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ACCA Applied Knowledge · Management Accounting · Standard costing system

Mortlake Co makes a single product. The standard for each unit is: direct labour 3 hours at $14.00 per hour; variable overhead 3 hours at $2.00 per labour hour; fixed overhead absorbed at $5.00 per labour hour; direct material 2 kg at $9.00 per kg. Selling price is $120 per unit. Standard labour time includes an allowance for a 10% idle time on hours paid; the 3 hours above are hours paid. What is the standard marginal cost per unit and the standard profit per unit?

Standard marginal cost is $66.00 per unit: labour $42, variable overhead $6 and material $18. Adding absorbed fixed overhead of $15 gives a full standard cost of $81, so standard profit is $120 minus $81, which is $39.00. The idle time is already within the 3 hours.

  1. AMarginal cost $66.00; profit $54.00
  2. BMarginal cost $60.00; profit $45.00
  3. CMarginal cost $66.00; profit $39.00Correct
  4. DMarginal cost $60.00; profit $60.00

Explanation

Labour 3 x 14 = 42; variable overhead 3 x 2 = 6; material 2 x 9 = 18. Marginal cost = 66. Fixed overhead = 3 x 5 = 15, so full absorption cost = 81. Profit = 120 - 81 = 39. The idle time note is already included in the 3 hours paid, so no further adjustment is needed. Profit of $54 ignores fixed overhead.

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