Question

49

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 300,500 strips at $3.30 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 80,000 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 $fill in the blank 1 Favorable Usage variance $fill in the blank 3 Unfavorable Total variance $fill in the blank 5 Favorable 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? No , The suggestion of the purchasing manager is premature. A favorable materials price can produce an effect on both materials usage and labor variances. Yes, the purchasing manager is correct. This will improve the overall profitability of the company. 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 1

During the first month of the year, the Boise plant produced 43,000 belts. Actual leather purchased was 110,000 strips at $3.20 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 35,000 hours at $14.50 per hour.

Required:

1. Compute the costs of leather and direct labor that should be incurred for the production of 43,000 leather belts.

Materials	$fill in the blank 1
Labor	$fill in the blank 2

2. Compute the total budget variances for materials and labor.

	Total Budget Variance
Materials	$fill in the blank 3	Favorable
Labor	$fill in the blank 5	Unfavorable

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

Answer 1

Answer 1

Part 1
Price variance	(210,350)	Favorable
Usage variance	98,000	Unfavorable
Total variance	(112,350)	Favorable

	Minus sign indicate Favorable variance.
	Measure	Pound
	Standard price per Pound	$               4.00
	Actual price per Pound	$               3.30
92000*3	Standard quantity in Pounds	276,000
	Actual quantity purchased in Pounds	300,500
	Actual quantity used in Pounds	300,500
	Actual price per Pound	3.30
Less	Standard price per Pound	-4.00
	Difference	-0.70
Multiply	Actual quantity purchased in Pounds	300500
	Material price variance	$     (210,350)
	Indicate	Favorable
	Actual quantity used in Pounds	300500
Less	Standard quantity in Pounds	-276000
	Difference	24500
Multiply	Standard price per Pound	4.00
	Material quantity variance	$          98,000
	Indicate	Unfavorable
	Material cost variance (Total of both varaince)	$     (112,350)
	Indicate	Favorable

Part 2

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 2

Part 1
Cost of materials (43000*12)	516,000
Cost of labor (43000*9)	387,000

Part 2
	Materials	Labor
Actual costs (110000*3.20) (35000*14.50)	352,000	507,500
Less: flexiable Budgted cost	516,000	387,000
Total budget variance	(164,000)	120,500
Indicate	Favorable	Unfavorable

Part 3
Would you consider these variances material with a need for investigation?		Yes
Above variance is more significant, therefore, material should be investigated.