The Thompson Company uses standard costing and has established the following direct material and direct labor standards for each unit of Lept.
Direct materials: 2 gallons at $4 per gallon
Direct labor: 0.5 hours at $8 per hour
During September, the company made 6,000 Lepts and incurred the following costs:
Direct materials purchased: 13,400 gallons at $4.10 per gallon
Direct materials used: 12,600 gallons
Direct labor used: 2,800 hours at $7.65 per hour
The materials price variance for September was:
1340 UNFAVORABLE
To calculate the materials price variance, we need to compare the actual cost of direct materials purchased to the standard cost of direct materials.
1. Calculate the standard cost of direct materials purchased:
Standard cost per gallon = $4.00 per gallon
Standard quantity purchased = 2 gallons per unit
Standard cost per unit = $4.00 per gallon * 2 gallons = $8.00 per unit
Standard cost of direct materials purchased = $8.00 per unit * 6,000 units = $48,000
2. Calculate the actual cost of direct materials purchased:
Actual cost per gallon = $4.10 per gallon
Actual quantity purchased = 13,400 gallons
Actual cost of direct materials purchased = $4.10 per gallon * 13,400 gallons = $54,940
3. Calculate the materials price variance:
Materials price variance = Actual cost of direct materials purchased - Standard cost of direct materials purchased
= $54,940 - $48,000
= $6,940
Therefore, the materials price variance for September is $6,940.
Explanation:
The materials price variance measures the difference in cost between the standard price and the actual price paid for direct materials. It helps identify whether the company paid more or less for materials than anticipated.
To calculate the materials price variance, we need to calculate the standard cost of direct materials purchased and the actual cost of direct materials purchased.
The standard cost of direct materials purchased is calculated by multiplying the standard cost per unit (the standard cost for each gallon of materials) by the number of units purchased (in this case, the number of gallons purchased).
The actual cost of direct materials purchased is calculated by multiplying the actual cost per unit (the actual cost for each gallon of materials) by the number of units purchased.
Finally, we can calculate the materials price variance by subtracting the standard cost of direct materials purchased from the actual cost of direct materials purchased. A positive variance indicates that the materials were purchased at a higher cost than anticipated, while a negative variance indicates that the materials were purchased at a lower cost than anticipated.