Standard costsA predetermined target cost that should be attainable under efficient conditions. Standard costs are used in variance analysis to monitor costs for direct materials, direct labor, and overhead. are predetermined target amounts that should be attainable under efficient conditions. Standard costs aid in the budget process, pinpoint trouble areas of production, and evaluate performance.

Prior to the start of production, companies establish standards (ie, benchmarks/targets) for the costs and quantities used of direct materials, direct labor, and overhead. At the end of the period, these standard costs are compared with actual results to determine price and/or quantity variances. Variances can be favorable or unfavorable and are generally investigated to determine the cause of the difference.

Direct labor (DL) cost per unit is the actual DL cost per hour times the number of hours allowed per unit. Hours allowed is the standard amount developed prior to production. A worker earns $500 for 40 hours of work per week, or $12.50 per hour. Each unit requires 2 hours for a total cost per unit of $25. Benefits of 20% of $25, or $5, are also considered part of the direct labor cost, resulting in a standard direct labor cost of $30 per unit.

The standard direct labor cost per unit of Glu can also be calculated in a tabular format, as follows:

(Choices B and D) An amount of $24 is based on 50 workers instead of 40 hours [($500 / 50) × 1.2 = $12 × 2 hours = $24]. An amount of $12 uses 1 hour, not 2.

(Choice C) An amount of $15 is calculated with 1 hour of direct labor, not 2.

Things to remember:
Standard costs are predetermined target amounts that should be attainable under efficient conditions. Standard costs aid in the budget process, pinpoint trouble areas of production, and evaluate performance. Direct labor (DL) cost per unit is the actual DL cost per hour times the number of hours allowed per unit.