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 $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.

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)?

Answer 1

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