Problem 10-45   Control Limits, Variance Investigation

The management of Golding Company has determined that the cost to investigate a variance produced by its standard cost system ranges from $2,000 to $3,000. If a problem is discovered, the average benefit from taking corrective action usually outweighs the cost of investigation. Past experience from the investigation of variances has revealed that corrective action is rarely needed for deviations within 8% of the standard cost. Golding produces a single product, which has the following standards for materials and labor:

Direct materials (8 lbs. @ $0.25)                                           $2

Direct labor (0.4 hr. @ $7.50)                                                 3

Actual production for the past three months with the associated actual usage and costs for mate- rials and labor follow. There were no beginning or ending raw materials inventories. 

  April May June

Production (units) Direct materials:

Cost 90,000

 

$189,000 100,000

$218,000 110,000

$230,000

Usage (lbs.) 723,000 870,000 885,000

Direct labor:

Cost                                         $270,000          $323,000          $360,000

Usage (hrs.)                                36,000              44,000              46,000

Required:

1.       What upper and lower control limits would you use for materials variances? For labor variances?

2.       Compute the materials and labor variances for April, May, and June. Identify those that would require investigation by comparing each variance to the amount of the limit com- puted in part 1. Compute the actual percentage deviation from standard. Round all unit costs to four decimal places. Round variances to the nearest dollar. Round variance rates to three decimal places so that percentages will show to one decimal place.

3.       CONCEPTUAL CONNECTION Let the horizontal axis be time and the vertical axis be variances measured as a percentage deviation from standard. Draw horizontal lines that identify upper and lower control limits. Plot the  labor  and  material  variances  for  April, May, and June. Prepare a separate graph for each type of variance. Explain how you would use these graphs (called control charts) to assist your analysis of variances.

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Status NEW Posted 26 Apr 2017 05:04 PM My Price 10.00

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