NuLathe Company produces a turbo engine component for jet aircraft manufacturers. A standard cost system has been

Question:

NuLathe Company produces a turbo engine component for jet aircraft manufacturers. A standard cost system has been used for years with good results. Unfortunately, NuLathe has recently experienced production problems. The source for its direct material went out of business. The new source produces a similar but higher quality material. The price per pound from the original source has averaged $7.00, while the price from the new source is $7.77. The use of the new material results in a reduction in scrap. This scrap reduction reduces the actual consumption of direct material from 1.25 to 1.00 pound per unit. In addition, the direct labor is reduced from 24 to 22 minutes per unit because there is less scrap labor and machine setup time.
The direct material changeover occurred at the same time that labor negotiations resulted in an increase of over 14% in hourly direct labor costs. The average rate rose from $12.60 per hour to $14.40 per hour. Production of the main product requires a high level of labor skill. Because of a continuing shortage in that skill area, an interim wage agreement had to be signed.
NuLathe started using the new direct material on April 1, the same date that the new labor agreement went into effect. NuLathe has been using standards that were set at the beginning of the calendar year. The direct material and direct labor standards for the turbo engine component are as follows:
Direct material-(1.2 lbs. at $6.80 per lb.) .................................$ 8.16
Direct labor-(20 min. at $12.30 per DLH) ................................ 4.10
Standard prime cost per unit of product .....................................$12.26
H. Foster, cost accounting supervisor, had been examining the accompanying performance report that had been prepared at the close of business on April 30. When J. Keene, assistant controller, came into Foster's office, Foster said, "Look at this performance report. Direct material price increased 11% and the labor rate increased over 14% during April. I expected greater variances, yet prime costs decreased over 5% from the $13.79 we experienced during the first quarter of this year. The proper message just isn't coming through."
"This has been an unusual period," said Keene. "With all the unforeseen changes, perhaps we should revise our standards based on current conditions and start over."
Foster replied, "I think we can retain the current standards but expand the variance analysis. We could calculate variances for the specific changes that have occurred to direct material and direct labor before we calculate the normal price and quantity variances. What I really think would be useful to management right now is to determine the impact the changes in direct material and direct labor had in reducing our prime costs per unit from $13.79 in the first quarter to $13.05 in April-a reduction of $.74."

Required:
(1) Discuss the advantages of each of the following alternatives:
(a) Revise the standards immediately.
(b) Retain the current standards and expand the analysis of variances.
(2) Prepare an analysis that reflects the impact the new direct material and new labor contract had on reducing NuLathe's prime costs per unit from $13.79 in the first quarter to $13.05 in April. The analysis should show the changes in prime costs per unit that are due to
(a) The use of new direct material, and
(b) The new labor contract. This analysis should be in sufficient detail to identify the changes due to direct materials price, direct labor rate, the effect of direct material quality on direct material usage, and the effect of direct material quality on direct labor usage