ALOHA Corp., started in January 2007, manufactures Hawaiian muumuus. At that time, the following material and labor standards were developed:
Material ........ 3.0 yards at $ 4 per yard
Labor ......... 1.5 hours at $ 6 per hour
In January 2013, ALOHA Corp. hired a new cost accountant, Anulu Haoki. At the end of the month, Haoki was reviewing the production variances and was amazed to find that the company’s material and labor standards had never been revised. Actual material and labor data for January, when 17,200 muumuus were produced, follow.
Material................................. Purchased, 50,000 yards at $ 4.90
Used 50,000 yards
Labor ....................................17,800 hours at $ 9.05 per hour
Material prices have risen 4 percent each year beginning in 2007 (six years through 2012), but the company can now buy at 95 percent of regular price due to increased purchase volume. Also, direct material waste has been reduced from 1/4 yard to 1/8 yard per muumuu; waste has always been included in the standard material quantity. Beginning in 2007, each annual labor contract has specified a 7 percent cost-of-living adjustment. Revision of the plant layout and acquisition of more efficient machinery has decreased the labor time per muumuu by one-third since the company began.
a. Determine the material and labor variances based on the company’s original standards.
b. Determine the new standards against which Haoki should measure the January 2013 results. (Round adjustments annually to the nearest cent.)
c. Compute the variances for material and labor using the revised standards.