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 (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 287,500 strips at $3.90 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 79,500 hours at $13.50 per hour.

Required:

1. Break down the total variance for labor into a rate variance and an efficiency variance using the columnar and formula approaches.

Rate variance	$	Unfavorable
Efficiency variance	$	Unfavorable
Total variance	$	Unfavorable

2. CONCEPTUAL CONNECTION As part of the investigation of the unfavorable variances, the plant manager interviews the production manager. The production manager complains strongly about the quality of the leather strips. He indicates that the strips are of lower quality than usual and that workers have to be more careful to avoid a belt with cracks and more time is required. Also, even with extra care, many belts have to be discarded and new ones produced to replace the rejects. This replacement work has also produced some overtime demands. What corrective action should the plant manager take?

1. Return to suppliers that provide the quality corresponding to the price standard.
2. Employ more skilled labor at a cost lesser than the savings made by buying cheap material and improve the product quality.
3. There is no need to change anything. The sales are not affected by this low quality of raw material.

Answer 1

	BUDGET			STANDARD FOR 92000 BELT					ACTUAL FOR	92000	BELT
	QTY/HRS	RATE		QTY/HRS	RATE	Amount			QTY/HRS	RATE	Amount
LABOUR	0.75	12		69000	12	828000			79500	13.5	1073250
						828000					1073250
									Total labour varience		-245250

Labour rate variance	(standard rate -actual rate )*acutual hours
Standard - actual	actual hrs	Amount
-1.5	79500	-119250
Rate variance		-119250	unfavourable

Labour Efficency variance
Standard hrs - actual hrs	Standard rate	Amount
-10500	12	-126000
Efficiency variance		-126000

Corrective action.

Return to suppliers that provide the quality corresponding to the price standard