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Lesson 8 – Standard Costing – Solutions

Problem No 1: (Pacific Furniture) Actual Price = $259,120 ÷ 12,640 = $20.50

Direct MaterialsMPV (20.50 – 20) × 12,640 $6,320 UMQV/MEV (11,850 – 750×16) × $20 $3,000 F

Direct LaborLRV (31 – 20) × 2,325 Hours $2,325 ULEV (2,325 – 750×3) × $30 $2,250 U

Problem No 2: (Chemical, Inc.)

1. Direct MaterialsMPV (3.10 – 3) × 100,000 $10,000 UMQV/MEV (98,073 – 9810×10) × $3 $81 F

Direct LaborLRV (21 – 20) × 4,900 4,900 ULEV/LUV (4,900 – 9810×0.5) × $20 $100F

2.

a. Materials (98,100×3) $294,300MPV 10,000 A/P (100,000×3.10) $310,000

b. WIP (98,100×3) $294,300 Materials(98,073×3) 294,219 MEV 81

c. WIP (9810×0.5) × 20 $98,100 LRV 4,900 Wages/P (4,900×21) 102,900 LUV 100

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Problem No 3 (Mary Flanagan)

1. Variance Analysis

Actual Static Budget Static budget VarianceUnits Sold 23,000 20,000 3,000 FRevenue $874,000 $800,000 $74,000 FVariable Cost 630,000 500,000 130,000 UContribution margin 244,000 300,000 56,000 UFixed costs 195,000 200,000 5,000 FOperating Income $49,000 $100,000 $51,000 U

Actual FBV FB SVV Static Budget Units Sold 23,000 0 23,000 3,000 F 20,000 Revenue $874,000 $46,000 U 920,000 $120,000 U $800,000 Variable Cost 630,000 55,000 U 575,000 75,000 U 500,000

Contribution margin

244,000 101,000 U 345,000 45,000 F 300,000

Fixed costs 195,000 5,000 F 200,000 0 200,000 Operating Income $49,000 $96,000 U $145,000 $45,000 F $100,000

2. The actual SP per unit is $38 ($874,000÷23,000) compared to a budgeted $40 per unit. This reduction in SP may explain the 15% increase in unit sales (23,000 Vs 20,000). VC may have exceeded the budget for many reasons, including individual price increases in materials and supplies and possible inefficiencies because of the 15% spurt in production.

FC could be less than the budget because of delays in planned salary increases, adjustments in insurance coverage, and other reasons.

Problem No 4: (Bovar Company)

1. Standard DL hours allowed for actual output achieved

= 4,000 × 0.5 = 2,000 Hours

2. Actual DL hours worked

LEV = (Actual Hours – Standard Hours) × Standard Price -2,000 = (Actual Hours – 4,000×0.5) × $20 Actual Hours = 38,000÷20 = 1,900 Hours

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3. Actual DL Rate

LRV = (Actual Rate – Standard Rate) × Actual hours 1,900 = (Actual Rate – $20) × 1,900 hours Actual Rate = 39,900÷1,900 = $21

4. Standard quantity of DM allowed 4,000 × 3 Kg = 12,000 Kg

5. Actual quantity of DM used

MEV = (Actual quantity – Standard quantity) × Standard Price 2,500 = (Actual quantity – 12,000 Kg) × $5 Actual quantity = 62,500÷5 = 12,500 Kg

6. Actual quantity of DM purchased in Kg

MPV = (Actual Price – Standard Price) × DM purchased 3,250 = (Actual Price × DM purchased – Standard Price × DM purchased) 3,250 = (68,250 - $5 × DM purchased) DM purchased = 65,000÷5 = 13,000 Kg

7. Actual DM price per Kg = 13,000 Kg × Actual Price = $68,250 Actual Price = $5.25

Debit variances are unfavorable variance and shows as + Credit variances are favorable variance and shows as –

Problem No 5: (Aquafloat)

a). Direct-labor rate variance for November.

LRV = (A. Rate – S. Rate) × A. Hours = (8.24 -8.20) × 36,500 = $1,460 U 300,760÷36,500 = $8.24

b). Direct-labor efficiency variance for November.

