Question

Basuras Waste Disposal Company has a long-term contract with several large cities to collect garbage and trash from residential customers. To facilitate the collection, Basuras places a large plastic container with each household. Because of wear and tear, growth, and other factors, Basuras places about 210,000 new containers each year (about 20% of the total households). Several years ago, Basuras decided to manufacture its own containers as a cost-saving measure. A strategically located plant involved in this type of manufacturing was acquired. To help ensure cost efficiency, a standard cost system was installed in the plant. The following standards have been established for the product's variable inputs:

	Standard Quantity		Standard Price (rate in $)		Standard Cost
Direct materials	20 lbs.		$ 3.5		$70
Direct labor	1.7 hrs.		15		25.5
Variable overhead	1.7 hrs.		4		6.8
Total					$95.5

During the first week in January, Basuras had the following actual results:

Units produced	9,000
Actual labor costs	$238,500
Actual labor hours	15,900
Materials purchased and used	176,000	lbs. @ $3.55
Actual variable overhead costs	$ 79,560

The purchasing agent located a new source of slightly higher-quality plastic, and this material was used during the first week in January. Also, a new manufacturing process was implemented on a trial basis. The new process required a slightly higher level of skilled labor. The higher-quality material has no effect on labor utilization. However, the new manufacturing process was expected to reduce materials usage by 0.25 pound per container.

Required:

1. Conceptual Connection: Compute the materials price and usage variances. Assume that the 0.25 pound per container reduction of materials occurred as expected and that the remaining effects are all attributable to the higher-quality material. Would you recommend that the purchasing agent continue to buy this quality, or should the usual quality be purchased? Assume that the quality of the end product is not affected significantly.

Price	$8800 Unfavorable
Usage	$14000 Favorable
Select the effect.	The new process saves money.
Enter the net amount of the effect.	$_____________
Select the correct decision.	Use the higher-quality material.

Answer 1