Question

Emerson Company produces ceramic teapots. Emerson allocates overhead based on the number of direct labor hours. The company is considering using a standard cost system and has developed the following standards (a batch is 100 teapots).

Standard Costs:

Direct Material 60 lbs. per batch $ 5.00 per lb.

Direct Labor 3.0 hr. per batch $17.00 per hr.

Variable Manufacturing Overhead 3.0 hr. $7.00 per hr.

Fixed Manufacturing Overhead 3.0 hr. $3.00 per hr.   

2018 Budgeted Data for February:

Budgeted production, 121 batches (100 teapots each batch)

Denominator Hours, 363 DLH. (Emerson applies overhead on the basis of direct labor hours.)

Budgeted variable overhead, $2,541

Budgeted fixed overhead, $1,089.

2018 Actual Results for February:

Direct material purchases were 4,500 lbs. at a cost of $4.70 per lb.

Direct material used was 4,100 lbs.

Direct labor costs was $3,344 at an average direct labor cost per hour of $17.60.

Total variable manufacturing overhead was $1,406.

Total fixed manufacturing overhead was $1,490.

Actual production was 60 batches.

Q.

1. Have the company’s managers done a good job or a poor job controlling materials, labor, and overhead costs? Why or why not?

a) What do you think may have caused the variances to be favorable or unfavorable? Give 2 examples for each variance you have calculated above

b) Describe how the company’s managers can benefit from the standard costing system. Do you think the company should continue with the standard cost system? Why or why not?

Answer 1

DMPV=	(4.70-5)4100	1230	F
DMQV=	(60*60 - 4100)5	2500	F
DLRV=	(17.60-17)190	114	U
DLEV=	(60*3 - 190)17	170	U
VMO/HV=	(1406 - 60*3*7)	146	U
FMO/HV=	(1490-1089)	401	U

1) The company's managers have not performed on the all the jobs. The material has been very well controlled and executed. The expenses on the labor and overhead has been over done and over-expensed. More hours are been used to produce the batches. Also, the rates has been over charged.

a) The caused of the various adverse variances :

1) More hours has been utilised to production.

2) Labor and overhead rates has been paid at the higher rate.

b) Through the use of Standard costing system, the managers would able to judge the variance of the cost incurred on production from that of put under standards.

So, the company should continue with the standard costing system, so that any further over expense on the production can be picked up at the earliest so that further loss to the company can be stopped.