Units completed 5,600 × 6 hours per unit = 33,600 hours Partial completed 800 × 0.75 × 6 hours = 3,600 37,200 LEV = (A. Hours – S. Hours) × S. Hours

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= (36,500 – 37,200) × 4 8.20 = $5,740 Fc). Actual kilograms of material used in the production process during November

Units completed 5,600 × 8 = 44,800 Kg Partial completed 800 × 8 = 6,400 51,200 Kg

MQV = ( A.Q – S.Q) × S. Rate 1500 = ( A.Q – 51,200) × $5 Actual Quantity = 51,500 Kg

d). Actual price paid per kilogram of direct material in November.

Actual price paid = 249,250 ÷ 50,000 = $ 4.985 per Kg

e). Total amounts of DM and DL cost transferred to FG inventory during November.

DM cost transferred 5,600×$40($5×8) $224,000DL cost transferred 5,600×$49.20 275,520

$499,520

f). The total amount of DM and DL cost in the ending balance of WIP inventory at the end of November.

DM 800×$40 = 32,000 DL 800×75%×49.20 = 29,520 $61,5202.

a. Direct Materials $250,000 MPV $750 A/P $249,250

MPV (4.985 – 5 ) ×50,000 $750 F

b. WIP (51,200×5) $256,000MQV 294,219 DM (51,500×5) 257,500

c. WIP (37,200×$8.20) $305,040 LRV 1,460 LUV $5,740 Wages payable 300,760

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Problem No 6: (Your Company)

Direct Labor Direct MaterialStandard Price or rate per unit of input E ($20) $8 per poundStandard Quantity per unit of input F ( 4 Hrs ) C (2.75 per unit)Actual quantity used per unit of output 3.5 Hours A ( 3 lbs)Actual price or rate per unit of input $21 per Hour $7 per poundActual output 10,000 units 10,000 unitsDirect material price variance ------- $30,000 FDirect material quantity variance ------- B (20,000 U)Total of Direct material variances -------- $10,000 FDirect labor rate variance D (35,000 U) ---------Direct labor efficiency variance $100,000 F ---------Total of Direct labor variances $65,000 F --------

A. MPV = (AP-SP) PQ -30,000 (F) = ($7 - $8) PQ Actual Qty Used = Qty Purchased AQ = PQ = 30,000 lbs Actual Qty per unit of output = 30,000 ÷ 10,000 units = 3 lbs per unit B. Total DMV = MPV + MQV 10,000(F) = 30,000(F) + MQV MQV = 20,000 U

C. MQV = (AQ – SQ) × SP 20,000(U) = (30,000 – SQ) × $8 SQ = 27,500 lbs Std Quantity per unit = 27,500÷10,000 units = 2.75 lbs per unit

D. Total DLV = LRV + LEV 65,000(F) = LRV - 100,000 (F) LRV = 35,000 U

E. A. Hours = 10,000 units × 3.5 Hours = 35,000 hours LRV = (21 – Std Rate ) × 35,000 35,000 (U) = (21 – Std Rate) × 35,000 Std Rate = $20

F. LEV = (35,000 – Std. Hrs) × $20 100,000 F = (35,000 – Std. Hrs) × $20 Std Hrs = 40,000 Hrs Std Hr per unit 40,000 ÷ 10,000 = 4 Hrs pr unit

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Problem No 14 Sullivan Tuxedo Company produces a single line of formal wear.

The standard costs for one suit are:

Direct materials:

5 yards of black cloth at $1.80 per yard, 2.5 yards of white cloth at $1.50 per yard

Direct labor: 2 hours at $9.50 per hour

During February, 450 suits were produced.

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The costs incurred during the month were:

Materials purchased:

2500 yards of black cloth at $1.85 per yard 1200 yards of white cloth at $1.40 per yard

Materials used:

2300 yards of black cloth , 1200 yards of white cloth

Direct labor: 960 hours at $9.80 per hour

Required:

A. Compute the material price and quantity variances and prepare all journal entries associated with direct materials for the month of February

B. Compute the labor rate and efficiency variances and prepare the journal entries to record the incurrence of direct labor costs.

