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These my workings
Materials price variance
= (Actual price – Standard price) x Actual quantity
= ($4.2*- $5) x20, 500
= $16, 400 (Favorable )
*($86, 100÷20,500=$4.2)Material usage variance
= (Actual quantity – Standard quantity) x standard price
= (20,500 – 22,500*) x $5
=$10, 000 (Favorable )
*(7,500×3=22,500)Labour rate variance
= (Actual rate – Standard rate) x Actual direct labour hours
= ($7.2*- $7.50) x 3,600
= $1, 080 (Favorable )
*($25, 920÷3,600=$7.2)Labour efficiency variance
= (Actual hours – Standard hours) x Standard rate
= (3,600 – 3,750*) x $7.50
= $1, 125 (Favorable )
*(7,500×0.5=3,750)Assume that the materials price was due to purchasing low quality raw material from a new supplier. The end product’s quality is not affected and the producer decides to purchase from this supplier in future.
What standards would likely need revision and what would the new standard ? Thank you for your help.I can’t check the workings of your variances, because you have not said what the question is. However your ‘formulae’ are correct.
Since they deliberately decided to buy lower quality material (and therefore pay less) then the new standard price for materials would change and be $4.20.
However, buying lower quality material would like mean having to use more material and so that standard might need changing (but it is impossible on the information you have given, to put a figure on it). Also, buying lower quality material might mean labour spend more time making it and so the standard time might need changing (but again, it is impossible to give a figure from the information you have given).
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