CHAPTER 12

STANDARD COSTS AND BALANCED SCORECARD

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, BLOOM’S TAXONOMY, LEVEL OF DIFFICULTY, AACSB CODES, AND CPA CODES

Bloom’s: AN = Analysis AP = Application C = Comprehension

E = Evaluation K = Knowledge

LOD: E = Easy M = Medium H = Hard

AACSB: AN = Analytic

CPA: F = Financial Reporting MA = Management Accounting

*This topic is dealt with in an Appendix to the chapter.

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, BLOOM’S TAXONOMY, LEVEL OF DIFFICULTY, AACSB CODES, AND CPA CODES (CONT’D)

Bloom’s: AN = Analysis AP = Application C = Comprehension

E = Evaluation K = Knowledge

LOD: E = Easy M = Medium H = Hard

AACSB: AN = Analytic

CPA: F = Financial Reporting MA = Management Accounting

*This topic is dealt with in an Appendix to the chapter.

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Note: TF = True-False C = Completion BE = Brief Exercise

MC = Multiple Choice Ex = Exercise SAE = Short-Answer Essay

Ma = Matching

*This topic is dealt with in an Appendix to the chapter.

CHAPTER LEARNING OBJECTIVES

1. Describe standard costs.

Both standards and budgets are predetermined costs. The main difference is that a standard is a unit amount, whereas a budget is a total amount. A standard may be regarded as the budgeted cost per unit of product.

Standard costs offer several advantages. They facilitate management planning, promote greater economy and efficiency, are useful in setting selling prices, contribute to management control, permit “management by exception,” simplify the costing of inventories, and reduce clerical costs. The direct materials price standard should be based on the delivered cost of raw materials plus an allowance for receiving and handling. The direct materials quantity standard should establish the required quantity plus an allowance for waste and spoilage. The direct labour price standard should be based on current wage rates and expected adjustments, such as COLAs. It also generally includes payroll taxes and fringe benefits. Direct labour quantity standards should be based on required production time plus an allowance for rest periods, cleanup, machine setup, and machine downtime. For manufacturing overhead, a standard predetermined overhead rate is used. It is based on an expected standard activity index, such as standard direct labour hours or standard direct labour cost.

2. Determine direct materials variances.

The formulas for the direct materials variances are as follows:

(Total actual quantities x Actual price) – (Total standard quantities allowed x Standard price) = Total materials variance

(Total actual quantities x Actual price) – (Total actual quantities x Standard price) = Materials price variance

(Total actual quantities x Standard price) – (Total standard quantities allowed x Standard price) = Materials quantity variance

3. Determine direct labour and total manufacturing overhead variances.

The formulas for direct labour are as follows:

(Total actual hours x Actual rate) – (Total standard hours allowed x Standard rate) = Total labour variance

(Total actual hours x Actual rate) – (Total actual hours x Standard rate) = Labour price variance

(Total actual hours x Standard rate) – (Total standard hours allowed x Standard rate) = Labour quantity variance

The formulas for the manufacturing overhead variances are as follows:

Actual overhead – Overhead applied = Total overhead variance

Actual overhead – (Variable overhead applied + Fixed Overhead budgeted) = Overhead budget variance

Fixed overhead rate x (Normal capacity hours – Standard hours allowed) = Overhead volume variance

4. Prepare variance reports and balanced scorecards.

Variances are reported to management in variance reports. The reports aid management by exception by highlighting significant differences.

Under a standard cost system, an income statement prepared for management will report the cost of goods sold at standard cost and then disclose each variance separately.

The balanced scorecard uses financial and non-financial measures in an integrated system that links performance measurement and a company’s strategic goals. It uses four perspectives: financial, customer, internal processes, and learning and growth. Objectives are set within each of these perspectives and link to objectives in the other perspectives.

5. Identify the features of a standard cost accounting system (Appendix 12A).

In a standard cost accounting system, standard costs are journalized and posted, and separate variance accounts are maintained in the ledger. When actual costs and standard costs do not differ significantly, inventories may be reported at standard 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 product or service.

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

4. 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.

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

6. An unfavourable labour quantity variance indicates that the actual number of direct labour hours worked was greater than the number of direct labour hours that should have been worked for the output attained.

