Materials 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\mathrm{.}00$

Direct labor $(0\mathrm{.}75$ hr$.$ @ $$16)12\mathrm{.}00$

Total prime cost $$30\mathrm{.}00$

During the first month of the year, the Boise plant produced $92,000$ belts. Actual leather purchased was $287,500$ strips at $$5\mathrm{.}40$ per strip. There was no beginning or ending inventories of leather. Actual direct labor was $78,200$ hours at $$16\mathrm{.}50$ per hour.

Required:

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$1.$ Break down the total variance for materials into a price variance and a usage variance using the columnar and formula approaches.

Line Item Description Amount Effect

Price variance $fill in the blank $1$

Usage variance $fill in the blank $3$

Total variance $fill in the blank $5$

$2.$ Conceptual Connection: Suppose the Boise plant manager investigates the materials variances and is told by the purchasing manager that a cheaper source of leather strips had been discovered and that this is the reason for the favorable materials price variance. Quite pleased, the purchasing manager suggests that the materials price standard be updated to reflect this new, less expensive source of leather strips. The plant manager responded that more information was needed before deciding to update the price standard. What additional information would prove to be useful to the plant manager? What does this tell you about the diagnostic role of data analytics?

$1.$ No$,$ the suggestion of the purchasing manager is premature. A favorable materials price can produce an effect on both materials usage and labor variances. The diagnostic role of data analytics requires both subjective and objective information and interaction effects are critical.

$2.$ Yes, the purchasing manager is correct. This will improve the overall profitability of the company. The diagnostic role of data analytics requires both subjective and objective information and interaction effects are not critical.

$3.$ No$,$ the suggestion of the purchasing manager is incorrect. The materials are not available and so changes to the price standard should not be made. The diagnostic role of data analytics requires both subjective and objective information and interaction effects are critical.