Shaw was relieved to see that the anticipated savings in material waste and rework seemed to have materialized. But, he was concerned that the union would press hard for higher wages given that actual unit costs came in below standard unit costs and operating income continued to climb. If you want to use Excel to solve this problem, go to the Excel Lab at www.prenhall.com/horngrenfcost13e and download the template for Problem 7-40.
1. Prepare a detailed variance analysis of the second-quarter results relative to the static budget. Show how much of the improvement in operating income arose due to changes in sales volume and how much arose for other reasons. Calculate variances that isolate the effects of price and usage changes in direct materials and direct manufacturing labor.
2. Use the results of requirement 1 to prepare a rebuttal to the union”s anticipated demands in light of the second-quarter results.
3. Terence Shaw thinks that the company can negotiate better if it changes the standards. Without performing any calculations, discuss the pros and cons of immediately changing the standards.