7. Standard cost + price variance + quantity variance = budgeted cost.

8. The learning and growth perspective on the balanced scorecard includes measures for monitoring product development, production, delivery, and after-sale service.

*9. 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

MULTIPLE CHOICE QUESTIONS

10. Which of the following is true?

a) Standard costs cannot be incorporated into the accounts in the general ledger.

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

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

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

11. Normal standards

a) should not be rigorous but attainable.

b) do not incorporate normal contingencies of production into the standards.

c) once set should not be changed during the year.

d) represent efficient levels of performance that are attainable under expected operating conditions.

12. Which of the following is true?

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

b) A direct labour price standard is frequently called the direct labour efficiency standard.

c) The standard predetermined overhead rate must be based on direct labour hours from the standard activity index.

d) The direct materials price standard should be based on the production department’s best estimate of the cost of raw material.

13. A standard cost is

a) a cost that 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.

14. The difference between a budget and a standard is that

a) 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.

15. Standard costs may be used by

a) universities.

b) governmental agencies.

c) charitable organizations.

d) all of these.

16. 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.

17. Budget data are not journalized in cost accounting systems with the exception of

a) the application of manufacturing overhead.

b) direct labour budgets.

c) direct materials budgets.

d) cash budget data.

18. It is possible that a company's financial statements may report inventories at

a) budgeted costs.

b) standard costs.

c) both budgeted and standard costs.

d) none of these.

19. 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 that is less relevant than the historical cost accounting system.

d) approval of the shareholders is required.

20. Standard costs

a) 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.

21. 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.

22. 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."

23. If a company is concerned with the potential negative effects of establishing standards, it should

a) 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 to motivate people.

24. A standard that 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.

25. Ideal standards

a) 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.

26. The final decision for setting standard costs should is the responsibility of

a) the quality control engineer.

b) the managerial accountants.

c) the purchasing agent.

d) management.

27. The labour time requirements for standards may be determined by the

a) sales manager.

b) product manager.

c) industrial engineers.

d) payroll department manager.

28. The two levels that standards may be set at are

a) normal and fully efficient.

b) normal and ideal.

c) ideal and less efficient.

d) fully efficient and fully effective.

29. The most rigorous of all standards is the

a) normal standard.

b) realistic standard.

c) ideal standard.

d) conceivable standard.

30. Most companies that use standards set them at

a) the normal level.

b) a conceivable level.

c) the ideal level.

d) last year's level.

31. A managerial accountant

1. does not participate in the standard setting process.

2. provides knowledge of cost behaviours in the standard setting process.

3. provides input of historical costs to the standard setting process.

a) 1

b) 2

c) 3

d) 2 and 3

32. The cost of freight-in

a) 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.

33. The direct materials quantity standard would not be expressed in

a) kilograms.

b) barrels.

c) dollars.

d) board metres.

34. The direct materials quantity standard should

a) exclude unavoidable waste.

b) exclude quality considerations.

c) allow for normal spoilage.

d) always be expressed as an ideal standard.

35. The direct labour quantity standard is sometimes called the direct labour

a) volume standard.

b) effectiveness standard.

c) efficiency standard.

d) quality standard.

36. A manufacturing company would include setup and downtime in its direct

a) materials price standard.

b) materials quantity standard.

c) labour price standard.

d) labour quantity standard.

37. Allowance for spoilage is part of the direct

a) materials price standard.

b) materials quantity standard.

c) labour price standard.

d) labour quantity standard.

38. The total standard cost to produce one unit of product is shown

a) 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.

39. A good system of standard costing always

a) ensures that the right employees are to blame if there are negative variances.

b) ensures that the right employees are both rewarded and blamed when there are positive or negative variances.

c) avoids excessive detail in examining small variances.

d) considers the impact of morale on all those who utilize the reporting system.

40. Which of the following would generally not be a cause to adjust standard cost rates in a service industry?

a) wage rate increase for the cleaners

b) electricity charges from the municipality

c) salary increases for management

d) increase in the cost of cleaning supplies from suppliers

41. When it comes to variances,

a) actual costs that vary from standard costs always indicate efficiencies.

b) ideal standards will generally result in favourable variances for the company.

c) a variance is the difference between total actual costs and total standard costs.

d) if actual costs are less than standard costs, the variance is unfavourable.

