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material specifications for every type of job that comes into the shop. During April, while there was a lot of business, profitability was off. Gordon Andrews, manager of Blue Spruce decides to do a variance analysis The following table details the results of this study 5. VARIANCE ANALYSIS. Blue Spruce Small Appliance Repair has well-defined time and of the month’s activities to determine what happenes o- Measure Actual quantity Standard quantity Actual price Standard price Materials 2250 parts 2000 parts Labor 188 hours 158 hours 20.00 per hou $18.00 per hour $5.00 a. Complete a price and efficiency variance for the materials used by Blue Spruce b. Complete a price and efficiency variance for the labor used by Blue Spruce c. Where is the biggest problem? Why?
Expert Answer
(a) Material price Variance = [ Standard price – Actual price ] * Actual Quantity
= [ 5 – 5.75 ] * 2,150
= – 1,612.50 = 1,612.50 Adverse
Material efficiency Variance = [ Standard quantity – Actual quantity ] * Standard price
= [ 2,000 – 2,150 ] * 5
= – 750 = 750 Adverse
(b) Labour price Variance = [ Standard price per hour – Actual price per hour ] * Actual hours
= [ 18 – 20 ] * 188
= – 376 = 376 Adverse
Labour efficiency Variance = [ Standard hours – Actual hours ] * Standard price per hour
= [ 158 – 188 ] * 18
= – 540 = 540 Adverse
(c) The biggest problem Blue Spruce is facing is connected with Material and Labour. The reasons are as follows :
(1) Adverse Material price Variance shows that material is being purchased at higher price than the standard price set for material purchase. This is causing the total cost to increase and profit to decrease .
(2) Adverse Material efficiency Variance shows that quantity of material being used for repair purpose is more than the standard quantity set for repair purpose. This again is causing the total cost to increase and profit to decrease.
(3) Adverse labour price Variance shows that price paid to labour per hour is higher than the price set as standard price to be paid to labour per hour. This is also causing the total cost to increase and profit to decrease.
(4) Adverse labour efficiency Variance shows that hours taken by labour to complete a particular work is higher than the standard hours set to complete a particular work. This is causing the total cost to increase and profit to decrease.
