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 variance.Multiple choice question.$220 U$720 U$220 F$720 F
Question
ABC Company has set the following standards for one unit of product: Direct materials: 0.5 pounds @ 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 374,400. Compute the direct materials variance.Multiple choice question.720 U720 F
Solution
To compute the direct materials variance, we first need to calculate the standard cost and the actual cost.
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Standard cost: The standard cost is the amount that the company expects to pay for the direct materials. According to the problem, the company expects to use 0.5 pounds of direct materials for each unit of product, and the cost of direct materials is 1.00/pound = 0.50/unit * 35,000 units = $17,500.
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Actual cost: The actual cost is the amount that the company actually paid for the direct materials. According to the problem, the company used 18,000 pounds of direct materials at a total cost of 17,280.
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Direct materials variance: The direct materials variance is the difference between the standard cost and the actual cost. If the actual cost is higher than the standard cost, the variance is unfavorable (U). If the actual cost is lower than the standard cost, the variance is favorable (F). In this case, the direct materials variance is 17,280 (actual cost) = $220 F.
So, the answer is $220 F.
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