42. An unfavourable materials quantity variance would occur if

a) more materials are purchased than are used.

b) actual kilograms of materials used were less than the standard kilograms allowed.

c) actual labour hours used were greater than the standard labour hours allowed.

d) actual kilograms of materials used were greater than the standard kilograms allowed.

43. If actual direct material costs are greater than standard direct materials costs, it means that

a) 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.

44. A total materials variance is analyzed in terms of

a) price and quantity variances.

b) buy and sell variances.

c) quantity and quality variances.

d) tight and loose variances.

Use the following information for questions 45–46.

A company developed the following per-unit standards for its product: 5 kilograms of direct materials at $3 per kilogram. Last month, 1,000 kilograms of direct materials were purchased for $2,900. Also last month, 700 kilograms of direct materials were used to produce 135 units.

45. What was the direct materials price variance for last month?

a) $12,100 favourable

b) $100 favourable

c) $12,100 unfavourable

d) $100 unfavourable

46. What was the direct materials quantity variance for last month?

a) $75 unfavourable

b) $75 favourable

c) $900 unfavourable

d) $900 favourable

47. The total materials variance is equal to the

a) 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.

48. The formula for the materials price variance is

a) (AQ × SP) – (SQ × SP).

b) (AQ × AP) – (AQ × SP).

c) (AQ × AP) – (SQ × SP).

d) (AQ × SP) – (SQ × AP).

49. The formula for the materials quantity variance is

a) (SQ × AP) – (SQ × SP).

b) (AQ × AP) – (AQ × SP).

c) (AQ × SP) – (SQ × SP).

d) (AQ × AP) – (SQ × SP).

50. A company uses 3,150 kilograms of materials and exceeds the standard by 150 kilograms. The quantity variance is $900 unfavourable. What is the standard price?

a) $2.00

b) $3.50

c) $4.00

d) $6.00

51. A company purchases 130,000 kilograms of materials. The materials price variance is $26,000 favourable. What is the difference between the standard and actual price paid for the materials?

a) $5.00

b) $0.20

c) $5.50

d) $0.25

52. A company uses 40,000 kilograms of materials for which it paid $9.00 a kilogram. The materials price variance was $80,000 favourable. What is the standard price per kilogram?

a) $2.00

b) $7.00

c) $10.00

d) $11.00

53. If the materials price variance is $600 F and the materials quantity and labour variances are each $450 U, what is the total materials variance?

a) $600 F

b) $450 U

c) $150 F

d) $1,050 U

54. Bridgeware Company's materials price variance is

a) $400 U.

b) $400 F.

c) $350 U.

d) $300 F.

55. Bridgeware Company's materials quantity variance is

a) $250 U.

b) $250 F.

c) $340 F.

d) $340 U.

56. Bridgeware Company's total materials variance is

a) $150 F.

b) $1,500 U.

c) $1,250 U.

d) $100 F.

57. The investigation of a materials price variance usually begins in the

a) first production department.

b) purchasing department.

c) controller's office.

d) accounts payable department.

58. The investigation of a materials quantity variance usually begins in the

a) production department.

b) purchasing department.

c) sales department.

d) controller's department.

59. EKPN Co. produces wooden boxes. The company’s standards per box require 6 boards, each costing $10 per board, and half of an hour of direct labour. The standard labour rate is $15 per hour. In August, EKPN Co. purchased 12,000 boards for a total cost of $123,000. It used 11,500 boards to manufacture 1,900 boxes. Total labour hours were 1,000 hours, and total labour costs were $16,250. What was the materials purchase price variance for August?

a) $3,000 F

b) $3,000 U

c) $ 8,000 F

d) $8,000 U

60. EKPN Co. produces wooden boxes. The company’s standards per box require 6 boards, each costing $10 per board, and half of an hour of direct labour. The standard labour rate is $15 per hour. In August, EKPN Co. purchased 12,000 boards for a total cost of $123,000. It used 11,500 boards to manufacture 1,900 boxes. Total labour hours were 1,000 hours, and total labour costs were $16,250. What was the material quantity variance for August?

a) $5,000 U

b) $5,000 F

c) $1,000 U

d) $1,000 F

61. Blue Fin Co. produces a product requiring 10 kilograms of material at $1.50 per kilogram. Blue Fin produced 10,000 products during 2022 resulting in a $30,000 unfavourable materials quantity variance. How much direct material did Blue Fin use during 2022?

a) 120,000 kilograms

b) 100,000 kilograms

c) 200,000 kilograms

d) 145,000 kilograms

62. If actual costs are greater than standard costs, there is a(n)

a) normal variance.

b) unfavourable variance.

c) favourable variance.

d) error in the accounting system.

