Cinturon Corporation produces high-quality leather belts. The company\'s plant i

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. 1- Break down the total variance for materials into a price variance and usage variance using the columnar formula approaches. 2- Conceptual Connection, Suppose the Boise plant manager investigates the materials variances and is told by the purchasing manager that cheaper source of leather strips had been discovered and that is the reason for the favorable materials price variance. Quite pleased, the purchasing manager suggest that the materials 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?

Explanation / Answer

Answer a. Standard Actual SQ / SH SR Total AQ / AH AR Total Material          276,000           4.00          1,104,000          287,500           3.60          1,035,000 Direct Labor            69,000         12.00              828,000            78,200         12.50              977,500 Actual Belt Produced = 92,000 Belts Direct Material Price Variance = (SR - AR) X AQ Direct Material Price Variance = ($4 - $3.60) X 287,500 strips Direct Material Price Variance = $115,000 (F) Direct Material Usage Variance = (SQ - AQ) X SR Direct Material Usage Variance = (276,000 nos - 2875,500 nos) X $4 Direct Material Usage Variance = $46,000 (U) Direct Material Cost Variance = $1,104,000 - $1,035,000 Direct Material Cost Variance = $69,000 (F) Direct Labor Rate Variance = (SR - AR) X AH Direct Labor Rate Variance = ($12 - $12.50) X 78,200 hrs Direct Labor Rate Variance = $39,100 (U) Direct Material Efficiency Variance = (SH - AH) X SR Direct Material Efficiency Variance = (69,000 hrs - 78,200) X $12 Direct Material Efficiency Variance = $110,400 (U) Direct Labor Cost Variance = $828,000 - $977,500 Direct Labor Cost Variance = $149,500 (U) Answer b. If the relationship is expected to persist than the new material should be adopted and standard of material should be revised.

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