00 per unit 7275 units 50925 oz price per oz 150738

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Actual ounces used = 7.00 per unit × 7,275 units = 50,925 oz.Price per oz. = $150,738 50,925 = $2.96Direct LaborActual labor hours = $145,35514.80 = 9,821.3 hoursLabor hours per unit = 9,821.37,275 units = 1.35 hours per unitActual CostsIncurred(Actual Input Qty.×Actual Price)(1)Actual Input Qty.×Budgeted Price(2)Flexible Budget(Budgeted InputQty. Allowed for Actual Output ×Budgeted Price)(3)DirectMaterials:Frames(7,275 × 3.2 × $2.40)$55,872(7,275 × 3.2 × $2.20)$51,216(7,275 × 3.00 × $2.20)$48,015$4,656 U$3,201 UPrice varianceEfficiency varianceDirectMaterials:Lenses(7,275 × 7.0 × $2.96)$150,738(7,275 × 7.0 × $3.10)$157,868(7,275 × 6.00 × $3.10)$135,315$7,130 F$22,553 UPrice varianceEfficiency varianceDirectManuf.Labor(7,275 × 1.35 × $14.80)$145,355(7,275 × 1.35 × $15.00)$147,319(7,275 × 1.20 × $15.00)$130,950$1,964 F$16,369 UPrice varianceEfficiency variance2.Possible explanations for the price variances are:(a)Unexpected outcomes from purchasing and labor negotiations during the year.(b) Higher quality of frames and/or lower quality of lenses purchased.(c)Standards set incorrectly at the start of the year.Possible explanations for the uniformly unfavorable efficiency variances are:(a) Substantially higher usage of lenses due to poor quality lenses purchased at lowerprice.(b) Lesser trained workers hired at lower rates result in higher materials usage (for bothframes and lenses), as well as lower levels of labor efficiency.(c)Standards set incorrectly at the start of the year.7-14
7-34(35 min.) Material cost variances, use of variances for performance evaluation1.Materials Variances Actual CostsIncurred(Actual Input Qty.×Actual Price)Actual Input Qty.×Budgeted PriceFlexible Budget(Budgeted Input Qty. Allowed for Actual Output ×Budgeted Price)DirectMaterials(6,000 × $18a)$108,000PurchasesUsage(6,000 × $20)(5,000 × $20)$120,000$100,000(500 × 8 × $20)(4,000 × $20)$80,000$12,000 F$20,000 UPrice varianceEfficiency variancea$108,000 ÷ 6,000 = $18 2.The favorable price variance is due to the $2 difference ($20 - $18) between the standard price based on the previous suppliers and the actual price paid through the on-line marketplace. The unfavorable efficiency variance could be due to several factors including inexperienced workers and machine malfunctions. But the likely cause here is that the lower-priced titanium was lower quality or less refined, which led to more waste. The labor efficiency variance could be affected if the lower quality titanium caused the workers to use more time.3.Switching suppliers was not a good idea. The $12,000 savings in the cost of titanium was outweighed by the $20,000 extra material usage. In addition, the $20,000U efficiency variance does not recognize the total impact of the lower quality titanium because, of the 6,000 pounds purchased, only 5,000 pounds were used. If the quantity of materials used in production is relatively the same, Better Bikes could expect the remaining 1,000 lbs to produce 100 more units. At standard, 100 more units should take 100 × 8 = 800 lbs. There could be an additional unfavorable efficiency variance of (1000 $20)(100 × 8 × $20)$20,000$16,000$4,000U4.The purchasing manager’s performance evaluation should not be based solely on theprice variance. The short-run reduction in purchase costs was more than offset by higherusage rates. His evaluation should be based on the total costs of the company as a whole.

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