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Managerial Accounting: The Corners...

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

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Tom Belford and Tony Sorrentino own a small business devoted to kitchen and bath granite installations. Recently, building contractors have insisted on up-front bid prices for a house rather than the cost-plus system that Tom and Tony had been using. They worry because natural flaws in the granite make it impossible to tell in advance exactly how much granite will be used on a particular job. In addition, granite can be easily broken, meaning that Tom or Tony could ruin a slab and would need to start over with a new one. Sometimes the improperly cut pieces could be used for smaller installations, sometimes not. All their accounting is done by a local certified public accounting firm headed by Charlene Davenport. Charlene listened to their concerns and suggested that it might be time to implement tighter controls by setting up a standard costing system.

  Charlene reviewed the invoices pertaining to a number of Tom and Tony’s previous jobs to determine the average amount of granite and glue needed per square foot. She then updated prices on both materials to reflect current conditions. The standards she developed for 1 square foot of counter installed were as follows:

Chapter 10, Problem 64P, Tom Belford and Tony Sorrentino own a small business devoted to kitchen and bath granite , example  1

These standards assumed that one seamless counter requires one sink cut (the space into which the sink will fit) as well as cutting the counter to fit the space available.

Charlene tracked the actual costs incurred by Tom and Tony for granite installation for the next 6 months. She found that they completed 50 jobs with an average of 32 square feet of granite installed in each one. The following information on actual amounts used and cost was gathered:

Chapter 10, Problem 64P, Tom Belford and Tony Sorrentino own a small business devoted to kitchen and bath granite , example  2

The actual wage rate for cutting and installation labor remained unchanged from the standard rate.

Required:

  1. 1. Calculate the materials price variances and materials usage variances for granite and glue for the past 6 months.
  2. 2. Calculate the labor rate variances and labor efficiency variances for cutting labor and installation labor for the past 6 months.
  3. 3. CONCEPTUAL CONNECTION Would it be worthwhile for Charlene to establish standards for atypical jobs (such as those with more than one sink cut or a wider than normal sink)?

1.

To determine

Compute the value of material price variance and material usage variance for granite and glue.

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 for granite:

Material Price Variance=Actual Cost(Standard Price×Actual Quantity)

Substitute $79,048 for actual cost, 1,640 units for actual quantity and $50 for standard price in the above formula.

Material Price Variance=$79,048($50×1,640)=$2,952(F)

Therefore, the material price variance is $2,952(F).

Use the following formula to calculate material usage variance for granite:

Material Usage Variance=(Actual QuantityStandard Quantity)×Standard Price

Substitute 1,640 for actual quantity, 1,600 for standard quantity and $50 for standard price in the above formula.

Material Usage Variance=(1,6401,600)×$50=$2,000(U)

Therefore, the material usage variance is $2,000(U).

Use the following formula to calculate material price variance for glue:

Material Price Variance=Actual Cost(Standard Price×Actual Quantity)

Substitute $2,560 for actual cost, 16,000 units for actual quantity and $0

2.

To determine

Compute the value of labor rate variance and labor efficiency variance for cutting labor and installation labor.

3.

To determine

Identify whether it would be worthwhile for CH to establish standards for a typical jobs.

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