Question

Budget Variances, Materials and Labor 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 @ $6.00) $24.00 Direct labor (0.75 hr. @ $13.00) 9.75 $33.75 Total prime cost During the first month of the year, the Boise plant produced 31,000 belts. Actual leather purchased was 130,000 strips at $3.10 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 38,000 hours at $14.50 per hour. Required: 1. Compute the costs of leather and direct labor that should be incurred for the production of 31,000 leather belts. Materials 744,000 Labor 302,250 2. Compute the total budget variances for materials and labor. Total Budget Variance Favorable V х Materials $ Unfavorable Labor 3. Conceptual Connection: Would you consider these variances material with a need for investigation?

Answer 1

1. Calculation of material variance,
   1. It is calculated as total cost that should have been incurred - total cost that is incurred.
      1. Total cost that should have been incurred is,
         • Material, 31000 belts @ 24 per belt is 744000.
         • Labour, 31000 belts @ 9.75 per belt is 302250.
      2. Total cost that is actually incurred is,
         • Material, 130000 strips @ 3.1 per strip is 403000.
         • Labour, 38000 hours @ 14.5 per hour is 551000.
   2. Material varience as per the above calculation is 744000-403000=341000 favourable.
   3. Labour varience is 302250-551000=248750 unfavourable.
2. The company had achieved cost reduction in terms of material but which is drastic, there is a very low cost per strip when compared to budget which may result in deterioration of quality due to poor quality of raw material, therefore futhuer investigation is required here.
3. For labour the number of labour hours used are very high than budgeted, this is because of inefficiency of labour which should be investigated and labourers are encouraged by paying bonus etc; and one more thing is that labour charges are also increased than budgeted which should also be investigated.