Chapter Eleven Assignment Part One - 10 Points Standard Gear

Chapter Eleven Assignmentpart One 10 Pointsstandard Gears Produces L

Standard Gears produces lawn mower gears and uses units as the cost driver for overhead. Given the provided data regarding its standard cost system, determine the standard cost of each lawn mower gear. Additionally, calculate the direct material quantity and price variances based on the actual and budgeted information.

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Standard costs play a vital role in managerial accounting by enabling organizations to budget, control, and evaluate operational efficiency. In the context of Standard Gears, a manufacturer of lawn mower gears, the analysis involves understanding the components of standard costs, calculating the per-unit cost, and analyzing variances to assess performance.

Part One: Calculation of the Standard Cost per Lawn Mower Gear

The standard cost for each gear encompasses direct materials, direct labor, and overhead. The key to calculating the standard unit cost is to understand the standards set for materials, labor, and overhead based on budgeted data and then apply these standards to the actual or expected production volume.

1. Standard Material Cost per Unit

Given that standard materials are 0.40 pounds per unit at $7.10 per pound, the standard material cost per gear is calculated as:

Standard Material Cost = 0.40 lbs. × $7.10 / lb. = $2.84

2. Standard Labor Cost per Unit

The standard labor input is 36 minutes per unit, which is 0.6 hours (since 36 minutes / 60 minutes per hour), at a rate of $11.00 per hour. Therefore, the standard labor cost per gear is:

Standard Labor Cost = 0.6 hrs. × $11.00/hr. = $6.60

3. Standard Overhead Cost per Unit

Overhead is allocated based on units as the cost driver. The budgeted total overhead (fixed + variable) is used to determine the standard overhead rate per unit.

Budgeted overhead:

  • Variable overhead: $35,625
  • Fixed overhead: $85,500

Total budgeted overhead: $35,625 + $85,500 = $121,125

Budgeted units: 12,500 units

The standard overhead rate per unit is:

Overhead rate per unit = $121,125 / 12,500 units = $9.69

4. Total Standard Cost per Unit

Adding all components:

Standard Cost per Gear = Material ($2.84) + Labor ($6.60) + Overhead ($9.69) = $19.13

Therefore, the standard cost of each lawn mower gear is approximately $19.13.

Part Two: Material Price and Quantity Variances

Understanding variances helps determine where the company is performing well or facing issues. The two main material variances are:

  • Material Price Variance (MPV): The difference between the actual price paid and the standard price, multiplied by the actual quantity purchased.
  • Material Quantity Variance (MQV): The difference between the actual material used and the standard amount allowed, multiplied by the standard price.

Calculations:

1. Material Price Variance (MPV):

- Actual cost of materials purchased: $32,550

- Actual pounds purchased: 4,650 lbs.

- Actual price per lb.: $32,550 / 4,650 lbs. ≈ $7.00 per lb.

- Standard price per lb.: $7.10

  1. MPV = (Actual Price – Standard Price) × Actual Quantity
  2. MPV = ($7.00 – $7.10) × 4,650 lbs. = (-$0.10) × 4,650 = -$465

The negative sign indicates a favorable variance.

2. Material Quantity Variance (MQV):

- Standard quantity allowed for actual output: 12,400 units × 0.40 lb. = 4,960 lbs.

- Actual material used: 4,700 lbs.

- Standard price per lb.: $7.10

  1. MQV = (Actual Quantity Used – Standard Quantity Allowed) × Standard Price
  2. MQV = (4,700 lbs. – 4,960 lbs.) × $7.10 = (-260 lbs.) × $7.10 = -$1,846

The negative sign indicates a favorable variance.

Summary of Material Variances:

- Material Price Variance ≈ $465 Favorable

- Material Quantity Variance ≈ $1,846 Favorable

These variances suggest that Standard Gears paid less per pound than planned and used less material than the standard amount for actual output, both contributing positively to cost efficiency.

Conclusion:

Standard Gears' standard cost per gear is approximately $19.13, with favorable material price and quantity variances indicating efficient purchasing and usage of materials. These variances and cost calculations assist management in assessing performance and implementing strategic improvements in production processes.

References:

  1. Drury, C. (2013). Management and Cost Accounting. Cengage Learning.
  2. Hilton, R. W., & Platt, D. E. (2013). Managerial Accounting: Creating Value in a Dynamic Business Environment. McGraw-Hill Education.
  3. Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
  4. Horngren, C. T., Datar, S. M., & Rajan, M. (2015). Cost Accounting: A Managerial Emphasis. Pearson.
  5. Kaplan, R. S., & Atkinson, A. A. (2015). Advanced Management Accounting. Pearson.
  6. Twesser, M., & Kopp, B. (2017). Practical Cost Management. Routledge.
  7. Anthony, R. N., & Govindarajan, V. (2014). Management Control Systems. McGraw-Hill Education.
  8. Barfield, J. T. (2017). Cost Accounting: Foundations and Evolutions. Wiley.
  9. Embler, G. A. (2018). Principles of Cost Accounting. Cengage Learning.
  10. Garrison, R., & Noreen, E. (2018). Cost Accounting: A Managerial Emphasis. McGraw-Hill Education.

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