Solution (P-14)

A. Material Price Variance Black (1.85 -1.80) × 2,500 = $125 U White (1.40 -1.50) × 1,200 = $120 F

Material Quantity Variance Black (2,300 – (450×5= 2,250) × $1.80 = $90 U White (1,200 – (450×2.5 =1,125) × $1.50 = $112.50 U

Black1. DM (2,500×1.80) 4,500

MPV 125

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A/P (2,500×1.85) 4,625

2. WIP (2,250×1.80) 4,050MQV 120 DM (2,300×1.80) 4,140White

1. DM (1,200 × 1.50) 1,800 A/P (1,200 × 1.40) 1,680 MPV 8,000 120

2. WIP (1,125×1.50) 1,687.50MQV 112.50 DM ( 1,200 ×1.50) 1,800

B. LRV (9.80 - 9.50) × 960 = $288 U LEV (960 – (450×2= 900)) × 9.50 = $570 U

1. DL (960×9.50) 9120LRV 288 Payroll (960×9.80) 9,408

2. WIP ( 900×9.5) 8,550LEV 570 Payroll (960×9.50) 9,120

Problem No 15

The production manager of Pippin Company exercises management by exception by reviewing materials usage and labor efficiency variances incurred during any given week. His decision rule is that any variance that is at least $5,000 or at least 10% of standard cost whichever is smaller, should be investigated to determine the underlying cause. During last week, the company’s operating performance included the following.

Units produced: 5,000 Direct material used: (21,600 lbs @ $18.20) Direct Labor hours worked: (8,300 hours@ $12.30)

Standard cost specifications for each unit produced are:

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Direct materials: 4lb at $18.00 each Direct labor: 1.6 hours @ $12.30 each

Required:

A. Calculate all cost variances for direct materials and direct labor

B. Should the production department manager investigate either of the variances for which he is responsible?

C. Identify three possible causes of each of the variances for which the manager is responsible.

Solution (P-15)

Direct Material

MPV (18.20 – 18) × 21,600 4,320 UMQV (21,600 – 5,000×4) × $18 28,800 U

$33,120 U

Direct Labor

LPV (12.30 – 12.30) × 8,300 0LEV (8,300 – 8,000) × $12.30 3,690 U

$3,690 U

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B. MQV of $28,800 U should be investigated because it is greater than $5,000. LEV of $3,690 is not a significant variance as it is less than $5,000 and under 10% of standard cost.

C. MQV

Material inferior quality Faulty equipment Mistakes during production

LEV

Faulty equipment Inexperienced workers Inadequate supervision

Problem No 16 Chemway Company produces an individual cleaning solvent. Each gallon of solvent requires 1.2 gallons of a liquid chemical and 1.7 pounds of a chemical compound. In addition 0.2 direct labor hour is needed for each gallon of solvent at a standard rate of $8.90. The liquid chemical is purchased in drums at a cost of $3 per gallon subject to a 2% discount if paid for within 10 days. The company’s policy is to take advantage of all discounts. The chemical compound has a standard cost of $50 per 100 pounds.

During 1990, the firm experienced the following:

Actual Production of solvent was 109,100 gallons

Actual Purchases of raw materials: Liquid chemical: 163,650 gallons at $494,223,

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Chemical compound: 218,200 pounds at $100,372

Actual usage of raw materials: Liquid chemical: 141,830 gallons

Chemical compound: 180,015 pounds

Actual Direct Labor Hours: 23,100 hours at $207,900

Required:

A. Calculate material price and quantity variances

B. Calculate the labor rate and efficiency variance

Solution (P-16)

A. MPV

Liquid Chemical (3.02 – 2.94) × 163,650 13,092 UChemical Compound (46 – 50) × 2,182 8,728 F

$494,000 ÷ 163,650 = $3.02 $3 × 0.98 = 2.94 100,372 ÷ 218,200 = $ 0.46

B. MQV

Liquid Chemical (141,830 – 130,920) × 2.94 23,075.40 U

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Chemical Compound (180,015÷ 100 – 185,470÷100) × 50 2,727.50 F

109,100 × 1.7 = 185,470 109,100 × 1.2 = 130,920

C. LRV

LRV ($9 – $8.90) × 23,100 $2,310 U

Actual Hours Rate = 207,900 ÷ 23,100 = $9

D. LEV

LEV (23,100 – 21,820) × $ 8.90 $11,392 U

Standard Hours = 109,100 × 0.20 = 21,820

Problem No 17

Flexmem Inc., manufacturer and sells four GB flash drives wholesale to computer retail chains and direct marketing organizations that we sell the drives as a house grand. The drives retail for an average of $8.00 per unit and compete with well known brands that retail for between $ 10 and $ 12 per drive. Flexmem CFO has provided the following budgeted standards for the month of February 2010.

