Jasper Company manufactures large plastic bins for industrial usage. One of Jasper’s larger customers uses model T-367. Jasper located a plant dedicated to the manufacture of model T-367 across the street from the customer’s plant. To help ensure cost efficiency, a standard costing system was installed in the plant. The following standards have been established for the product’s variable inputs:

	Standard Quantity	Standard Price (Rate)	Standard Cost
Direct materials	10 lbs.	$ 1.70	$17.00
Direct Labor	0.60 hrs.	10.00	6.00
Variable overhead	0.60 hrs.	2.5	1.5
Total			$24.50

During the first week in January, the company had the following actual results:

Units produced                                                 4,000

Actual labor costs                                             $26,500

Actual labor hours                                           2,500

Materials purchased and used                   38,500 lbs. @ $1.72

Actual variable overhead costs                  $16,500

Other information includes the following. The purchasing agent located a new source of slightly higher-quality plastic, and this material was used during the first week in January. Also, a new manufacturing process was implemented on a trial basis. The new process required a slightly higher level of skilled labor. The higher quality material has no effect on labor utilization. However, the new manufacturing process was expected to reduce materials usage by 0.25 pound per can.

1. Compute the materials price and usage variances. Assume that the 0.25-pound reduction of materials occurred as expected and that the remaining effects are all attributable to the higher-quality material. Would you recommend that the purchasing agent continue to buy this quality? Or should the usual quality be purchased? Assume that the quality of the end product is not affected significantly.

2. Compute the labor rate and efficiency variances. Assuming that the labor variances are attributable to the new manufacturing process, should it be continued or discontinued? In answering, consider the new process’s materials reduction effect as well. Explain.

3. Refer to Requirement 2. Suppose that the industrial engineer argued that the new process should not be evaluated after only one week. His reasoning was that it would take at least a week for the workers to become efficient with the new approach. Suppose that the production is the same the second week and that the actual labor hours were 2,200 and the labor cost was $22,400. Should the new process be adopted? Assume the variances are attributable to the new process. Assuming production of 4,000 units per week, what would be the projected annual savings? (Include the materials reduction effect.)

Answer rating: 100% (QA)

Variance is the deviation between the standard and the actual cost Variance analysis helps to identify the difference between the standard and actual cost Variances are analyzed in two ways one is fav... View the full answer