63. Variances from standards are

a) expressed in total dollars.

b) expressed on a per-unit basis.

c) expressed on a percentage basis.

d) all of these.

64. A favourable variance

a) 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.

65. The matrix approach to variance analysis

a) 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.

66. Which of the following is false?

a) The total overhead budget variance relates primarily to fixed overhead costs.

b) The fixed overhead volume variance relates only to fixed overhead costs.

c) If production exceeds normal capacity, the overhead volume variance will be favourable.

d) A two-variance analysis of overhead consists of a spending variance and a volume variance.

67. The per-unit standards for direct labour are 3 direct labour hours at $15 per hour. If in producing 700 units the actual direct labour cost was $31,175 for 2,150 direct labour hours worked, the total direct labour variance is

a) $50 unfavourable.

b) $325 favourable.

c) $50 favourable.

d) $325 unfavourable.

68. The standard rate of pay is $15 per direct labour hour. If the actual direct labour payroll was $58,800 for 4,000 direct labour hours worked, the direct labour price (rate) variance is

a) $1,200 unfavourable.

b) $1,200 favourable.

c) $1,500 unfavourable.

d) $1,500 favourable.

69. The standard number of hours that should have been worked for the output attained is 8,000 direct labour hours and the actual number of direct labour hours worked was 8,400. If the direct labour price variance was $8,400 unfavourable, and the standard rate of pay was $18 per direct labour hour, what was the actual rate of pay for direct labour?

a) $17.00 per direct labour hour

b) $15.00 per direct labour hour

c) $19.00 per direct labour hour

d) $18.00 per direct labour hour

70. The total overhead budget variance is equal to the

a) sum of the total materials variance and the total labour variance.

b) difference between the total materials variance and the total labour variance.

c) difference between the actual overhead costs and the overhead costs applied to the work done.

d) total variance minus the spending variance and the volume variance.

71. The total variance is $10,000 favourable. The total materials variance is $4,000 favourable. The total labour variance is twice the total overhead variance, both which are favourable. What is the total overhead variance?

a) $1,000

b) $2,000

c) $3,000

d) $4,000

72. Labour efficiency is measured by the

a) materials quantity variance.

b) total labour variance.

c) labour quantity variance.

d) labour rate variance.

73. An unfavourable labour quantity variance may be caused by

a) paying workers higher wages than expected.

b) paying workers a bonus at year end.

c) worker fatigue or carelessness.

d) higher pay rates mandated by union contracts.

74. If the labour quantity variance is unfavourable and the cause is inefficient use of direct labour, the responsibility rests with the

a) sales department.

b) production department.

c) budget office.

d) controller's department.

75. An overhead fixed volume variance is calculated as the difference between normal capacity hours and standard hours allowed

a) 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.

76. Under a standard costing system, manufacturing overhead costs are applied to work in process on the basis of

a) actual hours worked.

b) standard hours allowed.

c) ratio of actual variable to fixed costs.

d) actual overhead costs incurred.

77. 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 favourable if standard hours allowed for output are greater than the standard hours at normal capacity.

78. If the standard hours allowed are less than the standard hours at normal capacity,

a) the overhead volume variance will be unfavourable.

b) variable overhead costs will be under-applied.

c) the overhead controllable variance will be favourable.

d) variable overhead costs will be over-applied.

79. Which of the following statements about overhead variances is FALSE?

a) The difference between the budgeted fixed overhead and the fixed overhead applied is the volume variance.

b) Standard hours allowed are used in calculating the volume variance.

c) The spending variance pertains solely to fixed costs.

d) The total overhead variance pertains to both variable and fixed costs.

