Chapter 9, Problem 3E

Interpreting Direct Materials Price, Quantity Variances
 
Perfect Pet Collar Company makes custom leather pet collars. The company expects each collar to require 1.5 feet of leather and predicts leather will cost $2.50 per foot. Suppose Perfect Pet made 60 collars during February. For these 60 collars, the company actually averaged 1.75 feet of leather per collar and paid $2.00 per foot.
 
Required:

1. Compute the standard direct materials cost per unit.

Without performing any calculations, determine whether the direct materials price variance will be favorable or unfavorable.

Without performing any calculations, determine whether the direct materials quantity variance will be favorable or unfavorable.

Give a potential explanation for this pattern of variances.

Where would you begin to investigate the variances?

Calculate the direct materials price and quantity variances.

To determine

(a)

Concept introduction:

Price variance:

It is the difference between price per unit in standard and actual price of product and multiplying that with quantity purchased in actual.

Quantity variance:

It is referred to the amount which is computed by multiplying the standard price per unit with the difference between quantity in actual term and standard term of product.

Direct Material cost variance:

This amount is calculated as the difference between standard cost and actual cost of direct material. The result is favorable when price variance is more than quantity variance. The result is unfavorable when price variance is less than quantity variance.

To compute:

The standard direct materials cost per unit.

Answer to Problem 3E

The standard direct materials cost per unit is $\$225$.

Explanation of Solution

Perfect pet collar company produces $60$ collars.

Standard quantity of leather is $1.5$ feet per collar and leather cost is $\$2.50$ per foot.

Actual quantity of leather is $1.75$ feet per collar and leather cost is $\$2.00$ per foot.

Standard quantity $=1.5\text{feet}\times 60\text{collars = 90feet}$

Actual quantity $=\text{ 1}\text{.75feet}\times 60\text{collars =105feet}$

Calculate standard direct materials cost per unit:

$\begin{array}{c}\text{Standard direct materials per unit }=90\text{feet }\times \$2.50\text{ per foot}\\ \text{=}\$225\end{array}$

To determine

(b)

Concept introduction:

Price variance:

It is the difference between price per unit in standard and actual price of product and multiplying that with quantity purchased in actual.

Quantity variance:

It is referred to the amount which is computed by multiplying the standard price per unit with the difference between quantity in actual term and standard term of product.

Direct Material cost variance:

This amount is calculated as the difference between standard cost and actual cost of direct material. The result is favorable when price variance is more than quantity variance. The result is unfavorable when price variance is less than quantity variance.

The direct materials price variance will be favorable or unfavorable.

Answer to Problem 3E

The direct materials price variance is favorable.

Explanation of Solution

The standard price of per foot is $\$2.50$ and actual price paid for per foot is $\$2.00$. The actual price paid is lesser than standard price. So, the direct materials price variance is favorable.

To determine

(c)

Concept introduction:

Price variance:

It is the difference between price per unit in standard and actual price of product and multiplying that with quantity purchased in actual.

Quantity variance:

It is referred to the amount which is computed by multiplying the standard price per unit with the difference between quantity in actual term and standard term of product.

Direct Material cost variance:

This amount is calculated as the difference between standard cost and actual cost of direct material. The result is favorable when price variance is more than quantity variance. The result is unfavorable when price variance is less than quantity variance.

The direct materials quantity variance will be favorable or unfavorable.

Answer to Problem 3E

The direct materials quantity variance is unfavorable.

Explanation of Solution

The standard quantity of material is $90\text{feet}$ and actual quantity of the material is $105\text{feet}$. The actual quantity is more than standard quantity. So, the direct materials quantity variance is unfavorable.

To determine

(d)

Concept introduction:

Price variance:

It is the difference between price per unit in standard and actual price of product and multiplying that with quantity purchased in actual.

Quantity variance:

It is referred to the amount which is computed by multiplying the standard price per unit with the difference between quantity in actual term and standard term of product.

Direct Material cost variance:

This amount is calculated as the difference between standard cost and actual cost of direct material. The result is favorable when price variance is more than quantity variance. The result is unfavorable when price variance is less than quantity variance.

To explain:

The pattern of variances.

Answer to Problem 3E

The potential explanation on the pattern of variances is discussed.

Explanation of Solution

Market fluctuation is the main reason of variance in the price of material. Responsibility of material price variance is of purchasing manager of the companies. So, for P.P.C., the direct materials price variance is favorable.

To determine

(e)

Concept introduction:

Price variance:

It is the difference between price per unit in standard and actual price of product and multiplying that with quantity purchased in actual.

Quantity variance:

It is referred to the amount which is computed by multiplying the standard price per unit with the difference between quantity in actual term and standard term of product.

Direct Material cost variance:

This amount is calculated as the difference between standard cost and actual cost of direct material. The result is favorable when price variance is more than quantity variance. The result is unfavorable when price variance is less than quantity variance.

To explain:

From where it will begin to investigate the variances.

Answer to Problem 3E

The project manager is responsible for material. So, he has to find out the reason for the variance and also take necessary actions.

Explanation of Solution

P.P.C. has an unfavorable direct material quantity variance. The reason of this is purchasing of poor quality of material, i.e., to produce one unit, different types of ingredients are used. So, it is important that the manager should find out the reason and correct the variances.

To determine

(f)

Concept introduction:

Price variance:

It is the difference between price per unit in standard and actual price of product and multiplying that with quantity purchased in actual.

Quantity variance:

It is referred to the amount which is computed by multiplying the standard price per unit with the difference between quantity in actual term and standard term of product.

Direct Material cost variance:

This amount is calculated as the difference between standard cost and actual cost of direct material. The result is favorable when price variance is more than quantity variance. The result is unfavorable when price variance is less than quantity variance.

To compute:

The direct material price and quantity variances.

Answer to Problem 3E

Direct material price variance is $\$52.50\left(\text{F}\right)$.

Direct material quantity variance is $\$37.50\left(\text{U}\right)$.

Explanation of Solution

Calculation of direct material price variance:

$\begin{array}{c}\text{Direct material price variance}=\text{Actual quantity}\times \left(\text{Standard price}-\text{Actual price}\right)\\ =105\times \left(\$2.50-\$2.00\right)\\ =105\times \$0.50\\ =\$52.50\left(\text{F}\right)\end{array}$

Hence, the direct material price variance is $\$52.50\left(\text{F}\right)$.

Calculation of direct material quantity variance:

$\begin{array}{c}\text{Direct material quantity variance}=\left(\text{Standard quantity}-\text{Actual quantity}\right)\times \text{Standard price}\\ \text{=}\left(90-105\right)\times \$2.50\\ =\$37.50\left(\text{U}\right)\end{array}$

Hence, the direct material quantity variance is $\$37.50\left(\text{U}\right)$.