Question

Materials Variances 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 9.00 Direct labor (0.75 hr. @ $12) $21.00 Total prime cost During the first month of the year, the Boise plant produced 92,000 belts. Actual leather purchased was 290,500 strips at $3.60 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 80,500 hours at $14.00 per hour Required: 1. Break down the total variance for materials into a price variance and a usage variance using the columnar and formula approaches. Enter favorable values as negative numbers and unfavorable values as positive numbers. Price variance $1 Usage variance Total variance 2. CONCEPTUAL CONNECTION Suppose the Boise plant manager investigates the materials variances and is told by the purchasing manager that a cheaper source of leather strips had been discovered and that this is the reason for the favorable materials price variance. Quite pleased, the purchasing manager suggests that the materials price standard be updated to reflect this new, less expensive source of leather strips. Should the plant manager update the materials price standard as suggested? Why or why not? 1. No, The suggestion of the purchasing manager is premature. A favorable materials price can produce an effect on both materials usage and labor variances. 2. Yes, the purchasing manager is correct. This will improve the overall profitability of the company. 3. No, The suggestion of the purchasing manager is incorrect. The matierals are not available and so changes to the price standard should not be made

Answer 1

Asnwer 1:

The calculation for variances are as follows:

Calculation of revised standard figures:

Standard cost for labor and materials:
Particulars	Standard			Revised Standard			Actual
	Units	Rate($)	Amount(Units *Rate)	Units	Rate($)	Amount(Units *Rate)	Units	Rate($)	Amount(Units *Rate)
Materials: Leather (strips)	3	4	12	Units for 92000 belts =92000*3= 276000strips	4	1104000	290500	3.6	1045800
Direct labor (hours)	0.75	12	9	Hours for 92000 units= 0.75*92000= 69000	12	828000	80500	14	1127000
Prime cost ($)			21			1932000			2172800
Actual production(belts)	92000			92000

Calculation of Variance:
Particulars	Formula	Calculation	Final Amount	(Favourable)/Unvaourable
Material Price variance: (Standard price per strip - Actual Price per strip)*Actual production	=(4-3.6)*290500	116200	-116200	Favourable
Material Usage variance:
(Standard unit- Actual unit )* Standard rate per unit	=(276000-290500)*$4	-58000	58000	Unfavourable
Total variance:
Standard cost - Actual cost	=(1104000-1045800)	58200	-58200	Favourable

Final answer:

Variances	Variance amount	Result
Price Variance	-$116200	Favourable
Usage Variance	$58000	Unfavourable
Total Variance	-$58200	Favourable

Answer 2:

The Boise plant manager investigates the material variances and is told by the purchasing manager that a cheaper source of leather strips had been discovered and that is the reason for favourable materials  price variance. The suggestion of the manager that the material price standard be updated to reflect this new , less expensive source of leather is :

Option 3- No, The suggestion of the purchasing manager is incorrect. The materials are not available and so changes to the price standard should not be made..