Question :

Shirt Company manufactures shirts for sale to retail stores. Mai, Shirt Co.'s controller is becoming more frustrated with the company's standard costing system. Below are the actual and standards results for the most current period:

Standard Actual

Shirts manufactured 6,000 6,732

Direct material costs $30,000 $30,294

Direct material yards 600 612

Direct labor costs $27,000 $27,693

Direct labor hours 1,500 1,530

There was no starting or ending inventory of direct materials.

Standard costs are dependent on a study of the operations conducted by an independent consultant six months earlier. Mai seems that since that study she has rarely seen an unfavorable variance of any magnitude. She notes that still at present output levels, the workers seem to have a lot of time for long breaks and sitting around. Mai is concerned that the production manager, Ethan, is aware of this issue but does not want to tighten the standards. Variance analysis is part of the division and Ethan's performance evaluation.

Required: Complete each of the subsequent questions. For problems: show your work, give labels and descriptions of amounts, be organized in your work and evidently show your solution to the question.

1. Determine the direct materials price and efficiency variances for Shirt Company.

2. Evaluate the direct labor price and efficiency variances for Shirt Company.

3. Show the implications of the variance analysis results on Ethan's performance evaluation and division performance as division manager.

4. If Mai does nothing about what she believes is lax standards show how this behavior can violate the Standards of Ethical Conduct for Management Accountants.

Discuss which specific standards may be violated if no action is taken by Mai.

5. What action do you recommend Mai take? Describe and discuss.