P11-55A Calculate and explain direct material and direct labor variances
Dazzle Fabrics manufactures a specialty monogrammed blanket. The following are the cost standards for this blanket:
Direct materials (fabric)……………. 2.0 yards per blanket at $7 per yard
Direct labor……………………. 0.5 direct labor hours per blanker at $19.00 per hour
Actual results from last month’s production of 2,400 blankets are as follows:
Actual cost of 6,240 yards of direct material (fabric) purchased…………………. $40,560
Actual yards of direct material (fabric) used………………………………………………. 5,540
Actual wages for 1,350 direct labor hours worked……………………………………… $24,840
Requirements
- What is the standard direct material cost for one blanket?
- What is the actual cost per yard of fabric purchased?
- Calculate the direct material price and quantity variances.
- What is the standard direct labor cost for one blanket?
- What is the actual direct labor cost per hour?
- Calculate the direct labor rate and efficiency variances.
- Analyze each variance and speculate as to what may have caused that variance.
Look at all four variances together (the big picture). How might they all be related? What variance is very likely to have caused the other variances?
P12-67B Evaluate an investment using all four methods
Lazy River World is considering purchasing a water park in Chattanooga, Tennessee, for $1,950,000. The new facility will generate annual net cash inflows of $505,000 for eight years. Engineers estimate that the facility will remain useful for eight years and have no residual value. The company uses straight-line depreciation. Its owners want payback in less than five years and an ARR of 10% or more. Management uses a 14% hurdle rate on investments of this nature.
Requirements
- Compute the payback period, the ARR, the NPV, and the approximate IRR of this investment.
- Recommend whether the company should invest in this project.