cost variances

Problem 7

Note that the problem is asking you to determine which variance(s) will be affected in each of the 4 situations. You do not have sufficient information to calculate the variances. Instead you will be determining the amount of change in the variance as a result of the given facts. Don’t forget to indicate whether the direction of the change is favorable or unfavorable. You are only responsible for considering changes, if any,  to the direct materials (price and quantity), direct labor (rate and efficiency) , and variable overhead (spending and efficiency). You are not required to consider the fixed overhead variances.

37.  measuring the effects of decisions on standard cost variances (comprehensive).

            The following five unrelated situations affect one or more standard cost variances for materials, labor (assembly) and overhead:

1.      Lois Jones, a production worker, announced her intent to resign to accept another job paying $1.20 more per hour.  To keep Lois, the production manager agreed to raise her salary from $7.00 to $8.50 per hour.  Lois works an average of 175 regular hours per month.

2.      At the beginning of the month, a supplier of a component used in our product notified us that, because of a minor design improvement, the price will be increased by 15% above the current standard price of $100 per unit.  As a result of the improved design, we expect the number of defective components to decrease by 80 units per month.  On average 1200 units of the component are purchased each month.  Defective units are identified prior to use and are not returnable. 

3.      In an effort to meet a deadline on a rush order in Department A, the plant manager reassigned several higher-skilled workers from Department B, for a total of 300 labor hours.  The average salary of the Department B workers was $1.85 more than the standard $7.00 per hour rate of the Department A workers.  Since they were not accustomed to the work, the average Department B worker was able to produce only 36 units per hour instead of the standard 48 units per hour.  (Consider only the effect on Department A labor variances).

4.      Rob Celiba is an inspector who earns a base salary of $700 per month plus a piece rate of 20 cents per bundle inspected.  His company accounts for inspection costs as manufacturing overheard.  Because of a payroll department error in June, Rob was paid $500 plus a piece rate of 30 cents per bundle.  He received gross wages totaling $1100. 

For each of the preceding situations, determine which standard cost variance(s) will be affected, and compute the amount of the effect for one month on each variance.  Indicate whether the effect is favorable or unfavorable.  Assume that the standards are not changed in response to these situations. (Round calculations to two decimal places).