Santa Rosa Industries uses a standard-costing system to assist in the evaluation
ID: 445157 • Letter: S
Question
Santa Rosa Industries uses a standard-costing system to assist in the evaluation of operation. The company has had considerable trouble in recent months with suppliers and employees, so much so that management hired a new production supervisor (Frank Schmidt). The new supervisor has been on the job for five months and has seemingly brought order to an otherwise chaotic situation.
The vice president of manufacturing recently commented that “…Schmidt has really done the trick. The changes to a new direct-material supplier and Schmidt’s team-building/morale-boosting training exercises have truly brought things under control.” The VP’s comments were based on both a plant tour, where he observed a contented workforce, and a review of the following data, which was excerpted from a performance report:
Direct material variance……………………$4,620 (Favorable)
Direct labor variance……………………….$6,175 (Favorable)
These variances are especially outstanding, given that the amounts are favorable and small.
Santa Rosa’s budgeted material and labor costs generally each average about $350,000 for similar periods. Additional data for the period for which the performance report was based on are as follow:
Actual: The company purchased and used 45,000 lbs. of direct materials at $7.70/lb. The company paid $16.25/hr for 20,900 direct labor hours of activity. Total completed production amounted to 9,500 units.
Budget: Based on the firm’s standard cost records, each completed unit requires 4.2 lbs. of direct material at $8.80/lb. and 2.6 direct labor hours at $14 per hour.
Required:
Should Santa Rosa be concerned about the variances in direct material and direct labor? Why?
Calculate the price and efficiency variances for 1) direct material and 2) direct labor.
On the basis of your answers to the price and efficiency variances, should Santa Rosa be concerned about its variances? Why?
Are things going smoothly as the vice president believes? Evaluate the company’s variances and determine whether the change to a new supplier and Schmidt’s team-building/morale-boosting training exercises appear to be working. Explain.
Explanation / Answer
Answer for 1 & 2
Direct-material variances:
Price variance:
Actual quantity purchased x actual price
45,000 pounds x $7.70……………………………. $346,500
Actual quantity purchased x standard price
45,000 pounds x $8.80……………………………. 396,000
Direct-material price variance………………………. $ 49,500 Favorable
Quantity variance:
Actual quantity used x standard price
45,000 pounds x $8.80…………………………… $396,000
Standard quantity allowed x standard price
39,900 pounds* x $8.80………………………….. 351,120
Direct-material quantity variance…………………… $ 44,880 Unfavorable
* 9,500 units x 4.2 pounds
Total direct-material variance:
$49,500(F) + $44,880(U) = $4,620(F)
Direct-labor variances:
Rate variance:
Actual hours used x actual rate
20,900 hours x $16.25…………………. $339,625
Actual hours used x standard rate
20,900 hours x $14.00…………………. 292,600
Direct-labor rate variance………………… $ 47,025 Unfavorable
Efficiency variance:
Actual hours used x standard rate
20,900 hours x $14.00…………………. $292,600
Standard hours allowed x standard rate
24,700 hours* x $14.00………………... 345,800
Direct-labor efficiency variance…………. $ 53,200 Favorable
* 9,500 units x 2.6 hours
Total direct-labor variance:
$47,025(U) + $53,200(F) = $6,175(F)
3. Yes. Even though the sum total of the variances are very small, if we carry out a detailed analysis a sizeable variance is revealed. This variance is an addition of 12% costs being budgeted. This situation directs for a variance investigation of the company.
4. No, things are not as smooth as VP believes. Considering the new supplier, amount paid for direct materials is less. This raises a concern as the quality provided could be poor which is clearly shown by increased usage and unfavorable variance in quantity.
Now considering the favorable efficiency of the direct labor, shows that the company is producing more units in less hours than believed to be. This could be the byproduct of team building/morale boosting exercises. However, it should also be noted that the company might be paying more wages or premium wages for labors with more than average skill. This also explains the unfavorable variance in the quantity of material.
5. Yes. The cost and purchase decisions of a company are direct responsibilities of a Purchase manager. Schmidt is the production supervisor. Changing the supplier would introduce problems like
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