(a) Contractor A's written practice is to set his material-price standard for an item on the basis of average purchase prices expected to prevail during the calendar year. For that item whose usage from month to month is stable, a purchase contract is generally signed on May 1 of each year for a 1-year commitment. The current purchase contract calls for a purchase price of $3 per pound; an increase of 5 percent, or 15[cent] per pound, has been announced by the vendor when the new purchase contract comes into effect next May. Contractor A sets his material-price standard for this item at $3.10 per pound for the year ([$3.00x4+$3.15x8]/12). Since Contractor A sets his material-price standard in accordance with his written practice, he complies with provisions of 9904.407-40(c) of this Cost Accounting Standard.
(b) Contractor B accumulates, in one account, labor cost at standard for a department in which several categories of direct labor of disparate functions, in different combinations, are used in the manufacture of various dissimilar outputs of the department. Contractor B's department is not a production unit as defined in 9904.407-30(a)(7) of this Cost Accounting Standard. Modifying his practice so as to comply with the definition of production unit in 9904.407-30(a)(7), he could accumulate the standard costs and variances separately,
(1) For each of the several categories of direct labor, or
(2) For each of several subdepartments, with homogeneous output for each of the subdepartments.
(c) Contractor C allocates variances at the end of each month. During the month of March, a production unit has accumulated the following data with respect to labor: ------------------------------------------------------------------------
Labor
Labor dollars Labor
hours at at cost
standard standard variance------------------------------------------------------------------------Balance, March 1....................... 5,000 $25,000 $2,000Additions in March..................... 15,000 75,000 5,000
--------------------------------
Total.............................. 20,000 100,000 7,000Transfers-out in March................. 8,000 40,000
--------------------------------Balance, March 31...................... 12,000 60,000------------------------------------------------------------------------ Using labor hours at standard as the base, Contractor C establishes a labor-cost variance rate of $.35 per standard labor hour ($7,000 / 20,000), and deducts $2,800 ($.35x8,000) from the labor-cost variance account, leaving a balance of $4,200 ($7,000-$2,800). Contractor C's practice complies with provisions of 9904.407-50(d)(1) of this Cost Accounting Standard.
(d) Contractor D, who uses materials the prices of which are expected to fluctuate at different rates, recognizes material-price variances at the time purchases of material are entered into the books of account. He maintains one purchase-price variance account for the whole plant. Purchased items are requisitioned by various production units in the plant. Since prices of material are expected to fluctuate at different rates, this plant-wide grouping does not constitute a homogeneous grouping of material. Contractor D's practice does not comply with provisions of 9904.407-50(b)(2) of this Cost Accounting Standard. However, if he would maintain several purchased-items inventory accounts, each representing a homogeneous grouping of material, and maintain a material-price variance account for each of these homogeneous groupings of material, Contractor D's practice would comply with 9904.407-50(b)(2) of this Cost Accounting Standard.
(e)(1) Contractor E recognizes material-price variances at the time purchases of material are entered into the books of account and allocates variances at the end of each month. During the month of May, a homogeneous grouping of material has accumulated the following data: ------------------------------------------------------------------------
(1) Contractor E recognizes material-price variances at the time purchases of material are entered into the books of account and allocates variances at the end of each month. During the month of May, a homogeneous grouping of material has accumulated the following data: ------------------------------------------------------------------------
Material Material
cost at price
standard variance------------------------------------------------------------------------Inventory, May 1.............................. $150,000 $20,000Additions in May.............................. 1,850,000 120,000
-------------------------
Total..................................... 2,000,000 140,000Requisitions:
Production Unit 1........................... 900,000 ...........
Production Unit 2........................... 450,000 ...........
Production Unit 3........................... 300,000 ...........
Production Unit 4........................... 150,000 ...........
-------------------------
Inventory, May 31......................... 200,000 ...........------------------------------------------------------------------------
(2) Contractor E establishes a material-price variance rate of 7% ($140,000 / $2,000,000) and allocates as follows: ------------------------------------------------------------------------
Material Material
Material price price
cost at variance variance
standard rate (%) allocation------------------------------------------------------------------------Production Unit 1................... $900,000 7 $63,000Production Unit 2................... 450,000 7 31,500Production Unit 3................... 300,000 7 21,000Production Unit 4................... 150,000 7 10,500Ending inventory of homogeneous 200,000 7 14,000
grouping of material...............
-----------------------------------
Total........................... 2,000,000 ......... 140,000------------------------------------------------------------------------ Contractor E's practice complies with provisions of 9904.407-50(b)(3)(ii) of this Cost Accounting Standard.
(f)(1) Contractor F makes year-end adjustments for variances attributable to covered contracts. During the year just ended, a covered contract was processed in four production units, each with homogeneous outputs. Data with respect to output and to labor of each of the four production units are as follows: ------------------------------------------------------------------------
(1) Contractor F makes year-end adjustments for variances attributable to covered contracts. During the year just ended, a covered contract was processed in four production units, each with homogeneous outputs. Data with respect to output and to labor of each of the four production units are as follows: ------------------------------------------------------------------------
Total
units Total Total
Total used by labor labor-
Production unit units of the costs at cost
output covered standard variance
contract------------------------------------------------------------------------1............................. 100,000 10,000 $400,000 $20,0002............................. 30,000 6,000 900,000 30,0003............................. 20,000 5,000 600,000 10,0004............................. 10,000 4,000 500,000 20,000------------------------------------------------------------------------
(2) Since the outputs of each production unit are homogeneous, Contractor F uses the units of output as the basis of making memorandum worksheet adjustments concerning applicable variances, and establishes the following figures: ------------------------------------------------------------------------
Labor-cost
Labor- Units variance
cost used by attributable
variance the to the
per unit covered covered
of unit contract contract------------------------------------------------------------------------Production Unit 1.................... $0.20 10,000 $2,000Production Unit 2.................... 1.00 6.000 6.000Production Unit 3.................... .50 5,000 2,500Production Unit 4.................... 2.00 4,000 8,000
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Total labor-cost variance ........ ......... 18,500
attributable to the covered
contract........................------------------------------------------------------------------------
(3) Contractor F makes a year-end adjustment of $18,500 as the labor-cost variances attributable to the covered contract. Contractor F's practice complies with provisions of 9904.407-50(e) of this Cost Accounting Standard. [57 FR 14153, Apr. 17, 1992; 57 FR 34167, Aug. 3, 1992]