Question

Setting Standards, Materials and Labor Variances

Tom Belford and Tony Sorrentino own a small business devoted to kitchen and bath granite installations. Recently, building contractors have insisted on up-front bid prices for a house rather than the cost-plus system that Tom and Tony had been using. They worry because natural flaws in the granite make it impossible to tell in advance exactly how much granite will be used on a particular job. In addition, granite can be easily broken, meaning that Tom or Tony could ruin a slab and would need to start over with a new one. Sometimes the improperly cut pieces could be used for smaller installations, sometimes not. All their accounting is done by a local certified public accounting firm headed by Charlene Davenport. Charlene listened to their concerns and suggested that it might be time to implement tighter controls by setting up a standard costing system.

Charlene reviewed the invoices pertaining to a number of Tom and Tony's previous jobs to determine the average amount of granite and glue needed per square foot. She then updated prices on both materials to reflect current conditions. The standards she developed for one square foot of counter installed were as follows:

Granite, per square foot	$50.00
Glue (10 oz. @ $0.15)	1.50
Direct labor hours:
Cutting labor (0.10 hr. @ $15)	1.50
Installation labor (0.25 hr. @ $25)	6.25

These standards assumed that one seamless counter requires one sink cut (the space into which the sink will fit) as well as cutting the counter to fit the space available.

Charlene tracked the actual costs incurred by Tom and Tony for granite installation for the next 6 months. She found that they completed 50 jobs with an average of 32 square feet of granite installed in each one. The following information on actual amounts used and cost was gathered:

Granite purchased and used (1,640 sq. ft.)	$82,948
Glue purchased and used (16,000 oz.)	$2,560
Actual hours cutting labor	200
Actual hours installation labor	450

The actual wage rate for cutting and installation labor remained unchanged from the standard rate.

Required:

If an amount is zero, enter "0" and select neither from the dropdown.

1. Calculate the materials price variances and materials usage variances for granite and for glue for the past 6 months.

Granite
Materials price variance	$fill in the blank 1	Unfavorable
Materials usage variance	$fill in the blank 3	Unfavorable
Glue
Materials price variance	$fill in the blank 5	Unfavorable
Materials usage variance	$fill in the blank 7	Neither

2. Calculate the labor rate variances and labor efficiency variances for cutting labor and for installation labor for the past 6 months.

Cutting Labor
Labor rate variance	$fill in the blank 9	Neither
Labor efficiency variance	$fill in the blank 11	Unfavorable
Installation Labor
Labor rate variance	$fill in the blank 13	Neither
Labor efficiency variance	$fill in the blank 15	Unfavorable

3. Conceptual Connection: Would it be worthwhile for Charlene to establish standards for atypical jobs (such as those with more than one sink cut or wider than normal)?

Answer 1

Equations

Material price variance = (Actual unit cost - Standard unit cost) * Actual quantity purchased

Material usage variance = (Standard quantity of material allowed - actual quantity used) * standard price per unit

Direct labor rate variance = ( Actual rate - Standard rate) * Actual hours

Direct labor efficiency variance = (Actual hours - standard hours) * Actual rate

1)

Granite
Materials price variance =82,948 - (1640 x 50)	948.00	U
Materials usage variance=(1640 - 1600)50	2,000.00	U
Glue
Materials price variance = 2560 - (16000 x 0.15)	160.00	U
Materials usage variance (16000 - 16000) 0.15	-

2)

Cutting Labor
Labor rate variance = (15 - 15)200	-
Labor efficiency variance = (200 - 160)15	600.00	U
Installation Labor
Labor rate variance = (25 - 25)390	-
Labor efficiency variance = (450 - 400)25	1,250.00	U

3) No it Would not be worthwhile for Charlene to establish standards for a typical jobs , the operation is small which can be decided mentally also