P10-37 Measuring the effects of decisions on standard cost variances (comprehensive)

1. The materials purchasing manager purchase 5,000 unites of component K2X from a new source at a price of $14 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 5 percent. The higher rate of defects reduced the output of workers (who ear $9 per hour) from 20 units per hour to 15 units per hour on the unites 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 $0.30 for each of the components (good or bad) in the discount batch. Variable manufacturing overhead is applied at the rate of $3 per direct labor hour. The defective unit is also caused a 20-hour increase in total machine hours. The actual cost of electricity to run the machines is $2 per hour.

[IGNORE VARIANCE OVERHEAD FOR THIS PROBLEM]

Required

For each of the preceding situations, determine which standard cost variance(s) will be affected, and compute the amount of the effect for one month on each variance. Indicate whether the effect is favorable or unfavorable. Assume that the standards are not changed in response to these situations. (Round calculations to two decimal places.)