Budgeted average wholesale selling price per drive $4.00Total direct materials standard cost per drive $0.85Direct manufacturing labor: Direct manufacturing standard labor cost per hour $15.00 Average labor productivity rate (drives per hour) 300Direct marketing cost per unit $0.30Fixed overhead $900,000

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Forecasted sales for the month 1,500,000 units

On March 8th, the vice president of planning and control needs with the executive committee to discuss February results. He reports as follows.

Unit sales total 80% of plan Actual average selling price decline to $3.70 Productivity drop to 250 drives per hour. However due to favorable market

conditions the actual price of direct materials per unit drop to $0.80. Actual direct marketing cost were $0.30 per unit Fixed overhead costs were $30,000 below plan

Required:

1. Calculatea) Flexible- budget operating incomeb) Total flexible- budget variancec) Total sales volume variance

2. Calculate price and efficiency variances for direct manufacturing labor

Problem No 18

Tedken Company produces and sells a special formula shampoo, marketed under the label of Classique. The firm uses a just in time inventory system. The standard costs for the direct material and direct labor needed for each bottle of shampoo are as follows.

Direct materials 10 ounces × $0.15 per ounce Direct labor 0.4 hours × $12 per hour

During the month of May, the company produced 32,000 bottles of shampoo and incurred the following actual direct manufacturing costs:Purchases and usage of direct materials: 330,000 ounces at a total cost of $56,100Usage of direct labor: 13,100 hours at a total cost of $159,820.

Required:

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A. What was the total manufacturing cost variance for the firm’s May production performance?

B. Compute the following cost variances:

1. Material price variance 2. Materials quantity variance 3. Labor rate variance 4. Labor efficiency variance

Problem No 19

Maria Company produces a laundry detergent known as Clean-up. The firm uses a standard cost system to control costs. The standard direct materials required for one box of Clean-up are as follows.

Chemical Compound: 5 pounds at $1.10 per pound Container: I box at $0.05 per box

During August, the company purchased and used 110,000 pounds of chemical compound at $1.25 each and 22,000 containers at $.04 each. The actual production of Clean-up amounted to 21,200 boxes.

Required:

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Compute the material price and material quantity variances

Problem No 20

Lemon Tent Company produces a tent which requires two types of Nylon. Nylon F4 and Nylon Q7. The raw material standards are as follows.

Materials Std Qty per unit Standard costNylon F4 10 yards $14 per yardNylon Q7 6 yards $24 per yard The direct labor standards are 8 hours per tent at $10 per hour. There were no beginning or ending work in process inventories. Actual production for the year are as follows.

Direct Materials Nylon F4 Nylon Q7

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Purchases 122,000 yards 74,000 yardsPurchase Price $11.50 per yard $24.50 per yardBeginning inventory 8,000 yards 3,000 yardsEnding inventory 6,000 yards 5,000 yards

Direct labor: 95,200 hours @ $10.30 per hour12,000 tents were produced during the year

Required:

A. Calculate material price and quantity variances.

Price Variance

Nylon F4 ($11.5 – $14) × 122,000 = $305,000 FNylon Q7 ($24.50 – $24) × 74,000 = $37,000 U

Total MPV = $305,000 - $ 37,000 = $268,000 F

Quantity Variance

Nylon F4 (124,000 – 120,000) × $14 = $56,000 UNylon Q7 (72,000 – 72,000) × $24 = 0

Total MPV = $56,000 U

B. Calculate the labor rate and efficiency variances.

LRV = ($10.30 – $10) × 95,200 = $28,560 ULEV = (95,200 – 96,000) × $ 10 = 8,000 F

Total = 28,560 – 8,000 = $20,560

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Problem No 21:

Cool Ice Company is a large producer and distributor of packaged ice. The Company uses standard costs for all of its different sized packages. The standard costs and actual costs for the month of August are given below for one of the company’s product lines (per unit of product)

Standard Cost Actual CostDirect Materials: Standard: 25 gallons at $0.50 each $12.50 Actual: 28 gallons at $0.60 each $16.80Direct Labor: Standard: 3 hour at $10.00 per hour 3.00 Actual: 0.25 hour at $10.80 per hour 2.70Total Cost per unit $15.50 $19.50

During the month of August, the company produced 18,400 units of product. A comparison of standard and actual costs for the period on a total cost basis is given below.

