Question
Nancy Ann Inc. designs and manufacturesT-shirts. It sells itsT-shirts tobrand-name clothes retailers in lots of one dozen. Nancy Ann's May 2013 static budget and actual
Nancy Ann Inc. designs and manufacturesT-shirts. It sells itsT-shirts tobrand-name clothes retailers in lots of one dozen. Nancy Ann's May 2013 static budget and actual results for direct inputs are asfollows:
Static Budget
Number of T-shirt lots (1 lot = 1 dozen)400
Per Lot of T-shirts:
Direct materials 12 meters at $1.20 per meter = $14.40
Direct manufacturing labor1.8 hours at $7.60 per hour = $13.68
Actual Results
Number of T-shirt lots sold450
Total Direct Inputs:
Direct materials5,940 meters at $1.45 per meter = $8,613.00
Direct manufacturing labor765 hours at $7.70 per hour = $5,890.50
Nancy Ann has a policy of analyzing all input variances when they add up to more than10% of the total cost of materials and labor in the flexiblebudget, and this is true in May 2013. The production manager discusses the sources of thevariances: "A new type of material was purchased in May. This led to faster cutting andsewing, but the workers used more material than usual as they learned to work with it. Fornow, the standards arefine."
Requirement 1. Calculate the direct materials and direct manufacturing labor price and efficiency variances in May 2013. What is the total flexible-budget variance for both inputs(direct materials and direct manufacturinglabor) combined? What percentage is this variance of the total cost of direct materials and direct manufacturing labor in the flexiblebudget?
Requirement 2. Nancy Young, theCEO, is concerned about the input variances. But she likes the quality and feel of the new material and agrees to use it for one more year. In May 2014, Nancy Ann
again produces 450 lots ofT-shirts. Relative to May 2013, 2% less direct material isused, direct material price is down5%, and2% less direct manufacturing labor is used. Labor price has remained the same as in May 2013. Calculate the direct materials and direct manufacturing labor price and efficiency variances in May 2014. What is the total flexible-budget variance for both inputs(direct materials and direct manufacturinglabor) combined? What percentage is this variance of the total cost of direct materials and direct manufacturing labor in the flexiblebudget?
Requirement 3. Comment on the May 2014 results. Would you continue the"experiment" of using the new material?
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