TCC Industries Ltd produces speciality tyres in a variety of sizes and tread des
ID: 2419034 • Letter: T
Question
TCC Industries Ltd produces speciality tyres in a variety of sizes and tread designs for use on trailers and farm equipment. TCC is planning to implement a standard cost accounting system. Valerie Siewert, the accountant, has accumulated the following information on the standard cost of a particular bias tractor tyre. Each tyre requires 15 kilograms of carbon black, the basic tyre component, which is added in the mixing department. Other materials, such as zinc and sulphur, which are added in the moulding department, are required in such small quantities that they are treated as indirect materials and included as part of overhead. Each tyre requires 15 minutes of processing time to mould and cure. An additional 45 minutes of time is required to mix the ingredients in the mixing department. The standard cost for carbon black is $3.50 per kilogram. The standard cost of direct labour in the mixing department is $10 per labour hour, while the standard cost of direct labour in the moulding department is $11 per hour. Required a) Develop the standard cost of materials and labour for the tractor tyre. The standard cost should identify the standard quantity, the standard rate and the total standard cost per unit. (3 marks) b) Identify the advantages of implementing a standard cost system. (2 marks) c) Explain the role each of the following people would have in developing the standard costs: (5 marks) 1- Purchasing Power 2- Mixing department supervisor 3- Moulding department supervisor 4- Cost accountant 5- Product engineer
Explanation / Answer
a)
Standard cost of material for tractor tyre
= Standard quantity in kilogram of carbon black per tyre x Standard cost of one kilogram of carbon black
= 15 kg x $ 3.50 per kilogram
= $52.50
Standard labour for tractor tyre
= Standard cost of direct labour for moulding department + standard cost of direct labour for mixing department
= Standard rate for direct labour in moulding department x standard time required for one tyre
+ Standard rate for direct labour in mixing department x standard time required for one tyre
= $11 / hour x (15/60) hours + $10 / hour x (45/60) hours
= $2.75 per direct labour hour of moulding department + $7.50 direct labour hours of mixing department
= $10.25 per direct labour hours.
b)
Standard costing uses predetermined standard for various operations required to produce the product as well as for other operating expenses for an organization. Setting standard for each element of costs as well as for the volume of productions and sales like, standard material cost, standard direct labour cost, standard overhead absorption rate etc. Is the process of setting a benchmark for those elements, against which the actual performance of the company could be measured, and if there is an adverse variation corrective measures could be taken.
Standard costing can be used to set the yardsticks for the cost centers, responsibility centers or profit centers of an organization. The performance of these centers could be measured against those yardsticks. However, the most important application of standard costing system is that it helps to analyze the causes of variation of the actual performance from the standardized performance benchmark and to take the necessary corrective action, so that the performance of a company could be improved as well as the performance of its employees on every front of the operational procedure of the company.
c) Purchasing department:
Purchasing power - to develop the standard for purchasing department, it is first necessary to get the exact specification of material required, both in terms of quantity and quality, from the production department. The allowance for normal loss should be provided before finalizing the actual quantity to be purchased. Moreover, if the company follows a policy of maintaining buffer stock, that should also be accounted for before finalizing the quantity to be purchased. The quantity of material required for each unit of the products to be produced is multiplied by the unit purchase price of the material to give the standard cost of material required for unit production.
Mixing Department Supervisor:
The role of mixing department supervisor is to determine the labour hours required for mixing the materials to produce one unit of the product under normal production circumstances. The standard cost of direct labour required per hour under normal operational environment, with due allowance to normal wastage of time, should be determined by him. The normal time required for mixing the product should be multiplied by the standard rate of direct labour hour to determine the standard labour hour cost for mixing each unit of the product.
Moulding department supervisor:
Requirement of direct labour, with due allowance to normal wastage of time, under normal production environment should be determined for each unit of the product to be moulded. The standard cost of direct labour hour should be determined again by giving allowance for normal wastage time. The direct labour hour required to mould one unit should then be multiplied by the standard cost of direct labour per for moulding to get the standard cost of moulding of one unit of product.
Cost Accountant
The cost accountant should supervise the standardization process of all the departments by taking into the methods of calculations and the allowances made by each department in determining the respective standard rates. His responsibility is to check the development of the standards against the projected standard rates of the company and if there is any variation he should look into the methods and the parameters that have been used by each responsible employee to develop the standards. If any revision is needed the cost accountant will revise the procedure of setting the standard of the particular department and will develop the new set of standards after discussing with the responsible heads of the particular department. Apart from the above standards, one of the most important roles of the cost accountant is to set the standard for overhead cost that should be incurred under normal production environment while producing the product. Whether the standard production rate should be based on the direct labour hours or on the basis of units of production should be determined by him on the basis of whether the overhead cost is proportional to the direct labour or to the number of units produced. If there are variety of products, activity based costing system is the best possible approach for the cost accountant to determine the standard overhead rate, in which the standardized overhead allocation rates are established on the basis of the amount of activities or resources used by each type of products.
Production Engineer
The role of the production engineer is vital in developing the right standard in the sense that it is his responsibility to improve the process of production by reducing the downtime of production by specifying the exact quality and quality of materials and the production process to produce the desired quantity and quality of the products, identifying the idle time and reducing the same by synchronizing the production process using production engineering. In fact the standard material required for unit product, standard labour time required for unit product, standard allowance that should be made for normal idle time will first be reflected in the production design and report of the production engineer which are then to be used as the basis by each department to set their standards. If there is any variation found by the departments, those should be immediately reported back to the production engineer and with the input from his department the standard will be revised.
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