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
1 ounce of component Y @ $0.25
Current Material Standards
4 ounces of component X @ $0.10
2 ounces of component Y @ $0.25
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?