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 (3 strips @ $5.00) $15.00 Direct labor (0.25 hr. @ $8.00) 2.00 Total prime cost $17.00 During the first month of the year, the Boise plant produced 41,000 belts. Actual leather purchased was 100,000 strips at $3.70 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 30,000 hours at $15.00 per hour. Required: 1. Compute the costs of leather and direct labor that should be incurred for the production of 41,000 leather belts. Materials $ 615,000 Labor 82,000 2. Compute the total budget variances for materials and labor. Total Budget Variance -241,000 X Materials Favorable 157,000 X Labor Unfavorable 3. Conceptual Connection: Would you consider these variances material with a need for investigation? Yes

Please answer question 2.

Answer 1

Total Budgeted Materials Variance = Standard Material Cost - Actual Material cost

= $615000 - 100000*3.70

= $245,000 Favorable

Total Budgeted Labor Variance = Standard Labor Cost - Actual Labor cost

= $82000 - 30000*15

= $368,000 Unfavorable