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Hi Mr. Maffot.
Can you please explain this whole question to me while also explaining why we should add $86 and 10% to get $94.60. Thank you!
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 2200 hours were worked and there was an adverse labour efficiency variance of $8600. The 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?
The question asks for the standard cost for next year. It also says that a labour rate increase of 10% is to be built in (i.e. included) into the new standard cost.
Given that this year the standard labour rate is $86, then next year we will increase it by 10% so as to get the standard rate for next year.
The current standard labour cost per unit is 2.1 hours at $86 per hour.
The actually worked 2,200 hours, but there was an adverse efficiency variance of $8,600.
Therefore they should have only worked 2,200 – (8,600/86) = 2,100 hours.
So they actually produced 2,100 /2.1 = 1,000 units.They actually took 2,200 / 1,000 = 2.2 hours per unit.
The question says that this is to be incorporated into the standard cost for next year.
Therefore the standard labour cost per unit for next year is 2.2 hours at $94.60 per hour.
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