80. The overhead volume variance relates only to

a) variable overhead costs.

b) fixed overhead costs.

c) both variable and fixed overhead costs.

d) all manufacturing costs.

81. The fixed overhead spending variance is calculated as the difference between actual overhead costs incurred and the budgeted

a) 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.

82. If the standard hours allowed are less than the standard hours at normal capacity, the volume variance

a) cannot be calculated.

b) will be favourable.

c) will be unfavourable.

d) will be greater than the spending variance.

83. The budgeted overhead costs for standard hours allowed and the overhead costs applied to the product are the same amount

a) 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.

84. The spending variance relates to

a) fixed overhead costs.

b) variable overhead costs.

c) both fixed and variable overhead costs.

d) all manufacturing costs.

85. The difference between fixed overhead budgeted and overhead applied is the

a) budget variance.

b) spending variance.

c) total overhead variance.

d) volume variance.

86. The fixed overhead variance that indicates whether plant facilities were efficiently used is the

a) budget variance.

b) efficiency variance.

c) spending variance.

d) volume variance.

87. Each of the following may cause an unfavourable variable overhead budget variance except

a) higher than expected use of indirect materials.

b) greater than expected use of indirect labour.

c) increases in indirect manufacturing costs.

d) inefficient use of direct materials.

88. The difference between actual overhead costs and overhead costs applied is the

a) budget variance.

b) spending variance.

c) total overhead variance.

d) volume variance.

89. EKPN Co. produces wooden boxes. The company’s standards per box require 6 boards, each costing $10 per board, and half of an hour of direct labour. The standard labour rate is $15 per hour. In August, EKPN Co. purchased 12,000 boards for a total cost of $123,000. It used 11,500 boards to manufacture 1,900 boxes. Total labour hours were 1,000 hours, and total labour costs were $16,250.

What was the labour quantity variance for August?

a) $750 F

b) $750 U

c) $13,500 F

d) $13,500 U

90. EKPN Co. produces wooden boxes. The company’s standards per box require 6 boards, each costing $10 per board, and half of an hour of direct labour. The standard labour rate is $15 per hour. In August, EKPN Co. purchased 12,000 boards for a total cost of $123,000. It used 11,500 boards to manufacture 1,900 boxes. Total labour hours were 1,000 hours, and total labour costs were $16,250.

What was the labour price variance?

a) $1,250 U

b) $1,250 F

c) $4,250 F

d) $4,250 U

91. EKPN Co. produces wooden boxes. The company’s standards per box require 6 boards, each costing $10 per board, and half of an hour of direct labour. The standard labour rate is $15 per hour. In August, EKPN Co. purchased 12,000 boards for a total cost of $123,000. It used 11,500 boards to manufacture 1,900 boxes. Total labour hours were 1,000 hours, and total labour costs were $16,250.

What was the total labour variance for August?

a) $1.25 F

b) $1.25 U

c) $2,000 F

d) $2,000 U

92. Wild West Inc. produces a product requiring 3 direct labour hours at $20. per hour. During January, 2,000 products are produced using 6,300 direct labour hours. Wild West’s actual payroll during January was $122,850. What is the labour quantity variance?

a) $2,850 U

b) $6,000 F

c) $3,150 F

d) $6,000 U

93. A problem with placing excessive emphasis on labour efficiency can be

a) material costs get ignored.

b) pressure can be put on workers to work unsafely.

c) overhead costs can be improperly estimated.

d) work in progress and finished goods inventories can build up beyond acceptable levels.

94. Variance reports are

a) external financial reports.

b) Revenue Canada tax reports.

c) internal reports for management.

d) all of these.

95. In using variance reports, management looks for

a) total assets invested.

b) significant variances.

c) competitors’ costs in comparison to the company's costs.

d) more efficient ways of valuing inventories.

96. All of the following variances are reported to the production department except the

a) labour price variance.

b) materials price variance.

c) overhead controllable variance.

d) labour price and materials price variances.

97. The costing of inventories at standard cost for external financial statement reporting purposes is

a) 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.

98. Income statements prepared internally for management often show cost of goods sold at standard cost and variances are

a) separately disclosed.

b) deducted as other expenses and revenues.

c) added to cost of goods sold.

d) closed directly to retained earnings.

