9904.407-60 Illustrations.

(a) Contractor A's written practice is to set his material-price standard for an item on the basis of average purchase prices expected to prevail during the calendar year. For that item whose usage from month to month is stable, a purchase contract is generally signed on May 1 of each year for a 1-year commitment. The current purchase contract calls for a purchase price of $3 per pound; an increase of 5 percent, or 15¢ per pound, has been announced by the vendor when the new purchase contract comes into effect next May. Contractor A sets his material-price standard for this item at $3.10 per pound for the year ([$3.00 × 4 + $3.15 × 8] ÷ 12). Since Contractor A sets his material-price standard in accordance with his written practice, he complies with provisions of 9904.407-40(c) of this Cost Accounting Standard.

(b) Contractor B accumulates, in one account, labor cost at standard for a department in which several categories of direct labor of disparate functions, in different combinations, are used in the manufacture of various dissimilar outputs of the department. Contractor B's department is not a production unit as defined in 9904.407-30(a)(7) of this Cost Accounting Standard. Modifying his practice so as to comply with the definition of production unit in 9904.407-30(a)(7), he could accumulate the standard costs and variances separately,

(1) For each of the several categories of direct labor, or

(2) For each of several subdepartments, with homogeneous output for each of the subdepartments.

(c) Contractor C allocates variances at the end of each month. During the month of March, a production unit has accumulated the following data with respect to labor:

(d) Contractor D, who uses materials the prices of which are expected to fluctuate at different rates, recognizes material-price variances at the time purchases of material are entered into the books of account. He maintains one purchase-price variance account for the whole plant. Purchased items are requisitioned by various production units in the plant. Since prices of material are expected to fluctuate at different rates, this plant-wide grouping does not constitute a homogeneous grouping of material. Contractor D's practice does not comply with provisions of 9904.407-50(b)(2) of this Cost Accounting Standard. However, if he would maintain several purchased-items inventory accounts, each representing a homogeneous grouping of material, and maintain a material-price variance account for each of these homogeneous groupings of material, Contractor D's practice would comply with 9904.407-50(b)(2) of this Cost Accounting Standard.

(e)(1) Contractor E recognizes material-price variances at the time purchases of material are entered into the books of account and allocates variances at the end of each month. During the month of May, a homogeneous grouping of material has accumulated the following data:

(2) Contractor E establishes a material-price variance rate of 7% ($140,000 ÷ $2,000,000) and allocates as follows:

(f)(1) Contractor F makes year-end adjustments for variances attributable to covered contracts. During the year just ended, a covered contract was processed in four production units, each with homogeneous outputs. Data with respect to output and to labor of each of the four production units are as follows:

(2) Since the outputs of each production unit are homogeneous, Contractor F uses the units of output as the basis of making memorandum worksheet adjustments concerning applicable variances, and establishes the following figures:

(3) Contractor F makes a year-end adjustment of $18,500 as the labor-cost variances attributable to the covered contract. Contractor F's practice complies with provisions of 9904.407-50(e) of this Cost Accounting Standard.

Labor hours at standardLabor dollars at standardLabor cost variance Balance, March 15,000$25,000$2,000 Additions in March15,00075,0005,000 Total20,000100,0007,000 Transfers-out in March8,00040,000 Balance, March 3112,00060,000

Material cost at standardMaterial price variance Inventory, May 1$150,000$20,000 Additions in May1,850,000120,000 Total2,000,000140,000 Requisitions: Production Unit 1900,000 Production Unit 2450,000 Production Unit 3300,000 Production Unit 4150,000 Inventory, May 31200,000

Material cost at standardMaterial price variance rate (%)Material price variance allocation Production Unit 1$900,0007$63,000 Production Unit 2450,000731,500 Production Unit 3300,000721,000 Production Unit 4150,000710,500 Ending inventory of homogeneous grouping of material200,000714,000 Total2,000,000140,000

Production unitTotal units of outputTotal units used by the covered contractTotal labor costs at standardTotal labor-cost variance 1100,00010,000$400,000$20,000 230,0006,000900,00030,000 320,0005,000600,00010,000 410,0004,000500,00020,000

Labor-cost variance per unit of unitUnits used by the covered contractLabor-cost variance attributable to the covered contract Production Unit 1$0.2010,000$2,000 Production Unit 2166 Production Unit 30.55,0002,500 Production Unit 424,0008,000 Total labor-cost variance attributable to the covered contract18,500

Using labor hours at standard as the base, Contractor C establishes a labor-cost variance rate of $.35 per standard labor hour ($7,000 ÷ 20,000), and deducts $2,800 ($.35 × 8,000) from the labor-cost variance account, leaving a balance of $4,200 ($7,000−$2,800). Contractor C's practice complies with provisions of 9904.407-50(d)(1) of this Cost Accounting Standard.

Contractor E's practice complies with provisions of 9904.407-50(b)(3)(ii) of this Cost Accounting Standard.

[57 FR 14153, Apr. 17, 1992; 57 FR 34167, Aug. 3, 1992]