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Standard Costs and Variances: Dresser Company

Dresser Company uses a standard cost system and sets predetermined overhead rates on the basis of direct labor-hours. The following data are taken from the company's budget for the current year:

Denominator activity (direct labor-hours).................................................9,000
Variable manufacturing overhead cost at 9,000 direct labor-hour........$34,200
Fixed manufacturing overhead cost......................................................$63,000
The standard cost card for the company's only product is given below;
Direct material, 4 pounds @ $2.60 per pound.....................................$10.40
Direct labor, 2 direct labor-hours @ $9.00 per hour............................$18.00
Overhead, 2 direct labor-hours @ $10.80 per hour............................$21.60
Total standard cost per unit...................................................................$50.00

During the year, the company produced 4,800 units of product and incurred the following costs:

Material purchased, 30,000 pounds @ $2.50 per pound......................$75,000
Materials used in production (in pounds)................................................20,000
Direct labor cost incurred, 10,000 direct labor-hours @ $8.60 per
direct labor-hour....................................................................................$86,000
Variable manufacturing overhead cost incurred....................................$35,900
Fixed manufacturing overhead cost incurred.........................................$64,800

Required:
1. Redo the standard cost card in a clearer, more usable format by detailing the variable and fixed overhead cost elements.
2. Prepare an analysis of the variance for material and labor for the year.
3. Prepare an analysis of the variance for the variable and fixed overhead for the year.
4. What effect, if any, does the choice of a denominator activity level have on standard unit costs? Is the volume variance a controllable variance from a spending point of view? Explain.

Your tutorial is 359 words and shows how a standard cost should be presented (two components for each item), how the variances should be computed with instructional notes, and a paragraph discussing the denominator activity level and how it impacts standard cost per unit.

Solution Preview

1. It is easier to show standards as a quantity and a price for each of the four portions:

Direct materials = 4 pounds �- $2.60 per pound $10.40
Direct labor = 2 DLHs �- $9.00 per DLH 18.00
Variable manufacturing overhead = 2 DLHs �- $3.80 per DLH (A) 7.60
Fixed manufacturing overhead = 2 DLHs �- $7.00 per DLH (B) 14.00
Standard cost per unit (all four components) $50.00

(A) $34,200 ÷ 9,000 DLHs = $3.80 per DLH
(B) $63,000 ÷ 9,000 DLHs = $7.00 per DLH

2. Materials variances:

Materials ...

Solution Summary

Instructional notes and the procedures are shown for you.

$2.19