Standard Costing

Module Problem

Nature's Xmas, Inc. produces Christmas decorations from items such as sand from the beaches of Lake Erie, snowberries, maple leaves, etc.One of its most popular items is a large glass box filled with colorful items that are symbolic of various Christmas-related themes.The firm uses a standard costing system.

Standards for the glass box item were determined based on the following information:

Glass boxes are purchased in crates of 100.Each crate costs $500 plus 8% for insurance.Nature's pay shipping costs which amount to $50 per crate.Once the glass boxes arrive at the production facility, a hole must be drilled to allow filling.Two in 10 boxes break during this process.The broken boxes have no use and must be discarded (the firm dumps them into Lake Erie so there are no recycling charges).Quality control failures amount to 3%

The elves that do the labor on the boxes are paid an average wage of $15 per hour.It takes 20 minutes to drill the hole in each box and another 10 minutes to fill the box.(The cost of the materials used in filling the boxes is insignificantmost are acquired for literally nothing.)Elves are expected to be productive 90% of the time.Benefits for the elves amount to 25% of their total pay.

During October, the firm purchased 7,500 glass boxes at a total cost of $52,400.5,840 units of product were produced.A total of 3,545 direct labor hours were required and 6,350 glass boxes were used.Total payroll for this product was $70,342. Each box required 0.5 machine hours to complete.

Overhead is applied on the basis of machine hours.The variable overhead rate is $5.10 per machine hour and the fixed overhead rate is $12 per machine hour.These rates are based on long term averages and practical capacity of 50,000 machine hours per month.

It might help to know that elves are very careless and accidents occur during production on a regular basis.Also, the more highly paid an elf is, the more careless and the messier she is.

For October, it was expected that 50,000 machine hours would be worked.Thus the overhead budget was as follows:

Variable items:

Electricity$100,000

Medical supplies62,500

Maintenance92,500

Fixed items:

Rent$234,000

Insurance105,700

Production supervision260,300

For the entire firm, 53,000 machine hours were worked. The firm employed 350 FTE workers.It was necessary to hire some part time people.Total payroll amounted to $925,400.

Actual overhead costs were:

Variable items:

Electricity$105,700

Medical supplies85,400

Maintenance78,200

Fixed items:

Rent$234,000

Insurance124,000

Production supervision249,600

1. For the glass boxes, compute the DM price and quantity standards. Note that standard should be rounded to the nearest 2 decimal places.

1. For the glass boxes, compute the DL rate and quantity standards. Note that standards should be rounded to the nearest 2 decimal places.

1. For the glass boxes, compute both direct materials variances and both direct labor variances.

1. Prepare a standard cost card for the glass boxes.

1. Prepare a flexible budget analysis for overhead.