Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 38

Direct material variances—solving for unknowns Birchwood, Inc., manufactures end tables, armchairs, and other wood furniture products from high-quality materials. The company uses a standard costing system and isolates variances as soon as possible. The purchasing manager is responsible for controlling direct material price variances, and production managers are responsible for controlling usage variances. During August, the following results were reported for the production of Knotty Birch armchairs:

Units produced	1,000 armchairs
Direct materials purchased	12,000 board feet
Direct materials issued into production	11,500 board feet
Standard cost per unit (12 board feet x $12)	$144 per unit produced
Purchase price variance	$2,500 unfavorable

Required:

a. Calculate the actual price paid per board foot purchased.

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b. Calculate the standard quantity of materials allowed (in board feet) for the number of units produced.

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c. Calculate the direct materials usage variance.

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d. What is the most likely explanation for the price and usage variances? Is this a good trade-off for management of Birchwood, Inc., to make? Explain your answer.

Step 1 of 8

Material Purchase Price Variance:

Material Purchase Price Variance is the difference between the cost that has incurred in the purchase of material and the amount that should have been incurred. When the actual cost is greater than the standard cost, then it is termed as Unfavorable and when the actual cost is less than the standard cost, then it is termed as Favorable.