Budget Variances, Materials and Labor
Cinturon Corporation produces high-quality leather belts. The company's plant in Boise uses a standard costing system and has set the following standards for materials and labor:
|Leather (2 strips @ $6.00)||$12.00|
|Direct labor (0.25 hr. @ $11.00)||2.75|
|Total prime cost||$14.75|
During the first month of the year, the Boise plant produced 31,000 belts. Actual leather purchased was 100,000 strips at $3.30 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 35,000 hours at $12.50 per hour.
1. Compute the costs of leather and direct labor that should be incurred for the production of 31,000 leather belts.
2. Compute the total budget variances for materials and labor.
|Total Budget Variance|
3. Conceptual Connection: Would you consider
these variances material with a need for investigation?
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|Material Cost||31,000*$12||$ 372,000|
|Labor Cost||31,000*$2.75||$ 85,250|
|Actual Cost||Budgeted Cost||Variance|
|Material Cost||100,000*$3.30||$ 330,000||$ 372,000||$ 42,000||Favorable|
|Labor Cost||35,000*$12.50||$ 437,500||$ 85,250||$ 352,250||Unfavorable|
|Yes, Material cost variance is higher than 10% of budget and Labor variance is also huge|
|Both has to be investigated since there may be inter-connection link between two as well.|
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