Hugo Company produces frozen desserts and the company controller is
implementing a standard-cost system and has the information and the
material requirements for the product. Hugo?s popular product is
strawberries sherbet. The sherbet is produced 10-gallon batches and
each batch requires 6 quarts of good strawberries. Strawberries are
sorted by hand before entering production line. One (1) quart of
strawberries is lost for every 4 quarts accepted. 3 minutes is
standard direct-labor time for sorting required to obtain 1 quart of
acceptable strawberries. Those accepted are mixed with other
ingredients and it needs 12 minutes of direct-labor per batch then the
sherbet is packed in quart container. This information is collected
Strawberries cost $.80
Other ingredients $.45 per gallon
Direct labor is paid $9 per hour
Total cost of material and labor to package the sherbet $.41 per quart.

1-	Develop standard cost of direct material, direct labor and
packaging for 10-gallon of batch strawberry sherbet.
2-	If unfavorable price variance why? If favorable why?

1.  Direct materials:

Strawberries: 20% are bad, so must purchase 6/0.8 or 7.5 quarts to get
6 good quarts per batch.  At $.80 per quart, the cost per batch is $6.

Other ingredients are $.45 per gallon which equals $4.50 for a 10 gallon batch.

Total direct material cost per 10 gallon batch is therefore $10.50.

Direct labor:

It takes three minutes per quart to get a good batch of strawberries. 
6 quarts are needed, so 18 minutes are spent sorting.  An additional
12 minutes are required to process the batch.  This results in 30
minutes of direct labor per batch, which amounts to $4.50 for a 10
gallon batch.

Packaging:

A 10 gallon batch has 20 quarts which, at $.41 per quart, amounts to a
packaging cost of $8.20.

The total cost of a 10 gallon batch is therefore $24.70, which amounts
to approximately $1.24 per quart.

2.  A significant source of variance is likely to be related to the
strawberries.  It is unlikely that they will be consistently 20% bad. 
If there are more than 20% bad, there will be an unfavorable variance
in terms of both material cost and sorting will probably take longer,
leading to an unfavorable labor cost variance as well.  On the other
hand, if there are fewer than 20% bad, there will be a favorable
variance in terms of both material cost and sorting because it will
take less time and strawberries to generate the 6 quarts of good
strawberries.

Sincerely,

Wonko

Thank you for answer.