The Lubbock plant of Morril’s Small Motor Division produces a major subassembly for a 6.0 horsepower motor for lawn mowers. The plant uses a standard costing system for production costing and control. The standard cost sheet for the subassembly follows:
Direct materials (6.0 lbs. @ $ 5) ....... $ 30.00
Direct labor (1.6 hrs. @ $ 12) ........ 19.20
During the year, the Lubbock plant had the following actual production activity:
a. Production of subassemblies totaled 50,000 units.
b. A total of 260,000 pounds of raw materials was purchased at $ 4.70 per pound.
c. There were 60,000 pounds of raw materials in beginning inventory (carried at $ 5 per lb.). There was no ending inventory.
d. The company used 82,000 direct labor hours at a total cost of $ 1,066,000.
The Lubbock plant’s practical activity is 60,000 units per year. Standard overhead rates are computed based on practical activity measured in standard direct labor hours.
1. Complete the materials price and usage variances. Of the two materials variances, which is viewed as the most controllable? To whom would you assign responsibility for the usage variance in this case? Explain.
2. Compute the labor rate and efficiency variances. Who is usually responsible for the labor efficiency variance? What are some possible causes for this variance?
3. Assume that the purchasing agent for the small motors plant purchased a lower-quality raw material from a new supplier. Would you recommend that the plant continue to use this cheaper raw material? If so, what standards would likely need revision to reflect this decision? Assume that the end product’s quality is not significantly affected.
4. Prepare all possible journal entries.