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Hello Sir,
Would you kindly help me to sort it out ?
Q. A company uses standard costing. This year the standard labour cost of a product is $180.60 per unit. The standard labour rate is $86.00 per hour. Last month 2,200 hours were worked and there was an adverse labour efficiency variance of $8,600. This variance was caused entirely by new working practices introduced by the company. The full effect of the new working practices is to be incorporated into the new standard cost of the product for next year. In addition, a labour rate increase of 10% is to be built into the new standard cost.
What is the standard cost per unit of the product for next year?
$198.66
$208.12
$189.20
$207.26
This year they must expect to work 180.60/86 = 2.1 hours per unit.
There was an adverse efficiency variance and so they must have worked 8600/86.00 = 100 hours more than they expected to.
So they should have worked only 2,200 – 100 = 2,100 hours, which means they were budgeting on producing 2,100 / 2.1 = 1,000 units.
Since they actually worked 2,200 hours, they must have taken 2,200 / 1,000 = 2.2 hours per unit, and this will be the new standard time per unit.
The new standard rate of pay is 86.00 + 10% = $94.60 per hour
Therefore the new standard cost per unit = 2.2 hours x $94.60 per hour = $208.12
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