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 (4 strips @ $4.00) $16.00 Direct labor (0.75 hr. @ $8.00) 6.00 Total prime cost $22.00 During the first month of the year, the Boise plant produced 44,000 belts. Actual leather purchased was 140,000 strips at $3.30 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 34,000 hours at $13.00 per hour. Required: 1. Compute the costs of leather and direct labor that should be incurred for the production of 44,000 leather belts. Materials $ Labor $ 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? Yes/.

Answer 1

1. Calculation of costs of leather and direct labor incurred for the production of 44,000 leather belts:

Actual Production = 44,000 leather belts

Standard quantity of leather material = 44,000 * 4 = 176,000 strips

Standard price per strip = $4 per strip

Actual quantity of leather material used = 140,000 strips

Actual price per strip = $3.30 per strip

Standard hours of direct labor = 44,000 * 0.75 hours = 33,000 hours

Standard rate per labor hour = $8 per hour

Actual hours of direct labor = 34,000 hours

Actual rate per labor hour = $13 per hour

Cost of leather for 44,000 leather belts = Actual quantity of leather strips purchased * Actual price per strip

= 140,000 strips * $3.30 per strip = $462,000

Cost of direct labor for 44,000 leather belts = Actual hours of direct labor * Actual rate per labor hour

= 34,000 hours * $13 per hour = $442,000

2. Calculation of total budget variance for material and labor:

Total material variance (Leather strips) = Standard cost of leather - Actual cost of leather

= (Standard quantity of leather strips * Standard rate per strip) - (Actual quantity of leather strips * Actual rate per strip)

= (176,000 strips * $4 per strip) - (140,000 strips * $3.30 per strip)

= $704,000 - $462,000 = $242,000 (F) Favorable

Total Labor variance = Standard cost of labor - Actual cost of labor

= (Standard hours of direct labor * standard rate per hour) - (Actual hours of direct labor * actual rate per hour)

=(33,000 hours * $8 per hour) - (34,000 hours * $13 per hour)

= $264,000 - $442,000 = $178,000 (U) Unfavorable

Conclusion: From the above calculations, with regard to material variances, the actual material consumed is below the budgeted material and also the actual material price per unit is less than the standard rate per strip. Hence the material variance will result in favorable to the company. Therefore, we can say that the production manager and the purchase manager are working efficiently and thus result in sustainable cost reduction of material by $242,000.

With regard to the Labor variances, the actual direct labor hours worked are more than the budgeted labor hours and also the rate per direct labor hour is more than the standard rate per hour. Hence the direct labor variance will result in unfavorable to the company. Therefore, we can say that the hiring manager is inefficient in hiring the labor and thus result in increase in labor cost by $178,000.

The company should investigate in the cost incurred for Direct Labor and should make the efforts to reduce the Labor cost.