Question

Bargain, Inc. produced 1,000 units of the company's product in 2024. The standard quantity of direct materials was three yards of cloth per unit at a standard cost of $1.25 per yard. The accounting records showed that 2,800 yards of cloth were used and the company paid $1.30 per yard. Standard time was two direct labor hours per unit at a standard rate of $17.00 per direct labor hour. Employees worked 1,300 hours and were paid $16.00 per hour. Read the requirements Requirement 1. What are the benefits of setting cost standards? Standard costing helps managers dop i Requirements 1. What are the benefits of setting cost standards? 2. Calculate the direct materials cost variance and the direct materials efficiency variance as well as the direct labor cost and efficiency variances. Print Done Choose from any drop-down list and then click Check Answer. parts remaining Clear All Check Answer

Answer 1

Answer-

1. Advantages of Standard Costing

Though most companies do not use standard costing in its original application of calculating the cost of ending inventory, it is still useful for a number of other applications. In most cases, users are probably not even aware that they are using standard costing, only that they are using an approximation of actual costs. Here are some potential uses:

• Budgeting. A budget is always composed of standard costs, since it would be impossible to include in it the exact actual cost of an item on the day the budget is finalized. Also, since a key application of the budget is to compare it to actual results in subsequent periods, the standards used within it continue to appear in financial reports through the budget period.
• Inventory costing. It is extremely easy to print a report showing the period-end inventory balances (if you are using a perpetual inventory system), multiply it by the standard cost of each item, and instantly generate an ending inventory valuation. The result does not exactly match the actual cost of inventory, but it is close. However, it may be necessary to update standard costs frequently, if actual costs are continually changing. It is easiest to update costs for the highest-dollar components of inventory on a frequent basis, and leave lower-value items for occasional cost reviews.
• Overhead application. If it takes too long to aggregate actual costs into cost pools for allocation to inventory, then you may use a standard overhead application rate instead, and adjust this rate every few months to keep it close to actual costs.
• Price formulation. If a company deals with custom products, then it uses standard costs to compile the projected cost of a customer’s requirements, after which it adds on a margin. This may be quite a complex system, where the sales department uses a database of component costs that change depending upon the unit quantity that the customer wants to order. This system may also account for changes in the company’s production costs at different volume levels, since this may call for the use of longer production runs that are less expensive.

2.

Material Cost Variance = (actual price - Standard price) X Actual Quantity Used
		= (1.30-1.25)X 2800 = $ 140 U
Material Efficiency Variance = (Actual Qty-Standard Qty) X Standard Price
		= ( 2800- (1000 X3))X1.25 = $ 250 F
Direct Labour Cost variance = (actual rate- Standard Rate)X Actual hrs Used
		= (16.00-17.00)X 1300 = $ 1300 F
Direct Labour Efficiency variance = (actual hrs- Standard hrs)X Standard Rate
		=(1300- (1000X2)) X 17.00 = $11,900