Question One

STANDARD COSTING, PLANNED VARIANCES

Bytown Container Company manufactures a plastic container. The following standards have been established for the container's materials and labour inputs:

Standard Standard Price Standard

Quantity (rate in $) Cost ($)

Direct materials 0.5 kg 1 0.50

Direct labour 0.1 hr. 10 1.00

During the first week of July, the company had the following results:

Units produced 40,000

Actual labour costs $42,000

Actual labour hours 4,100

Materials purchased and used 19,500 kg @ $1.05 per kg

Other information: The purchasing agent located a new source of slightly higher quality plastic, and this material was used during the first week in July. Also, a new manufacturing layout was implemented on a trial basis. The new layout required a slightly higher level of skilled labour. The higher quality material has no effect on labour utilization. Similarly, the new manufacturing approach has no effect on material usage.

Required:

1. Compute the materials price and usage variances. Assuming that the material variances are essentially attributable to the higher quality of materials; would you recommend that the purchasing agent continue to buy this quality, or should the usual quality be purchased? Assume that the quality of the end product is not affected significantly.

2. Compute the labour rate and efficiency variances. Assuming that the labour variances are attributable to the new manufacturing layout, should it be continued or discontinued? Explain.

3. Refer to Requirement 2. Suppose that the industrial engineer argued that the new layout should not be evaluated after only one week. His reasoning was that it would take at least a week for the workers to become efficient with the new approach. Suppose that the production is the same the second week and that the actual labour hours were 3,900 and the labour cost was $39,000. Should the new layout adopted? Assume the variances are attributable to the new layout. If so, what be the projected annual savings?

Question Two

STANDARD COSTING

Crystal Company produces glass jars. The unit for costing purposes is a case of 18 jars. The following standards for producing one case of jars have been established:

Direct materials (5 kg @ $0.80) $ 4

Direct labour (1.5 hours @ $16.00) 24

Standard prime cost $28

During December, 52,000 kilograms of material were purchased and used in production. There were 10,000 cases produced, with the following actual prime costs:

Direct materials $40,000

Direct labour 236,910 (for 14,900 hrs.)

Required:

1. Compute the materials variances.

2. Compute the labour variances.

3. What are the advantages and disadvantages that can result from the use of a standard costing system?