Ripper Corp. uses a standard cost system for its aircraft component manufacturing operations. Recently, the companys direct material supplier went out of business, but Rippers

Ripper Corp. uses a standard cost system for its aircraft component manufacturing operations. Recently, the company’s direct material supplier went out of business, but Ripper’s purchasing agent found a new source that produces a similar material. The price per pound from the original supplier was $7.00; the new source’s price is $7.77. The new source’s material reduces scrap and, thus, each unit requires only 1.00 pound rather than the previous standard of 1.25 pounds per unit. In addition, use of the new source’s material reduces direct labor time from 24 to 22 minutes per unit because there is less machine setup time. At the same time, the recently signed labor contract increased the average direct labor wage rate from $12.60 to $14.40 per hour.

The company began using the new direct material on April 1, the same day that the new labor agreement went into effect. However, Ripper Corp. is still using the following standards that were set at the beginning of the calendar year:

Steve Wenskel, cost accounting supervisor, had been examining the following April 30 variance report.

When Cynthia Dirope, assistant controller, came into Wenskel’s office, he said, “Cynthia, look at this performance report! Direct material price increased 11 percent, and the labor rate increased over 14 percent during April. I expected greater variances, yet prime costs decreased over 5 percent from the $13.79 we experienced during the first quarter of this year. The proper message just isn’t coming through.”
Dirope said, “This has been an unusual period. With all the unforeseen changes, perhaps we should revise our standards based on current conditions and start over.”
Wenskel 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 $0.74.”
a. Discuss the advantages of
(1) Immediately revising the standards and
(2) Retaining the current standards and expanding the analysis of variances.
b. Prepare an analysis that reflects the impact of the new direct material and new labor contract on reducing Ripper Corp.’s standard costs per unit from $13.79 to $13.05. The analysis should show the changes in direct material and direct labor costs per unit that are caused by
(1) The use of the new direct material and
(2) The labor rates of the new contract. This analysis should be in sufficient detail to identify the changes due to direct material price, direct labor rate, the effect of direct material quality on direct material usage, and the effect of direct material quality on direct laborusage.

Direct material Direct labor Standard DM and DL cost per unit 1.2 pounds at $6.80 per pound 20 minutes at $12.30 per DLH $ 8.16 410 12.26 PERFORMANCE REPORT STANDARD COST VARIANCE ANALYSIS FOR APRIL 2010 Standard Actual 7.77 5.28 $13.05 Price Varlance DM $ 8.16 DL 410 (S0.97 x 1.0) $0.97 U [S2.10 X (22/60)] 0.77 U Quantity Varlance ($6.80 0.2) $1.36 F [S 12.30 (2/60)10.41 U $12.26 COMPARISON OF 2010 ACTUAL COSTS Average 1st Quarter Costs S 8.75 5.04 $13.79 April Costs Percent Increase (Decrease) DM DL 5.28 4.8 S13.05 (5.4)