Standard Costing

PERFORMANCE EVALUATION THROUGHSTANDARD COSTS

TRUE-FALSE STATEMENTS

1. Inventories cannot be valued at standard cost in financial statements.

2. Standard cost is the industry average cost for a particular item.

3. A standard is a unit amount, whereas a budget is a total amount.

4. Standard costs may be incorporated into the accounts in the general ledger.

5. An advantage of standard costs is that they simplify costing of inventories and reduce clerical costs.

6. Setting standard costs is relatively simple because it is done entirely by accountants.

7. Normal standards should be rigorous but attainable.

8. Actual costs that vary from standard costs always indicate inefficiencies.

9. Ideal standards will generally result in favorable variances for the company.

10. Normal standards incorporate normal contingencies of production into the standards.

11. Once set, normal standards should not be changed during the year.

12. In developing a standard cost for direct materials, a price factor and a quantity factor must be considered.

13. A direct labor price standard is frequently called the direct labor efficiency standard.

14. The standard predetermined overhead rate must be based on direct labor hours as the standard activity index.

15. Standard cost cards are the subsidiary ledger for the Work in Process account in a standard cost system.

16. A variance is the difference between actual costs and standard costs.

17. If actual costs are less than standard costs, the variance is favorable.

18. A materials quantity variance is calculated as the difference between the standard direct materials price and the actual direct materials price multiplied by the actual quantity of direct materials used.

19. An unfavorable labor quantity variance indicates that the actual number of direct labor hours worked was greater than the number of direct labor hours that should have been worked for the output attained.

Test Bank for Managerial Accounting, Second Edition

20. Standard cost + price variance + quantity variance = Budgeted cost.

21. The overhead controllable variance relates primarily to fixed overhead costs.

22. The overhead volume variance relates only to fixed overhead costs.

23. If production exceeds normal capacity, the overhead volume variance will be favorable.

24. There could be instances where the production department is responsible for a direct materials price variance.

25. The starting point for determining the causes of an unfavorable materials price variance is the purchasing department.

26. A two-variance analysis of overhead consists of a controllable variance and a volume variance.

27. Variance analysis facilitates the principle of "management by exception."

*28. A credit to a Materials Quantity Variance account indicates that the actual quantity of direct materials used was greater than the standard quantity of direct materials allowed.

*29. A standard cost system may be used with a job order cost system but not a process cost system.

*30. A debit to the Overhead Volume Variance account indicates that the standard hours allowed for the output produced was greater than the standard hours at normal capacity.

Answers to True-False Statements

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.1. F 6. F 11. F 16. T 21. F 26. T2. F 7. T 12. T 17. T 22. T 27. T3. T 8. F 13. F 18. F 23. T *28. F4. T 9. F 14. F 19. T 24. T *29. F5. T 10. T 15. F 20. F 25. T *30. F

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Performance Evaluation Through Standard Costs 8-3

MULTIPLE CHOICE QUESTIONS

31. A standard cost isa. a cost which is paid for a group of similar products.b. the average cost in an industry.c. a predetermined cost.d. the historical cost of producing a product last year.

32. The difference between a budget and a standard is thata. a budget expresses what costs were, while a standard expresses what costs should

be.b. a budget expresses management's plans, while a standard reflects what actually

happened.c. a budget expresses a total amount while a standard expresses a unit amount.d. standards are excluded from the cost accounting system, whereas budgets are

generally incorporated into the cost accounting system.

33. Standard costs may be used bya. universities.b. governmental agencies.c. charitable organizations.d. all of these.

34. Which of the following statements is false?a. A standard cost is more accurate than a budgeted cost.b. A standard is a unit amount.c. In concept, standards and budgets are essentially the same.d. The standard cost of a product is equivalent to the budgeted cost per unit of product.

35. Budget data are not journalized in cost accounting systems with the exception ofa. the application of manufacturing overhead.b. direct labor budgets.c. direct materials budgets.d. cash budget data.

36. It is possible that a company's financial statements may report inventories ata. budgeted costs.b. standard costs.c. both budgeted and standard costs.d. none of these.

37. If standard costs are incorporated into the accounting system,a. it may simplify the costing of inventories and reduce clerical costs.b. it can eliminate the need for the budgeting process.c. the accounting system will produce information which is less relevant than the

historical cost accounting system.d. approval of the stockholders is required.

38. Standard costsa. may show past cost experience.b. help establish expected future costs.c. are the budgeted costs per unit in the present.d. all of these.


39. Which of the following statements about standard costs is false?a. Properly set standards should promote efficiency.b. Standard costs facilitate management planning.c. Standards should not be used in "management by exception."d. Standard costs can simplify the costing of inventories.

40. Which of the following is not considered an advantage of using standard costs?a. Standard costs can reduce clerical costs.b. Standard costs can be useful in setting prices for finished goods.c. Standard costs can be used as a means of finding fault with performance.d. Standard costs can make employees "cost-conscious."

41. If a company is concerned with the potential negative effects of establishing standards, they shoulda. set loose standards that are easy to fulfill.b. offer wage incentives to those meeting standards.c. not employ any standards.d. set tight standards in order to motivate people.

42. A standard which represents an efficient level of performance that is attainable under expected operating conditions is called a(n)a. ideal standard.b. loose standard.c. tight standard.d. normal standard.

43. Ideal standardsa. are rigorous but attainable.b. are the standards generally used in a master budget.c. reflect optimal performance under perfect operating conditions.d. will always motivate employees to achieve the maximum output.

44. The final decision as to what standard cost should be is the responsibility ofa. the quality control engineer.b. the managerial accountants.c. the purchasing agent.d. management.

45. The labor time requirements for standards may be determined by thea. sales manager.b. product manager.c. industrial engineers.d. payroll department manager.

46. The two levels that standards may be set at area. normal and fully efficient.b. normal and ideal.c. ideal and less efficient.d. fully efficient and fully effective.

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47. The most rigorous of all standards is thea. normal standard.b. realistic standard.c. ideal standard.d. conceivable standard.

48. Most companies that use standards set them ata. the normal level.b. a conceivable level.c. the ideal level.d. last year's level.

49. A managerial accountant

1. does not participate in the standard setting process.2. provides knowledge of cost behaviors in the standard setting process.3. provides input of historical costs to the standard setting process.

a. 1b. 2c. 3d. 2 and 3

50. The cost of freight-ina. is to be included in the standard cost of direct materials.b. is considered a selling expense.c. should have a separate standard apart from direct materials.d. should not be included in a standard cost system.

51. The direct materials quantity standard would not be expressed ina. pounds.b. barrels.c. dollars.d. board feet.

52. The direct materials quantity standard shoulda. exclude unavoidable waste.b. exclude quality considerations.c. allow for normal spoilage.d. always be expressed as an ideal standard.

