Problem - Browser Products operates a small plant in New Mexico that produces dog food in batches of 1,000 pounds. The product sells for $3.00 per pound.
Standard costs for 2015 are:
Standard direct labor cost = $ 15 per hour
Standard direct labor hours per batch = 8 hours
Standard cost of material A = $0.20 per pound.
Standard pounds of material A per batch = 800 pounds
Standard cost of material B = 0.40 per pound
Standard pounds of material B per batch = 200 pounds
Fixed overhead costs per batch = $ 400
At the start of 2015, the company estimated monthly production and sales of 40 batches. The company estimated that all overhead costs were fixed and amounted to $ 16,000 per month.
During the month of June 2015 (typically a somewhat slow month) 30 batches were produced (not an unusual level of production for this month). The following costs were incurred:
Direct labor costs were $4,800 for 300 hours
24,500 pounds of material A costing $ 4,655 were purchased and used.
5,900 pounds of material B costing $2,419 were purchased and used.
Fixed overhead of $ 15,500 were incurred.
Required:
a. Calculate variances of material, labor and overhead.
b. Prepare a summary of the variances. Does the unfavourable overhead volume variance suggest that overhead costs are out of control.
Problem - Stan Holbert, the purchase manager for Champion Industries, recently attended a meeting with a potential supplier, Wallace Materials. At the meeting a Wallace Manager demonstrated a material that was easier to handle and shape than the material currently used by Champion Industries.
Current standards call for 10 pounds of material for per unit costing $20 per pound. Direct labor per unit is 2 hours at $ 20 per hour.
The new material will cost $ 22 per pound. However, only 9 pounds of material will be needed per unit due to reduced waste. Also direct labor per unit will be reduced to 1.5 hours because the new material is less toxic and easier to handle.
Required:
a. Assume the annual production is 100,000 units. Calculate the cost savings associated with using the new material.
b. Stan knows that because of an overworked accounting department, standard costs will not be updated in a timely manner. Suppose that the company switches to the new material, what are the expected material and labor variances if standards are not updated?
c. Suppose purchase price variances play a prominent role in the evaluation of Stan's job performance. Will he be inclined to suggest use of the new material?