Question

Todco planned to produce 3,000 units of its single product, Teragram, during November. The standard specifications for one unit of Teragram include six pounds of material at $0.30 per pound. Actual production in November was 3,100 units of Teragram. The accountant computed a favorable materials purchase price variance of $380 and an unfavorable materials quantity variance of $120. Based on these variances, one could conclude that:
(A) the actual cost of materials was less than the standard cost.
(B) the actual usage of materials was less than the standard allowed.
(C) more materials were used than were purchased.
(D) more materials were purchased than were used.

Answer 1

Answer:

(A) the actual cost of materials was less than the standard cost.

Explanation:

Since actual production was 3,100 units we shall calculate standard cost for such product

standard cost of material per unit = 6 pounds for $0.30 per pound = $1.8 per unit

Cost for 3,100 units = 3,100 $\times$ $1.8 = $5,580

Favorable material purchase price variance = $380 favorable

which means actual price was less than standard price,

Unfavorable material quantity variance of $120 means actual quantity used is more than standard quantity.

Material Quantity Variance = (Standard Quantity - Actual Quantity) $\times$ Standard Price

Standard Quantity = 3,100 $\times$ 6 = 18,600

- 120 = (18,600 - AQ) $\times$ $0.3

-120/0.3 = 18,600 - AQ

-400 = 18,600 - AQ

AQ = 18,600 + 400 = 19,000 units

Using material price variance, we have

$380 = ($0.3 - AP) $\times$ 19,000

$380/19,000 = $0.3 - AP

$0.02 = $0.3 - AP

AP = $0.3 - $0.02 = $0.28

Therefore Actual Cost = 19,000 $\times$ $0.28 = $5,320

Standard Cost = $5,580

Therefore correct statement is

(A) the actual cost of materials was less than the standard cost.