Haig McNamee owns and operates McNamee Machining, a subcontractor to several aerospace industry contractors. When Mr. McNamee wins a bid to produce a piece of equipment, he sets standard costs for the production of the item. He then compares actual manufacturing costs with the standards to judge the efficiency of production.
In April 20X1, McNamee won a bid to produce 15,000 units of a shielded component used in a navigation device. Specifications for the component were very tight, and Mr. McNamee expected that on average 1 out of every 6 finished components would fail his final inspection, even if employees exercise every care in production. There was no way to identify defective items before production was complete. Therefore, the company had to produce 18,000 units to get 15,000 good components. The company set standards to include an allowance for the expected number of defective items.
Each final component contained 3.2 pounds of direct materials, and the company expected normal scrap from production to average an additional .4 pounds per unit. It expected the direct material to cost $11.40 per pound plus $.80 per pound for shipping and handling.
Machining of the components required close attention by skilled machinists. Each component required 4 hours of machining time. McNamee paid the machinists $20 per hour, and they worked 40-hour weeks. Of the 40 hours, employees spent an average of 32 hours directly on production. The other 8 hours consisted of time for breaks and waiting time when machines were broken down or there was no work to be done. Nevertheless, the company considered all payments to machinists to be direct labor, whether or not they represented time spent directly on production. In addition to the basic wage rate, McNamee paid fringe benefits averaging $6 per hour and payroll taxes of 10% of the basic wages.
Determine the standard cost of direct materials and direct labor for each good unit of output.