Question

Use the following information for Exercises 10-45, 10-46, and 10-47:

Cinturon Corporation produces high-quality leather belts. The company's plant in Boise uses a standard costing system and has set the following standards for materials and labor:

leather (3 strips @ $4) $12.000

direct labor (0.75 hr @ $12.00). 9.00

total prime cost $21.00

During the first month of the year, the Boise plant produced 92,000 belts. Actual leather purchased was 287,500 strips at $3.60 per strip. There was no beginning or ending inventories of leather. Actual direct labor was 78,200 hours at $12.50 per hour.

Materials Variances

Objective 3

Refer to the information for Cinturon Corporation above.

Required:

1. Break down the total variance for materials into a price variance and a usage variance using the columnar and formula approaches.

2. Conceptual Connection Suppose the Boise plant manager investigates the materials variances and is told by the purchasing manager that a cheaper source of leather strips had been discovered and that this is the reason for the favorable materials price variance. Quite pleased, the purchasing manager suggests that the materials price standard be updated to reflect this new, less expensive source of leather strips. Should the plant manager update the materials price standard as suggested? Why or why not?

Answer 1

Material Rate Variance = Actual Quantity of Strip (Standard Rate per Strip - Actual Rate per Strip)

                                                = 287500 Strip ($4 - $3.6)

                                                = $115000 (Favourable)

Material Usage Variance = Standard Rate per Strip (Standard Quantity - Actual Quantity of Strip)

                                                = $4 (276000 Strips – 287500 Strips)

                                                = $46000 (Unfavourable)

Total Material Cost Variance = Total Standard Cost – Total Actual Cost

                                                                   = $1104000 - $1035000

                                                                   = $69000 (Favourable)

Working Note

Standard (92000 Belts)	Actual (92000 Belts)
Total Strips	Rate	Total Cost	Total Strips	Rate	Total Cost
276000	4	1104000	287500	3.6	1035000

Conceptual Connection: According to me, the plant manager should not update the material price standard. Rationale is, it’s the purchasing manager efforts that he find and purchase the raw material at a lower rate with same quality than the standard rate where the work of purchase manager is justified and appreciable. If the same purchase price is change to standard than there will be no motivation and reflection of work for purchase manager could be seen to the company. Thus it is advisable to not update the material price standard.