Problem 10-49

1
Crunchy Chips will benefit greatly by using standard costing system. The firm can gain greater cost control by setting
standards for each type of the cost incurred and thenn highlightin execeptions or varianves. These variances provide a
starting point for judging the effectiveness of managers - Edward Golding - in the controlling costs for which he is
reponsible. Using appropriate cost control, Crunchy Chips will succed in controlling production costs. The data can be
used in creating accurate budgets. Morevoer, standard costing system will be a valuable tool in managing inventory.
Lasltly, a standard costs may cause employees to become a more cost conscious and to seek improved moethods and
completing their tasks.

2
Setting engineering standards may seem impossible to achieve and therefore may discourage even the most diligent
and highly motivated workers. The occurrence of large variances from ideal standards is normal which reduces the
effectiveness of 'manage by exception'. In normal conditions, the interpretation of variances from normal standards is
very difficult. Therefore, we can consider engeneering standards as an ideal standards. Ideal standards are normally
considered unrealistic for inventory planning and forecasting.

3
Stanrd Cost Sheet

1 Box of Potato Chips

Direct Materials
Potatoes* 15.9375 $0.24 $3.79
Cooking Oil 49.5 $0.04 $1.98
Bags 15 $0.11 $1.65
Boxes 1 $0.52 $0.52

$7.94
*Solution for Pounds / Box
Pounds / Box = 15 x 4 x 4.25/16 = 15.9375

Price / Pound $0.245 less scrap value; scrap per box = 15 x (17.0 oz - 16.3 oz) = 10.50 oz
Scrap Value / oz = $0.16/16 = $0.01 per oz.
Savings / Box $0.01 x 10.5 = $0.105
Savings / Pound of Potato $0.105 / 15.9375 = $0.007
Standard Price / Pound of Potatio $0.245 - $0.007 = $0.238

Direct Labor Rate** Cost

Potato Inspection 0.006 $15.20 $0.09
Chip Inspection 0.0225 $10.30 $0.23
Frying monitor 0.0118 $14.00 $0.17
Boxing 0.0311 $11.00 $0.34
Machine Operators 0.0118 $13.00 $0.15 $0.9837

Variable Overhead ($0.9837 x 1.16) 1.1411

Fixed Overhead ($0.9837 x 1.9671)*** 1.9350
Cost / Box 12.0029

Cost / Bag $12.0029 / 15 $0.8002

**Solution for Rate

Number of Boxes / Year = 8,800,00 / 15
= 586,667
Hours / Box
Potato Inspection 3,200(1.1) / 586,667 0.006
Chip aInspeciton 12,000(1.1) /586,667 0.0225
Frying Monitor 6,300(1.1)/586,667 0.0118
Boxing 16,600(1.1)/586,667 0.0311
Machine Operators 6,300(1.1)/586,668 0.0118

***Solution for FOH

Fixed OH rate based on labor dollars $1,135,216 / $0.9837 x 568,667 1.967

4
DMQV (AQ - SQ)SP SP Standard Price, or the estima
(9,500 - 9,350,000)$0.238 AQ Actual quantity of materials r
35,700.00 SQ Standard quantity, or the esti
DMQV Direct Material Quantity Vari

SQ 15.9375 x (8,800,000/15)
9,350,000
ost control by setting
se variances provide a
ts for which he is
osts. The data can be
managing inventory.
proved moethods and

ven the most diligent

which reduces the
m normal standards is
ndards are normally

3 oz) = 10.50 oz
Standard Price, or the estimated price of materials requried for the operations
Actual quantity of materials required for the operations
Standard quantity, or the estimated quantity of mateials required for the operations
Direct Material Quantity Variance