Chapter 10, Problem 63P

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

Chapter
Section

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
5 views

Basuras Waste Disposal Company has a long-term contract with several large cities to collect garbage and trash from residential customers. To facilitate the collection, Basuras places a large plastic container with each household. Because of wear and tear, growth, and other factors, Basuras places about 200,000 new containers each year (about 20% of the total households). Several years ago, Basuras decided to manufacture its own containers as a cost-saving measure. A strategically located plant involved in this type of manufacturing was acquired. To help ensure cost efficiency, a standard cost system was installed in the plant. The following standards have been established for the products variable inputs:During the first week in January, Basuras had the following actual results:The purchasing agent located a new source of slightly higher-quality plastic, and this material was used during the first week in January. Also, a new manufacturing process was implemented on a trial basis. The new process required a slightly higher level of skilled labor. The higher- quality material has no effect on labor utilization. However, the new manufacturing process was expected to reduce materials usage by 0.25 pound per container.Required: 1. CONCEPTUAL CONNECTION Compute the materials price and usage variances. Assume that the 0.25 pound per container reduction of materials occurred as expected and that the remaining effects are all attributable to the higher-quality material. 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. CONCEPTUAL CONNECTION Compute the labor rate and efficiency variances. Assuming that the labor variances are attributable to the new manufacturing process, should it be continued or discontinued? In answering, consider the new process’s materials reduction effect as well. Explain. 3. CONCEPTUAL CONNECTION Refer to Requirement 2. Suppose that the industrial engineer argued that the new process 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 9,000 and the labor cost was $99,000. Should the new process be adopted? Assume the variances are attributable to the new process. Assuming production of 6,000 units per week, what would be the projected annual savings? (Include the materials reduction effect.) 1. 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 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: Material Price Variance=[(Actual Price×Actual Quantity)(Standard Price×Actual Quantity)] Substitute$3.55 for actual price, 69,000 units for actual quantity and $3.50 for standard price in the above formula. Material Price Variance=($3.55×69,000)($3.50×69,000)=$3,450(U)

Therefore, the material price variance is $3,450 (U). Use the following formula to calculate material usage variance with the help of columnar approach: Material Usage Variance=((Standard Price×Actual Quantity)(Standard Price×Standard Quantity1)) Substitute$3

2.

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.

3.

To determine

Calculate the value of labor rate variance and labor efficiency variance. Identify whether the new process be adopted or not.

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