Materials Variances 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, the Boise plant produced 92,000 belts. Actual leather purchased was 270,500 strips at $3.60 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 78,400 hours at $13.00 per hour. Required: 1. Break down the total variance for materials into a price variance and a usage variance using the columnar and formula approaches. Enter favorable values as negative numbers and unfavorable values as positive numbers. Price variance $ Usage variance $ Total variance $ 2. CONCEPTUAL CONNECTION Suppose the Boise plant manager investigates the materials variances and is told by the purchasing manager that a cheaper source of leather strips had been discovered and that this is the reason for the favorable materials price variance. Quite pleased, the purchasing manager suggests that the materials price 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? No , The suggestion of the purchasing manager is premature. A favorable materials price can produce an effect on both materials usage and labor variances. Yes, the purchasing manager is correct. This will improve the overall profitability of the company. No , The suggestion of the purchasing manager is incorrect. The matierals are not available and so changes to the price standard should not be made
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Materials Variances
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, the Boise plant produced 92,000 belts. Actual leather purchased was 270,500 strips at $3.60 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 78,400 hours at $13.00 per hour.
Required:
1. Break down the total variance for materials into a price variance and a usage variance using the columnar and formula approaches. Enter favorable values as negative numbers and unfavorable values as positive numbers.
| Price variance | $ | |
| Usage variance | $ | |
| Total variance | $ |
2. CONCEPTUAL CONNECTION Suppose the Boise plant manager investigates the materials variances and is told by the purchasing manager that a cheaper source of leather strips had been discovered and that this is the reason for the favorable materials price variance. Quite pleased, the purchasing manager suggests that the materials price 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?
- No , The suggestion of the purchasing manager is premature. A favorable materials price can produce an effect on both materials usage and labor variances.
- Yes, the purchasing manager is correct. This will improve the overall profitability of the company.
- No , The suggestion of the purchasing manager is incorrect. The matierals are not available and so changes to the price standard should not be made
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