Question 13.3: White Heaven Ltd manufactures a bathroom basin, the Shell an...
White Heaven Ltd manufactures a bathroom basin, the Shell and uses standard costing based on a monthly output of 50,000 units. White Heaven uses two grades of direct labour and two items of raw material.
Variable overheads include:
■ indirect labour costs of material handlers and stores persons
■ maintenance labour costs
■ general production overheads.
Fixed overheads include:
■ supervisory salaries
■ other overheads such as
– factory rent
– electricity standing charges
– gas standing charges.
The ideal standard cost of a Shell is as follows:
| Direct labour | 1 hour at £7.20 per hour | grade A |
| 0.75 hours at £6.00 per hour | grade B | |
| Direct materials | 5 kg at £2 per kg | clay |
| 3 kg at £4 per kg | glaze | |
| Indirect labour | 0.25 hours at £5.00 per hour | |
| Maintenance | 0.05 hours at £10.00 per hour | |
| Variable overheads | 15% of direct materials cost, plus 10% of direct labour cost | |
| Supervisory salaries | £95,000 per month | |
| Other fixed overheads | £109,000 per month |
In June 2010 adjustments were agreed as the basis for the following month’s attainable standard costs:
■ Grade A labour rates increased by 40p, grade B by 30p and indirect and maintenance labour by 20p per hour.
■ Grade B labour hours increased by 0.05 hours because of process delays due to a tool change problem.
■ Turnover of operators has meant recruiting some inexperienced, untrained operators:
10% of grade A operators with 50% efficiency
25% of grade B operators with 60% efficiency
■ The clay is to be upgraded in quality with the supplier imposing a 10% surcharge.
■ The glaze will be purchased in larger batches with a 12.5% discount but resulting in an increase in variable overheads to 20% of materials cost for this type of material.
For the July output of 49,000 Shells you are required to calculate:
(i) the ideal standard cost for one Shell
(ii) the attainable standard cost for a Shell for July 2010
(iii) the total variance between the ideal and attainable standards
(i) Ideal standard cost per Shell
| £ | £ | ||
| Direct materials | |||
| Clay | 5 kg × £2.00 | 10.00 | |
| Glaze | 3 kg × £4.00 | \underline{12.00} | |
| 22.00 | |||
| Direct labour | |||
| Grade A | 1 hour × £7.20 | 7.20 | |
| Grade B | 0.75 hours × £6.00 | \underline{4.50} | |
| 11.70 | |||
| Indirect labour | 0.25 hours × £5.00 | 1.25 | |
| Maintenance | 0.05 hours × £10.00 | 0.50 | |
| Variable overhead | |||
| Direct materials | 15% × £22.00 | 3.30 | |
| Direct labour | 10% × £11.70 | \underline{1.17} | |
| \underline{6.22} | |||
| Total variable costs | 39.92 | ||
| Fixed overhead cost | |||
| Supervisors’ salaries | £95,000/50,000 | 1.90 | |
| Other | £109,000/50,000 | \underline{2.18} | |
| \underline{4.08} | |||
| Ideal standard cost per Shell | \underline{44.00} |
(ii)
Grade A direct labour
Originally 1 operator working for 1 hour made 1 Shell
Or, 10 operators each working for 1 hour made 10 Shells
Now 1 operator working for 1 hour makes 0.5 Shells
And 9 operators each working for 1 hour make 9 Shells
So 10 operators each working for 1 hour make 9.5 Shells
So 1 Shell takes \frac{10}{9.5} hours = 1.053 hours
The rate is now £7.20 + £0.40 or £7.60 per hour
Therefore 1 Shell costs 1.053 hours × £7.60 = £8.00 direct labour
Grade B direct labour
Originally 1 operator working for 0.75 hours made 1 Shell
Or, 10 operators each working for 0.75 hours made 10 Shells
Now 1 operator working for 0.80 hours would ideally make 1 Shell
Or, 10 operators each working for 0.80 hours would ideally make 10 Shells
But 2.5 operators working for 0.80 hours only make 0.6 Shells each or 1.5 Shells
And 7.5 operators each working for 0.80 hours make 1 Shell each or 7.5 Shells
So 10 operators each working for 0.80 hours make 9 Shells
So 1 Shell takes \frac{8}{9} hours = 0.889 hours
The rate is now £6.00 + £0.30 or £6.30 per hour
Therefore 1 Shell costs 0.889 hours × £6.30 = £5.60 direct labour
| Attainable standard cost per Shell | |||
| £ | £ | ||
| Direct materials | |||
| Clay | £10.00 + 10% | 11.00 | |
| Glaze | £12.00 − 12.5% | \underline{10.50} | |
| 21.50 | |||
| Direct labour | |||
| Grade A | see workings | 8.00 | |
| Grade B | see workings | \underline{5.60} | |
| 13.60 | |||
| Indirect labour | 0.25 hours × £5.20 | 1.30 | |
| Maintenance | 0.05 hours × £10.20 | 0.51 | |
| Variable overhead | |||
| Direct material | |||
| Clay | 15% × £11.00 | 1.65 | |
| Glaze | 20% × £10.50 | 2.10 | |
| Direct labour | 10% × £13.60 | \underline{1.36} | |
| \underline{6.92} | |||
| Total variable costs | 42.02 | ||
| Fixed overhead cost | |||
| Supervisors’ salaries | £95,000/50,000 | 1.90 | |
| Other | £109,000/50,000 | \underline{2.18} | |
| \underline{4.08} | |||
| Attainable standard cost per Shell | \underline{46.10} |
(iii)
Ideal standard cost per Shell = £44.00 × 49,000 units = £2,156,000
Attainable standard cost per Shell = £46.10 × 49,000 units = £2,258,900
Variance = £2.10 × 49,000 units = £102,900