XO-20 is an oil-based product used to remove rust on bolts and nuts that are stuck

| January 30, 2017

Question
XO-20 is an oil-based product used to remove rust on bolts and nuts that are stuck. Its accounting system uses standard costs. The standards per 0.5-liter can of solution call for 0.75 liters of material and 4 hours of labor. (0.75 liters of material are needed due to evaporation in the production process.) The standard cost per liter of material is $2.5. The standard cost per hour for labor is $13.00. Overhead is applied at the rate of $15.375 per can. Expected production is 8,000 cans with fixed overhead per year of $35,000 and variable overhead of $11 per unit (a 0.5-liter can).

During 2015, 7,800 cans were produced; 13,000 liters of material were purchased at a cost of $60,000; 10,100 liters of material were used in production. The cost of direct labor incurred in 2015 was $376,250 based on an average actual wage rate of $11 per hour. Actual overhead for 2015 was $125,000.

Require:

a) Determine the standard cost per unit. Round to the nearest cent.
b) Calculate material, labor and overhead variances.
c) List a possible cause for each variance.

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