Islander Corporation Manufactures a Product with the Following Standard Costs

question 20

Essay

Islander Corporation manufactures a product with the following standard costs: $$\begin{array} { l r } \text { Direct materials } ( 20 \mathrm {~m} ( \$ , \$ 1.85 \text { per metre) } & \$ 37.00 \\\text { Direct labour } ( 4 \text { hours } ( a , \$ 12.00 \text { per hour) } & 48.00\end{array}$$ Standards are based on normal monthly production involving 2,000 direct labour hours (500 units of output).
The following information pertains to the month of April: $\begin{array}{ll}\text { Direct materials purchased }(16,000 \mathrm{~m} @ \$ 1.80 \text { per metre }) & \$ 28,800 \\\text { Direct materials used }(9,400 \mathrm{~m}) & \\\text { Direct labour }(1,880 \text { hours } @ \$ 12.20 \text { per hour }) & 22,936\\\text { Actual production in July: } 460 \text { units }\end{array}$ Required:
A. Compute the following variances for the month of April, indicating whether each variance is favourable or unfavourable:
1) Materials purchase price variance
2) Materials quantity variance
3) Labour rate variance
4) Labour efficiency variance
B. Give potential reasons for each of the variances. Be sure to consider interrelationships among variances.

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Definitions:

Unearned Revenue

Funds a company acquires for products or services that are still to be provided or executed.

Ordinary Gains

Profits resulting from the sale of assets used in a business's normal operations, subject to regular income tax rates.

Troubled Debt Restructuring

A process where terms of a debt are modified due to the debtor's financial difficulties, often involving a reduction in interest rate or principal owed.

Settlement

The process of resolving a transaction, including the transfer of funds and securities.