53. The direct labor quantity standard is sometimes called the direct labora. volume standard.b. effectiveness standard.c. efficiency standard.d. quality standard.

54. A manufacturing company would include setup and downtime in their directa. materials price standard.b. materials quantity standard.c. labor price standard.d. labor quantity standard.


55. Allowance for spoilage is part of the directa. materials price standard.b. materials quantity standard.c. labor price standard.d. labor quantity standard.

56. The total standard cost to produce one unit of product is showna. at the bottom of the income statement.b. at the bottom of the balance sheet.c. on the standard cost card.d. in the Work in Process Inventory account.

57. An unfavorable materials quantity variance would occur ifa. more materials are purchased than are used.b. actual pounds of materials used were less than the standard pounds allowed.c. actual labor hours used were greater than the standard labor hours allowed.d. actual pounds of materials used were greater than the standard pounds allowed.

58. If actual direct material costss are greater than standard direct materials costs, it means thata. actual costs were calculated incorrectly.b. the actual unit price of direct materials was greater than the standard unit price of direct

materials.c. the actual unit price of raw materials or the actual quantities of raw materials used was

greater than the standard unit price or standard quantities of raw materials expected.d. the purchasing agent or the production foreman is inefficient.

59. If actual costs are greater than standard costs, there is a(n)a. normal variance.b. unfavorable variance.c. favorable variance.d. error in the accounting system.

60. A total materials variance is analyzed in terms ofa. price and quantity variances.b. buy and sell variances.c. quantity and quality variances.d. tight and loose variances.

61. A company developed the following per-unit standards for its product: 2 pounds of direct materials at $6 per pound. Last month, 1,000 pounds of direct materials were purchased for $5,700. The direct materials price variance for last month wasa. $5,700 favorable.b. $300 favorable.c. $150 favorable.d. $300 unfavorable.

62. The per-unit standards for direct materials are 2 gallons at $4 per gallon. Last month, 5,600 gallons of direct materials that actually cost $21,200 were used to produce 3,000 units of product. The direct materials quantity variance for last month wasa. $1,600 favorable.b. $1,200 favorable.c. $1,600 unfavorable.d. $2,800 unfavorable.

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63. The per-unit standards for direct labor are 2 direct labor hours at $12 per hour. If in producing 1,200 units, the actual direct labor cost was $25,600 for 2,000 direct labor hours worked, the total direct labor variance isa. $960 unfavorable.b. $3,200 favorable.c. $2,000 unfavorable.d. $3,200 unfavorable.

64. The standard rate of pay is $10 per direct labor hour. If the actual direct labor payroll was $39,200 for 4,000 direct labor hours worked, the direct labor price (rate) variance isa. $800 unfavorable.b. $800 favorable.c. $1,000 unfavorable.d. $1,000 favorable.

65. The standard number of hours that should have been worked for the output attained is 8,000 direct labor hours and the actual number of direct labor hours worked was 8,400. If the direct labor price variance was $4,200 unfavorable, and the standard rate of pay was $9 per direct labor hour, what was the actual rate of pay for direct labor?a. $8.50 per direct labor hourb. $7.50 per direct labor hourc. $9.50 per direct labor hourd. $9.00 per direct labor hour

66. Variances from standards area. expressed in total dollars.b. expressed on a per-unit basis.c. expressed on a percentage basis.d. all of these.

67. A favorable variancea. is an indication that the company is not operating in an optimal manner.b. implies a positive result if quality control standards are met.c. implies a positive result if standards are flexible.d. means that standards are too loosely specified.

68. The total materials variance is equal to thea. materials price variance.b. difference between the materials price variance and materials quantity variance.c. product of the materials price variance and the materials quantity variance.d. sum of the materials price variance and the materials quantity variance.

69. The total overhead variance is equal to thea. sum of the total materials variance and the total labor variance.b. difference between the total materials variance and the total labor variance.c. sum of the controllable variance and the volume variance.d. total variance minus the controllable variance and the volume variance.


70. The total variance is $5,000. The total materials variance is $2,000. The total labor variance is twice the total overhead variance. What is the total overhead variance?a. $500.b. $1,000.c. $1,500.d. $2,000.

71. The formula for the materials price variance isa. (AQ × SP) – (SQ × SP).b. (AQ × AP) – (AQ × SP).c. (AQ × AP) – (SQ × SP).d. (AQ × SP) – (SQ × AP).

72. The formula for the materials quantity variance isa. (SQ × AP) – (SQ × SP).b. (AQ × AP) – (AQ × SP).c. (AQ × SP) – (SQ × SP).d. (AQ × AP) – (SQ × SP).

73. A company uses 6,300 pounds of materials and exceeds the standard by 300 pounds. The quantity variance is $900 unfavorable. What is the standard price?a. $1.00.b. $2.00.c. $3.00.d. Cannot be determined from the data provided.

74. A company purchases 15,000 pounds of materials. The materials price variance is $3,000 favorable. What is the difference between the standard and actual price paid for the materials?a. $1.00.b. $.20.c. $5.00.d. Cannot be determined.

75. A company uses 20,000 pounds of materials for which they paid $4.50 a pound. What is the materials price variance?a. $.50.b. $1.00.c. $2.50.d. Cannot be determined from the data provided.

76. If the materials price variance is $1,200 F and the materials quantity and labor variances are each $900 U, what is the total materials variance?a. $1,200 Fb. $900 Uc. $300 Fd. $1,350 U

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Use the following information for questions 77–79.

Staley Company has a materials price standard of $3.00 per pound. Two thousand pounds of materials were purchased at $3.30 a pound. The actual quantity of materials used was 2,000 pounds, although the standard quantity allowed for the output was 1,800 pounds.

77. Staley Company's materials price variance isa. $60 U.b. $600 U.c. $540 U.d. $600 F.

78. Staley Company's materials quantity variance isa. $600 U.b. $600 F.c. $660 F.d. $660 U.

79. Staley Company's total materials variance isa. $1,200 U.b. $1,200 F.c. $1,260 U.d. $1,260 F.

80. The matrix approach to variance analysisa. will yield slightly different variances than the formula approach.b. is more accurate than the formula approach.c. does not separate the price and quantity variance calculations.d. provides a convenient structure for determining each variance.

81. Labor efficiency is measured by thea. materials quantity variance.b. total labor variance.c. labor quantity variance.d. labor rate variance.

82. An unfavorable labor quantity variance may be caused bya. paying workers higher wages than expected.b. misallocation of workers.

c. worker fatigue or carelessness.d. higher pay rates mandated by union contracts.

83. The investigation of materials price variance usually begins in thea. first production department.b. purchasing department.c. controller's office.d. accounts payable department.

