Question

Martin Company manufactures a powerful cleaning solvent. The main ingredient in the solvent is a raw material called Echol. Information concerning the purchase and use of Echol follows:

Purchase of Echol Echol is purchased in 15-gallon containers at a cost of $115 per container. A discount of 2% is offered by the supplier for payment within 10 days, and Martin Company takes all discounts. Shipping costs, which Martin Company must pay, amount to $130 for an average shipment of 100 15-gallon containers of Echol.

Use of Echol The bill of materials calls for 7.6 quarts of Echol per bottle of cleaning solvent. (Each gallon contains four quarts.) About 5% of all Echol used is lost through spillage or evaporation. In addition, statistical analysis has shown that every 41st bottle is rejected at final inspection because of contamination.

Required:
a. Compute the standard purchase price for one quart of Echol.
b. Compute the standard quantity of Echol (in quarts) per salable bottle of cleaning solvent.
c. Using the data from (1) and (2) above, prepare a standard cost card showing the standard cost of Echol per bottle of cleaning solvent.

Answer 1

Answer: a. $1.90

b. 8.2 quarts

c. $15.58

Explanation:

a. Compute the standard purchase price for one quart of Echol.

Cost per 15 gallon container = $115

Less: Cash discount= 2% × $115 = $2.30

Net cost = $115 - $2.30 = $112.70

Add: Shipping cost = $139/100 = $1.30

Total cost = $112.70 + $1.30 = $114

Number of quarts per container = (15 × 4) = 60

Standard cost per quart = $114/60 = $1.90

b. Compute the standard quantity of Echol (in quarts) per salable bottle of cleaning solvent.

Content per bill of materials = 7.6 quart

Add: Allowance for evaporation and spillage = 8.0 - 7.6 = 0.4 quart

Add: Allowance for rejected unit = 8.0/40 = 0.2 quarts

Standard quantity of Echol per salable bottle of cleaning solvent = 7.6 + 0.4 + 0.2 = 8.2 quarts

c. Using the data from (1) and (2) above, prepare a standard cost card showing the standard cost of Echol per bottle of cleaning solvent.

This will be:

= 8.2 quart × $1.90 per quart

= $15.58