Problem 2 - Accounting

Question

Hickory Furniture Company manufactures unfinished oak furniture. Hickory use: standard cost system. The direct labor, direct materials, and factory overhead standar for an unfinished dining room table are as follows: \(\begin{array}{lll}\text { Direct labor: } & \text { standard rate } & \$ 18.00 \text { per hr. } \\ \text { standard time per unit } & 2.5 \mathrm{hrs} . \\ \text { Direct materials (oak): } & \text { standard price } & \$ 9.50 \text { per bd. ft. } \\ \text { Variable factory overhead: } & \text { standard quantity } & 18 \text { bd. ft. } \\ \text { Fixed factory overhead: } & \text { standard rate } & \$ 280 \text { per direct labor hr. } \\\ & \$ 1.20 \text { per direct labor hr. }\end{array}\) Determine the standard cost per dining room table.

Step-by-Step Solution

Answer

The standard cost per dining room table is $919.00.

Step 1: Compute Direct Labor Cost

First, we need to calculate the direct labor cost per dining room table. Given the standard rate is $18.00 per hour and the standard time is 2.5 hours per table, the direct labor cost is calculated as follows:\[\text{Direct Labor Cost} = 18.00 \, \text{USD/hr} \times 2.5 \, \text{hrs} = 45.00 \, \text{USD}\]

Step 2: Compute Direct Materials Cost

Next, calculate the direct materials cost. The standard price is $9.50 per board foot, and the standard quantity is 18 board feet. Thus, the cost for materials is:\[\text{Materials Cost} = 9.50 \, \text{USD/bd.ft} \times 18 \, \text{bd.ft} = 171.00 \, \text{USD}\]

Step 3: Compute Variable Factory Overhead

The variable factory overhead is described as $1.20 per direct labor hour. With a direct labor of 2.5 hours per table, the variable overhead cost is:\[\text{Variable Factory Overhead} = 1.20 \, \text{USD/hr} \times 2.5 \, \text{hrs} = 3.00 \, \text{USD}\]

Step 4: Compute Fixed Factory Overhead

The fixed factory overhead is based on the standard rate of $280 per direct labor hour. With 2.5 hours per table, the calculation is:\[\text{Fixed Factory Overhead} = 280 \, \text{USD/hr} \times 2.5 \, \text{hrs} = 700.00 \, \text{USD}\]

Step 5: Sum All Standard Costs

Now, add up all the standard costs calculated in the previous steps to find the total standard cost per dining room table:\[\text{Total Standard Cost} = 45.00 \, \text{USD} \text{ (Labor)} + 171.00 \, \text{USD} \text{ (Materials)} + 3.00 \, \text{USD} \text{ (Variable Overhead)} + 700.00 \, \text{USD} \text{ (Fixed Overhead)} = 919.00 \, \text{USD}\]

Key Concepts

Direct Labor Cost

Understanding direct labor cost is crucial when calculating manufacturing expenses in a standard cost system. Direct labor cost refers to the expense associated with the labor directly involved in the production of a product. This cost is determined by multiplying the standard labor rate per hour by the number of hours required to produce one unit.

In our example with Hickory Furniture Company, the standard rate for direct labor is $18.00 per hour. Each dining room table requires 2.5 hours of direct labor to complete.

To compute the direct labor cost per table, the following formula is used:

• Direct Labor Cost = Standard Rate × Standard Time
• Direct Labor Cost = $18.00/hr × 2.5 hrs
• Direct Labor Cost = $45.00

Calculating direct labor costs helps in budgeting and controlling production expenses by setting benchmarks for evaluating labor efficiency.

Direct Materials Cost

In a standard cost system, the direct materials cost represents the cost of raw materials used in the production of a product. This cost is calculated by multiplying the standard price per unit of materials by the quantity required for one product unit.

For Hickory Furniture Company, constructing an unfinished dining room table involves oak wood at a standard price of $9.50 per board foot. The standard quantity needed is 18 board feet.

To determine the direct materials cost per table, this formula is applied:

• Direct Materials Cost = Standard Price × Standard Quantity
• Direct Materials Cost = $9.50/bd.ft × 18 bd.ft
• Direct Materials Cost = $171.00

Precise calculation of direct materials costs aids in ensuring cost efficiency in material usage and maintains control over material expense impact on total product costs.

Factory Overhead

Factory overhead refers to the indirect costs associated with manufacturing that aren't directly tied to labor or materials for any single product. It includes both variable and fixed overhead costs.

Variable factory overhead fluctuates with changes in production levels. At Hickory Furniture Company, the standard rate is given as $1.20 per direct labor hour. Since each table requires 2.5 hours of labor, the variable overhead cost per table is calculated as:

• Variable Factory Overhead = $1.20/hr × 2.5 hrs = $3.00

Fixed factory overhead remains constant regardless of production levels and often includes costs like rent and salaries. Here, the standard fixed rate is $280 per direct labor hour, and the fixed overhead cost is:

• Fixed Factory Overhead = $280/hr × 2.5 hrs = $700.00

Adding these gives the total factory overhead per table:

• Total Factory Overhead = Variable + Fixed = $3.00 + $700.00 = $703.00

Understanding these concepts helps businesses manage and optimize overhead costs to improve profit margins.