P10-23 Developing Standard Costs Le Forestier, S.A, is a cesses wild mushrooms f

Question

P10-23 Developing Standard Costs Le Forestier, S.A, is a cesses wild mushrooms found in the forests of central France. For many years, Le Forestier's products have had strong sales in France. However, companies from other countries in the European common ma France, and price competition has become increasingly important. Jean Leveque, the com pany's controller, is planning to implement a standard cost system for Le Forestier and has gathered considerable information from the purchasing and production managers concerning production and material requirements for Le Forestier's products. Leveque believes that the use of standard costing will allow Le Forestier to improve cost control and thereby better compete with the new entrants into the French market. rket such as Italy and Spain have begun marketing similar products in Le Forestier's most popular product is dried chanterelle mushrooms, which are sold in small vacuum-packed jars. Each jar contains 15 grams of dried mushrooms. Fresh mush- rooms are purchased for 300 FF per kilogram in bulk from individuals who gather them from local forests. (FF stands for French francs, and a kilogram is 1,000 grams.) Because of imperfections in the mushrooms and normal spoilage, one-quarter of the fresh mush- rooms are discarded. Fifteen minutes is the direct labor time required for inspecting and sorting per kilogram of fresh mushrooms. After sorting and inspecting, the acceptable mushrooms are flash-dried, which requires 10 minutes of direct labor time per kilogram of acceptable, sorted, and inspected fresh mushrooms. The flash-drying removes mos moisture content of the mushrooms and therefore drastically reduces their weight. A kilo- gram of acceptable fresh mushrooms yields only about 200 grams of dried mushrooms. Af- ter drying, the mushrooms are vacuum-packed in small jars and labels are applied labels is 50 FF per 100 jars. The labor time required to pack 100 jars is 10 minutes. 1. Direct labor is paid at the rate of 60 FF per hour. The cost of the glass jars, lids, and Develop the standard cost for the direct labor and materials cost components of a single jar of dried chanterelle mushrooms, including the costs of the mushrooms, inspecting and sorting, drying, and packing 2. Jean Leveque wonders who should be held responsible-the purchasing manager or the production manager- for the material variances for the chanterelle mushrooms. Who should be held responsible for the material price variances for the chanterelle a. mushrooms? Explain Who should be held responsible for the material quantity variances for the chante- relle mushrooms? Explain b.

Explanation / Answer

1)

Price of 1 kg or 1000 gm fresh mushrooms = 300 FF

spoilage = 1/4 of fresh mushrooms

acceptable mushrooms from 1 kg fresh mushrooms = 1000 x 1/4 = 750 gm

1000 gm of accepatable musrooms gives 200 gm of dried mushrooms

therefore, 750 gm of accepatable musrooms will give= (200/1000 x 750) gm of dried mushrooms (unitary method)

= 150 gm of dried mushrooms

1 jar contains 15 gm of dried mushrooms, therefore, 150 gms will fill 10 jars.

Hence, we can say that 1 kg of fresh mushrooms gives us 10 jars of dried mushrooms.

Calculation of cost per jar:-

cost of 1 kg of mushroom = 300 FF

Labour cost per hour = 60 FF

direct labour time required for inspecting and sorting 1 kg fresh mushrooms = 15 minutes or 1/4 hour (15/60 = 1/4)

Direct labour cost of inspecting and sorting = 1/4 x 60 FF = 15 FF

Direct labour time required for drying 1kg acceptable mushrooms = 10 min 0r 1/6 hour

Direct labour time required for drying 750 gm acceptable mushrooms = 10/1000 x 750 min = 7.5 min (unitary method)

= 7.5/60 hour

Direct labour cost for drying 750 gm acceptable mushrooms = 60 x 7.5/60 = 7.5 FF

Labour time required to pack 100 jars = 10 minutes

Labour time required to pack 10 jars = 1 minute 0r 1/60 hour

Labour cost of packing 10 jars = 1/60 x 60 = 1 FF

Cost of 100 jars, lids and labels = 50 FF

Cost of 10 jars, lids and labels = 5 FF

As We calculated earlier, 1 kg of fresh mushrooms gives us 10 jars of dried mushrooms

So, Total cost of 10 jars = 300 + 15 + 7.5 + 1 + 5 = 328.5 FF

Total cost of 1 jar = 328.5/10 = 32.85 FF

2)a. Materials Price Variance is the difference between standard cost of material and actual cost of material. If standard cost is higher than actual cost then it is called a favourable variance. If the actual costs were higher than standard costs then it is called unfavourable variance. Generally speaking, the purchase manager has the control over price of the direct materials. He is the one who is responsible for are discrepancies in prices. Its the duty of the purchasing manager to try to get the materials at the least cost possible without comprising the quality of the materials. But in some cases production manager may also be responsible for an unfavourable variance. For example, if the production manager asks for raw materials on a urgent basis, the purchasing manager may have to but the materials at a high price leading to an unfavourable variance. Another example may be if the production manager wants high quality raw materials to decrease wastage that may also increase the price of the materials leading to a negative variance.

2)b. Material quantity variance is the difference between standard quantity of materials required and actual quantity of materials required bot computed at the standard cost. If the actual quantity is more than standard then we have unfavourable variance and if standard is more than actual then we have a favourable variance. Generally, its the duty of the production department to see that the actual material usage is in accordance with standard allowed. But in some cases, purchasing department may also be responsible for unfavourable variance. For example, the purchase manager may but low grade materials to reduce the cost which may inturn rsult in high wastage of raw material leading to a negative or unfavourable variance.

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