Tom Belford and Tony Sorrentino own a small business devoted to kitchen and bath granite installations. Recently, building contractors have insisted on up-front bid prices for a house rather than the cost-plus system that Tom and Tony had been using. They worry because natural flaws in the granite make it impossible to tell in advance exactly how much granite will be used on a particular job. In addition, granite can be easily broken, meaning that Tom or Tony could ruin a slab and would need to start over with a new one. Sometimes the improperly cut pieces could be used for smaller installations, sometimes not. All their accounting is done by a local certified public accounting firm headed by Charlene Davenport. Charlene listened to their concerns and suggested that it might be time to implement tighter controls by setting up a standard costing system.

Charlene reviewed the invoices pertaining to a number of Tom and Tonys previous jobs to determine the average amount of granite and glue needed per square foot. She then updated prices on both materials to reflect current conditions. The standards she developed for 1 square foot of counter installed were as follows:

These standards assumed that one seamless counter requires one sink cut (the space into which the sink will fit) as well as cutting the counter to fit the space available.

Charlene tracked the actual costs incurred by Tom and Tony for granite installation for the next 6 months. She found that they completed 50 jobs with an average of 32 square feet of granite installed in each one. The following information on actual amounts used and cost was gathered:

The actual wage rate for cutting and installation labor remained unchanged from the standard rate.

1. The material price and usage variance for granite and for glue of past 6 months are determined as below:

For Granite: The material price and usage variance for granite is $2,952 F and $2,000 U resp.

For Glue: Therefore, the material price and usage variance for granite is $160 U and zero resp.

2. The labor rate and efficiency variances for cutting and installation labor are determined as below:

For cutting labor: the labor rate and efficiency variances for cutting labor is zero and 300U resp.

For Installation labor: the labor rate and efficiency variances for cutting labor is zero and 250F resp.

Question:

Utilizing the data above, Write a report in Word to the manager outlining what is causing the variances and what courses of action should be/could be taken?

Granite,persquarefootGlue(10oz.@$0.15)Directlaborhours:Cuttinglabor(0.10hr.@$15)Installationlabor(0.25hr.@$25)$50.001.501.506.25 Granite purchased and used (1,640 sq. ft.) Glue purchased and used (16,000 oz.) Actual hours cutting labor Actual hours installation labor