84. The investigation of a materials quantity variance usually begins in thea. production department.b. purchasing department.c. sales department.d. controller's department.


85. If the labor quantity variance is unfavorable and the cause is inefficient use of direct labor, the responsibility rests with thea. sales department.b. production department.c. budget office.d. controller's department.

86. An overhead volume variance is calculated as the difference between normal capacity hours and standard hours alloweda. times the total predetermined overhead rate.b. times the predetermined variable overhead rate.c. times the predetermined fixed overhead rate.d. divided by actual number of hours worked.

87. Manufacturing overhead costs are applied to work in process on the basis ofa. actual hours worked.b. standard hours allowed.c. ratio of actual variable to fixed costs.d. actual overhead costs incurred.

88. Which of the following statements is false?a. The overhead volume variance indicates whether plant facilities were used efficiently

during the period.b. The costs that cause the overhead volume variance are usually controllable costs.c. The overhead volume variance relates solely to fixed costs.d. The overhead volume variance is favorable if standard hours allowed for output is

greater than the standard hours at normal capacity.

89. If the standard hours allowed are less than the standard hours at normal capacity,a. the overhead volume variance will be unfavorable.b. variable overhead costs will be underapplied.c. the overhead controllable variance will be favorable.d. variable overhead costs will be overapplied.

90. Which of the following statements about overhead variances is false?a. Standard hours allowed are used in calculating the controllable variance.b. Standard hours allowed are used in calculating the volume variance.c. The controllable variance pertains solely to fixed costs.d. The total overhead variance pertains to both variable and fixed costs.

91. The overhead volume variance relates only toa. variable overhead costs.b. fixed overhead costs.c. both variable and fixed overhead costs.d. all manufacturing costs.

92. The overhead controllable variance is calculated as the difference between actual overhead costs incurred and the budgeteda. overhead costs for the standard hours allowed.b. overhead costs applied to the product.c. overhead costs at the normal level of activity.d. fixed overhead costs.

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93. If the standard hours allowed are less than the standard hours at normal capacity, the volume variancea. cannot be calculated.b. will be favorable.c. will be unfavorable.d. will be greater than the controllable variance.

94. The budgeted overhead costs for standard hours allowed and the overhead costs applied to product are the same amounta. for both variable and fixed overhead costs.b. only when standard hours allowed is less than normal capacity.c. for variable overhead costs.d. for fixed overhead costs.

95. The controllable variance relates toa. fixed overhead costs.b. variable overhead costs.c. both fixed and variable overhead costs.d. all manufacturing costs.

96. The difference between overhead budgeted and overhead applied is thea. budget variance.b. controllable variance.c. total overhead variance.d. volume variance.

97. The overhead variance that indicates whether plant facilities were efficiently used is thea. budget variance.b. controllable variance.c. spending variance.d. volume variance.

98. Each of the following may cause an unfavorable controllable variance excepta. higher than expected use of indirect materials.b. greater than expected use of indirect labor.c. increases in indirect manufacturing costs.d. inefficient use of direct labor.

99. The difference between actual overhead costs and overhead costs applied is the a. budget variance.b. controllable variance.c. total overhead variance.d. volume variance.

100. Variance reports area. external financial reports.b. SEC financial reports.c. internal reports for management.d. all of these.


101. In using variance reports, management looks fora. total assets invested.b. significant variances.c. competitors’ costs in comparison to the company's costs.d. more efficient ways of valuing inventories.

102. All of the following variances are reported to the production department except the a. labor price variance.b. materials price variance.c. overhead controllable variance.d. labor price and materials price variances.

103. The costing of inventories at standard cost for external financial statement reporting purposes isa. not permitted.b. preferable to reporting at actual costs.c. in accordance with generally accepted accounting principles if significant differences

exist between actual costs and standard costs.d. in accordance with generally accepted accounting principles if significant differences

do not exist between actual and standard costs.

104. Debit balances in variance accounts representa. unfavorable variances.b. favorable variances.c. favorable for price variances; unfavorable for quantity variances.d. favorable for quantity variances; unfavorable for price variances.

105. Income statements prepared internally for management often show cost of goods sold at standard cost and variances area. separately disclosed.

b. deducted as other expenses and revenues.c. added to cost of goods sold.d. closed directly to retained earnings.

106. In income statements prepared for management under a standard cost accounting system, each of the following are reported at actual amounts excepta. sales.b. selling expenses.c. gross profit.d. cost of goods sold.

* 107. If 20,000 pounds of direct materials are purchased for $14,400 on account and the standard cost is $.70 per pound, the journal entry to record the purchase isa. Raw Materials Inventory ..................................................... 14,400

Accounts Payable ...................................................... 14,400b. Work In Process Inventory .................................................. 14,400

Accounts Payable ...................................................... 14,000Materials Quantity Variance ....................................... 400

c. Raw Materials Inventory ..................................................... 14,400Accounts Payable ...................................................... 14,000Materials Price Variance ............................................ 400

d. Raw Materials Inventory ..................................................... 14,000Materials Price Variance ..................................................... 400

Accounts Payable ...................................................... 14,400

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*108. A standard cost system may be used witha. job order costing only.b. process costing only.c. activity-based costing.d. either job order or process costing.

*109. The materials price variance is recordeda. at the end of the accounting period.b. when materials are purchased.c. when materials are issued to production.d. at the beginning of the accounting period.

*110. Each of the following accounts is recorded at standard cost excepta. Factory Labor.b. Raw Materials Inventory.c. Wages Payable.d. Work in Process Inventory.

Answers to Multiple Choice Questions

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.31. c 43. c 55. b 67. b 79. a 91. b 103. d32. c 44. d 56. c 68. d 80. d 92. a 104. a33. d 45. c 57. d 69. c 81. c 93. c 105. a34. a 46. b 58. c 70. b 82. c 94. c 106. d35. a 47. c 59. b 71. b 83. b 95. b *107. d36. b 48. a 60. a 72. c 84. a 96. d *108. d37. a 49. d 61. b 73. c 85. b 97. d *109. b38. d 50. a 62. a 74. b 86. c 98. d *110. c39. c 51. c 63. b 75. d 87. b 99. c40. c 52. c 64. b 76. c 88. b 100. c41. b 53. c 65. c 77. b 89. a 101. b42. d 54. d 66. a 78. a 90. c 102. b


EXERCISES

Ex. 111

Betty Short manufactures and sells a nutrition drink for children. She wants to develop a standard cost per gallon. The following are required for production of a 100-gallon batch:

1,960 ounces of lime Kool-Drink at $.15 per ounce40 pounds of granulated sugar $.60 per pound63 kiwi fruit at $.80 each100 protein tablets at $.90 each4,000 ounces of water at $.0025 per ounce

Betty estimates that 2% of the lime Kool-Drink is wasted, 20% of the sugar is lost, and 10% of the kiwis cannot be used.