99. In income statements prepared for management under a standard cost accounting system, each of the following are reported at actual amounts except

a) sales.

b) selling expenses.

c) gross profit.

d) cost of goods sold.

100. Which of the following statements describes the customer perspective in the balanced scorecard?

a) It establishes which people should be targeted as potential customers.

b) It evaluates the profitability of specific customers rather than the profitability of specific products or services.

c) It evaluates how well the company is performing from the viewpoint of those people who buy and use its products or services.

d) It evaluates which customers are not profitable and should be dropped.

101. Which of the following would be an objective for the internal process perspective?

a) profit per employee

b) customer retention

c) training hours

d) planning accuracy

102. The perspectives included in the balanced scorecard approach include all of the following except the

a) internal process perspective.

b) capacity utilization perspective.

c) learning and growth perspective.

d) customer perspective.

103. When analyzing period end variance reports, if a variance amount is small the manager should

a) consider the variance within normal terms and ignore it for that period.

b) combine all such small variances and if they show a larger variance, investigate them then.

c) consider investigating the variance as there may be undetected swings in the intervening period that require investigation.

d) focus his or her attention on more material variances.

104. A favourable variance that is significant in a cost report

a) is a positive result for a manager.

b) is a negative result for a manager.

c) can be ignored especially if it is a minor amount.

d) should be investigated along with any negative variances.

105. If standard cost reports emphasize meeting predetermined standards

a) there should be non-financial performance measures available to management to supplement the cost reports.

b) management can control the department properly with standard cost reports.

c) the budget process should be sufficient to support management’s performance.

d) all members of the team will be able to properly identify critical variance issues.

106. When a company implements a balanced scorecard approach in its business,

a) it must ensure that it focuses on every aspect of its operations.

b) it must ensure that only one or two areas is seen as the focus.

c) it must establish performance measures that are focused on the specific strategy of the company.

d) it must never supplant the traditional accounting information that is available to management.

107. In designing a balanced scorecard approach for its operations, a company should

a) seek to determine as much detail as possible from its activities.

b) ensure the report is readily available as a discussion tool between management and shareholders.

c) attempt to link performance measures on a cause and effect basis.

d) eliminate any financial results as these will be dealt with in.

108. One problem with standard cost reports is

a) they can only be read effectively by trained accountants.

b) they are often prepared well after the events that give rise to them.

c) not everyone in the organization can agree on their use.

d) they allow for shareholders to ask difficult questions from management.

109. In a standard cost variance report,

a) the largest unfavourable variance is the one that will impact on the company the most.

b) the largest positive variance can be scanned and cleared the quickest.

c) the trend or pattern of variances on a period-to-period basis should be monitored.

d) management must set predetermined variance limits that will dictate what variances must be investigated.

*110. Which of the following could cause a debit balance in the direct material price variance accounts?

a) paying more than the standard price per unit for direct material

b) paying less than the standard price per unit for direct material

c) using more than the standard quantity of direct material

d) using less than the standard quantity of direct material

*111. If 20,000 kilograms of direct materials are purchased for $14,400 on account and the standard cost is $.70 per kilogram, the journal entry to record the purchase under a standard costing system is

a) Raw Materials Inventory 14,400

Accounts Payable 14,400

b) Work in Process Inventory 14,400

Accounts Payable 14,000

Materials Quantity Variance 400

c) Raw Materials Inventory 14,400

Accounts Payable 14,000

Materials Price Variance 400

d) Raw Materials Inventory 14,000

Materials Price Variance 400

Accounts Payable 14,400

*112. A standard cost system may be used with

a) job order costing only.

b) process costing only.

c) activity-based costing.

d) either job order or process costing.

*113. Under a standard costing system, the materials price variance is recorded

a) 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.

*114. Under a standard costing system, each of the following accounts is recorded at standard cost except

a) Factory Labour.

b) Raw Materials Inventory.

c) Wages Payable.

d) Work in Process Inventory.

ANSWERS TO MULTIPLE CHOICE QUESTIONS

BRIEF Exercises

Brief Exercise 115

Identify six advantages that are available to an organization when standard costs are carefully established and prudently used.

