Speeds, Inc. makes a popular jogging suit. The company wants to develop standards for material, labor, and variable manufacturing overhead.
The standard price per unit for direct materials should be the final, delivered cost of materials. The standard price should reflect:
Specified quality of materials.
Discounts for quantity purchases.
Discounts for early payment, if any.
Transportation (freight) costs.
Receiving and handling costs.
A material known as verilon is used in the jogging suits. The standard price for a yard of verilon is determined as follows:
Purchase price, grade a verilon $5.70
Less purchase discount in 20,000 yard lots (0.20)
Freight, by truck 0.40
Receiving and handling 0.10
Standard price per yard $6.00
The standard quantity per unit for direct materials is the amount of material that should go into each finished unit of product. The standard quantity should reflect:
Engineered (bill of materials) requirements.
Expected spoilage of raw materials.
Unavoidable waste of materials in the production process.
Materials in expected scrapped units (rejects).
The standard quantity of verilon that in one jogging suit is computed as follows:
Bill of materials requirement 2.8 yds
Allowance for waste 0.6 yds
Allowance for rejects 0.1 yds
Standard quantity per jogging suit 3.5 yds
Once the price and quantity standards have been set, the standard cost of materials (verilon) for one unit of finished product can be computed:
3.5 yds. per jogging suit ´ $6 per yd. = $21 per jogging suit