InstructionsCompute the standard cost of the ingredients for one gallon of the nutrition drink.

Solution 111 (15–20 min.)

Ingredient Amount Per Gallon Standard WasteLime Kool-Drink 19.6 oz. 2%Sugar .40 lb. 20%Kiwis .63 10%Protein Tablets 1 0%Water 40 oz. 0%

Standard Usage Standard Price Standard CostLime Kool-Drink (a) 20.00 oz $ .15 $3.00Sugar (b) .50 lb. .60 .30Kiwis (c) .70 .80 .56Protein Tablets 1 .90 .90Water 40 oz. .0025 .10

Standard Cost per Gallon $4.86

(a) .98X = 19.6 ounces X = 20.00(b) .80X = .40 pounds X = .50(c) .90X = .63 kiwis X = .70

Ex. 112

The following direct labor data pertain to the operations of Laird Manufacturing Company for the month of November:

Actual labor rate $9.20 per hr.Actual hours used 10,000Standard labor rate $9.00 per hr.Standard hours allowed 9,500

InstructionsPrepare a matrix and calculate the labor variances.

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Ex. 112 (cont.)

Price Variance Quantity Variance

Total Labor Variance


Actual Hours Actual Hours Standard Hours× Actual Rate × Standard Rate × Standard Rate

10,000 × $9.20 = 10,000 × $9.00 = 9,500 × $9.00 =$92,000 $90,000 $85,500


$2,000 U $4,500 U


$6,500 U


Ex. 113

The following direct materials data pertain to the operations of Jenson Manufacturing Company for the month of December.

Standard materials price $5.00 per poundActual quantity of material purchased and used 16,400 pounds

The standard cost card shows that a finished product contains 4 pounds of material. The 16,400 pounds were purchased in December at a discount of 5% from the standard price. In December, 4,000 units of finished product were manufactured.

InstructionsPrepare a matrix for materials and calculate the materials variances.


Total Materials Variance


Actual Quantity Actual Quantity Standard Quantity× Actual Rate × Standard Rate × Standard Price

16,400 × $4.75 = 16,400 × $5.00 = 16,000 × $5.00 =$77,900 $82,000 $80,000

Price Variance Quantity Variance$4,100 F $2,000 U


$2,100 F

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Ex. 114

Sweet Dreams, Inc. makes down pillows. Each king pillow requires 4 pounds of down and takes .3 hours of direct labor. The standard cost of the down used by Sweet Dreams is $8 per pound and the standard labor cost is $10 per hour. In January, Sweet Dreams purchased 7,500 pounds of down for $60,375. During the year, the company manufactured 2,000 king pillows. Payroll reported a total of 740 direct labor hours at a cost of $7,030.

Instructionsa. Compute the materials price and quantity variances and indicate whether the variances are

favorable or unfavorable.b. Compute the labor price and quantity variances and indicate whether the variances are

favorable or unfavorable.

Solution 114 (15 min.)

a. Actual Quantity Actual Quantity Standard Quantity× Actual Price × Standard Price × Standard Price7,500 × $8.05 = 7,500 × $8 = 8,000 × $8 =

$60,375 $60,000 $64,000

Price Variance Quantity Variance$375 U $4,000 F


$3,625 F

b. Actual Hours Actual Hours Standard Hours× Actual Rate × Standard Rate × Standard Rate740 × $9.50 = 740 × $10 = 600 × $10 =

$7,030 $7,400 $6,000

Price Variance Quantity Variance$370 F $1,400 U


$1,030 U

(1) ($64,000 + $1,600) / $2(2) ($65,600 – $1,640) / $32,800


Ex. 115

You have just been hired at Ralph’s as a managerial accountant. You are responsible for variance analysis for direct materials required in the manufacturing of polo mallets. An old college friend called and asked you to lunch. You raced out the door before finishing the cost analysis for June. While you were gone, a janitor accidentally threw away your cost analysis sheet. You do remember, however, that each mallet requires 4 feet of wood with a standard cost of $2 per foot and that there were 8,000 mallets completed during June. In addition, you remember that the materials price variance was $1,640 favorable, and the total materials variance was $40 favorable.

Instructionsa. Calculate the materials quantity variance.b. Calculate the actual price paid per foot of wood.


Actual Quantity Actual Quantity Standard Quantity× Actual Price × Standard Price × Standard Price

(1)32,800 × (2)$1.95 = (1)32,800 × $2 = 32,000 × $2 =$63,960 $65,600 $64,000

Price Variance Quantity Variance$1,640 U $1,600 U


$40 F

a. Materials quantity variance = $1,600 U ($1,640 F – $40 F)b. Actual price paid per foot of wood = $1.95.

Ex. 116

Cattybrook Brick Company makes fired clay bricks for construction. The company uses a standard costing system that calls for 2.75 pounds of clay at $.10 per pound for each brick. The standard cost for labor is .075 hour at $16 per hour for each brick. In September, Cattybrook anticipates production to be at a level of 200,000 bricks. During September, Cattybrook manufactured 201,000 bricks. The company purchased 553,000 pounds of clay at a cost of $66,365. The cost of direct labor was $242,530 for 15,350 hours.

Instructionsa. Compute the materials price and quantity variances and indicate whether the variances are

favorable or unfavorable.b. Compute the labor price and quantity variances and indicate whether the variances are

favorable or unfavorable.

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a. Actual Quantity Actual Quantity Standard Quantity× Actual Price × Standard Price × Standard Price

553,000 × $.12 = 553,000 × $.10 = 552,750 × $.10 =$293,090 $55,300 $55,275

Price Variance Quantity Variance$11,060 U $25 U

TotalMaterials Variance

$11,035 F

b. Actual Hours Actual Hours Standard Hours× Actual Rate × Standard Rate × Standard Rate

15,350 × $15.80 = 15,350 × $16 = 15,075 × $16 =$242,530 $245,600 $241,200

Price Variance Quantity Variance$3,070 F $4,400 U

TotalLabor Variance

$1,330 U

Ex. 117

Fryer Company has developed the following standard costs for its product for 2002:

FRYER COMPANYStandard Cost Card

Product ACost Element Standard Quantity × Standard Price = Standard CostDirect materials 4 pounds $3 $12Direct labor 3 hours 8 24Manufacturing overhead 3 hours 4 12

$48

The company expected to produce 30,000 units of Product A in 2002 and work 90,000 direct labor hours.


Ex. 117 (cont.)

