Question

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 @ $4.00) $12.00 Direct labor (0.25 hr. @ $9.00) 2.25 Total prime cost $14.25 During the first month of the year, the Boise plant produced 49,000 belts. Actual leather purchased was 110,000 strips at $3.10 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 30,000 hours at $12.00 per hour.

Required: 1. Compute the costs of leather and direct labor that should be incurred for the production of 49,000 leather belts.

Materials $ 588,000 Labor $ 110,250

2. Compute the total budget variances for materials and labor. Total Budget Variance Materials $ Favorable Labor $ Unfavorable

3. Conceptual Connection: Would you consider these variances material with a need for investigation?

Answer 1

Solution:

1)

The cost of leather and direct labor that should be incurred to produce 49,000 belts:

Leather =$588,000

Direct labor =$110,250

2)

Total budget variance fo rmaterial and labor:

Materials = Standard cost of leather - Actual cost of leather

=$588,000 -$341,000

=$247,000 favorable

Direct labor = Standard cost of direct labor - Actual cost of direct labor

=$110,000 - $360,000

=($250,000) unfavorable

Working;

Standard data for 49,000 belts:

Leather = 49,000*12 =$588,000

Direct labor =49,000*2.25 =$110,250

Actual data for 49,000 belts:

Leather =110,000*$3.10 =$341,000

Direct labor =30,000*$12 =$360,000

3)

Yes, I think that material variance needs investigation.

Material variance is a combination of material price variance and material quantity variance. So, both the variances are needed to be computed to understand the significant reason for material variance, whether material price or material quantity.

Material quantity variance can be further analysed by computing material mix variance and material yield variance. This would provide with more insights with respect to material quantity variance.

Variance in managerial accounting is required to be computed to make more informed decisions with respect to better cost control and higher production.

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