Why would a company implement an engineering change that increases the standard production cost by…

Erica Tommasen uses a JIT system in her manufacturing firm, which makes “Mew” for cats. Erica provides you with the following standards for a can of Mew:

Annual Material Standards

5 ounces of component X @ $0.10

$0.50

1 ounce of component Y @ $0.25

0.25

$0.75

Current Material Standards

4 ounces of component X @ $0.10

$0.40

2 ounces of component Y @ $0.25

0.5

$0.90

The standards were changed because of a nutritional (engineering) adjustment. Production during March was 60,000 cans of Mew. Usage of raw material (all purchased at standard costs) was 250,000 ounces of Component X and 108,000 ounces of Component Y.

a. Calculate the material quantity variance for each component.

b. Calculate the engineering change variance for each component.

c. Why would a company implement an engineering change that increases the standard production cost by 20 percent?

 

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