Oklahoma Pneumatic uses a JIT system. The following standards are related to materials A and B, which are used to make one unit of the company’s final product:
Annual Material Standards__________________
3 pounds of Material A × $2.50 ...... $ 7.50
4 pounds of Material B × $3.40 ...... 13.60
$21.10
Current Material Standards__________________
2 pounds of Material A × $2.50 ...... $ 5.00
5 pounds of Material B × $3.40 ...... 17.00
$22.00
Current material standards differ from the original because of an engineering change order made near the end of June. During July, the company produced 3,000 units of its final product and used 11,000 pounds of Material A and 10,000 pounds of Material B.
All material is acquired at the standard cost per pound.
a. Calculate the material variance and the ECO material variance.
b. Explain the effect of the ECO on product cost.