Natural Gardens makes recylcable pots for plants and uses JIT to manage inventories and production. The following are standards for a typical 1-gallon pot:
Annual Material Standards_____________________________
32 ounces of Component X × $0.02 ....... $0.64
2 ounces of Component Y × $0.05 ......... 0.10
$0.74
Current Material Standards_____________________________
27 ounces of Component X × $0.02 ........ $0.54
4 ounces of Component Y × $0.05 ........ 0.20
$0.74
In-house experiments indicated that changing the material standard would make the pots stronger, so the company issued an engineering change order for the product in February; this ECO established the current material standards. March production was 8,000 pots. Usage of raw material (all purchased at standard price) in March was 220,000 ounces of Component X and 31,000 ounces of Component Y.
a. Calculate the material quantity variance.
b. Calculate the ECO variance.
c. Summarize the company’s effectiveness in managing March production costs.
d. Comment on the circumstances in which a company would institute an ECO that results in the expected product cost being unchanged.