Calculation of material and labor variances and setting revised standards.
Maui Muumuus manufactures traditional Hawaiian dresses. The company was started early in 2002, and the following standards for materials and labor were developed at that time:
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Materials
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3 yards at $6 per yard
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Labor
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1.5 hours at $10 per hour
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In May 2008, Maui Muumuus hired a new cost accountant, Sally Rogers. At the end of May, Sally was reviewing the variances calculated for the month and was amazed to find that standards had never been revised since the company started. Actual data for May 2008 for material and labor are as follows:
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Materials
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Purchased, 50,000 yards at $7.00
Used in production of 17,200 muumuus, 50,000 yards
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Labor
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17,800 hours at $13.50 per hour
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Since 2002, material prices have risen 4 percent each year. However, the company can now buy at 94 percent of regular price due to the increased volume of purchases. Labor contracts have specified a 5 percent cost-of-living adjustment for each year, beginning in 2003. Because of revising the plant layout and purchasing some more efficient machinery, the labor time per muumuu has decreased by one-third; also, direct material waste ha been reduced from ¼ yard to 1/8 yard per muumuu.
Required:
a. Determine the material and labor variances based on the standards originally designed for the company.
b. Determine the new standards against which Sally should measure the May 2008 resultys. (Round adjustments annually to the nearest penny.)
c. Compute the variance for material and labor using the revised standards.