[Case Study #05] Saidwell Company Saidwell Company manufactures washers and dryers on a single assembly line in its fact main ory. The market has deteriorated over the last five years and competition has made cost control very important. Management has been concerned about the materials costs of both washers and dryers. There have been no model changes in the past two years, and economic conditions have allowed the company to negotiate price reductions for many key parts Saidwell uses a standard cost system in accounting for materials. Purchases are charged to inventory at a standard price, and purchase discounts are considered an administrative cost reduction. Production is charged at the standard price of the materials used. Thus, the price variance is isolated at time of purchase as the difference between gross contract price and standard price multiplied by the quantity purchased. When a substitute part is used in production, a price variance equal to the difference in the standard prices of the materials is recognized at the time of substitution. The quantity variance is the actual quantity used compared with the standard quantity allowed, with the difference multiplied by the standard price. The materials variances for several of the parts Saidwell uses are unfavorable. Part #4121 is one item that has an unfavorable variance. Saidwell knows that some of these parts are defective and will fail. The failure is discovered during production. The normal defective rate is 5 percent of normal input. The original contract price of this part was $0.285 per unit; thus, Saidwell set the standard unit price at $0.285. The unit contract purchase price of Part #4121 was increased to $0.325 from the original $0.285 due to a parts specification change. Saidwell chose not to change the standard; it treated the increase in price as a price variance. In addition, the contract terms were changed from payment due in 30 days to a 4 percent discount if paid in 10 days or full payment due in 30 days. These new contractual terms were the consequence of negotiations resulting from changes in the economy. Data regarding the use of Part #4121 during December are as follows: Purchases of Part #4121 -unit price paid for purchases of Part #4121 -Requisitions of Part #4121 from stores for use in products * Substitution of Part #5125 for Part #4121 to use obsole (standard unit price of Part #5125 is S0.35) * Units of Part #4121 and its substitute (Part #5125) identified as defective Standard allowed usage (including normal defective units) of Part #4121 and its substitute based on output for the month 150,000 units 0.325 134,000 units 24,000 units 9,665 units 153,300 units Saidwell's material variances related to Part #4121 for December were reported as follows