Chapter 10, Problem 69P

Phono Company manufactures a plastic toy cell phone. The following standards have been established for the toys materials and labor inputs:

During the first week of July, the company had the following results:

The purchasing agent located a new source of slightly higher-quality plastic, and this material was used during the first week in July. Also, a new manufacturing layout was implemented on a trial basis. The new layout required a slightly higher level of skilled labor. The higher-quality material has no effect on labor utilization. Similarly, the new manufacturing approach has no effect on material usage. (Note: Round all variances to the nearest dollar.)

Required:

1. 1. CONCEPTUAL CONNECTION Compute the materials price and usage variances. Assuming that the materials variances are essentially attributable to the higher quality of materials, would you recommend that the purchasing agent continue to buy this quality, or should the usual quality be purchased? Assume that the quality of the end product is not affected significantly.
2. 2. CONCEPTUAL CONNECTION Compute the labor rate and efficiency variances. Assuming that the labor variances are attributable to the new manufacturing layout, should it be continued or discontinued? Explain.
3. 3. CONCEPTUAL CONNECTION Refer to Requirement 2. Suppose that the industrial engineer argued that the new layout should not be evaluated after only one week. His reasoning was that it would take at least a week for the workers to become efficient with the new approach. Suppose that the production is the same the second week and that the actual labor hours were 13,200 and the labor cost was $132,000. Should the new layout be adopted? Assume the variances are attributable to the new layout. If so, what would be the projected annual savings?

To determine

Calculate the value of material price variance and material usage variance. Identify whether the plant manger could continue to purchase this quality product or purchase the usual quality.

Explanation of Solution

Variance:

The amount obtained when actual cost is deducted from budgeted cost is known as variance. Variance is calculated to find whether the cost is over applied or under applied.

Use the following formula to calculate material price variance:

$\text{Material Price Variance}=\left[\begin{array}{c}\left(\text{Actual Price}\times \text{Actual Quantity}\right)\\ -\left(\text{Standard Price}\times \text{Actual Quantity}\right)\end{array}\right]$

Substitute $1.55 for actual price, 44,250 units for actual quantity and $1.50 for standard price in the above formula.

$\begin{array}{c}\text{Material Price Variance}=\left(\$1.55\times 44,250\right)-\left(\$1.50\times 44,250\right)\\ =\text{\$2,213}\left(\text{U}\right)\end{array}$

Therefore, the material price variance is $2,213(U).

Use the following formula to calculate material usage variance:

$\begin{array}{c}\text{Material Usage Variance}=\left(\text{Standard Price}\times \text{Actual Quantity}\right)\\ -\left(\text{Standard Price}\times {\text{Standard Quantity}}^1\right)\end{array}$

Substitute $1.50 for standard price, 44,250 units for actual quantity and 45,000 for standard quantity in the above formula.

$\begin{array}{c}\text{Material Usage Variance}=\left(\$1.50\times 44,250\right)-\left(\$1.50\times 45,000\right)\\ =\$1,125\left(\text{F}\right)\end{array}$

Therefore, the material usage variance is $1,125(F).

The total variance is $1,088(U) $\left(\$2,213-\$1,125\right)$. Therefore, company should not purchase this quality of material and should continue with usual quality material.

Working Note:

1. Calculation of standard quantity:

$\begin{array}{c}\text{Standard Quantity}=\text{Actual Quantity}\times \text{Standard Rate}\\ =90\text{,000}\times \text{\$0}\text{.50}\\ =\text{\$45,000}\end{array}$

To determine

Calculate the value of labor rate variance and labor efficiency variance. Identify whether the labor variances are attributable to the new manufacturing process should be continued or discontinued.

Explanation of Solution

Use the following formula to calculate labor rate variance:

$\text{Labor Rate Variance}=\left[\text{Actual Cost}-\left(\text{Standard Rate}\times \text{Actual Hours}\right)\right]$

Substitute $138,000 for actual cost, 10,800 hours for actual hours and $10 for standard rate in the above formula.

$\begin{array}{c}\text{Labor Rate Variance}=\$138,000-\left(\$10\times 13,400\text{ Hours}\right)\\ =\$4,000\left(\text{U}\right)\end{array}$

Therefore, the labor rate variance is $4,000(U).

Use the following formula to calculate labor efficiency variance:

$\begin{array}{c}\text{Labor Efficiency Variance}=\left(\text{Standard Rate}\times \text{Actual Hours}\right)\\ -\left(\text{Standard Rate}\times \text{Standard Hours}\right)\end{array}$

Substitute $10.00 for standard rate, 13,400 hours for actual hours and 13,500 hours for standard hours in the above formula.

$\begin{array}{c}\text{Labor Efficiency Variance}=\left(\$10.00\times 13,400\text{ Hours}\right)-\left(\$10.00\times 13,500\text{ Hours}\right)\\ =\$1,000(\text{F)}\end{array}$

Therefore, the labor efficiency variance is $1,000(F).

The total labor variance is $3,000 (U) $\left(\$4,000-\$1,000\right)$. Therefore; company should discontinue the new process.

Working Note:

1. Calculation of standard hours:

$\begin{array}{c}\text{Standard Hours}=\text{Actual Output}\times \text{Standard Rate}\\ =90\text{,000}\times \text{\$0}\text{.15}\\ =13\text{,500 Hours}\end{array}$

To determine

Calculate the value of labor rate variance and labor efficiency variance. Identify whether the new process should be adopted.

Explanation of Solution

Use the following formula to calculate labor rate variance:

$\text{Labor Rate Variance}=\left[\text{Actual Cost}-\left(\text{Standard Rate}\times \text{Actual Hours}\right)\right]$

Substitute $132,000 for actual cost, 13,200 hours for actual hours and $10 for standard rate in the above formula.

$\begin{array}{c}\text{Labor Rate Variance}=\$132,000-\left(\$10\times 13,200\text{ Hours}\right)\\ =\$0\end{array}$

Therefore, the labor rate variance is $0.

Use the following formula to calculate labor efficiency variance:

$\begin{array}{c}\text{Labor Efficiency Variance}=\left(\text{Standard Rate}\times \text{Actual Hours}\right)\\ -\left(\text{Standard Rate}\times \text{Standard Hours}\right)\end{array}$

Substitute $10 for standard rate, 13,200 hours for actual hours and 13,500 hours for standard hours in the above formula.

$\begin{array}{c}\text{Labor Efficiency Variance}=\left(\$10\times 13,200\text{ Hours}\right)-\left(\$10\times 13,500\text{ Hours}\right)\\ =\$3,000(\text{F)}\end{array}$

Therefore, the labor efficiency variance is $3,000(F).

The total labor variance is $3,000 (F) $\left(\$0-\$3,000\right)$. Therefore; company should continue with the new process because it helps the company in saving $156,000 per year $\left(3,000\times 5\text{2 weeks}\right)$.

Working Note:

1. Calculation of standard hours:

$\begin{array}{c}\text{Standard Hours}=\text{Actual Output}\times \text{Standard Rate}\\ =90\text{,000}\times \text{\$0}\text{.15}\\ =13\text{,500 Hours}\end{array}$