Actual results for 2002 are as follows:• 31,000 units of Product A were produced. • Actual direct labor costs were $759,000 for 92,000 direct labor hours worked. • Actual direct materials purchased and used during the year cost $352,800 for 126,000

pounds. • Actual variable overhead incurred was $155,000 and actual fixed overhead incurred was

$205,000.

InstructionsCompute the following variances showing all computations to support your answers. Indicate whether the variances are favorable or unfavorable.(a) Materials quantity variance.(b) Total direct labor variance.(c) Direct labor quantity variance.(d) Direct materials price variance.(e) Total overhead variance.


(a) Materials quantity variance = $6,000 unfavorable.(AQ × SP) – (SQ × SP) = Materials quantity variance(126,000 × $3) – (124,000 × $3) = $378,000 – $372,000 = $6,000 unfavorableSQ = 31,000 × 4 = 124,000 pounds

(b) Total direct labor variance = $15,000 unfavorable.(AH × AR) – (SH × SR) = Total direct labor variance(92,000 × $8.25) – (93,000 × $8) = $759,000 – $744,000 = $15,000 unfavorableSH = 31,000 × 3 = 93,000 direct labor hours

(c) Direct labor quantity variance = $8,000 favorable.(AH × SR) – (SH × SR) = Direct labor quantity variance(92,000 × $8) – (93,000 × $8) = $736,000 – $744,000 = $8,000 favorable

(d) Direct materials price variance = $25,200 favorable.(AQ × AP) – (AQ × SP) = Direct materials price variance(126,000 × $2.80) – (126,000 × $3) = $352,800 – $378,000 = $25,200 favorable

(e) Total overhead variance = $12,000 favorable.(Actual overhead) – (Overhead applied) = Total overhead variance($155,000 + $205,000) – (93,000 × $4) = $360,000 – $372,000 = $12,000 favorable

Standard hours = 31,000 × 3 = 93,000 direct labor hours

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Ex. 118

Greene Company developed the following standard costs for its product for 2002:

GREENE COMPANYStandard Cost Card

Cost Elements Standard Quantity × Standard Price = Standard CostDirect materials 4 pounds $ 5 $20Direct labor 2 hours 10 20Variable overhead 2 hours 4 8Fixed overhead 2 hours 2 4

$52

The company expected to work at the 30,000 direct labor hours level of activity and produce 15,000 units of product.

Actual results for 2002 were as follows:• 14,200 units of product were actually produced.• Direct labor costs were $276,210 for 27,900 direct labor hours actually worked.• Actual direct materials purchased and used during the year cost $271,660 for 57,800 pounds.• Total actual manufacturing overhead costs were $170,000.

InstructionsCompute the following variances for Greene Company for 2002 and indicate whether the variance is favorable or unfavorable.1. Direct materials price variance.2. Direct materials quantity variance.3. Direct labor price variance.4. Direct labor quantity variance.5. Overhead controllable variance.6. Overhead volume variance.


1. Direct materials price variance = $17,340 favorable.(AQ × AP) – (AQ × SP) = Materials price variance(57,800 × $4.70) – (57,800 × $5) = $271,660 – $289,000 = $17,340 favorable

2. Direct materials quantity variance = $5,000 unfavorable.(AQ × SP) – (SQ × SP) = Materials quantity variance(57,800 × $5) – (56,800 × $5) = $289,000 – $284,000 = $5,000 unfavorableSQ = 14,200 products × 4 lbs = 56,800 lbs.

3. Direct labor price variance = $2,790 favorable.(AH × AR) – (AH × SR) = Labor price variance(27,900 × $9.90) – (27,900 × $10) = $276,210 – $279,000 = $2,790 favorable

4. Direct labor quantity variance = $5,000 favorable.(AH × SR) – (SH × SR) = Labor quantity variance(27,900 × $10) – (28,400 × $10) = $279,000 – $284,000 = $5,000 favorableSH = 14,200 units × 2 hrs = 28,400 direct labor hours


Solution 118 (cont.)

5. Overhead controllable variance = $3,600 favorable.Actual overhead – Budgeted overhead for = Controllable overhead variance

standard hours allowed$170,000 – $173,600 = $3,600 favorable

Budgeted overhead for 28,400 direct labor hours allowed.Variable overhead (28,400 × $4) = $113,600Fixed overhead = 60,000

$173,600

6. Overhead volume variance = $3,200 unfavorable.Budgeted overhead for 28,400 direct labor hours allowed

Variable overhead (28,400 × $4) = $113,600Fixed overhead = 60,000

173,600Overhead applied (28,400 × $6) = 170,400Overhead volume variance $ 3,200 unfavorable

Ex. 119

American Sporting Goods Company manufactures aluminum baseball bats that it sells to university athletic departments. It has developed the following per unit standard costs for 2002 for each baseball bat:

Manufacturing Direct Materials Direct Labor Overhead

Standard Quantity 2 Pounds (Aluminum) 1/2 hour 1/2 hourStandard Price $4.00 $10.00 $6.00Unit Standard Cost $8.00 $5.00 $3.00

In 2002, the company planned to produce 40,000 baseball bats at a level of 20,000 hours of direct labor.

Actual results for 2002 are presented below:1. Direct materials purchased were 82,000 pounds of aluminum which cost $344,400.2. Direct materials used were 73,000 pounds of aluminum.3. Direct labor costs were $187,200 for 19,500 direct labor hours actually worked.4. Total manufacturing overhead was $117,000.5. Actual production was 38,000 baseball bats.

Instructions(a) Compute the following variances:

Direct materials price.Direct materials quantity.Direct labor price.Direct labor quantity.Total overhead variance.

*(b) Prepare the journal entries to record the transactions and events in 2002.

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(a) 1. Direct materials price variance = $16,400 Unfavorable.(AQ × AP) – (AQ × SP)(82,000 × $4.20) – (82,000 × $4.00) = $344,400 – $328,000 = $16,400

2. Direct materials quantity variance = $12,000 Favorable.(AQ × SP) – (SQ × SP)(73,000 × $4.00) – (76,000* × $4.00) = $292,000 – $304,000 = $12,000*SQ = 38,000 × 2 pounds = 76,000 pounds

3. Direct labor price variance = $7,800 Favorable.(AH × AR) – (AH × SR)(19,500 × $9.60) – (19,500 × $10.00) = $187,200 – $195,000 = $7,800

4. Direct labor quantity variance = $5,000 Unfavorable.(AH × SR) – (SH × SR)(19,500 × $10.00) – (19,000* × $10.00) = $195,000 – $190,000 = $5,000*SH = 38,000 × 1/2 hour = 19,000 hours

5. Actual overhead – Overhead applied = Total overhead variance.$117,000 – $114,000* = $3,000 Unfavorable*SH 19,000 × $6.00 = $114,000

*(b) 1. Raw Materials Inventory ........................................................ 328,000Materials Price Variance ........................................................ 16,400

