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ABC Company has set the following standards for one unit of product: Direct materials: 0.5 pounds @ $1.00 per pound; Direct labor: 1 hour @ $10.00 per hour. The company produced 35,000 units and had the following actual costs: Direct materials: 18,000 pounds at a total cost of $17,280; Direct labor: 36,000 hours at a total cost of $374,400. Compute the direct materials price variance.Multiple choice question.$720 U$500 F$500 U$720 F

Question

ABC Company has set the following standards for one unit of product: Direct materials: 0.5 pounds @ 1.00perpound;Directlabor:1hour@1.00 per pound; Direct labor: 1 hour @ 10.00 per hour. The company produced 35,000 units and had the following actual costs: Direct materials: 18,000 pounds at a total cost of 17,280;Directlabor:36,000hoursatatotalcostof17,280; Direct labor: 36,000 hours at a total cost of 374,400. Compute the direct materials price variance.Multiple choice question.720U720 U500 F500U500 U720 F

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Solution

To compute the direct materials price variance, follow these steps:

  1. Calculate the standard cost per unit of direct materials: 0.5 pounds @ 1.00perpound=1.00 per pound = 0.50 per unit.

  2. Calculate the actual cost per unit of direct materials: 17,280/18,000pounds=17,280 / 18,000 pounds = 0.96 per pound.

  3. Subtract the actual cost per unit from the standard cost per unit: 0.50−0.50 - 0.96 = -$0.46. This is the price variance per unit.

  4. Multiply the price variance per unit by the actual quantity of units produced: -0.46∗18,000pounds=−0.46 * 18,000 pounds = -8,280.

  5. Since the actual cost is less than the standard cost, the variance is favorable (F). So, the direct materials price variance is $8,280 F.

However, none of the options provided match this calculation. Please check the numbers or the options again.

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