Lynden Ltd produced 7800 widgets during January. The accounting records indicated the following:
Direct material purchased
25 000 kilograms @ $2.60 per kilogram
Direct material used
23 100 kilograms
Direct labour used
40 100 hours @ $18 per hour
The widget has the following standard prime costs:
Direct material: 3 kilograms @ $2.50 per kilogram
Direct labour hours: 5 hours @ $17 per hour
Standard prime cost per unit
1. For the month of January, calculate the following variances, indicating whether each is favourable or unfavourable:
a) Direct material price variance.
b) Direct material quantity variance.
c) Direct labour rate variance.
d) Direct labour efficiency variance.
2. Suggest possible explanations for each variance
3. What is ‘management by exception’? Briefly explain.