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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?
I’m having trouble understanding what the question means. It’s a little confusing.
The standard labour rate is $86 per hour and therefore the standard time this year is 180.60/86 = 2.1 hours per unit.
Because the labour efficiency variance was $8,600 adverse, they must have worked 8,600/86 = 100 hours more than expected. So they should have worked 2,100 hours and so they must have produced 1,000 units.
Given they actually took 2,200 hours to make 1,000 units, the new standard time per unit will be 2.2 hours.
The labour rate increases by 10% and so is 86 + (10% x 86) = 94.60 per hour.So the new standard cost is 2.2 hours x 96.40 per hour.
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