Title Calculate the material quantity variance. Description (JIT variances) Natural Gardens makes recylcable pots for plants and uses JIT to manage inventories and production. The following are standards for a typical 1-gallon pot: Annual Material Standards 32 ounces of Component X × $0.02 $0.64 2 ounces of Component Y × $0.05 0.10 $0.74 Current Material Standards 27 ounces of Component X × $0.02 $0.54 4 ounces of Component Y × $0.05 0.20 $0.74 In-house experiments indicated that changing the material standard would make the pots stronger, so the company issued an engineering change order for the product in February; this ECO established the current material standards. March production was 8,000 pots. Usage of raw material (all purchased at standard price) in March was 220,000 ounces of Component X and 31,000 ounces of Component Y. a. Calculate the material quantity variance. b. Calculate the ECO variance. c. Summarize the company’s effectiveness in managing March production costs. d. Comment on the circumstances in which a company would institute an ECO that results in the expected product cost being unchanged.
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.
(JIT variances) Natural Gardens makes recylcable pots for plants and uses JIT to manage inventories and production. The following are standards for a typical 1-gallon pot:
|
Annual Material Standards |
|
|
32 ounces of Component X × $0.02 |
$0.64 |
|
2 ounces of Component Y × $0.05 |
0.10 |
|
$0.74 |
|
|
Current Material Standards |
|
|
27 ounces of Component X × $0.02 |
$0.54 |
|
4 ounces of Component Y × $0.05 |
0.20 |
|
$0.74 |
In-house experiments indicated that changing the material standard would make the pots stronger, so the company issued an engineering change order for the product in February; this ECO established the current material standards. March production was 8,000 pots. Usage of raw material (all purchased at standard price) in March was 220,000 ounces of Component X and 31,000 ounces of Component Y.
a. Calculate the material quantity variance.
b. Calculate the ECO variance.
c. Summarize the company’s effectiveness in managing March production costs.
d. Comment on the circumstances in which a company would institute an ECO that results in the expected product cost being unchanged.
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