CONTROL LIMITS, VARIANCE INVESTIGATION Goodsmell Company produces a well-known cologne. The standard manufacturing cost of the cologne is described by the following standard cost sheet:

Direct materials:

Liquids (4.2 oz. @ $0.25) $1.05 Bottles (1 @ $0.05) 0.05 Direct labor (0.2 hr. @ $12.50) 2.50 Variable overhead (0.2 hr. @ $4.70) 0.94 Fixed overhead (0.2 hr. @ $1.00) 0.20 Standard cost per unit $4.74 Management has decided to investigate only those variances that exceed the lesser of 10 percent of the standard cost for each category or $20,000.

During the past quarter, 250,000 four-ounce bottles of cologne were produced.

Descriptions of actual activity for the quarter follow:

a. A total of 1.15 million ounces of liquids was purchased, mixed, and processed.

Evaporation was higher than expected (no inventories of liquids are maintained).

The price paid per ounce averaged $0.27.

b. Exactly 250,000 bottles were used. The price paid for each bottle was $0.048.

c. Direct labor hours totaled 48,250, with a total cost of $622,425.

Normal production volume for Goodsmell is 250,000 bottles per quarter. The standard overhead rates are computed by using normal volume. All overhead costs are incurred uniformly throughout the year.

Required:

. Calculate the upper and lower control limits for each manufacturing cost category.

. Compute the total materials variance, and break it into price and usage variances.

Would these variances be investigated?

. Compute the total labor variance, and break it into rate and efficiency variances.

Would these variances be investigated?

Problem