Labor Variances

Cinturon Corporation produces high-quality leather belts. The company's plant in Boise uses a standard costing system and has set the following standards for materials and labor:

Line Item Description	Cost
Leather (3 strips @ $6)	$18.00
Direct labor (0.75 hr. @ $16)	12.00
Total prime cost	$30.00

During the first month of the year, the Boise plant produced 92,000 belts. Actual leather purchased was 287,500 strips at $4.80 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 79,700 hours at $17.50 per hour.

Required:

1. Break down the total variance for labor into a rate variance and an efficiency variance using the columnar and formula approaches.

Line Item Description	Amount	Effect
Rate variance	$fill in the blank 1	FavorableUnfavorable
Efficiency variance	$fill in the blank 3	FavorableUnfavorable
Total variance	$fill in the blank 5	FavorableUnfavorable

2. Conceptual Connection: As part of the investigation of the unfavorable variances, the plant manager interviews the production manager. The production manager complains strongly about the quality of the leather strips. He indicates that the strips are of lower quality than usual and that workers have to be more careful to avoid a belt with cracks and more time is required. Also, even with extra care, many belts have to be discarded and new ones produced to replace the rejects. This replacement work has also produced some overtime demands. Based on a review of control charts for the past several months, the plant manager is confident that the materials usage and labor effects mentioned by the production manager are largely due to the cheaper materials used in the recent months. Suppose that the sum of the MPV and MUV is $103,500 F . Now add the LEV and LRV to this total materials variance. What corrective action should the plant manager take? Finally, what data analytic types were involved in this decision process (see Exhibit 2.2 for a review of data analytic types)? 1. Return to suppliers that provide the quality corresponding to the price standard. Many of the amounts calculated describe what is and, therefore, these calculations are clearly descriptive. 2. Employ more skilled labor at a cost lesser than the savings made by buying cheap material and improve the product quality. Many of the amounts calculated describe what is and, therefore, these calculations are clearly diagnostic. 3. There is no need to change anything. The sales are not affected by this low quality of raw material. Many of the amounts calculated describe what is and, therefore, these calculations are clearly prescriptive.