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After I revised the chapter and listened to the lectures on standard costing, I got stumped on what I think is an easy question, but just cannot figure out the book’s answer. (Kaplan Chap 15. Test your understanding 12)
Question
Brake Ltd. manufactured and distributes brake discs to the automotive sector. The company operates an integrated standard cost system in which.– Purchases of materials are recorded at standard cost
– Direct Material costs and direct labour costs are variable
– Production overheads are fixed and absorbed using direct labour hours.Actual and budgeted data for May are shown below
– Budgeted direct materials per unit 0 2kg at $5/kg
– Direct Labour – 0.5/unit
– Budgeted production for the month was 10,000 units
– 22,500 kgs of materials were purchased
– The total standard cost of the materials was $115,000
…etc (didn’t include all the info cause I don’t think it’s pertinent)
(It gives you materials price variance of 11,250A and labour efficiency var at 1,750AFirst question and only question I had a problem is: Calculate the actual number of brake discs manufactured.
My logic was to say, ok, we purchased 22,500kg of material, 2kg per unit therefore 11,250 units. The answer is 11,500 units. What on earth am I missing?
The problem is that they may have used more or less than the standard 2kg per unit (and therefore had a material usage variance), and also because of inventories they may have purchased more or less than they actually used.
Since the standard cost of materials used was $115,000, and the standard cost of materials per unit is 2kg x $5 = $10, they must have produced 115,000/10 = 11,500.
But isn’t standard costing what something should have cost to produce, and not the actual cost? Which is why we have variances? So to find the actual produced wouldn’t you chose what was actually purchased? I understand what you said that they could have used more or less than the standard, I guess my intuition was incorrect and wondered why. I always associate standard anything with budget not actual. I disregarded inventory because I assumed there was none, since they didn’t mention it. Is that a bad assumption moving forward?
Thank you!
Rachel
The standard cost is the budgeted cost per unit.
It is not relevant whether or not there is inventory. Just because they actually purchased 22,500 kgs does not mean that they were using 2kg per unit. They were budgeting on using 2 kg a unit, but they may have bought more or they may have bought less – that is why we have variances.
If the standard cost of materials is $115,000 it means that that is how much the purchases should have cost (the actual cost may have been higher or lower). Since the standard cost per unit is $10, then they must have produced 11,500 units.
I do suggest that you watch again the free lectures on variance analysis.
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