Page 239 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes 40 minutes per unit would be used in reporting. Management also concluded that the
workers would not be informed of the cost standard used for reporting purposes. The
production vice-president conducted several sessions prior to implementation in the plant,
informing the workers of the new standard cost system and answering questions. The new
standards were not related to incentive pay but were introduced when wages were
increased to $7 per hour.
The standard cost system was implemented on January 1, 19 – . At the end of six months of
operation, these statistics on labour performance were presented to executive management:

January February March April May June
Production (units) 5,100 5,000 4,700 4,500 4,300 4,400
Direct labour hours 3,000 2,900 2,900 3,000 3,000 3,100
Quantity Variances:
Variance based on labour $3150 U* $2,800 U $3,850 U $5,250U $5,950 U $6,300 U
standard (one unit each 30
minutes)
Variance based on cost $2,800 F $3,033 F $1,633 F -0- $933U $1,167 U
standard (one unit each 40
minutes)

*U = Unfavourable; F = Favourable
Materials quality, labour mix, and plant facilities and conditions have not changed to any
great extent during the six month period.
Questions:
1. Discuss the impact of different types of standards on motivations, and specifically
the likely effect on motivation of adopting the labour standard recommended for
Harden Company by the engineering firm.
2. Evaluate Harden Company’s decision to employ dual standards in its standard cost
system.
Source: http://accounting4management.com/standard_costing_variance_analysis_case_study.htm

Self Assessment

Fill in the blanks:
12. The …………………… overhead variance is a total or aggregate variance and does not tell
us much about the causes of variance.
13. …………………… Variance indicates the deviation caused from the standard due to
difference in quantities used.

14. …………………… Rate Variance is the difference between the standard and the actual
direct labour rate per hour for the total hours worked.
15. …………………… variance is the difference between the standard cost of actual production
and the actual cost of materials used.

12.5 Summary

 Standard costing is a very important device of cost control, as it detects not only variation
in volume but also variation in costs. That is to say, the standard costing will highlight

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