility of the production department, however, some of the factors to consider also is the adaptability and quality of the materials into the production which would be from the choice of materials by the purchasing department