In: Accounting
Standard Costing: Planned Variances
As part of its cost control program, Tracer Company uses a standard costing system for all manufactured items. The standard cost for each item is established at the beginning of the fiscal year, and the standards are not revised until the beginning of the next fiscal year. Changes in costs, caused during the year by changes in direct materials or direct labor inputs or by changes in the manufacturing process, are recognized as they occur by the inclusion of planned variances in Tracer’s monthly operating budgets.
The following direct labor standard was established for one of Tracer’s products, effective June 1, 2012, the beginning of the fiscal year:
Assembler A labor (5 hrs. @ $10) | $ 50 |
Assembler B labor (3 hrs. @ $11) | 33 |
Machinist labor (2 hrs. @ $15) | 30 |
Standard cost per 100 units | $113 |
The standard was based on the direct labor being performed by a team consisting of five persons with Assembler A skills, three persons with Assembler B skills, and two persons with machinist skills; this team represents the most efficient use of the company’s skilled employees. The standard also assumed that the quality of direct materials that had been used in prior years would be available for the coming year.
For the first seven months of the fiscal year, actual manufacturing costs at Tracer have been within the standards established. However, the company has received a significant increase in orders, and there is an insufficient number of skilled workers to meet the increased production. Therefore, beginning in January, the production teams will consist of eight persons with Assembler A skills, one person with Assembler B skills, and one person with machinist skills. The reorganized teams will work more slowly than the normal teams, and as a result, only 80 units will be produced in the same time period in which 100 units would normally be produced. Faulty work has never been a cause for units to be rejected in the final inspection process, and it is not expected to be a cause for rejection with the reorganized teams.
Furthermore, Tracer has been notified by its direct materials supplier that lower-quality direct materials will be supplied beginning January 1. Normally, one unit of direct materials is required for each good unit produced, and no units are lost due to defective direct materials. Tracer estimates that 6 percent of the units manufactured after January 1 will be rejected in the final inspection process due to defective direct materials.
Required:
1. Determine the number of units of lower
quality direct materials that Tracer Company must enter into
production in order to produce 47,000 good finished units.
_ units
2. How many hours of each class of direct labor must be used to manufacture 47,000 good finished units?
Assembler A | hrs | |
Assembler B | hrs | |
Machinist | hrs |
3. Determine the amount that should be included
in Tracer’s January operating budget for the planned direct labor
variance caused by the reorganization of the direct labor teams and
the lower quality direct materials. In your computations, carry the
direct labor cost per unit to 3 decimal places. (CMA
adapted)
$_
1) | No. Of units of lower quality to be introduced in production | |||||
No. Of good units to be produced | = | 47000 | ||||
Normal Loss (% of units produced) | = | 6% | ||||
No. Of units to be introduced | = | Good Products / (1-percentage of loss) | ||||
= | 47000/(0.94) | |||||
= | 50000 units | |||||
2) | No. Of hours of each class of labour to produce 47000 good finished units | |||||
Total no. Of goods to be introduced | = | 50000 units | ||||
Assembler A | Assembler B | Mechanist | ||||
a. | Normal labour hour / 100 units | 5 | 3 | 2 | ||
b. | Revised labour hour / 100 units | 6.25 | 3.75 | 2.5 | ||
(= normal * revised production
/ normal production = normal hr * 100 /80) |
||||||
c. | Total no. Of hours required to produce 50000 units (b * 50000/100) | 3125 | 1875 | 1250 | ||
hrs | hrs | hrs | ||||
Note : Calculations to be done taking 50000 units into account since 6 % i.e., 3000 units are expected to be rejected on quality inspection | ||||||
3) | Planned direct labour variance | |||||
Assembler A | Assembler B | Mechanist | Total | |||
Rate per hour | 10 | 11 | 15 | |||
Normal hours per 100 units | 5 | 3 | 2 | |||
Normal hours per unit | 0.050 | 0.030 | 0.020 | |||
Normal labour cost per unit | 0.500 | 0.330 | 0.300 | |||
Revised hours per 100 units | 6.25 | 3.75 | 2.5 | |||
Revised hours per unit | 0.063 | 0.038 | 0.025 | |||
Revised labour cost per unit | 0.625 | 0.413 | 0.375 | |||
Total normal cost for 47000 units | 23500.00 | 15510.00 | 14100.00 | 53110.00 | ||
Total revised cost for 47000 units | 29375.00 | 19387.50 | 17625.00 | 66387.50 | ||
Total revised cost for 50000 units | 31250.00 | 20625.00 | 18750.00 | 70625.00 | ||
Direct labour Variance | 7750.00 | 5115.00 | 4650.00 | 17515.00 | ||
Variance due to reorganisation of labour | 5875.00 | 3877.50 | 3525.00 | 13277.50 | ||
Variance due to lower quality material | 1875.00 | 1237.50 | 1125.00 | 4237.50 | ||
Note: | ||||||
The above labour cost variance can be subdivided into 2 parts | ||||||
1) arising due to reorganisation of labour | = Revised cost for 47000 units - normal cost of 47000 units | |||||
2) arising due to low cost material usage | = Revised cost for 50000 units - revised cost for 47000 units | |||||
(since if normal quality material would have been used only 47000 raw material units would have been introduced in production) | ||||||