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Required information Skip to question [The following information applies to the questions displayed below.] I thought lean production was supposed to make us more efficient

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[The following information applies to the questions displayed below.] "I thought lean production was supposed to make us more efficient" commented Ben Carrick, manufacturing vice president of Vorelli Industries. "But just look at Junes manufacturing variances for Zets. The labor efficiency variance was $240,000 unfavorablefour times higher than its ever been before. If you add on the $102,000 unfavorable materials price variance, thats $342,000 down the drain in a single month on just one product."

"Now take it easy, Ben," replied Sandi Shipp, the companys purchasing manager. "We knew the switch to lean production was going to increase our material costs. But now were partnering with top-notch suppliers who deliver raw materials to our plant three times a day. In a few months, well be able to offset most of our higher purchasing costs by vacating three rented warehouses."

"And I know our labor efficiency variance looks bad," responded Raul Duvall, the companys production manager, "but it doesnt tell the whole story. The just-in-time flow in our production lines has made our plant more efficient than ever before. Plus our investment in automation is reducing our materials waste each month."

"How can you say youre being more efficient when you took 90,000 direct labor-hours to produce just 30,000 Zets last month?" asked Ben Carrick. "Thats an average of 3 hours per unit, whereas the Zets standard cost card only allows 2.5 hours per unit."

Raul explained that "part of our lean transformation requires cutting back production to reduce excess finished goods inventories. In a few months our finished goods inventories will be depleted and well be able to match production with demand. In the meantime, dont forget that our line people arent just standing around when their machines are idle. Under the lean approach, theyre doing their own inspections and equipment maintenance."

Ben replied, "We cant let this go on a few more months . . . at least not if you want to earn a bonus this year. Ive been looking at these reports for 30 years, and I know inefficiency when I see it. Lets get things back under control."

After leaving Bens office, Raul asked for your help in developing some performance measures that will highlight the benefits of the companys lean transformation. Working with Raul, you gathered the following information:

  1. A standard cost card for Zets (one of the companys many products) is given below:

Standard Quantity or Hours Standard Price or Rate Standard Cost
Direct materials 18 feet $ 3.00 per foot $ 54.00
Direct labor 2.5 hours $ 16.00 per hour 40.00
Variable manufacturing overhead 2.5 hours $ 2.80 per hour 7.00
Total standard cost $ 101.00
  1. During June the company purchased 510,000 feet of material for production of Zets at a cost of $3.20 per foot. All of this material was used to make 30,000 units during the month.

  2. The company maintains a stable workforce to produce Zets. Employees who previously performed inspections and maintenance have been reassigned as direct labor workers. During June, direct laborers worked 90,000 hours on the Zets production lines at an average pay rate of $15.85 per hour.

  3. Variable manufacturing overhead cost is allocated to products based on direct labor-hours. During June, the company incurred $207,000 in variable manufacturing overhead costs associated with the manufacture of Zets.

  4. As workers have become more familiar with lean production methods, the following trends (per unit) have emerged over the last three months:

April May June
Processing time 2.6 hours 2.5 hours 2.4 hours
Inspection time 1.3 hours 0.9 hours 0.1 hours
Move time 1.9 hours 1.4 hours 0.6 hours
Queue time 8.2 hours 5.2 hours 1.9 hours

Required:

1. For direct materials: a. Compute the price and quantity variances. b. Is the decrease in waste that was mentioned by Raul apparent from your variance calculations? c. What standard price per foot should the company use going forward to compute the materials price variance? (Round your answer to 1 decimal place.) 2. For direct labor: a. Compute the rate and efficiency variances. b. Is the companys labor efficiency variance a useful performance measure in its lean environment? 3. For variable manufacturing overhead: a. Compute the rate and efficiency variances. b. Is direct labor-hours an appropriate cost driver for variable manufacturing overhead in the companys lean environment? 4. Compute the following for April, May, and June: (Round your answers to 1 decimal place.) a. The throughput time per unit. b. The manufacturing cycle efficiency (MCE). (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

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