Tempro, inc, uses a standard cost accounting system. Variances for the year ended December 31, 2005 were as follows:
- Material Price Variance Unfavorable
- Material usage variance favorable
- labor rate variance favorable
- labor efficiency variance unfavorable
Managers at Tempro are considering the following changes in operations for the next year ending December 31, 2006
1. An across the board pay increase of 5% will be given to all personnel.
2. The purchasing department will be allowed to purchase lower grades of material
3. Several key production workers will be transferred into managerial positions. These workers will be replaced either by new hires or by production personnel who will be transferred from another department.
4. Additional inspectors will be hired to ensure quality production. The cost of these inspectors will be considered administrative and general expense.
Required: Assuming that product standards are not changed from the previous year, what impact, if any, would you expect each of the changes to have on the company's variances? Consider each decision separately, and identify the variance that would be affected by the decision and whether the change would increase or decrease the prior-year variance. Explain your answer.