Dawson Toys, Ltd., produces a toy called the Maze. The company has recently established a standard cost system to help control costs and has established the following standards for the Maze toy:
Direct materials: 6 microns per toy at $0.34 per micron
Direct labor: 1.2 hours per toy at $6.90 per hour
During July, the company produced 5,100 Maze toys. The toy's production data for the month are as follows:
Direct materials: 76,000 microns were purchased at a cost of $0.33 per micron. 37,750 of these microns were still in inventory at the end of the month.
Direct labor: 6,620 direct labor-hours were worked at a cost of $48,326.
Required:
1. Compute the following variances for July:a. Direct materials price and quantity variances. b. Direct labor rate and efficiency variances.2. Prepare a brief explanation of the possible causes of each variance.

Instructions are below.

Explanation:

Giving the following information:

Direct materials: 6 microns per toy at $0.34 per micron

Direct labor: 1.2 hours per toy at $6.90 per hour

During July, the company produced 5,100 Maze toys.

Direct materials: 76,000 microns were purchased at a cost of $0.33 per micron. 37,750 of these microns were still in inventory at the end of the month.

Direct labor: 6,620 direct labor-hours were worked at a cost of $48,326.

1) To calculate the direct material price and quantity variance, we need to use the following formula:

Direct material price variance= (standard price - actual price)*actual quantity

Direct material price variance= (0.34 - 0.33)*76,000

Direct material price variance= $760 favorable

This variance can be explained by negotiation with the supplier, finding a new supplier, or a market decrease in the price of the part.

Direct material quantity variance= (standard quantity - actual quantity)*standard price

Direct material quantity variance= (5,100*6 - 38,250)*0.34

Direct material quantity variance= $2,601 unfavorable

This variance can be explained by a decrease in the quality of the part, mishandlings, and breakage of parts, or an inexperienced worker.

2) To calculate the direct labor efficiency and rate variance, we need to use the following formulas:

Direct labor time (efficiency) variance= (Standard Quantity - Actual Quantity)*standard rate

Direct labor time (efficiency) variance= (5,100*1.2 - 6,620)*6.9

Direct labor time (efficiency) variance= $3,450 unfavorable

This variance can be explained by an inexperienced worker or a trainee, a break down of a machine, a new part, etcetera.

Direct labor rate variance= (Standard Rate - Actual Rate)*Actual Quantity

Actual rate= 48,326/6,620= $7.3

Direct labor rate variance= (6.9 - 7.3)*6,620

Direct labor rate variance= $2,648 unfavorable

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