Actual Costs 18,400 units at $19.50 $358,800Standard costs 18,400 units at $15.50 (258,200)Unfavorable cost variance $73,600

There was no inventory of materials on hand at the beginning of August. During the month, 515,200 gallons of materials were purchased, all of which were used in production.

Required:

A. for direct materials

1. Compute the price and quantity variances for August 2. Prepare journal entries to record all activity relating to direct materials for August.

B. for direct labor

1. Compute the rate and efficiency variances. 2. Prepare journal entries to record the incurrence of direct labor cost for August.

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Problem No 22

Albert manufacturing Company manufactures a single product. The standard cost of one unit of this product is:

Direct Materials: 6 meters at $1.50 $9.00Direct Labor: 1 hour at $6.75 $6.75Variable Overhead: 1 hour at $4.50 $4.50Total Standard Variable Cost per unit $20.25

During the month of October, 6,000 units were produced. Selected cost data relating to the month’s production follow:

Materials Purchased: 60,000 meters at $1.43 $85,800 Materials Used in Production: 38,000 meters Direct Labor____ hours at $_____ per hour $41,925 Variable Overhead Cost incurred $30,713 Variable Overhead Efficiency Variance $ 2,250 U

There was no beginning inventory of raw material. The variable overhead rate is based on direct labor hours.

Required:

a) For direct materials, compute the price and quantity variances for the month, and prepare journal entries to record activity for the month.

b) For direct labor, compute the rate and efficiency variances for the month, and prepare a journal entry to record labor activity for the month.

c) For variable overhead, compute the spending variances for the month, and prove the efficiency variance given above.

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Problem No 23

The manager of the BlackBerry Department of RIM is unhappy with the sales for the accounting period, but points out to you that both variable and fixed costs have a favorable variance as is shown in the following analysis

Actual results % Static Budget % SB VarianceUnits sold 10,000 0.0 12,000 0.0 -2,000

Sales revenue $1,850,000 100.0 $2,160,000 100.0 $(310,000)Variable costs 1,120,000 60.50 1,188,000 55.00 68,000

CM 730,000 39.50 972,000 45.00 (242,0000Fixed costs 705,000 38.10 710,000 32.90 5,000

Operating Income 25,000 1.40 262,000 12.10 (237,000)

The Product Manager asks you to interpret these results. You tell the Product manager that there is a better way to calculate variances. You tell her that using only the static budget for variance analysis does not give the true picture.

Required

Prepare variance analysis for the Product Manager using flexible budget variance analysis. Explain the variances to the product manager.She knows nothing about management accounting.

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A: Xavier Company produces a single product. Variable manufacturing overhead is applied to products on the basis of direct labor-hours. The standard costs for one unit of product are as follows. (6 Marks)

Direct materials: 6 ounces at $0.50 per ounce $3.00Direct labor: 1.8 hours at $10 per hour $18.00Variable manufacturing overhead: 1.8 hours at $5 per hour $9.00 Total standard variable cost per unit $30.00

During June, 2000 units were produced. The costs associated with June’s operations were as follows:

Materials purchased: 18,000 ounces at $0.60 per ounce $10,800Materials used in production: 14,000 ouncesDirect labor: 4,000 hours at $9.75 per hour 39,000Variable manufacturing overhead costs incurred 20,800

Required:

1. Compute the Materials variances. (2 Marks)

MPV = (0.60 – 0.50) × 18,000 = $1,800 U MQV = (14,000 – 12,000) × O.50 = $ 1,000 U

Total = $2,800 U

2. Compute the labor variance.( 2 Marks)

LRV = (9.75 – 10.00)× 4,000 = $ 1,000 F LEV = (4,000 – 3,600)× $10 = $ 4,000 UTotal= $3,000

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3. Compute the variable manufacturing overhead variance. (2 Marks)

Variable overhead spending Variance = (5.20 – 5)×4,000 = $800 UVariable overhead efficiency variance = (4000 – 3,600) × $5 = $2,000 U

Total Variance = $2,800