Question

A heavy equipment manufacturing company has produced its first unit using 3500 hours and
$300,000 overhead cost. The next unit, i.e. the second unit took 3300 hours. Overhead cost for this
unit was $200,000. Suppose the labor was $20 per hour. Being the production manager, you need
to decide what would be the total production costs for additional 10 units after the completion of
the second unit. Round the final amount to nearest integer
(A) $1,597,832
(B) $594,650
(C) $1,003,183
D) None of the above​

Answer 1

Answer:

The standard materials cost of any product is simply the standard quantity of materials that should be used multiplied by the standard price that should be paid for those materials. Actual costs may differ from standard costs for materials because the price paid for the materials and/or the quantity of materials used varied from the standard amounts management had set. These two factors are accounted for by isolating two variances for materials—a price variance and a usage variance.

Accountants isolate these two materials variances for three reasons. First, different individuals may be responsible for each variance—a purchasing agent for the price variance and a production manager for the usage variance. Second, materials might not be purchased and used in the same period. The variance associated with the purchase should be isolated in the period of purchase, and the variance associated with usage should be isolated in the period of use. As a general rule, the sooner a variance can be isolated, the greater its value in cost control. Third, it is unlikely that a single materials variance—the difference between the standard cost and the actual cost of the materials used—would be of any real value to management for effective cost control. A single variance would not show management what caused the difference, or one variance might simply offset another and make the total difference appear to be immaterial.

Explanation: