(Adjusting standards) ALOHA Corp., started in January 2004, manufactures Hawaiian muumuus. At that time, the following material and labor standards were developed:
|
Material |
3.0 yards at $4 per yard |
|
Labor |
1.5 hours at $6 per hour |
In January 2010, ALOHA Corp. hired a new cost accountant, Anulu Haoki. At the end of the month, Haoki was reviewing the production variances and was amazed tofind that the company’s material and labor standards had never been revised. Actual material and labor data for January, when 17,200 muumuus were produced, follow.
|
Material |
Purchased, 50,000 yards at $4.90 |
|
Used 50,000 yards |
|
|
Labor |
17,800 hours at $9.05 per hour |
Material prices have risen 4 percent each year beginning in 2004 (six yearsthrough 2009), but the company can now buy at 95 percent of regular price due to increased purchase volume. Also, direct material waste has been reduced from 1/4yard to 1/8 yard per muumuu; waste has always been included in the standard material quantity. Beginning in 2004, each annual labor contract has specified a 7 percent cost of living adjustment. Revision of the plant layout and acquisition of more efficient machinery has decreased the labor time per muumuu by one third since the company began.
a. Determine the material and labor variances based on the company’s original standards.
b. Determine the new standards against which Haoki should measure the January 2010 results. (Round adjustments annually to the nearest cent.)
c. Compute the variances for material and labor using the revised standards.