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

Direct materials (10 lbs. @ $3 per lb.) $30

Direct labor (4 hrs. @ $6 per hr.) 24

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

Direct materials (92,000 lbs. @ $2.95 per lb.) $ 271,400

Direct labor (37,600 hrs. @ $6.05 per hr.). 227,480

(1) Compute the direct materials price and quantity variances.

(2) Compute the direct labor rate variance and the direct labor efficiency variance. Indicate whether each variance is favorable or unfavorable.

1. $4,600 favorable; $6,000 unfavorable and 1,400 unfavorable

2. $1,880 unfavorable; $9,600 unfavorable and $11,480 unfavorable

Explanation:

The computations are shown below:

1. Direct material price variance

= Actual Quantity * (Standard Price - Actual Price)

= 92,000 lbs * ($3 - $2.95)

= 92,000 lbs * $0.05

= $4,600 favorable

Direct material quantity variance:

= Standard Price * (Standard Quantity - Actual Quantity)

= $3 * (10 lbs * 9,000 units - 92,000 lbs)

= $3 * (90,000 lbs - 92,000 lbs)

= $3 * 2,000 lbs

= $6,000 unfavorable

And, the total direct material variance equals to

= Direct material price variance + Direct material quantity variance

= 4,600 favorable + 6,000 unfavorable

= 1,400 unfavorable

2. Direct labor rate variance

= Actual Hours * (Actual rate - standard rate)

= 37,600 hours * ($6.05 per hour - $6 per hour)

= 37,600 hours * $0.05 per hour

= $1,880 unfavorable

Direct labor efficiency variance:

= Standard Rate * (Actual hours - Standard hours)

= $6 per hour * (37,600 hours - 9,000 units * $4 hours)

= $6 per hour * 1,600 hours

= $9,600 unfavorable

And, the total labor cost variance would be

= Direct labor rate variance + Direct labor efficiency variance

= 1,880 unfavorable + $9,600 unfavorable

= $11,480 unfavorable