Exam 12: Standard Costs: Direct Labor and Materials

Correct Answer:

Verified

a. (i) Responsible parties for setting standards
Materials
The development of standard prices for material is primarily the responsibility of the materials manager because this person has the specialized knowledge.
Operating department managers and engineering should both be involved in setting standards for material quantities.
Labor
The personnel manager or payroll manager would be involved in setting standard labor rates.
Operating department managers with input from production supervisors and engineering would be involved in setting standards for labor usage.
Manufacturing Overhead
Operating department managers, service department managers, and cost accounting would all be involved in setting the standards for manufacturing overhead.
General
Cost accounting should review the standards for material and labor and Ralph Davis should review and approve all of the standards. Thus, the manager with the specialized knowledge about the standard initiates the standard. But, cost accounting and Davis have the decision control rights over all the standards.
(ii) The factors that should be considered in establishing materials standards include the following.
• Price studies including expected general economic conditions, industry prospects, demand for the materials, and market conditions.
• Product specifications from descriptions, drawings, and blueprints.
• Past records on raw material cost, usage, waste, and scrap.
The factors that should be considered in establishing labor standards include the following.
• Employee skills, experience, and training, and the mix of employees for each job.
• Time and motion studies to determine the efficiency of labor and machinery.
• Past performance and payroll records including historical wage rates.
The factors that should be considered in establishing manufacturing overhead standards include the following:
• Estimated expenditures for all indirect factory expense items such as indirect materials, indirect labor, property taxes, insurance, depreciation, supplies, utilities, and repairs.
• Cost behavior of each overhead item (fixed and variable).
• Basis for charging costs to production.
b. The basis for assignment of responsibility under a standard cost system is controllability. In general, judgments about whether departments or department managers are performing efficiently should not be affected by items over which they have no control.
The responsibility for a variance should be assigned to the department or individual that has the greatest responsibility for deciding whether a specific cost should be incurred. Some variances, however, are interdependent and responsibility must be shared.

Correct Answer:

Verified

The direct labor variance for each type of auditor is: $$\begin{array} { | c | r | r | r | r | } \hline \begin{array} { r } \text { Type of } \\\text { Auditor }\end{array} & \begin{array} { r } \text { Actual } \\\text { Costs }\end{array} & \begin{array} { r } \text { Standard } \\\text { Costs }\end{array} & \begin{array} { r } \text { Direct } \\\text { Labor } \\\text { Variance }\end{array} & \\\hline \text { Manager } & \$ 468 & \$ 500 & \langle \$ 32 \} & \\\hline \text { Senior } & 836 & 800 & 36 & \\\hline \text { Staff } & 1,320 & 1,200 & 120 & \\\hline \text { Total } & \$ 2,624 & \$ 2,500 & \$ 124 & \text { Unfavorable } \\\hline\end{array}$$ The wage rate variance for each type of auditor is: $\begin{array}{|r|l|r|}\hline\text { Manager } & \begin{array}{l}(\$ 52 / \text { hour }-\$ 50 / \text { hour })(9 \\\text { hours) }\end{array} & \$ 18 \\\hline \text { Senior } & \begin{array}{l}(\$ 38 / \text { hour - } \$ 40 / \text { hour) (22 } \\\text { hours) }\end{array} & (44) \\\hline \text { Staff } & \begin{array}{l}(\$ 30 / \text { hour }-\$ 30 / \text { hour })(44 \\\text { hours })\end{array} & 0\\\hline\end{array}$

$\text { Total wage rate variance } \quad\quad (\$ 26) \quad \text { Favorable }$
The labor efficiency variance for each type of auditor is: $\begin{array}{|r|l|r|}\hline\text { Manager } & \begin{array}{l}(9 \text { hours }-10 \text { hours }) \\(\$ 50 / \text { hour })\end{array} & (\$ 50) \\\hline \text { Senior } & \begin{array}{l}(22 \text { hours }-20 \text { hours }) \\(\$ 40 / \text { hour })\end{array} & 80 \\\hline \text { Staff } & \begin{array}{l}(44 \text { hours }-40 \text { hours }) \\(\$ 30 / \text { hour })\end{array} & 120 \\\hline\end{array}$

$\text { Total labor efficiency variance } \quad \$ 150 \quad\quad \text { Unfavorable }$
Note that the direct labor variance is equal to the sum of the wage rate and labor efficiency variances. The favorable wage rate variance means that on average the auditors were paid less than expected although managers were paid more than expected. The unfavorable labor efficiency variance means that on average the auditors took longer to complete the audit than expected. Managers, however, spent less time on the audit than expected.