Question

Complete the essay and quantitative problems below. Staple your answers to the back of your exam. All essay components should be typed, double-spaced and at least 1-2 pages per question. 3. DIRECT LABOR AND DIRECT MATERIAL VARIANCES (20 POINTS) Dr. Madison, inventor and owner of Madison Corrosion Treatment, has discovered that ordinary mufflers and pipes, when treated with his patented process, will become permaneatly impervious to corrosion. To reap the rewards from his ingenuity, he has opened Rust Belt Mufflers, a chain of 30 corporste-owned mufler shops. Rust Belt unconditionally warrants all of its muffler and pipe installations for the life of the vehicle. From minor adjustments to complete replacement, a Rust Belt customer must be a satisfied customer Although Rust Belt's service has become the rage of the Great Lakes, profits heve boen unimpressive. Simon, one of the Madison's employees, scolds his boss: "Here you are, with the greatest competitive advantsge in the history of muffler service, doing no better than any of your rivals." Madison retorts, "I'm devoted to science, not business. As long as the enterprise is profitable, I will not interfere with my shop managers." Simon says that the profitability problem is dae to squandering of resources by shop managers. The product's superior price, strong demand, and Madison's policy of beaign neglect have given managers a virtual blank check when it comes to expenditures. Simon says that Madison's solution is to reduce costs by monitoring shop performance via a standard cost system. Due in large part to early childhood conditioning, Madison does as Simon says Each Rust Belt shop provides two services: 1. Replacement of non-Madison mafflers and pipes with modern Madison mufflers and pipes 2. Warranty replacement of defective Madison mufflers and pipes with new Madison mufflers and pipes These services require materials (inclading corrosion treatment) and direct labor. Materíals purchases, installation procedures, and labor allocation are strictly the responsibility of each individaal shop manager. Since Madison mufflers and pipes are merely ordinary mufflers and pipes that are treated with Madison's corrosion process, shop managers purchase mufflers and pipes from any supplier of their choosing. Corrosion treatment is done at each shop After careful study, Madison adopts the following cost standards per installation. Actual installations include both original and warranty installations. Materials $60 per installation 1 hour per installation $11.80 Direct Labor Standard Labor Rate Cost data for the three shops in Buffalo, New York, for the first year of the standard cost system follow. State St. 15,000 Dewey Ave 22,500 MIHope Ave 10,000 11.500 Expectod installations Actual installations Materials costs 14,500 S710,500 11,600 22.250 $759,000 12,650 $13.00 S1,346,125 21,138 $12.00 Direct labor hours Actual labor rate S11.00 Required: a) Calculate materials and labor variances for each of the three Buffalo shops. Evaluate the relative performance of cach shop based on the calculated variances. Madison's cousin Milty, Rust Belt's MBA intern, presents the following in his analysis of the Bufalo shops under standard b) costing. During the standard costing period, 500 of the instalations performed by State Street involved the originally installed Madison mufflers and pipes being fully replaced under warranty with new Madison mufflers and pipes. Work at the Dewey Avemue shop has produced 100 original installations requiring full warranty replacement. At the Mt. Hope Avenue shop. only eight installations have required full warranty replacement. This acoounts for all known warranty work in Buffalo for installations performed under standard costing. (Warranty replacement services performed before standard costing were not considered.) Has your interpretation changed? In broad terms is the standard costing system effectively moeting its objectives? What general improvements should be made?

Answer 1

Let Us Simplify the given information and calculate the variances

Given Info	State St	Dewey Ave	Mr. Hope Ave
Expected Installation	15,000	22,500	10,000
Actual Installations	14,500	22,250	11,500
Material Cost	710,500	1,346,125	759,000
Direct Labor Hours	11,600	21,138	12,650
Actual Labor Rate	11	12	13
Standards	State St	Dewey Ave	Mr. Hope Ave
Expected Installation	15,000	22,500	10,000
Material Cost	900,000	1,350,000	600,000
Direct Labor Hours	15,000	22,500	10,000
Standard Labor Cost	177,000	265,500	118,000
Actual	State St	Dewey Ave	Mr. Hope Ave
Actual Installation	14,500	22,250	11,500
Material Cost	710,500	1,346,125	759,000
Direct Labor Hours	11,600	21,138	12,650
Actual Labor Cost	127,600	253,656	164,450

Using the given information in the problem statement, we have calculated above variances. The formulas to calculate these are as follows

Standards

Expected Installations = Given

Material Cost = Standard Material Cost Per Job X Expected Installations

Direct Labor Hours = Expected Installation X Standard Time Per Installation

Standard Labor Cost = Direct Labor Hours X Standard Cost Per Hour

Actual

Actual Installations = Given

Material Cost = Given

Direct Labor Hours = Given

Actual Labor Cost = Direct Labor Hours X Standard Cost Per Hour

Now let us calculate the variances

There are three type of variances for each material and labor i,e. Rate, Efficiency and Cost. Efficiency variance will not be in Materials as there is only one type of material.

Variances	State St	Dewey Ave	Mr. Hope Ave
Material Rate Variance ($ per job)	11.00	(0.50)	(6.00)
Material Cost Variance ($)	189,500.00	3,875.00	(159,000.00)
Labor Rate Variance ($ per Hour)	0.80	(0.20)	(1.20)
Labor Cost Variance ($)	49,400.00	11,844.00	(46,450.00)
Labor Efficiency Variance (Hours)	3,400.00	1,362.00	(2,650.00)

Favorable variances are the ones in Positive and Unfavorable variances are the one in the Bracket

Formulas to calculate variances

Material Rate Variance = Standard Rate - (Actual Cost / Actual Installations)

Material Cost Variance = Standard Material Cost - Actual Material Cost

Labor Rate Variance = Standard Rate - Actual Rate

Labor Cost Variance = Standard Labor Cost - Actual Labor Cost

Labor Efficiency Variance = Standard Labor Hours - Actual Labor Hours

Relative Comparisons

State Store has performed efficiently in every avenue they are most high performing store

Dewey Avenue has performed inefficient on the rate front, though they have performed greatly on cost front, their performance is statisfactory

Hope Avenue has not met the set expectations they has under performed in every front.

As per the Analysis report of MBA Intern

He states they they had already accounted for warranty on the laid standards. Hence we will have to deduct the number of installations that were done for the warranty purpose to compare it with that of standards

Standards	State St	Dewey Ave	Mr. Hope Ave
Expected Installation	15,000	22,500	10,000
Material Cost	900,000	1,350,000	600,000
Direct Labour Hours	15,000	22,500	10,000
Standard Labour Cost	177,000	265,500	118,000
Actuals	State St	Dewey Ave	Mr. Hope Ave
Actual Installation	14,000	22,150	11,492
Material Cost	710,500	1,346,125	759,000
Direct Labour Hours	11,600	21,138	12,650
Actual Labour Cost	127,600	253,656	164,450
Variances	State St	Dewey Ave	Mr. Hope Ave
Material Rate Variance ($ per job)	9.25	(0.77)	(6.05)
Material Cost Variance ($)	189,500.00	3,875.00	(159,000.00)
Labor Rate Variance ($ per Hour)	0.80	(0.20)	(1.20)
Labor Cost Variance ($)	49,400.00	11,844.00	(46,450.00)
Labor Efficiency Variance (Hours)	3,400.00	1,362.00	(2,650.00)

We can see that the warranty installations has not made much difference in our variances and our analysis and conclusion remains as they have been earlier