Penray uses a standard costing system in evaluating production operations .The company has had a number of problems with suppliers and employees in recent times so they hired a new production supervisor, David Smith. David Smith has been working for the company for three months now and the employees appear much happier with the company.
The director of manufacturing commented that employees appear happier after Smith had been there for the last three months and with the changes in suppliers of material and various morale boosting activities the overall total labour and material variances being low he seemed to have transformed the company and to have considerably improved its performance from a company which has always struggled to achieve its cost targets and achieve positive material and labour variances.
The following additional information is provided:
– The company purchased and consumed 90,000 kilograms of direct materials
at $7.90 per kilogram and paid $15.50 per hour for 42,000 direct labour hours
– Total units produced were 19,200
-The company’s standard costs show that each completed unit required 4.4 kilograms of direct materials at $8.50 per kilogram and 2.5 direct labour hours at $14 per hour.
1. Calculate the direct material and the direct labour variances.
2. Based on your answer to part 1 should the management of Penray be concerned about its variances? Explain why.
3. Are things going as smoothly as the director of manufacturing believes?
Evaluate the company’s variances and determine whether or not the changes
in suppliers and the morale boosting activities appear to be working. Explain
Question 2(10 marks)
The accountant for Daily Manufacturing compares each month’s actual results with the monthly budget. The standard direct labour rates and the standard hours allowed based on expected labour output are as follows:
Standard direct labour rate Standard direct labour hours
per hour allowed
Labour class 3 $25 2000
Labour class 2 $22 2000
Labour class1 $16 2000
A new union contract negotiated in March resulted in actual wage rates that were different from the standard rates. The actual wage rates paid and theactual direct labour hours worked for April were as follows:
Actual direct labour rate Actual direct labour hours
Labour class 3 $26.20 2100
Labour class 2 $23.80 2350
Labour class 3 $16.80 1900
1. Calculate the following variances for April indicating whether each is favourable or unfavourable:
(a) Direct labour rate variance for each labour class
(b) Direct labour efficiency variance for each labour class
2. Discuss the advantages and disadvantages of a standard costing system in which the standard direct labour rates per hour are not changed during the year to reflect events such as a new labour contract.
3. Construct an Excel or other spreadsheet to demonstrate how the solution to part 1 would change if the following information changes:
the actual labour rates were $27.00, $22.90 and $17.00 for labour classes 3,2 and 1 respectively.