DiAngelo Products Uses a Standard Costing System to Assist in the Evaluation

question 73

Essay

DiAngelo Products uses a standard costing system to assist in the evaluation of operations. The company has had considerable employee difficulties in recent months, so much so that management has hired a new production supervisor (Joe Simms). Simms has been on the job for six months and has seemingly brought order to an otherwise chaotic situation.
The vice-president of manufacturing recently commented that "¼ Simms has really done the trick. Joe's team-building/morale-boosting exercises have truly brought things under control." The vice-president's comments were based on both a plant tour, where he observed a contented work force, and review of a performance report that showed a total labor variance of $14,000F. This variance is truly outstanding, given that it is less than 2% of the company's budgeted labor cost. Additional data follow.
• Total completed production amounted to 20,000 units.
• A review of the firm's standard cost records found that each completed unit requires 2.75 hours of labor at $14 per hour. DiAngelo's production actually required 42,000 labor hours at a total cost of $756,000.
Required:
A. As judged by the information contained in the performance report, should the vice-president be concerned about the company's labor variances? Why?
B. Calculate DiAngelo's direct-labor variances.
C. On the basis of your answers to requirement "B," should DiAngelo be concerned about its labor situation? Why?
D. Briefly analyze and explain the direct-labor variances.

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Definitions:

Good Lot

A term used in quality control to describe a batch of products that meet specified quality standards.

AQL

Acceptable Quality Level, a statistical measurement used in quality control that defines the maximum number of defective items allowed in a sample lot.

Type II Error

Statistically, the probability of accepting a bad lot.

Bad Lot

A batch of products that fails to meet quality specifications or standards, often leading to rejection or rework.