Question

Hutto Corp. has set the following standard direct materials and direct labor costs per unit for the product it manufactures.

Direct materials (15 lbs. @ \(4 per lb.) \)60

Direct labor (3 hrs. @ \(15 per hr.) 45

During May the company incurred the following actual costs to produce 9,000 units.

Direct materials (138,000 lbs. @ \)3.75 per lb.) \(517,500

Direct labor (31,000 hrs. @ \)15.10 per hr.) 468,100

Compute the (1) direct materials price and quantity variances and (2) direct labor rate and efficiency variances. Indicate whether each variance is favorable or unfavorable.

Short answer

The Direct material price variance isfavorable.

Direct labor rate variance is unfavorable.

Step-by-step solution

Meaning of Variance Analysis

Variance analysis refers to the technique used by managerial accountants for ascertaining the differences between actual and standard outputs. It enables the managers to take necessary actions to correct the adverse impact of such variations.

Computation of direct material price and quantity variances

Actual Cost

Actual Quantity	x	Actual Price
138,000	x	3.75
	517,500
Actual Quantity	x	Standard Price
138,000	x	4
	552,000

Standard Cost

Standard Quantity	x	Standard Price
135,000	x	4
	540,000

Comments:

The direct material price variance is favorable because the actual cost is less than the standard cost, i.e., the difference between 517,500 and 552,000.

Direct material quantity variance is unfavorablebecause the standard cost is less than the actual cost, i.e., the difference between 552,000 and 540,000.

The total direct material variance is favorable because the standard cost is higher than the actual cost, i.e., the difference between 540,000 and 517,500.

Computation of direct labor rate and efficiency variances

Actual Cost

Actual Hours	x	Actual Rate
31,000	x	15.10
	468,100
Actual Hours	x	Standard Rate
31,000	x	15
	465,000

Standard Cost

Standard Hours	x	Standard Rate
27,000	x	15
	405,000

Comments:

The direct labor rate variance is unfavorable because the actual cost is higher than the standard cost, i.e., the difference between 468,100 and 465,000.

Direct labor efficiency variance is unfavorable because the standard cost is less than the actual cost, i.e., the difference between 465,000 and 405,000.

Total direct labor variance is unfavorable because the actual cost is higher than the standard cost, i.e., the difference between 468,100 and 405,000.