Question

Setting Standards, Materials and Labour 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 were used to. 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 chartered 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 metre. She then updated prices on both materials to reflect current conditions. The standards she developed for one square metre of counter installed were as follows:

Granite, per square metre	$50.00
Glue (10 oz. @ $0.15)	1.50
Direct labour hours:
Cutting labour (0.10 hr. @ $15)	1.50
Installation labour (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 six months. She found that they completed 50 jobs with an average of 32 square metres 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.)	$80,848
Glue purchased and used (16,000 oz.)	$2,560
Actual hours cutting labour	220
Actual hours installation labour	390

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

Required:

If an amount is zero, enter "0" and select neither from the dropdown. Enter all amounts as positive numbers.

Answer 1

		Square Meter of granite Installed	1600	(32*50)
	SQGR	Standard Quantity of Granite(Sq m)	1600
	SPGR	Standard Price of Granite per sq m	$50
	SQGL	Standard Quantity of Glue required(oz)	16000	10*1600)
	SPGL	Standard Price of Glue per oz	$0.15
	AQGR	Actual Quantity of Granite(Sq m)	1640	Note : There iserror in unit. It should be square meter , not square feet
	APGR	Actual Price of Granite per sq m	$49.2976	(80848/1640)
	AQGL	Actual Quantity of Glue required(oz)	16000
	APGL	Actual Price of Glue per oz	$0.16	(2560/16000)
		Material Price Variance =Actual Quantity*(Actual Price-Standard Price)
		Material Quantity variance =Standard Price*(Actual quantity-Standard Quantity)
	AQGR*(APGR-SPGR)	Price Variance of Granite	$1,152.00	Favorable	(Actual Price is less than standard)
	SPGR*(AQGR-SQGR)	Quantity Variance of Granite	$2,000.00	Unfavorable	(Actual Quantity is more than standard)
		Cost variance of granite	$848.00	Unfavorable	(2000-1152)
	AQGL*(APGL-SPGL)	Price Variance of Glue	$160.00	Unfavorable	(ActualPrice is more than standard)
	SPGL*(AQGL-SQGL)	Quantity Variance of Glue	$0.00		(Actual Quantity is equal to standard)
		Cost variance of Glue	$160.00	Unfavorable
		Total Material Cost Variance	$1,008.00	Unfavorable	(848+160)
	SHCL	Standard Hour of Cutting Labor	160	(0.1*1600)
	SRCL	Standard Rate of Cutting labor/hour	$15
	SHIL	Standard Hour of Installation labor	400	(0.25*1600)
	SRIL	Standard Rate of Installation Labor	$25.00
	AHCL	Actual Hour of Cutting Labor	220
	ARCL	Actual Rate of Cutting labor	$15
	AHIL	Actual Hour of Installation labor	390
	ARIL	Actual Rate of Installation labor	$25.00
		Labor Rate Variance =Actual Hour*(Actual Rate-Standard Rate)
		labor efficiency variance =Standard Rate*(Actual Hour-Standard Hour)
		Rate Variance of Cutting labor	$0.00		(Actual Rate equal to the standard)
	SRCL*(AHCL-SHCL)	Efficiency Variance of Cutting Labor	$900.00	Unfavorable	(Actual Hour is more than standard)
		Cost variance of Cutting labor	$900.00	Unfavorable	(2000-1152)
		Rate Variance of Installation Labor	$0.00		(Actual Rate equal to the standard)
	SRIL*(AHIL-SHIL)	Efficiency Variance of Installation labor	$250.00	Favorable	(Actual Hour is less than standard)
		Cost variance of Installation Labor	$250.00	Favorable
		Total Labor Cost Variance	$650.00	Unfavorable	(900-250)