Larsen, Inc., produces two types of electronic parts and has provided the following data: Part X12 Part YK7 Total Units produced 100,000 600,000 — Direct labor hours 30,000 70,000 100,000 Machine hours 50,000 300,000 350,000 Number of setups 40 80 120 Testing hours 1,000 9,000 10,000 Number of purchase orders 500 3,500 4,000 There are four activities: machining, setting up, testing, and purchasing. Required: Calculate the activity consumption ratios for each product. Calculate the consumption ratios for the plantwide rate (direct labor hours). When compared with the activity ratios, what can you say about the relative accuracy of a plant wide rate? Which product is under costed? What if the machine hours were used for the plantwide rate? Would this remove the cost distortion of a plant wide rate?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Larsen, Inc., produces two types of electronic parts and has provided the following data:
|
|
|
Part X12 |
|
Part YK7 |
|
Total |
|
Units produced |
|
100,000 |
|
600,000 |
|
— |
|
Direct labor hours |
|
30,000 |
|
70,000 |
|
100,000 |
|
Machine hours |
|
50,000 |
|
300,000 |
|
350,000 |
|
Number of setups |
|
40 |
|
80 |
|
120 |
|
Testing hours |
|
1,000 |
|
9,000 |
|
10,000 |
|
Number of purchase orders |
|
500 |
|
3,500 |
|
4,000 |
There are four activities: machining, setting up, testing, and purchasing.
Required:
- Calculate the activity consumption ratios for each product.
- Calculate the consumption ratios for the plantwide rate (direct labor hours). When compared with the activity ratios, what can you say about the relative accuracy of a plant wide rate? Which product is under costed?
- What if the machine hours were used for the plantwide rate? Would this remove the cost distortion of a plant wide rate?
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