Accounts Payable ............................................................ 344,400(To record purchase of materials)

2. Work in Process Inventory ..................................................... 304,000Materials Quantity Variance ............................................. 12,000Raw Materials Inventory .................................................. 292,000

(To record issuance of direct materials)

3. Factory Labor ........................................................................ 195,000Labor Price Variance ....................................................... 7,800Wages Payable ................................................................ 187,200

(To record direct labor costs)

4. Work in Process Inventory ..................................................... 190,000Labor Quantity Variance ........................................................ 5,000

Factory Labor ................................................................... 195,000(To assign factory labor to jobs)

5. Manufacturing Overhead ....................................................... 117,000Accounts Payable/Cash etc. ............................................ 117,000

(To record overhead incurred)

6. Work in Process Inventory ..................................................... 114,000Manufacturing Overhead ................................................. 114,000

(To assign overhead to jobs)



7. Finished Goods Inventory (38,000 × $16) .............................. 608,000Work in Process Inventory ............................................... 608,000

(To record transfer of completed work to finished goods)

Ex. 120

The standard cost of Product 245 manufactured by Starr Company includes 2 pounds of direct materials at $5.00 per pound. During September, 40,000 pounds of direct materials are purchased at a cost of $4.80 per pound, and 37,000 pounds of direct materials are used to produce 19,000 units of Product 245.

Instructions(a) Compute the materials price and quantity variances.

*(b) Journalize the purchase of the materials and the issuance of the materials, assuming a standard cost system is used.


(a) Materials Price Variance:$192,000 – $200,000 = $8,000 F

(40,000 × $4.80) (40,000 × $5.00)

Materials Quantity Variance:$185,000 – $190,000 = $5,000 F

(37,000 × $5.00) *(38,000 × $5.00)

*19,000 × 2 pounds = 38,000

*(b) Raw Materials Inventory .............................................................. 200,000Materials Price Variance ...................................................... 8,000Accounts Payable ................................................................ 192,000

Work in Process Inventory ........................................................... 190,000Materials Quantity Variance ................................................. 5,000Raw Materials Inventory ....................................................... 185,000

Ex. 121

Lankford Company's standard labor cost of producing one unit of product is 2 hours at the rate of $14.00 per hour. During February, 38,500 hours of labor are incurred at a cost of $13.80 per hour to produce 19,000 units of product.

Instructions(a) Compute the labor price and quantity variances.

*(b) Journalize the incurrence of the labor costs and the assignment of direct labor to production, assuming a standard cost system is used.

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(a) Labor Price Variance:$531,300 – $539,000 = $7,700 F

(38,500 × $13.80) (38,500 × $14.00)

Labor Quantity Variance:$539,000 – $532,000 = $7,000 U

(38,500 × $14.00) (38,000 × $14.00)

*(b) Factory Labor .............................................................................. 539,000Labor Price Variance ............................................................ 7,700Wages Payable .................................................................... 531,300

Work in Process Inventory ........................................................... 532,000Labor Quantity Variance .............................................................. 7,000

Factory Labor ....................................................................... 539,000

Ex. 122

The following direct labor data pertain to the operations of Foster Manufacturing Company for the month of November:

Standard labor rate $10.00 per hr.Actual hours incurred and used 4,500

The standard cost card shows that 2.5 hours are required to complete one unit of product. The actual labor rate incurred exceeded the standard rate by 10%. Two thousand units were manu-factured in November.

Instructions(a) Calculate the price, quantity, and total labor variances.

*(b) Journalize the entries to record the labor variances.


(a) Actual Hours Actual Hours Standard Hours× Actual Rate × Standard Rate × Standard Rate

4,500 × $11.00 = 4,500 × $10.00 = 5,000 × $10.00 =$49,500 $45,000 $50,000

Price Variance Quantity Variance$4,500 U $5,000 F


$500 F



*(b) Factory Labor .............................................................................. 45,000Labor Price Variance ................................................................... 4,500

Wages Payable .................................................................... 49,500

Work in Process Inventory ........................................................... 50,000Labor Quantity Variance ....................................................... 5,000Factory Labor ....................................................................... 45,000

Ex. 123

Reagan Company planned to produce 25,000 units of product and work 100,000 direct labor hours in 2002. Manufacturing overhead at the 100,000 direct labor hours level of activity was estimated to be:

Variable manufacturing overhead $ 700,000Fixed manufacturing overhead 300,000Total manufacturing overhead $1,000,000

At the end of 2002, 26,000 units of product were actually produced and 107,000 actual direct labor hours were worked. Total actual overhead costs for 2002 was $1,015,000.

Instructions(a) Compute the total overhead variance.(b) Compute the overhead controllable variance.(c) Compute the overhead volume variance.


(a) Actual overhead – Overhead applied = Total overhead variance$1,015,000 – $1,040,000 = $25,000 favorable

Overhead applied = 26,000 units × 4 hrs = 104,000 standard hours allowed104,000 × $10 = $1,040,000

(b) Actual overhead – Overhead budgeted = Overhead controllable variance$1,015,000 – $1,028,000 = $13,000 favorable

Overhead budgeted at 104,000 actual direct labor hours allowed.

Variable overhead (104,000 × $7) $ 728,000Fixed overhead 300,000

$1,028,000

(c) Budgeted overhead – Overhead applied = Overhead volume variance$1,028,000 – $1,040,000 = $12,000 favorable

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Ex. 124

Stone Company planned to produce 20,000 units of product and work at the 50,000 direct labor hours level of activity for 2002. Manufacturing overhead at this level of activity and the predetermined overhead rate is as follows:

PredeterminedOverhead Rate perDirect Labor Hour

Variable manufacturing overhead $300,000 $6Fixed manufacturing overhead 150,000 3Total manufacturing overhead $450,000 $9

At the end of 2002, 22,000 units were actually produced and 53,700 direct labor hours were actually worked. Total actual manufacturing overhead costs were $475,000.

InstructionsUsing a two-variance analysis of manufacturing overhead, calculate the following variances and indicate whether they are favorable or unfavorable:(a) Overhead controllable variance.(b) Overhead volume variance.


(a) Overhead controllable variance = $5,000 unfavorable.Overhead budgeted for standard hours allowed


480,000Actual overhead incurred 475,000Overhead controllable variance $ 5,000 favorable

(b) Overhead volume variance = $15,000 favorable.Overhead budgeted for standard hours allowed


480,000Overhead applied (55,000 × $9) 495,000Overhead volume variance $ 15,000 favorable

Ex. 125

The following information was taken from the annual manufacturing overhead cost budget of Olson Company:

Variable manufacturing overhead costs $124,000Fixed manufacturing overhead costs $93,000Normal production level in direct labor hours 62,000Normal production level in units 31,000

Ex. 125 (cont.)

