Islander Corporation Manufactures a Product with the Following Standard Costs

Essay

Islander Corporation manufactures a product with the following standard costs: $\begin{array}{lr}\text { Direct materials }(20 \mathrm{~m} @ \$ 1.85 \text { per metre }) & \$ 37.00 \\\text { Direct labour }(4 \text { hours } @ \$ 12.00 \text { per hour }) & 48.00\end{array}$ 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: $\begin{array}{lr}\text { Direct materials purchased }(16,000 \mathrm{~m}(\$ 1.80 \text { per metre })&\$28,800\\\text { Direct materials used }(9,400 \mathrm{~m})\\\text { Direct labour (1,880 hours } @ \$ 12.20 \text { per hour })&22,936\\\text { Actual production in July: } 460 \text { units }\end{array}$
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.