Metal Shelf Company's standard cost for raw materials is $ 4.00 per pound and it is expected that each metal shelf uses two pounds of material. During October Year 2, 25 comma 000 pounds of materials are purchased from a new supplier for $ 97 comma 000 and 13 comma 000 shelves are produced using 27 comma 000 pounds of materials. Which statement is a possible explanation concerning the direct materials variances?

There are 3 possible primary answers:

a. The production department had to use more materials since the quality of the material was inferior. The expectation that each metal shelf uses 2 lbs of materials is rounded off figure whereas in actual each metal shelf uses 2.0769 lbs of material There is a process loss of 0.0769 of material per metal shelf's manufacturing (3.7% process loss)

Explanation:

Given:

Expected Material required per metal shelf = 2 lbs

Cost of raw material = 4 $/lb

Material purchased in Oct-year 2 = 25,000 lbs

Cost of purchased material in Oct-year 2 = 97,000 $

Cost of material per lbs purchased in Oct-year 2 = 97000/25000 = 3.88 $/lb

Total shelves produced = 13,000 Nos

Total material used = 27,000 lbs

Actual material used per metal shelf = 27000/13000 = 2.0769 lbs/Nos

Thus it is concluded that either the expected materials' amount of 2 lbs was rounded off or there happened a process loss 0.0769 lbs per metal shelf.

Why not these?

Cost of material per lbs purchased in Oct-year 2 = 97000/25000 = 3.88 $/lb

b. The purchasing manager paid more than expected for materials

As the purchased lot was cheaper (@ 3.88 $/lb) than regular rate of 4$/lb therefore the purchase manager didn't pay more than expected.

c. Production workers were more efficient than anticipated

Actual material used per metal shelf = 27000/13000 = 2.0769 lbs/Nos

As the more material was used than expected thus this statement can't be true.

d. The overall materials variance is positive, no further analysis is necessary

Actual material used per metal shelf = 27000/13000 = 2.0769 lbs/Nos

Considering we are using more materials than expected so the overall material variance should not be positive and we should plan further analysis.

Direct material price variance

= (Standard price - Actual price) x Actual quantity purchased

= ($4 - $3.38) x 25,000 pounds

= $3,000 (F)

Direct material price variance is $3,000 favorable

Actual price = $97,000/25,000 pounds = $3.88

Direct material usage variance

= (Standard quantity - Actual quantity used) x Standard price

= (26,000 - 27,000) x $4

= $4,000 (U)

Direct material usage variance is $4,000 unfavorable.

Standard quantity = 2 pounds x 13,000 shelves = 26,000 pounds

Explanation:

Direct material price variance is the difference between standard price and actual price multiplied by actual quantity purchased. Actual price is calculated as actual material cost divided by actual quantity purchased.

Direct material usage variance is the difference between standard quantity and actual quantity used multiplied by standard price. Standard quantity is the product of standard quantity per unit and actual unit produced.