Solution 115 (5-7 min.)

1. Facilitates management planning.

2. Promotes greater economy by making employees more cost-conscious.

3. Helps set selling prices.

4. Contributes to management control by providing a basis for evaluation of cost control.

5. Helps highlight variances in management by exception.

6. Simplifies costing of inventories and reduces clerical costs.

Brief Exercise 116

Explain the similarities and differences between standards and budgets.

Solution 116 (5 min.)

Both standards and budgets are predetermined and contribute to management planning and control. However, a standard is a unit amount or a budgeted cost per unit of product, while a budget is a total amount. In addition, budget data is not journalized in cost accounting systems while standard costs are sometimes used in cost accounting systems.

Brief Exercise 117

Go Mix Company uses both standards and budgets. The company estimates that production for the year will be 125,000 units of Product Fast. To produce these units of Product Fast, the company expects to spend $406,250 for materials and $1,875,000 for labour.

Instructions

Calculate the estimates for (a) a standard cost and (b) a budgeted cost.

Solution 117 (5 min.)

(a) Standards are stated as a per-unit amount. Thus, the standards are materials $3.25, ($406,250 ÷ 125,000), and labour $15, ($1,875,000 ÷ 125,000).

(b) Budgets are stated as a total amount. Thus, the budgeted costs for the year are materials $406,250 and labour $1,875,000.

Brief Exercise 118

During March, Tile Company purchases and uses 15,125 kilograms of materials costing $22,990 to make 5,000 tiles. Tile Company’s standard material cost per tile is $4.50 (3 kilograms of material x $1.50).

Instructions

Calculate the total, price, and quantity material variances for Tile Company for March.

Solution 118 (5 min.)

Total materials variance = $490 U, (15,125 x $1.52) – (15,000 x $1.50).

Materials price variance = $302.50 U, (15,125 x $1.52) – (15,125 x $1.50).

Materials quantity variance = $187.50 U, (15,125 x $1.50) – (15,000 x $1.50).

Brief Exercise 119

KMV Ltd. makes only one item and has a standard direct material cost of $8 per kg and uses 10 kgs to make one unit. The expected production for the year was 5,000 units using 50,000 kg of material. During 2022 KMV produced 5,100 units and used 52,000 kgs purchased at $8.25 per kg.

Instructions

Calculate the direct materials quantity variance. Is it favourable or unfavourable?

Solution 119 (5 min.)

$8.00 x (52,000 – (5,100 x 10)) = $8,000 unfavourable

(50,000 ÷ 5,000 = 10)

Brief Exercise 120

During January, Ray Company incurs 2,250 hours of direct labour at an hourly cost of $10.10 in producing 1,250 units of its finished product. Ray’s standard labour cost per unit of output is $18.45 (1.75 hours x $10.25).

Instructions

Calculate the total, price, and quantity labour variances for Ray Company for January.

Solution 120 (5 min.)

Total labour variance = $303.13 U, (2,250 x $10.10) – (2,187.50 x $10.25).

Labour price variance = $337.50 F, (2,250 x $10.10) – (2,250 x $10.25).

Labour quantity variance = $640.63 U, (2,250 x $10.25) – (2,187.50 x $10.25).

Brief Exercise 121

In October, Halo Inc. reports 35,000 actual direct labour hours, and it incurs $168,750 of manufacturing overhead costs. Standard hours allowed for the work completed during October is 36,000 hours. Halo’s predetermined overhead rate is $4.70 per direct labour hour.

Instructions

Calculate the total manufacturing overhead variance for Halo Inc. for October.

Solution 121 (5 min.)

The formula is:

*36,000 x $4.70 = $169,200

Brief Exercise 122

KMV Ltd. makes only one item and has a standard direct labour cost of $24 calculated as 2 hours at $12 per hour. In the recent month, 1,000 units were produced using 2,200 hours at $12.75 per hour.

Instructions

Calculate the direct labour efficiency variance. Is it favourable or unfavourable?

Solution 122 (5 min.)

$12.00 x (2,200 – 2,000) = $2,400 unfavourable

Brief Exercise 123

Just Dogs Inc. wants to develop a balanced scorecard for its dog grooming business. Just Dogs’ strategy is to provide high-end grooming for dogs using organic products and non-invasive techniques. It anticipates finding a niche market that will pay a premium for its services, knowing that there are owners who are concerned about their dogs being treated ethically.

