Question

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 $26 per hour. Assume, too, that the budgeted labor-hour standard for October of the current year is 1.90 hours and that this standard is reduced each month by 1%. During December of the current year the company produced 9,000 units of XL-10, using 16,800 direct labor hours. The actual wage rate per hour in December was $30.00. Required: 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)? Complete this question by entering your answers in the tabs below.

Answer 1

Month Opening req. per unit Reducction Closing Req. per unit Standard Direct Labor Cost c=d*1% d =b-c e=d*$26 October 1.90000 $ 49.40 Novembe 1.90000 0.01900 1.88100 $ 48.91 December 1.88100 0.01881 1.86219 $ 48.42 January 1.86219 0.01862 1.84357 $ 47.93 Direct Labor Efficiency Variance =Standard Rate * (Standard Hours - Actual Hours) =$26 ([9000 units*1.84357 hour per unit) -16800 hours) =$26 (16592.13-16800) =$5405 (U)