Lock Nut has a standard costing system for all manufactured items as part of its

Question

       Lock Nut has a standard costing system for all manufactured items as part of its cost
control and management system. A standard cost for each item is set at the beginning of
the fiscal year. Standards are not revised during the year. However, planned variances are
included in Lock Nut’s monthly operating budgets to reflect changes in costs related to
modifications in the material and labor inputs or by changes in the manufacturing process.
      The table below shows the labor standards for one of Lock Nut’s products for the current
fiscal year.

     Assembler – 2nd class (6 hr @ $12)           $ 72
     Assembler – 1st class (3 hr @ $16)           $ 48
     Master Machinist (2 hr @ $20)                  $ 40
     Standard cost per 100 units                    $160

       The budget standard was based on a labor team that includes six people with assembler
second-class skills, three people with assembler first-class skills, and two people with master
machinist skills. This team represents the most efficient use of the company’s skilled
employees. The labor standard also assumed that the quality of materials would remain the
same as that used in prior years.
       For the first seven months of the fiscal year, actual manufacturing costs at Lock Nut
have been close to the established standards. Recently, the company has won several large
new orders. The firm does not have enough skilled workers available to support the production
increases needed using the typical work team. Management has chosen to restructure
the work teams used. Beginning in month eight, the production teams will consist of
nine people with assembler second-class skills, one person with assembler first-class
skills, and one person with master machinist skills. The reorganized teams will work more
slowly than the normal teams. As a result only 80 good units will be produced in the same
time period 100 units would normally be produced. The overall quality of the production
units is expected to remain extremely high with the reorganized teams.
       Its major material supplier has notified Lock Nut that due to shortages, lower-quality
materials will be supplied beginning at the start of month eight. Normally, one unit of raw
materials is required for each good unit produced, and no units are lost due to defective
material. Lock Nut estimates that 10 percent of the units manufactured starting in month
eight will be rejected in the final inspection process due to defective material. (CMA
adapted and modified)

Required:
a. What is the amount of budgeted cost per good quality batch produced?
b. Determine the number of units of lower-quality material that Lock Nut must start into
production in order to produce 62,000 good finished units.

c. How many hours of each class of labor must be used to manufacture 62,000 good
finished units using the modified work teams?

Explanation / Answer

a.Budgeted cost per good quality batch proced Assembler-2nd class-9persons 6hrs @12per person 9*6*12 $648 Assembler-ist class-1 person 3 hrs @16 per person 1*3*16 $48 Master Machinist -1personhrs@20 per person 1*2*20 $40 Budgeted cost per good quality batch $726 b. For producing one unit of lower-quality material Lock nut need one unit of rawmaterials so now Lock nut has to produce 62000 units,so it requires 62000 units of raw materials. c. Assembler 9 persons at 6 hrs 54 units Total production units 62000 units Assembler-2nd batch 9 persons at 6 hrs62000/54 1148.14 hrs Assember-1st btch 1 person at 3 hts     62000/3          20667 hours Master Machinist     1person at 2 hrs       62000/2 31000 hours

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