At a recent seminar you attended, the invited speaker was discussing some of the advantages and...
At a recent seminar you attended, the invited speaker was discussing some of the advantages and disadvantages of standard costs in terms of evaluating performance and motivating goal-congruent behavior on the part of employees. One criticism of standard costs in particular caught your attention: The use of conventional standard costs may not provide appropriate incentives for improvements needed to compete effectively with world-class organizations. The speaker then discussed so-called continuous-improvement standard costs. Such standards embody systematically lower costs over time. For example, on a monthly basis, it might be appropriate to budget a 1.0% reduction in per-unit direct labor cost.
Assume that the standard wage rate into the foreseeable future is $21 per hour. Assume, too, that the budgeted labor-hour standard for October of the current year is 2.40 hours and that this standard is reduced each month by 2%. During December of the current year the company produced 7,800 units of XL-10, using 19,500 direct labor hours. The actual wage rate per hour in December was $24.00.
1. Prepare a table that contains the standard labor-hour requirement per unit and standard direct labor cost per unit for the 4 months, October through January.
2. Compute the direct labor efficiency variance for December. Was this variance favorable (F) or unfavorable (U)?
1 Month Previous standard Reduction New standard (hr./unit) Standard direct labor cost/unit October 2.4 hour/unit $50.4 (21*2.4) November 2.4 hour/unit 0.048 2.352 hour/ unit $49.39 (21*2.352) December 2.352 hour/ unit 0.04704 2.30496 hour/unit $48.40 (21*2.30496) January 2.30496 hour/unit 0.0460992 2.258861 hour/unit $47.44 (21*2.258861) 2 Direct labor efficiency variance SR * (Actual hour - standard hour) $21 * (19500 - 17978.69) $21 * (1521.31) $31947.51 Unfavorable Standard hour 7800*2.30496 17978.688