Bramlett Company has several divisions and just built a newplant with a capacity of 20,000 units of a new product. A standardcosting system has been introduced to aid in evaluating managers'performance and for establishing a selling price for the newproduct. At the present time, Bramlett faces no competitors in thisproduct market, and managers priced it at standard variable andfixed manufacturing cost, plus 60% mark-up. Managers hope thisprice will be maintained for several years.
During the first year of operations, 1,000 units per month willbe produced. During the second year, production is estimated to be1,500 units per month. In the first month of operations, employeeswere learning the processes, so direct labour hours were estimatedto be 20% greater than the standard hours allowed per unit. Insubsequent months, employees were expected to meet the directlabour hours standards.
Experience in other plants and with similar products ledmanagers to believe that variable manufacturing costs would vary inproportion to actual direct labour dollars. For the first severalyears, only one product will be manufactured in the new plant.Fixed overhead costs of the new plant per year are expected to be$1,920,000, incurred evenly throughout the year.
The standard variable manufacturing cost (after the break-inperiod) per unit of product has been set as follows:
Direct materials (4 pieces @ $20 per piece) $ 80
Direct labour (10 hours @ $25 per hour) 250
Variable overhead (50% of direct labour cost) 125
Total $455
At the end of the first month of operations, the actual costsincurred to make 950 units of product were as follows:
Direct materials (3,850 pieces @ $19.80) $ 76,230
Direct labour (12,000 hours @ $26) 312,000
Variable overhead 160,250
Fixed overhead 172,220
Bramlett managers want to compare actual costs to standard toanalyze and investigate variances and take any correctiveaction.
REQUIRED
A. What selling price should Bramlett set for the new productaccording to the new pricing policy? Explain.
B. Using long-term standard costs, compute all direct labour andmanufacturing overhead variances.
C. Is it reasonable to use long-term standard costs to calculatevariances for the first month of operations? Why or why not?
D. Revise the variance calculations in Part B, using the expectedcosts during the first month of operations as the standardcosts.
E. Provide at least two possible explanations for each of thefollowing variances:
1. Direct labour price variance
2. Direct labour efficiency variance
3. Variable overhead spendingvariance
4. Fixed overhead spending variance
