Question

1. Basics of Variance Analysis, Variable Inputs

   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 250,000 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	14 lbs.		$ 3.5		$49
   Direct labor	1.7 hrs.		14		23.8
   Variable overhead	1.7 hrs.		6		10.2
   Total					$72.8

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

   Units produced	9,000
   Actual labor costs	$222,600
   Actual labor hours	15,900
   Materials purchased and used	124,000	lbs. @ $3.55
   Actual variable overhead costs	$ 119,340

   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	$
   Usage	$
   Select the effect.
   Enter the net amount of the effect.	$
   Select the correct decision.

   2. Conceptual Connection: Compute the labor rate and efficiency variances. Assuming that the labor variances are attributable to the new manufacturing process, should it be continued or discontinued? In answering, consider the new process's materials reduction effect as well. If an amount is zero, enter "0".

   Rate	$
   Efficiency	$
   Select the effect.
   Enter the overall net amount of the effect.	$
   Select the correct decision.

   3. Conceptual Connection: Refer to Requirement 2. Suppose that the industrial engineer argued that the new process should not be evaluated after only one week. His reasoning was that it would take at least a week for the workers to become efficient with the new approach. Suppose that the production is the same the second week and that the actual labor hours were 12,000 and the labor cost was $168,000. Should the new process be adopted? Assume the variances are attributable to the new process. Assuming production of 9,000 units per week, what would be the projected annual savings? (Include the materials reduction effect.) If an amount is zero, enter "0".

   Rate	$
   Efficiency	$
   Select the effect.
   Enter the annual amount of the effect.	$
   Select the correct decision.

Answer 1

1.

Price	$ 6,200 U
Usage	875 U
Effect	Unfavorable
Net amount of effect	$ 7,075 U
Decision	Discontinue buying the new quality

Materials price variance = $ ( 3.50 - 3.55) x 124,000 lb. = $ 6,200 U

Materials usage variance = ( 9,000 x 13.75 - 124,000) x $ 3.50 = $ 875 U

Net amount of the effect = $ 7, 075 U

The purchasing agent should discontinue buying the new quality.

2.

Rate	$ 0
Efficiency	$ 8,400 U
Effect	Unfavorable
Net amount of effect	$ 8,400
Decision	Discontinue new manufacturing process

Labor rate variance = $ ( 14 - 14) x 15,900 hours = $ 0

Labor efficiency variance = ( 9,000 x 1.70 - 15,900 ) x $ 14 =   $ 8,400 U

Net amount of effect = 8,400 U

The new manufacturing process should be discontinued.

3.

Rate	$ 0
Efficiency	$ 46,200 F
Effect	Favorable
Annual amount of effect	$ 2,402,400
Decision	New manufacturing process should be continued

Labor rate variance = $ ( 14 - 14 ) x 12,000 = $ 0

Labor efficiency variance = ( 9,000 x 1.70 - 12,000 ) x $ 14 = $ 46,200 F

Net amount of effect = $ 46,200 F

Annual amount of the effect = $ 46,200 x 52 weeks = $ 2,402,400

The new manufacturing process should be continued.