Question

Materials Variances

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)	$12.00
Direct labor (0.75 hr. @ $12)	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 271,500 strips at $3.30 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 79,200 hours at $14.00 per hour.

Required:

1. Break down the total variance for materials into a price variance and a usage variance using the columnar and formula approaches. Enter favorable values as negative numbers and unfavorable values as positive numbers.

Price variance	$
Usage variance	$
Total variance	$

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?

1. No , The suggestion of the purchasing manager is premature. A favorable materials price can produce an effect on both materials usage and labor variances.
2. Yes, the purchasing manager is correct. This will improve the overall profitability of the company.
3. No , The suggestion of the purchasing manager is incorrect. The matierals are not available and so changes to the price standard should not be made

Answer 1