Answer:
a. Total material cost variance: $
Standard material cost ($7 x 3,240) = 22,680
Less: Actual material cost = 22,440
Total material cost variance 240(F)
Material price variance = (SP - AP) x Actual quantity purchased
= ($7 - $6.80) x 3.300
= $660(F)
Material quantity variance = (SQ - AQU) x standard price
= (3,240 - 3,300) x $7
= $420(A)
b. Favourable material price variance could arise as a result of higher bargaining power of the company
Unfavourable material usage variance could be as a result of substandard material
Unfavourable labour quantity variance may arise as a result of use of unskilled labour
Explanation: Total material cost variance is the difference between standard material cost and actual material cost.
Material price variance is the difference between standard price and actual price multiplied by actual quantity purchased. Actual price is obtained by dividing the actual material cost by the actual quantity purchased.
Material quantity variance is the difference between standard quantity and actual quantity used multiplied by standard price. Standard quantity is obtained by multiplying the standard quantity per unit by actual production for the period.