During the year, 30,000 units were produced, 64,000 hours were worked, and the actual


manufacturing overhead costs were $225,000. The actual fixed manufacturing overhead costs did not deviate from the budgeted fixed manufacturing overhead costs. Overhead is applied on the basis of direct labor hours.

Instructions(a) Compute the total, fixed, and variable predetermined manufacturing overhead rates.(b) Compute the total, controllable, and volume overhead variances.


(a) Item Amount Hours Rate Variable Overhead $124,000 62,000 $2.00Fixed Overhead 93,000 62,000 1.50Total Overhead $217,000 62,000 $3.50

(b) Total overhead variance:Overhead incurred – Overhead applied = $15,000 U

($225,000) (60,000 hours × $3.50)

Overhead controllable variance:Overhead incurred – Overhead budgeted = $12,000 U

($225,000) [(60,000 × $2) + $93,000]

Overhead volume variance:Overhead budgeted – Overhead applied = $3,000 U

($213,000) (60,000 hours × $3.50)

Ex. 126

Presented below is a flexible manufacturing budget for Waner Company, which manufactures fine timepieces:

Activity Index:Standard direct labor hours 2,000 3,200 3,600 4,000Variable costs

Indirect materials $ 4,000 $ 6,400 $ 7,200 $ 8,000Indirect labor 2,300 3,680 4,140 4,600Utilities 3,200 5,120 5,760 6,400

Total variable 9,500 15,200 17,100 19,000Fixed costs

Supervisory salaries 1,000 1,000 1,000 1,000Rent 3,000 3,000 3,000 3,000

Total fixed 4,000 4,000 4,000 4,000Total costs $13,500 $19,200 $21,100 $23,000

Ex. 126 (cont.)

The company applies the overhead on the basis of direct labor hours at $6.00 per direct labor hour and the standard hours per timepiece is 1/2 hour each. The company's actual production was 5,800 timepieces with 3,000 actual hours of direct labor. Actual overhead was $18,200.

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Instructions(a) Compute the controllable and volume overhead variances.

*(b) Prepare the entries for manufacturing overhead during the period and the entry to recognize the overhead variances at the end of the period.


(a) Computation of variances:Actual overhead – Budgeted overhead = Controllable overhead variance

$18,200 – [(5,800 × 1/2 × $4.75) + $4,000] = $425 Unfavorable

Overhead volume variance:Budgeted overhead – Overhead applied

[(5,800 × 1/2 × $4.75) + $4,000] –(5,800 × 1/2 × $6.00) = $375 Unfavorable

*(b) 1. Manufacturing Overhead.......................................................... 18,200Accounts Payable, Cash, Etc. .......................................... 18,200


2. Work in Process Inventory ...................................................... 17,400Manufacturing Overhead ................................................. 17,400

(To assign overhead to production)

3. Overhead Controllable Variance ............................................. 425Overhead Volume Variance .................................................... 375

Manufacturing Overhead ................................................. 800(To recognize overhead variances)

Ex. 127

Voss Company uses a standard cost accounting system. During March, 2002, the company reported the following manufacturing variances:

Material price variance $2,000 FMaterial quantity variance 2,400 ULabor price variance 800 ULabor quantity variance 1,200 UOverhead controllable 500 FOverhead volume 3,000 U

In addition, 15,000 units of product were sold at $18 per unit. Each unit sold had a standard cost of $12. Selling and administrative expenses for the month were $10,000.

InstructionsPrepare an income statement for management for the month ending March 31, 2002.


Voss COMPANYIncome Statement

For the Month Ended March 31, 2002


Sales (15,000 × $18) ............................................................................ $270,000Cost of goods sold (15,000 × $12) ....................................................... 180,000Gross profit (at standard) ..................................................................... 90,000

Variances:Materials price ............................................................................. $(2,000)Materials quantity ........................................................................ 2,400Labor price .................................................................................. 800Labor quantity .............................................................................. 1,200Overhead controllable ................................................................. (500)Overhead volume ........................................................................ 3,000

Total variances (unfavorable) ............................................. 4,900Gross profit (actual) .............................................................................. 85,100Selling and administrative expenses .................................................... 10,000Net income ........................................................................................... $ 75,100

*Ex. 128

Norris Company developed the following standards for 2002:

NORRIS COMPANYStandard Cost Card

Cost Elements Standard Quantity × Standard Price = Standard CostDirect materials 5 pounds $ 5 $25Direct labor 1 hour $18 18Manufacturing overhead 1 hour $10 10

$53

The company planned to produce 30,000 units of product and work at the 30,000 direct labor level of activity in 2002. The company uses a standard cost accounting system which records standard costs in the accounts and recognizes variances in the accounts at the earliest opportunity. During 2002, 29,000 actual units of product were produced.

InstructionsPrepare the journal entries to record the following transactions for Norris Company during 2002.(a) Purchased 147,000 pounds of raw materials for $4.90 per pound on account.(b) Actual direct labor payroll amounted to $527,000 for 28,500 actual direct labor hours

worked. Factory labor cost is to be recorded and distributed to production.(c) Direct materials issued for production amounted to 147,000 pounds which actually cost

$4.90 per pound.(d) Actual manufacturing overhead costs incurred were $288,000 in 2002.(e) Manufacturing overhead was applied when the 29,000 units were completed.(f) Transferred the 29,000 completed units to finished goods.

*Solution 128 (20–25 min.)

(a) Raw Materials Inventory ................................................................ 735,000Materials Price Variance ..................................................... 14,700Accounts Payable ............................................................... 720,300

(To record purchase of materials)

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(b) Factory Labor ................................................................................ 513,000Labor Price Variance .................................................................... 14,000

Wages Payable ................................................................... 527,000(To record direct labor costs)

Work in Process Inventory ............................................................ 522,000Labor Quantity Variance ............................................................... 9,000

Factory Labor ...................................................................... 513,000(To assign factory labor to jobs)

(c) Work In Process Inventory ............................................................ 725,000Materials Quantity Variance .......................................................... 10,000

Raw Materials Inventory ..................................................... 735,000(To record issuance of raw materials)

(d) Manufacturing Overhead ............................................................... 288,000Accounts Payable/Cash/Acc. Depreciation ......................... 288,000


(e) Work In Process Inventory ............................................................ 290,000Manufacturing Overhead .................................................... 290,000

(To assign overhead to jobs)

(f) Finished Goods Inventory ............................................................. 1,537,000Work In Process Inventory .................................................. 1,537,000

(To record transfer of completed units to finished goods)


COMPLETION STATEMENTS

129. A ________________ is expressed as a unit amount, whereas a _________________ is

expressed as a total amount.

