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Problem Three

CONTROL LIMITS, VARIANCE INVESTIGATION

The management of Golding Company has determined that the cost to investigate a variance produced by its standard cost system ranges from $2,000 to $3,000. If a problem is discovered, the average benefit from taking corrective action usually outweighs the cost of investigation. Past experience from the investigation of variances has revealed that corrective action is rarely needed for deviations within 8 percent of the standard cost. Golding produces a single product, which has the following standards for materials and labour:

Direct materials (8 kg $0.25)$2

Direct labour (0.4 hr. $7.50)3

Actual production for the past three months with the associated actual usage and costs for materials and labour follow. There were no beginning or ending raw material inventories.

AprilMay June

Production (units)90,000100,000110,000

Direct materials:

Cost$189,000$218,000$230,000

Usage (kg)723,000870,000885,000

Direct labour:

Cost$270,000$323,000$360,000

Usage (kg)36,00044,00046,000

Required:

1.What upper and lower control limits would you use for materials variances? For labour variances?

2.Compute the materials and labour variances for April, May, and June. Identify those that would require investigation.

3.Let the horizontal axis be time and the vertical axis be variances measured as a percentage deviation from standard. Draw horizontal lines that identify upper and lower control limits. Plot the labour and material variances for April, May, and June.

4.Prepare a separate graph for each type of variance. Explain how you would use these graphs (called control charts) to assist your analysis of variances.

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