(Adjusting standards) Lovie Corp., started in early 2000, manufactures tradi¬ tional Hawaiian dresses. At that time, the following material and labor stan¬ dards were developed:

Material 3.0 yards at $6 per yard Labor 1.5 hours at $10 per hour In May 2006, Lovie Corp. hired a new cost accountant, David Anulu. At the end of the month, Anulu 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 May 2006 when 17,200 muumuus were produced follow:

Material prices have risen 4 percent each year since 2000, but the com¬ pany can now buy at 94 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 2001, each annual labor contract has specified a 5 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 Anulu should measure the May 2006 results. (Round adjustments annually to the nearest cent.)

c. Compute the variances for material and labor using the revised standards.LO.1

Transcribed Image Text:

Material Labor Purchased, 50,000 yards at $7.00 Used 50,000 yards 17,800 hours at $13.50 per hour