130. Standards which represent optimum performance under perfect operating conditions are

called _______________ standards, but most companies use _________________

standards which are rigorous but attainable.

131. In developing a standard cost for direct materials used in making a product, consideration

should be given to two factors: (1) __________________ per unit of direct materials and

(2) the __________________ of direct materials to produce one unit of product.

132. The difference between actual hours times the actual pay rate and actual hours times the

standard pay rate is the labor _________________ variance.

133. The standard number of hours allowed times the predetermined overhead rate is the

amount of ________________ to the products produced.

134. The difference between actual quantity of materials times the standard price and standard

quantity times the standard price is the materials ________________ variance.

135. If the actual direct labor hours worked is greater than the standard hours, the labor

quantity variance will be ___________________, and the labor rate variance will be

____________________ if the standard rate of pay is greater than the actual rate of pay.

136. A two-variance approach to analyzing overhead variances requires the calculation of the

overhead _________________ variance and the overhead ________________ variance.

137. The overhead ______________ variance is the difference between total overhead

budgeted and total overhead applied.

138. In using variance reports, top management normally looks for _________________

variances.

Answers to Completion Statements

129. standard, budget130. ideal, normal131. price, quantity132. price133. overhead applied134. quantity135. unfavorable, favorable136. controllable, volume137. volume138. significant

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MATCHING

139. Match the items in the two columns below by entering the appropriate code letter in the space provided.

A. Variances F. Materials price varianceB. Standard costs G. Labor quantity varianceC. Standard cost accounting system H. Overhead controllable varianceD. Normal standards I. Overhead volume varianceE. Ideal standards J. Standard hours allowed

____ 1. The difference between actual overhead incurred and overhead budgeted for the standard hours allowed.

____ 2. The hours that should have been worked for the units produced.

____ 3. The difference between the actual quantity times the actual price and the actual quantity times the standard price.

____ 4. The difference between total actual costs and total standard costs.

____ 5. The difference between actual hours times the standard rate and standard hours times the standard rate.

____ 6. Predetermined unit costs that are measures of performance.

____ 7. The difference between overhead budgeted for the standard hours allowed and the overhead applied.

____ 8. Standards based on an efficient level of performance that are attainable under expected operating conditions.

____ 9. Standards based on the optimum level of performance under perfect operating conditions.

____ 10. A double-entry system of accounting in which standard costs are used in making entries and variances are recognized in the accounts.

Answers to Matching

1. H 6. B2. J 7. I3. F 8. D4. A 9. E5. G 10. C


SHORT-ANSWER ESSAY QUESTIONS

S-A E 140

Rand Company computes variances as a basis for evaluating the performance of managers responsible for controlling costs. For several months, the labor quantity variance has been unfavorable. Briefly explain what could be causing the unfavorable labor quantity variance and indicate what type of corrective action, if any, might be taken.

Solution 140

Since labor quantity variances relate to the efficiency of labor, the cause of an unfavorable variance could be poor training, poor maintenance of machinery, fatigue, carelessness, or similar problems that affect efficiency.

The management of Rand Company would need to identify the likely causes of the variance and correct the situation with additional training, improved maintenance, better scheduling or similar appropriate actions.

S-A E 141

In reviewing the activities of the Mixing Department for the month of June, the manager of the department notices that there was an unfavorable materials price variance for the month and there was an unfavorable materials quantity variance. Under what circumstances, if any, can the responsibility for each variance be placed on (a) the purchasing department and (b) the production department?

Solution 141

(a) Purchasing department. The investigation of a materials price variance usually begins with this department. If the price standard has been properly set, purchasing is responsible. However, it should be recognized that in a period of inflation, prices may rise faster than expected. Also, there may be extenuating circumstances such as oil cartel price increases.

The purchasing department may be responsible for an unfavorable quantity variance if it purchased raw materials of inferior quality.

(b) Production department. Ordinarily, responsibility for an unfavorable quantity variance rests with the department. For example, production is responsible if the variance is caused by inexperienced workers, faulty machinery, or carelessness.

The production department may be responsible for an unfavorable price variance when the materials must be ordered on a rush basis at a higher price than planned.

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S-A E 142 (Ethics)

Tinikits, Inc. is the manufacturer of miniature models, especially of automobiles with historical interest. The company is developing new standard costs. Trent Roswell suggests that the new standards for materials should not include any waste for liquid plastics that spill out of the molds. "After all," he says, "We're trying to be a world class company. When we build in waste, we tell the workers it's okay to waste some." Mary Farrell, another manager, disagrees. "If we don't allow for some normal human error," she says, "we'll have a mighty unhappy work force. Also, I think that these kinds of perfection standards exploit the workers. I certainly wouldn't want to be held up to perfection every day—what could I do but fail?"

The argument continued. Finally, the standards were prepared. All standards were prepared according to normal expected performance, except that for materials, an ideal standard was used. Mary, still maintaining the unfairness of the system, refused to hold her workers accountable for materials quantity variances.

Required:1. Are ideal standards unethical? Explain briefly.2. Is it unethical for Mary to refuse to support the standards? Explain.

Solution 142

1. Ideal standards are not necessarily unethical. They may be used unethically, such as in the case in which employees are denied bonuses or other rewards because of not meeting a standard which was out of their reach. If they are used as a guide to maximum attainable performance, however, and not tied directly to the reward system, they may be ethical.

2. It is unethical for Mary simply to refuse to accept a particular standard. However, if the company intends to use the standard unethically, she may refuse to hold her workers accountable while she pursues a permanent disposition of the matter. If she simply refuses to accept it, she may be indirectly sabotaging the company by hindering it from accomplishing its legitimate objectives. This would be unethical.

S-A E 143 (Communication)

Mike Kiner has come to the accounting department for help in interpreting his variance report. He says that he understands that last month was not a very good one for output, but he really thought everyone put forth good effort, so he is confused about the existence of an unfavorable labor efficiency variance. He cites as an example of the workers' effort their willingness to work extra hours to get full output, even when a whole week's worth of production had to be scrapped. He knew that his materials costs would be higher, and that overtime would make his rate variance unfavorable, but he certainly didn't think his workers had been inefficient.

Required:Write a short note to Mike explaining the probable cause of the unfavorable labor efficiency variance.


Solution 143

Mike,

Last month was a tough one for all of us, wasn't it? Your workers certainly did go the extra mile, no doubt about it.

You asked about your efficiency variance. When we calculate it, we count the number of hours it took to get good output. Since we had such high spoilage, we got fewer units, but used more hours. That is why your efficiency variance was negative. It does not imply that you didn't do your best. It just means that we investigate to see what happened.

Good luck, and I hope this month is a better one for all of us.

(signed)

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Standard Costing

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