# Quiz 12: Standard Costs: Direct Labor and Materials

Standard Costing It is a method of costing in which a standard cost is defined for each head of the cost. The reason behind this is to provide a base for the evaluation of actual performance. If actual performance is less than the standards set then there is a need to identify the cause and if actual performance is better than standard costs can be revised based on them. Variance: It is simply the difference between the actual amount and the budgeted amount. Variance has many types such as overhead variance, labor variance, material variance etc. There are two types of variances, favorable and unfavorable. Favorable Variance is a term used in the accounting which explains the circumstances in which the standard or the expected costs of the company are more than the actual costs incurred by the company. It also brings to the notice of the management that the estimated profits will be more. a.In the present case, the information regarding the standards set for the production of the three products is provided. The details of quantity produced and the usage of hours and material in those products for the month of March is also given. Compute the piece rate per cigar with the help of MS-Excel as follows: The result of the above calculations is as follows: So the piece rate of Panatella, Corolla, and Churchill comes out to be , and respectively. b.First, compute the actual price per gram for the tobacco as follows: So the actual price comes out to be $0.23. Now, compute the price variance as follows: Therefore the price variance comes out to be and it is Unfavorable.c.Compute the quantity variances as follows: The result of the above calculations is as follows: Therefore the quantity variance comes out to be for Panatella, for Corona and for Churchill. d.Compute the labor efficiency variance for each type of cigar as follows: The result of the above calculations is as follows: Therefore the labor efficiency variance comes out to be for Panatella, for Corona and for Churchill. e.Prepare a table showing the analysis regarding the wage rate as follows: The result of the above calculations is as follows: The labor variances which denoted the efficiency of the labor clearly shows that the employees of the company are very efficient. They are able to generate an extra revenue for the company at the rate of $3 per hour. But on the other hand, the quantity variances that were unfavorable clearly shows that the company as unable to keep the safety of the stock. The stock of tobacco in the company was misused or extra utilized in the production. f.In the present case, the management of the company shall try to reduce the unfavorable variances in the quantity by doing the proper planning on the wastage of stock of tobacco. The stock of tobacco was either lost due to theft or it was miss-utilized by the labor. The company shall create strict quantity norms and the managers shall provide only the required quantity of tobacco to the labor so that the wastage shall be minimized. The management should also work towards the security of stock of tobacco so that the theft relating to the tobacco is not done by the employees.

Variance It is simply the difference between the actual amount and budgeted amount. Various has many types such as overhead variance, labor variance, material variance etc.Material Price Variance This price variance is the difference between budgeted cost and the actual cost which is being incurred for acquiring such materials multiplied by the number of units purchased by the entity. In the present case, the purchase price for silver tubing is $4 per inch, the purchase price for 1,200 inches silver tubing is given. The information regarding the quantity used in the production is also provided. Compute the material variance with the help of MS-Excel as follows: The result of the above calculation is as follows: Therefore the silver tubing variance comes out to be $280 and it is Unfavorable. $120F indicates that the company as able to purchase the tubing below the cost of standards which were set as per the industry norms and the company as saving a cost of $120 in that case.But on the other hand, $400F indicates that the company was purchasing the tubing at a cost above standards but reduced the quantity and hence was unable to maintain quality norms.

Variance: It is simply the difference between the actual amount and budgeted amount. Variance has many types such as overhead variance, labor variance, material variance etc.Standard Costing It is a method of costing in which a standard cost is defined for each head of cost. The reason behind this is to provide a base for evaluation of actual performance. If actual performance is less than the standards set then there is a need to identify the cause and if actual performance is better than standard costs can be revised based on them. a.In the present case, the information regarding the data related to the cost of the company on the basis of standard costing is provided. The details of adopted cost standards of the company is also given. There are no particular details regarding the quantity is provided which may relate to the installations. The total variance related to the material cannot be bifurcated into the price and quantity. It is computed by subtracting the standard cost per time of installation from the actual price paid.So compute the material variance with the help of MS-Excel as follows: The result of the above calculations is as follows: So the material variance for S is $159,500, for D is $11,125 and for H is $69,000. The variance in terms of the labor can be bifurcated into the quantity and the price variance. So first, compute the direct labor price variance as follows: The result of the above calculation is as follows: So the direct labor price variance for State, Dewey and Mt. Hope comes out to be $9,280, $4,228 and $15,180 respectively. Now, compute the direct labor quantity variance as follows: The result of the above calculation is as follows: So the direct labor quantity variance for State, Dewey and Mt. Hope comes out to be $34,220, $13,122 and $13,570 respectively. Prepare a table showing the summary of all the variances of the company as follows: b.In the present case, if on the basis of calculations performed for the computation of variances and any large difference arises then it shall be considered to be problematic. The information given in the problem regarding the warranty of the products will be termed for generating the opinion on variances. The report given by M creates differences between the variances and the system of standard costing that will be implemented in the company later on. The information of warranty clearly states that some managers of the company are awarded incentives in their payment for giving false report about the quality of the product. The data related to the company mentions some point of correlation between the work done by the managers and time utilized by the staff of the company. Therefore there is difference between the actual data that pertains to computation of variances in such a case. So if the managers were guided for just producing the results in the favor of company then the managers are eligible to get the desired incentives on their salary. The person M is benefitted with the information that the costing system adopted by the company for the incentives that were to be given to the managers for the lower cost of product is not accurately implemented. The system of standard costing should completely focus on eliminating the poor quality of the products and the incentives of the managers should be given on such basis that is to reduce the extra burden of costs from the products which are manufactured in the company.