(Changes of Standards; CMA adapted) NuLathe Co. produces a turbo engine component for jet aircraft manufacturers. A standard cost system has been used for years with good results.

Unfortunately, NuLathe has recently experienced production problems. The source for its direct materials went out of business. The new source produces s'mMar but higher quality materials. The price per pound from the original source has averaged $7.00, while the price from the new source is $7.77. The use of the new materials does result in a reduction in scrap that lowers the actual consumption of direct matenals from 1.25 to 1.00 pounds per unit. In addition, the direct labor is reduced from 24 to 22 minutes per unit because there is less scrap labor and machine setup time.

The direct materials problem was occurring at the same time that labor negotiations resulted in an increase of over 14 percent in houriy direct labor costs. The average rate rose from $12 60 per hour to $14.40 per hour. Production of the main product requires a high level of labor skill. Because of a continuing shortage in that skill area, an intenm wage agreement had to be signed.

NuLathe started using the new direct materials on April 1 of this year, the same day the new labor agreement went into effect. The fimn has been using standards that were set at the beginning of the calendar year. The direct materials and direct labor standards for the turbo engine are as follows.

Howarxl Foster, Cost Accounting Supervisor, had been examining the perfomnance report shown below that he had prepared at the close of business on Apnl 30 Jane Keene Assistant Controller, came into Foster's office, and Howard said, Jane, look at this perfomiance report. Direct materials price increased 11 percent and the labor rate increased over 14 percent during April. 1 expected greater variances, yet pnme costs decreased over five percent from the $13.79 we experienced during the first quarter of this year The proper message just isn't coming through."
"This has been an unusual period," said Jane. "With the unforeseen changes, perhaps we should revise our standards based on current conditions and start over."
Howard replied, "I think we can retain the cun-ent standards but expand the vanance analysis We could calculate variances for the specific changes that have occurred to direct materials and direct labor before we calculate the nomnal price and quantity vanances What I really think would be useful to management right now is to deteirnine the impact the changes in direct labor had in reducing our prime costs per unit from $13.79 in the first quarter to $1 3.05 in April~a reduction of $.874."

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Direct materials Direct labor Standard prime cost per unit 1.2 lbs. @$6.80/lb. 120 min. @$12.30 DLH $ 8.16 4.10 $12.26