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, Boise plant produced 92,000 belts. Actual leather purchased was 287,500 strips at $3.60 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 78,200 hours at $12.50 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

1. Rate variance = (Actual hours * Actual rate) - (Actual hours * Standard rate)

= (78,200 * $12.5) - (78,200 * $12)

= $39,100 Unfavorable

Efficiency variance = (Actual hours * Standard rate) - (Standard hours * Standard rate)

= (78,200 * $12) - [(92,000 * 0.75) * $12]

= $110,400 Unfavorable

Total variance = Rate variance + Efficiency variance

= $39,100 Unfavorable + $110,400 Unfavorable

= $149,500 Unfavorable

2. The answer is Return to suppliers that provide the quality corresponding to the price standard.