Measuring the Effects of Decisions on Standard Cost Variances (Comprehensive)

The following five unrelated situations affect one or more standard cost variances for materials, labor (assembly), and overhead. For each of the situations, compute the amount of the effect for one month on each variance listed. Indicate whether the effect is favorable or unfavorable. Assume that the standards are not changed in response to these situations.

Round answers to 2 decimal places.

1. Sally Smith, a production worker, announced her intent to resign to accept another job paying $1.75 more per hour. To keep Sally, the production manager agreed to raise her salary from $12 to $14 per hour. Sally works an average of 245 regular hours per month.

Effect on labor rate variance $Answer Favorable/Unfavorable

2. At the beginning of the month, a supplier of a component used in our product notified us that, because of a minor design improvement, the price will be increased by 10% above the current standard price of $125 per unit. As a result of the improved design, we expect the number of defective components to decrease by 70 units per month. On average, 1,680 units of the component are purchased each month. Defective units are identified prior to use and are not returnable.

Effect on materials price variance $Answer Favorable/Unfavorable
Effect on materials quantity variance $Answer Favorable/Unfavorable

3. In an effort to meet a deadline on a rush order in Department A, the plant manager reassigned several higher-skilled workers from Department B, for a total of 504 labor hours. The average salary of the Department B workers was $2.15 more than the standard $11.00 per hour rate of the Department A workers. Since they were not accustomed to the work, the average Department B worker was able to produce only 24 units per hour instead of the standard 36 units per hour. (Consider only the effect on Department A labor variances.)

Effect on labor rate variance $Answer Favorable/Unfavorable
Effect on labor efficiency variance $Answer Favorable/Unfavorable

4. Robbie Wallace is an inspector who earns a base salary of $2,800 per month plus a piece rate of 40 cents per bundle inspected. His company accounts for inspection costs as manufacturing overhead. Because of a payroll department error in June, Robbie was paid $2,100 plus a piece rate of 60 cents per bundle. He received gross wages totaling $2,940.
Hint: Robbie’s compensation has both paid $2,100 plus a piece rate of 60 cents per bundle. He received gross wages totaling $2,940.
Hint: Robbie’s compensation has both fixed and variable components.

Effect on variable overhead spending variance $Answer Favorable/Unfavorable
Effect on fixed overhead budget variance $Answer Favorable/Unfavorable

5. The materials purchasing manager purchased 7,000 units of component K2X from a new source at a price $20 below the standard unit price of $200. These components turned out to be of extremely poor quality with defects occurring at three times the standard rate of 6%. The higher rate of defects reduced the output of workers (who earn $12 per hour) from 20 units per hour to 16 units per hour on the units containing the discount components. Each finished unit contains one K2X component. To appease the workers (who were irate at having to work with inferior components), the production manager agreed to pay the workers an additional $0.50 for each of the components (good and bad) in the discount batch. Variable manufacturing overhead is applied at the rate of $6.00 per direct labor hour. The defective units also caused a 25-hour increase in total machine hours. The actual cost of electricity to run the machines is $2.00 per hour.

Effect on materials price variance $Answer Favorable/Unfavorable
Effect on materials quantity variance $Answer Favorable/Unfavorable
Effect on labor rate variance $Answer Favorable/Unfavorable
Effect on labor efficiency variance $Answer Favorable/Unfavorable
Effect on variable overhead spending variance $Answer Favorable/Unfavorable
Effect on variable overhead efficiency variance $Answer Answer Favorable/Unfavorable