Units Produced Direct Labor Supervision 0-500 S 25,000 $ 40,000 501–1,000 1,001–1,500 50,000 75,000 40,000 40,000 1,501-2,000 2,001-2,500 100,000 125,000 80,000 80,000 2,501-3,000 3,001–3,500 150,000 175,000 80,000 120,000 3,501-4,000 200,000 120,000
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.
Step Costs, Relevant Range
Vargas, Inc., produces industrial machinery. Vargas has a machining department and a group of
direct laborers called machinists. Each machinist is paid $25,000 and can machine up to 500
units per year. Vargas also hires supervisors to develop machine specification plans and to over-
see production within the machining department. Given the planning and supervisory work, a
supervisor can oversee three machinists, at most. Vargas’s accounting and production history
reveal the following relationships between units produced and the costs of direct labor and
supervision (measured on an annual basis):
Required:
1. Prepare two graphs: one that illustrates the relationship between direct labor cost and units
produced, and one that illustrates the relationship between the cost of supervision and units
produced. Let cost be the vertical axis and units produced the horizontal axis.
2. How would you classify each cost? Why?
3. Suppose that the normal range of activity is between 2,400 and 2,450 units and that the exact number of machinists is currently hired to support this level of activity. Further sup-
pose that production for the next year is expected to increase by an additional 400 units. How much will the cost of direct labor increase (and how will this increase be realized)?
Cost of supervision?
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