Question

“Wonderful! Not only did our salespeople do a good job in meeting the sales budget this year, but our production people did a good job in controlling costs as well,” said Kim Clark, president of Martell Company. “Our $18,300 overall manufacturing cost variance is only 1.2% of the $1,536,000 standard cost of products made during the year. That’s well within the 3% parameter set by management for acceptable variances. It looks like everyone will be in line for a bonus this year.” The company produces and sells a single product. The standard cost card for the product follows: Standard Cost Card—per Unit of Product Direct materials, 2 feet at $8.45 per foot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16.90 Direct labor, 1.4 direct labor hours at $16 per direct labor-hour … . . . . . . . . .. . . . . . . 22.40 Variable overhead, 1.4 direct labor-hours at $2.50 per direct labor-hour ….. . . . . . . . . . 3.50 Fixed overhead, 1.4 direct labor-hours at $6 per direct labor-hour . . . . . . . ….. . . . . . . . 8.40 Standard cost per unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. $51.20 The following additional information is available for the year just completed: a. The company manufactured 30,000 units of product during the year. b. A total of 64,000 feet of material was purchased during the year at a cost of $8.55 per foot. All of this material was used to manufacture the 30,000 units. There were no beginning or ending inventories for the year. c. The company worked 43,500 direct labor-hours during the year at a direct labor cost of $15.80 per hour. d. Overhead is applied to products on the basis of standard direct labor-hours. Data relating to manufacturing overhead costs follow: Denominator activity level (direct labor-hours) . . . . . . . .... . . . . . . . . . . . . . . . . . . . . . 35,000 Budgeted fixed overhead costs (from the overhead flexible budget) . . . . . . . . . . . . $210,000 Actual variable overhead costs incurred . . . .

Answer 1

Standard costing is an effective tool for management to control costs, plan its budgets and take timely decisions. This enables management to establish standardized costs from a global perspective. However, this system requires a large amount of data and int the involvement of all the department managers of the company.

Tools It is very important for the effective use of standard costing tools that all the managers involved in using the standard costing system. This tool requires a lot of information from the various department managers who work at the various cost centers. This information is again relayed to the same managers. They are expected to use this information in taking departmental decisions and reduce the variance between actual and standards.

A thof standard between, however, this information regarding costs and revenue is too detailed and is understood by the accountants, management, and, departmental managers. It is also pertinent to note that in recent times there have been lots of changes in the macroeconomics like political changes, environmental changes, etc. which has caused lots of deviations from standards. Because of this a lot of time and resource is utilized for knowing the differences between the standard cost and actual costs.

Material Variances - The difference between the budgeted/standard material cost for a product and the actual material costs after production. Material variances are calculated for acknowledging the effect of changes in quantity consumed and changes in the price of the raw materials price.

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