CAN DO Inc. manufactures home improvement products in a JIT environment. The annual and current material standards for one of the company’s products follow.
|
Annual Material Standards |
|
|
4 pounds of Material 1 × $3.75 |
$15.00 |
|
12 pounds of Material 2 × $2.25 |
27 |
|
$42.00 |
|
|
Current Material Standards |
|
|
8 pounds of Material 1 × $3.75 |
$30.00 |
|
8 pounds of Material 2 × $2.25 |
18 |
|
$48.00 |
The current material standards differ from the original because an engineering change order was made near the end of August. During September, the company manufactured 1,000 units of product and used 7,500 pounds of Material 1 and 8,200 pounds of Material 2. All material is acquired at the standard cost per pound.
Required:
a. Calculate the material variance and the ECO material variance.
b. Explain the effect of the ECO on product cost.