Question

STANDARD COSTING, PLANNED VARIANCES

Bytown Container Company manufactures a plastic container. The following standards have been established for the container's materials and labour inputs:

                                    Standard       Standard Price         Standard

                                    Quantity         (rate in $)                   Cost ($)

Direct materials        0.5 kg                          1                    0.50

Direct labour            0.1 hr.                        10                   1.00

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

Units produced                                  40,000

Actual labour costs                          $42,000

Actual labour hours                            4,100

Materials purchased and used       19,500 kg @ $1.05 per kg

Other information: 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 labour. The higher quality material has no effect on labour utilization. Similarly, the new manufacturing approach has no effect on material usage.

Required:

1. Compute the materials price and usage variances. Assuming that the material 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. Compute the labour rate and efficiency variances. Assuming that the labour variances are attributable to the new manufacturing layout, should it be continued or discontinued? Explain.

3. 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 labour hours were 3,900 and the labour cost was $39,000. Should the new layout adopted? Assume the variances are attributable to the new layout. If so, what be the projected annual savings?

Answer 1

Answer

• All working forms part of the answer
• Working

Actual DATA for		40000	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	19500	$              1.050	$           20,475.00
Direct labor	4100	$              10.24	$           42,000.00

Standard DATA for		40000	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	( 0.5 kgs x 40000 units)=20000 kgs	$                   1.00	$       20,000.00
Direct labor	( 0.1 hours x 40000 units)=4000 hours	$                10.00	$       40,000.00

• Requirement 1

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                        1.00	-	$                       1.05	)	x	19500
	-975
	Variance		$                  975.00			Unfavourable-U

Material Usage Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	20000	-	19500	)	x	$                           1.00
	500
	Variance		$                  500.00			Favourable-F

--Purchasing agent should discontinue purchasing this quality, because its rates are higher BUT there are no significant quality improvement in end products.

• Requirement 2

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                     10.00	-	$                    10.24	)	x	4100
	-1000
	Variance		$              1,000.00			Unfavourable-U

Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	4000	-	4100	)	x	$                        10.00
	-1000
	Variance		$              1,000.00			Unfavourable-U

--The new layout should be DISCONTINUED as it has resulted in Unfavourable Variances.

• Requirement 3

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                     10.00	-	$                    10.00	)	x	3900
	0
	Variance		$                           -			Favourable-F
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	4000	-	3900	)	x	$                        10.00
	1000
	Variance		$              1,000.00			Favourable-F

--YES, now the new layout should be ADOPTED.

--Monthly saving = $ 1000
--Annual saving = $ 1000 x 12 = $ 12,000