Indicate if each of the following items will affect one or more of the material
ID: 2500715 • Letter: I
Question
Indicate if each of the following items will affect one or more of the material or labor cost valances. [Note, you have learned about two types of material cost variances and two types of labor cost variances under Standard Costing] Further, indicate if cache such cost variance will be favorable or unfavorable. Your company recently has switched to a new supplier for buying its component parts .The supplier makes delivery at a higher freight rate; however, the parts are significantly better in quality than before, resulting in less breakage of material. The utility company that provides electricity and gas to your company has raised its rates by 6% for the year. Due to a strike by the assembly line workers, the management is using senior level employees to complete the production on a timely basis. These senior employees are must faster in their work output. Poor maintenance of machinery and equipment has resulted in a lot of waste of raw material besides slowing down the production line and requiring overtime pay. The new training program for production workers has resulted in reduced material usage.Explanation / Answer
1 Less Brakage of Material will result in lower Material Usage Variance, Hence It will Be favourable 2 Hike in Price of Electricity and Gas will result in Higher Price Variance, It will be unfavourable 3 Since senior employees are much faster in their work output, that means senior employees takes less labour hours to do the same work, hence labour efficiency variance will decrease and hence it will be favourable. However senior employees Labour rate Per hour may be Higher than junior employees, it may result in Increase in Labour rate Variance, and hence may be unfavourable. 4 Waste in Raw material will increase Material Usage. Hence Material Usage Variance will be Unfavourable Slowing down the Production line will require more Labour Hours than actually need and hence will result in Increase in Labour Efficiency Variance as well as Labour Price Variance and hence will be unfavourable. 5 New training Program resulted in reduced material Usage. Hence Material Usage Variance will be favourable.