Instructions

Indicate a measure for each of the four perspectives of the BSC that Just Dogs might use to help track its performance.

Solution 123 (5 min.)

Note: Students’ answers will vary. There are many different measures that could be acceptable. This is just a sample of possible answers.

Perspective Measure

Financial % increase in sales due to increased sales volume

Customer % increase in new customers

customer retention percentage

customer satisfaction survey

Internal Process number of dogs groomed with zero errors

% of ethical products used in grooming

Learning and Growth training dollars per employee

employee satisfaction survey

Brief Exercise 124

Mary’s Hamburger Barn is looking to develop a balanced scorecard for 2022. The company strategy is a low-cost leadership strategy focusing on reducing costs, while maintaining high quality and reducing scrap.

Instructions

Indicate a measure for each of the four perspectives of the BSC that Mary’s Hamburger Barn might use to help track its performance.

Solution 124 (5 min.)

Note: Students’ answers will vary. There are many different measures that could be acceptable. This is just a sample of possible answers.

Perspective Measure

Financial raw material cost per burger

labour cost per burger

overhead cost per burger

Customer % increase in customer volume

customer satisfaction survey

Internal Process number of burgers made per labour hour

% of scrapped raw materials

Learning and Growth % of employees trained in food sanitation and customer service

employee satisfaction survey

*Brief Exercise 125

Explain the two important assumptions of a standard job-order cost accounting system.

*Solution 125

A standard job-order cost accounting system is based on the following two important assumptions:

1. Variances from standards are recognized at the earliest opportunity.
2. The Work in Process account is maintained using only standard costs.

*Brief Exercise 126

Monsoon Company manufactures a single product with the following standard material costs for one unit:

Direct materials: 3 feet at $1.50 $4.50

During the month of April, 5,000 units were produced with the following material cost data relating to the month's production:

Materials purchased: 30,000 feet at $1.25 $37,500

Materials used in production: 17,000 feet

There was no beginning inventory of raw materials.

Instructions

1. Compute the materials price and quantity variances for the month.
2. Prepare the appropriate journal entries assuming Monsoon uses a standard costing system.

*Solution 126

1. Materials Price Variance = $37,500 – (30,000 x $1.50) = $7,500 F

Materials Quantity Variance = (17,000 x $1.50) – (3 x 5,000 x $1.50) = $3,000 U

1. Raw Materials Inventory 45,000

Materials Price Variance 7,500

Accounts Payable 37,500

Work in Process Inventory (3 x 5,000 x $1.50) 22,500

Materials Quantity Variance 3,000

Raw Materials Inventory (17,000 X $1.50) 25,500

*Brief Exercise 127

Monsoon Company manufactures a single product with the following standard labour costs for one unit:

Direct labour: 0.5 hour at $6.50 $3.25

During the month of April, 5,000 units were produced with the following labour cost data relating to the month's production:

Direct labour: 3,000 hours at $6.25 per hr. $18,750

Instructions

a) Compute the labour price and quantity variances for the month.

b) Prepare the appropriate journal entries.

*Solution 127

1. Labour Price Variance = $18,750 – (3,000 x $6.50) = $750 F

Labour Quantity Variance = (3,000 x $6.50) – (0.5 x 5,000 x $6.50) = $3,250 U

1. Factory Labour 19,500

Labour Price Variance 750

Accounts Payable 18,750

Work in Process Inventory (0.5 x 5,000 x $6.50) 16,250

Labour Quantity Variance 3,250

Factory Labour (3,000 X $6.50) 19,500

*Brief Exercise 128

EKPN Co. purchased 5,000 units of raw material on account for $14,750, when the standard cost was $15,000. Later in the month, EKPN Co. issued 4,700 units of raw materials for production, when the standard units were 4,800.

Instructions

Journalize the transactions for EKPN Co. to account for this activity assuming EKPN uses a standard costing system.

*Solution 128 (5 min.)

a) Raw Materials Inventory 15,000

Materials Price Variance 250

Accounts Payable 14,750

b) