Inc. produced 1,000 units of the company\'s product in 2016. The standard quanti
ID: 2467289 • Letter: I
Question
Inc. produced 1,000 units of the company's product in 2016. The standard quantity of direct materials was three yards of cloth per unit at a standard cost of $ 1.40 per yard. The accounting records showed that 2,400 yards of cloth were used and the company paid $ 1.45 per yard. Standard time was two direct labor hours per unit at a standard rate of $ 9.75 per direct labor hour. Employees worked 1, 900 hours and were paid $ 9.25 per hour.
Requirements 1. What are the benefits of setting cost standards?
2. Calculate the direct materials cost variance and the direct materials efficiency variance as well as the direct labor cost and efficiency variances.
Explanation / Answer
1. Advantages of Standard Costing
Though most companies do not use standard costing in its original application of calculating the cost of ending inventory, it is still useful for a number of other applications. In most cases, users are probably not even aware that they are using standard costing, only that they are using an approximation of actual costs. Here are some potential uses:
2.
Material Cost Variance = (actual price - Standard price) X Actual Quantity Used = (1.45-1.40)X 2400 = $ 120 U Material Efficiency Variance = (Actual Qty-Standard Qty) X Standard Price = ( 2400- (1000 X3))X1.40 = $ 840 F Direct Labour Cost variance = (actual rate- Standard Rate)X Actual hrs Used = (9.25-9.75)X 1900 = $ 950 F Direct Labour Efficiency variance = (actual hrs- Standard hrs)X Standard Rate =(1900- (1000X2)) X 9.75 = $ 975