Question

Labor 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 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 $4.50 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 79,800 hours at $14.50 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 A Efficiency variance A Total variance A $ 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

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Direct Labor SR ( Given) $12 69,000 SH (92000 X 0.75) $14.50 AR ( $170302 / 5240) = AH ( Given). 79,800 Labor Rate variance = Labor Rate variance = AH (SR - AR) 79,800 ( 12 - 14.50) $199500 ( Unfavorable) Labor Rate variance = Labor efficiency Variance = Labor efficiency Variance = Labor efficiency Variance = SR (SH - AH) 12 ( 69,000 - 79,800) $ 129600 (Unfavorable ) Total variance = Total variance = (SH X SR ) - (AH X AR) (12 X 69,000) - ( 14.5 X 79800) $329100 (Unfavorable ) Total variance =

2

Answer : Return to supplier that provide the quality corresponding to price standard.

Since the quality is not maintained the employees had to work overtime and many have to be rejected. So the option of returning the supplier is more effective.

The rate variance is higher than the efficiency variance, so it indicates that employing high skilled labor wont reduce the total variance. The option of no change because sales is not affected cannot be accepted because the profit of the company will be effected.