Setting Standards, Materials and Labour Variances

Tom Belford and Tony Sorrentino own a small business devoted tokitchen and bath granite installations. Recently, buildingcontractors have insisted on up-front bid prices for a house ratherthan the cost-plus system that Tom and Tony were used to. Theyworry because natural flaws in the granite make it impossible totell in advance exactly how much granite will be used on aparticular job. In addition, granite can be easily broken, meaningthat Tom or Tony could ruin a slab and would need to start overwith a new one. Sometimes the improperly cut pieces could be usedfor smaller installations, sometimes not. All their accounting isdone by a local chartered accounting firm headed by CharleneDavenport. Charlene listened to their concerns and suggested thatit might be time to implement tighter controls by setting up astandard costing system.

Charlene reviewed the invoices pertaining to a number of Tom andTony's previous jobs to determine the average amount of granite andglue needed per square metre. She then updated prices on bothmaterials to reflect current conditions. The standards shedeveloped for one square metre of counter installed were asfollows:

Granite, per square metre	$50.00
Glue (10 oz. @ $0.15)	1.50
Direct labour hours:
Cutting labour (0.10 hr. @ $15)	1.50
Installation labour (0.25 hr. @ $25)	6.25

These standards assumed that one seamless counter requires onesink cut (the space into which the sink will fit) as well ascutting the counter to fit the space available.

Charlene tracked the actual costs incurred by Tom and Tony forgranite installation for the next six months. She found that theycompleted 50 jobs with an average of 32 square metres of graniteinstalled in each one. The following information on actual amountsused and cost was gathered:

Granite purchased and used (1,640 sq. ft.)	$80,848
Glue purchased and used (16,000 oz.)	$2,560
Actual hours cutting labour	220
Actual hours installation labour	390

The actual wage rate for cutting and installation labourremained unchanged from the standard rate.

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