For its manufactur ing facility in Montreal, Quebec, Metalmoulder has a long-term contract with Osaka Metals. Metalmoulder manufactures large-scale machining systems that are sold to other industrial companies. Each machining system has a sizable direct materials cost, consisting primarily of the purchase price for a metal compound. Osaka will supply to Metalmoulder up to 2,400 kilograms of metal per month at a fixed purchase price of $144 per kilogram for each month in 2013. For purchases above 2,400 kilograms in any month, Metalmoulder renegotiates the price for the additional amount with Osaka Metals (or another supplier). The standard price per kilogram is $144 for each month in the January to December 2013 period.

Production data, direct materials actual usage in dollars, and direct materials actual price per kilogram for the January to May 2013 period, are as follows:

The average actual direct materials purchase price is for all units purchased in that month.
Assume that (a) the direct materials purchased in each month are all used in that month and (b) each machining system is started and completed in the same month.
The Montreal facility is one of three plants that Metalmoulder operates to manufacture large-scale machining systems. The other plants are in Worcester, U.K., and Tokyo, Japan.
REQUIRED
1. Assume that Metalmoulder's standard materials input per machining system is 198 kilograms of metal. Compute the direct materials price variance and direct materials efficiency variance for each month of the January to May 2013 period.
2. How does the signing of a long-term agreement with a supplier-an agreement that includes a fixed-purchase-price clause-affect the interpretation of a materials price variance?

Transcribed Image Text:

Average Actual Direct Materials Number of Machining ng Total Actual Direct Purchae Price per January February March April May Systems Produced 10 12 18 16 Materials Usage S290,880 343,872 530,712 474,317 304,128 Kilogram of Metal $144.00 144.00 151.20 153.60 144.00