Problem:
Production volume has grown steadily for the past several years, as the following schedule of production labor indicates:
|
This Year
|
32,000 Hours
|
|
1 Year Ago
|
30,000 Hours
|
|
2 Years Ago
|
27,000 Hours
|
|
3 Years Ago
|
28,000 Hours
|
|
4 Years Ago
|
26,000 Hours
|
The company has developed standard costs for its several products. It sets standard costs for each year in the preceding October.
The standard cost of a sprinkler this year was $4.00, computed as follows:
|
Direct materials
|
|
|
|
Aluminum
|
0.2 pound x $0.40 per pound
|
$0.08
|
|
Plastic
|
1.0 pound x $0.38 pound
|
$0.38
|
|
Production Labor
|
0.3 hour x $9.00 per hour
|
$2.70
|
|
Overhead*
|
|
|
|
Variable
|
0.3 hour x $1.60 per hour
|
0.48
|
|
Fixed
|
0.3 hour x $1.20 per hour
|
0.36
|
|
TOTAL
|
|
$4.00
|
*Calculated using 30,000 production labor-hours as normal capacity
During February of this year, 8,500 good sprinklers were manufactured. The following costs were incurred and charged to production.
|
Materials requisitioned for production
|
|
|
|
Aluminum
|
1,900 pounds x $0.40 per pound
|
$760
|
|
Plastic: Regular
|
6,000 pounds x $0.38 pound
|
2,280
|
|
Low Grade
|
3,500 pounds x $0.38 per pound
|
1,330
|
|
Production Labor
|
|
|
|
Straight Time
|
2,300 hours x $10.00 per hour
|
23,000
|
|
Overtime
|
400 hours x $15.00 per hour
|
6,000
|
|
Overhead
|
|
|
|
Variable
|
$5,200
|
|
|
Fixed
|
3,100
|
8,300
|
|
Costs charged to production
|
|
$41,670
|
Materials price variations are not charged to production but to materials price variation account at the time the invoice is entered. All materials are carried in inventory at standard prices. Materials purchases for February follow:
|
Aluminum
|
1,800 pounds x $0.48 per pound
|
$864
|
|
Plastic:
|
|
|
|
Plastic: Regular
|
3,000 pounds x $0.50 pound
|
1,500
|
|
Low Grade
|
6,000 pounds x $0.29 per pound
|
1,740
|
Plastic shortages forced the company to purchase lower-grade plastic than called for in the standards, which increased the number of sprinklers rejected on inspection.