3.) Refer to Requirement 2. Suppose that the industrial engineer argued that the
ID: 2543754 • Letter: 3
Question
3.) Refer to Requirement 2. Suppose that the industrial engineer argued that the new layout should not be evaluated after only one week. The second week had labor hours of 13,200 and labor cost of 132,000. Should the new layout be adopted? Assume the variances attribute to the new layout. If so, what would be the projected annual savings?
**** I got the first two questions but am stuck on number 3. For Labor rate variance I got 0, and for Labor efficiency variance I got 3000 favorable. I am not sure if this is correct and also not sure as to if this should now be adopted and what the savings would be?
Problem 10-69 Standard Costing, Planned Variances Phono Company manufactures a plastic toy cell phone. The following standards tablished for the toyterials and labor inputs: have been Standard Standard Standard Quantity 0.5 lb 0.15 hr Price (rate in S) $1.50 10.00 Cost $0.75 Direct materials Direct labor 1.50 During the first week of July, the company had the following results: 90,000 Units produced Actual labor costs Actual labor hours Materials purchased and used $138,000 13,400 44,250 lbs. @ $1.55 per lb. The purchasing agent located a new source of slightly higher-quality plastic, and this material was used during the first week in July. Also, a new manufacturing layout was implemented on a trial basis. The new layout required a slightly higher level of skilled labor. The higher-qualiry material has no effect on labor utilization. Similarly, the new manufacturing approach has no effect on material usage. (Note: Round all variances to the nearest dollar.) Required: 1. CONCEPTUAL CONNECTION Compute the materials price and usage variances of Assuming that the materials variances are essentially attributable to the higher quality f materials, would you recommend that the purchasing agent continue to buy this qualit, or should the usual quality be purchased? Assume that the quality of the end products not affected significantly. 2. CONCEPTUAL CONNECTION Compute the labor rate and efficiency variances Assuming that the labor variances are attributable to the new manufacturing layout, should it be continued or discontinued? Explain.Explanation / Answer
Particulars
Amt/units
Calculation of labour effeciency variance
Actual labour hours
13,400
Actual units produced
90,000
Standard labour hours per unit
0.15
Standard hours, for actual units
13,500
Actual hours
13,400
Hours saved
100
Standard cost per hour
10
Total labour effeciency variance (positive)
1,000
Calculation of labour rate variance
Actual labour hours
13,400
Labour costs
1,38,000
Labour rate per hour
10.30
Standard labour rate
10
Increase in labour cost
0.30
No of units produced
13,400
Labour rate variance (adverse)
4,000
Net labour variance (adverse)
3,000
The entity should adopt the new layout. It is clear from the data provided that in the second week, the skilled labour got used to the new layout and therefore the output increased.
As per the standard cost sheet provided, the labour hours for 90,000 units would be 13,500. However, in the second week under the new layout, the hours have reduced to 13,200. Also, in the second week, the labour rate has also reached the standard rate of USD 10 per hour, indicating that the increase in week 1 was more of a learning curve and labour with almost same skill and price can work in the new layout.
Assuming standard man hours of 13,500 per week have gone down to 13,200 per week, the net saving is 300 man hours per week, i.e. 15,600 hours per 52 weeks, i.e. 156,000 USD per annum. Adjusted for first week adverse variance of 3000 USD, the net saving in the first year would be USD 153,000.
Particulars
Amt/units
Calculation of labour effeciency variance
Actual labour hours
13,400
Actual units produced
90,000
Standard labour hours per unit
0.15
Standard hours, for actual units
13,500
Actual hours
13,400
Hours saved
100
Standard cost per hour
10
Total labour effeciency variance (positive)
1,000
Calculation of labour rate variance
Actual labour hours
13,400
Labour costs
1,38,000
Labour rate per hour
10.30
Standard labour rate
10
Increase in labour cost
0.30
No of units produced
13,400
Labour rate variance (adverse)
4,000
Net labour variance (adverse)
3,000
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