Materials Variances

Cinturon Corporation produces high-quality leather belts. The company's plant in Boise uses a standard costing system and has set the following standards for materials and labor:

Line Item Description	Cost
Leather (3 strips @ $6)	$18.00
Direct labor (0.75 hr. @ $16)	12.00
Total prime cost	$30.00
During the first month of the year, the Boise plant produced 92,000 belts. Actual leather purchased was 291,500 strips at $4.20 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 78,400 hours at $16.50 per hour.

Required:

1. Break down the total variance for materials into a price variance and a usage variance using the columnar and formula approaches.

To analyze the materials variances for Cinturon Corporation, we will break down the total variance into **Price Variance** and **Usage (Quantity) Variance**. Let's do this using both the columnar and formula approaches.

### Step 1: Identify the Variables and Formulas

#### Variables:
- **Standard Price (SP)** = $6.00 per strip
- **Actual Price (AP)** = $4.20 per strip
- **Standard Quantity (SQ)** = 3 strips per belt
- **Actual Quantity (AQ)** = 291,500 strips
- **Standard Quantity Allowed (SQA)** = 3 strips per belt × 92,000 belts = 276,000 strips

### Step 2: Calculate the Variances

#### **A. Price Variance**  
The price variance is the difference between the actual price and the standard price multiplied by the actual quantity purchased.

\[
\text{Price Variance} = (AP - SP) \times AQ
\]
\[
\text{Price Variance} = (\$4.20 - \$6.00) \times 291,500
\]
\[
\text{Price Variance} = (-\$1.80) \times 291,500 = -\$524,700 \text{ (Favorable)}
\]

The price variance is **$524,700 Favorable** because the actual price is lower than the standard price.

#### **B. Usage Variance (Quantity Variance)**
The usage variance is the difference between the actual quantity used and the standard quantity allowed, multiplied by the standard price.

\[
\text{Usage Variance} = (AQ - SQA) \times SP
\]
\[
\text{Usage Variance} = (291,500 - 276,000) \times \$6.00
\]
\[
\text{Usage Variance} = 15,500 \times \$6.00 = \$93,000 \text{ (Unfavorable)}
\]

The usage variance is **$93,000 Unfavorable** because more strips were used than the standard quantity allowed.

### Step 3: Total Material Variance
The total material variance is the sum of the price variance and the usage variance.

\[
\text{Total Material Variance} = \text{Price Variance} + \text{Usage Variance}
\]
\[
\text{Total Material Variance} = -\$524,700 + \$93,000 = -\$431,700 \text{ (Favorable)}
\]

### Columnar Approach:

| **Variance Type**       | **Formula**                           | **Calculation**                            | **Result**                |
|-------------------------|---------------------------------------|--------------------------------------------|---------------------------|
| **Price Variance**       | $(AP - SP) \times AQ$               | $(\$4.20 - \$6.00) \times 291,500$       | $-\$524,700$ (Favorable) |
| **Usage Variance**       | $(AQ - SQA) \times SP$              | $(291,500 - 276,000) \times \$6.00$      | \$93,000 (Unfavorable)     |
| **Total Material Variance** | Price Variance + Usage Variance     | $-\$524,700 + \$93,000$                  | $-\$431,700$ (Favorable) |

### Summary:
- **Price Variance:** $524,700 Favorable
- **Usage Variance:** $93,000 Unfavorable
- **Total Material Variance:** $431,700 Favorable

This analysis shows that while the company spent less on materials than expected (price variance favorable), it used more materials than the standard allowed (usage variance unfavorable), resulting in an overall favorable total material variance.

---

Do you want details or have any questions?  
Here are some related questions you may consider:

1. How do changes in material prices impact the overall profitability of a product?
2. What could cause a favorable price variance in materials?
3. How can companies reduce unfavorable usage variances?
4. What role do standard costs play in variance analysis?
5. How would labor variances be calculated for the same scenario?
6. How does material variance analysis aid in cost control?
7. What is the significance of having both favorable and unfavorable variances?
8. How can Cinturon Corporation improve its variance outcomes in future periods?

**Tip:** Regular variance analysis helps in identifying inefficiencies and making informed cost-management decisions.

Learn how to analyze materials variances using standard costing with detailed formulas and examples. Calculate price variance, usage variance, and total material variance step-by-step. Suitable for advanced learners and professionals.

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