Clarke Auto Parts Company manufactures replacement parts for car repairs. The company recently installed a flexible manufacturing system (FMS), which has significantly changed the production process The installation of the new FMS was not anticipated when the current year's budget and cost structure were developed.
The installation was hastened by several major breakdowns in the company's old production machinery.
The new system was very expensive, but management expects it to cut the labour time required by; substantial amount. Management also expects the new equipment to allow a reduction in direct mete' waste. On the negative side, the FMS requires a more highly skilled labour force to operate it than was needed for the company's old equipment.
The cost variance report overleaf was prepared for the month of June, the first full month after the equipment was installed.
Clarke auto parts company
Cost Variance Report June
Direct material:
Standard cost........................................................$602,450
Actual cost............................................................598,700
Direct material price variance.........................................150 U
Direct material quantity variance....................................3,900 F
Direct labour:
Standard cost........................................................$393,000
Actual cost............................................................383,800
Direct labour rate variance..........................................4,800 U
Direct labour efficiency variance.................................14,000 F
Manufacturing overhead:
Applied to work in process........................................$400,000
Actual cost............................................................408,000
Variable overhead spending variance..............................8,000 U
Variable overhead efficiency variance...........................10,000 F
Fixed overhead budget variance.................................30,000 U
Fixed overhead volume variance.................................20,000 F
Required:
Comment on the possible interactions between the variances listed in the report. Which ones are likely to have been caused by the purchase of the new system? The company budgets and applies manufacturing overhead on the basis of direct labour hour?