Question

Standard Costing, Planned Variances

Phono Company manufactures a plastic toy cell phone. The following standards have been established for the toy’s materials and labor inputs:

	Standard Quantity		Standard Price (rate in $)		Standard Cost
Direct materials	0.5 lb.		$ 1.50		$0.75
Direct labor	0.15 hr.		10.00		1.50

During the first week of July, the company had the following results:

Units produced	90,000
Actual labor costs	$138,000
Actual labor hours	13,400
Materials purchased and used	44,250 lbs.	@ $1.55 per lb

The purchasing agent located a new source of slightly higher-quality plastic, and this material was used during the first week in July. Also, a new manufacturing layout was implemented on a trial basis. The new layout required a slightly higher level of skilled labor. The higher-quality material has no effect on labor utilization. Similarly, the new manufacturing approach has no effect on material usage. (Note: Round all variances to the nearest dollar.)

Required:

1. Conceptual Connection: Compute the materials price and usage variances.

Materials price variance	$
Materials usage variance	$

Assuming that the materials variances are essentially attributable to the higher quality of materials, 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.

2. Conceptual Connection: Compute the labor rate and efficiency variances.

Labor rate variance	$
Labor efficiency variance	$

Assuming that the labor variances are attributable to the new manufacturing layout, should it be continued or discontinued?

3. Conceptual Connection: Refer to Requirement 2. Suppose that the industrial engineer argued that the new layout 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 13,200 and the labor cost was $132,000. If there is no variance, enter "0" and select "No variance" from the dropdown.

Labor rate variance	$
Labor efficiency variance	$

Should the new layout be adopted? Assume the variances are attributable to the new layout.

If so, what would be the projected annual savings?
$

Answer 1

• Requirement 1

Material Price Variance	$                                                     2,213.00	Unfavourable-U
Material Quantity Variance	$                                                     1,125.00	Favourable-F

--Working

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                                1.50	-	$                       1.55	)	x	44250
	-2212.5
	Variance		$             2,212.50			Unfavourable-U
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	45000	-	44250	)	x	$                           1.50
	1125
	Variance		$              1,125.00			Favourable-F

• Requirement 2

Labor Rate Variance	$                                                     4,000.00	Unfavourable-U
Labour Efficiency Variance	$                                                     1,000.00	Favourable-F

--Working

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                              10.00	-	$                    10.30	)	x	13400
	-4000
	Variance		$              4,000.00			Unfavourable-U
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	13500	-	13400	)	x	$                        10.00
	1000
	Variance		$              1,000.00			Favourable-F

• Requirement 3

Labor Rate Variance	$                                                                  -	No Variance
Labour Efficiency Variance	$                                                     3,000.00	Favourable-F

--Working

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                              10.00	-	$                    10.00	)	x	13200
	0
	Variance		$                           -			Favourable-F
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	13500	-	13200	)	x	$                        10.00
	3000
	Variance		$              3,000.00			Favourable-F

• Projected annual saving
  = 138000 – 132000
  = $ 6,000