Level 4 - Standard Costing Direct Costs

ggp25

Hi, is anyone able to help with the direct material efficiency part of the question?

Many thanks in advance

shamilkaria

Hi @ggp25

I hope you are well?

To work out Budget / Standard cost of labour for actual production:

307 hours x £12.50 = £3,837.50 (Favourable as it's less than actual by £107.50 - £3,945)

Direct Labour Rate:

Standard / Budgeted Rate = £12.50 per hour

Actual Rate = £3,945 / 307 Hours = £12.85 - Rounded to 2 decimal places

The Actual Rate is Adverse by 35p per hour

Direct Labour Efficiency:

Actual Cost of Labour for 5,000 units based on 307 hours is - £3,945

Budgeted / Standard Cost - 6 hours to make 100 units. So to make 5,000 units it will be (5,000 units / 100 units x 6 Hours) = 300 Hours. Then 300 hours x £12.50 per hour = £3,750

This gives you a Adverse of £195 (£3,945 - £3,750)

Actual Cost of Labour for Actual Production:

£3,945 - Mentioned in question (Adverse as it's more than £107.50 - £3,837.50)

Hopefully this is all right, sorry I have answered this question on my mobile so the breakdown might not be as clear. If you need a clearer breakdown do let me know or if anything is wrong do let me know too, I'll log into the laptop and look at it properly again.

Kind regards

Shamil

ggp25

Thank you!

shamilkaria

Hi @ggp25

Hopefully that was all right and it helped you 🙂

ggp25

@shamilkaria are you able to help with a different question please? I am unsure on the total cost per KG part of the question? All of the other parts are fine

shamilkaria

Hi @ggp25

Sorry for the late reply.

Just wanted to make sure the Maximum Material Cost per unit is correct?

To get from 200 grams to 1Kg you would need to muliply by 5. Target cost is usually your selling price - desired profit.

ggp25

Hi @shamilkaria ,

I have just checked the answers and it is correct:

shamilkaria

Hi @ggp25

Glad you got it correct 🙂. I had to read up on Target Cost been a while since needed to use it.

But yh happy to help if you got anything else.

Kind regards

Shamil

ggp25

Are you able to confirm how to get to the target cost per KG as I’m still a little confused

shamilkaria

Hi @ggp25

It's all about understanding the metric conversion. So you have worked out that the maximum you can per unit is £4 but that is for 200 grams.

They then ask you per kilogram. Kilo is 1kg which is 1000 grams. So what they did was how many 200 grams go into 1000 grams (which is 1kg or kg). 5 x 200 grams = 1kg. So the target cost for 1kg is £4 (200 grams) x 5 = £20

For example if they said 5kg that would be 5000 grams. Then it would be 5000 grams / 200 grams = 25. So that means it would be 25 x £4 = £100

Hope this helps you.

Kind regards

Shamil

ggp25

Thank you

shamilkaria

Hi @ggp25

Most welcome

Kind regards

Shamil

LouboutinLou1

> @shamilkaria said:
> Hi @ggp25
>
> I hope you are well?
>
> To work out Budget / Standard cost of labour for actual production:
>
> 307 hours x £12.50 = £3,837.50 (Favourable as it's less than actual by £107.50 - £3,945)
>
> Direct Labour Rate:
>
> Standard / Budgeted Rate = £12.50 per hour
>
> Actual Rate = £3,945 / 307 Hours = £12.85 - Rounded to 2 decimal places
>
> The Actual Rate is Adverse by 35p per hour
>
> Direct Labour Efficiency:
>
> Actual Cost of Labour for 5,000 units based on 307 hours is - £3,945
>
> Budgeted / Standard Cost - 6 hours to make 100 units. So to make 5,000 units it will be (5,000 units / 100 units x 6 Hours) = 300 Hours. Then 300 hours x £12.50 per hour = £3,750
>
> This gives you a Adverse of £195 (£3,945 - £3,750)
>
> Actual Cost of Labour for Actual Production:
>
> £3,945 - Mentioned in question (Adverse as it's more than £107.50 - £3,837.50)
>
> Hopefully this is all right, sorry I have answered this question on my mobile so the breakdown might not be as clear. If you need a clearer breakdown do let me know or if anything is wrong do let me know too, I'll log into the laptop and look at it properly again.
>
> Kind regards
>
> Shamil


Hi Shamil,

Regarding the direct labour efficiency variance can you breakdown the answer £87.50?

Many thanks,

shamilkaria

Hi @LouboutinLou1

In order to get £87.50 for Direct Labour Efficiency see below the answer:

> Firstly you got to understand what is Direct Labour Efficiency. Direct Labour Efficiency is based on the hours and not the rate. So this means in our calculation we are going to be using the Standard Rate.

> So we are going to be comparing the Actual Hours we worked with what we were expecting to work based on our actual production

> 307 Actual Labour Hours x £12.50 our standard labour per hour cost = £3,837.50

> We are told it takes 6 hours to manufacture 100 units. We actually produced 5000 units. So we need to know how many hours were done to reach 5000 units. 2 ways you can do this. 6 hours / (divide by) 100 units then x 5000 units = 300 hours. Or 5000 units / (divide by) 100 units = 50 then x (Multiply by) 6 hours = 300 hours

> Next we calculate 300 hours (Standard hours for actual production) x £12.50 (Standard hourly labour rate) = £3,750

> Finally this should give you the difference - £3,837.50 - £3,750 = £87.50

Hope this helps sorry the answer is absolutely massive but I feel if it is broken down in detail you will understand it better.

Kind regards

Shamil

LouboutinLou1

Thank you very much, when it's broken down like that it's so much easier to understand 😊

shamilkaria

Hi @LouboutinLou1

Glad that has helped you out 🙂.

Kind regards

Shamil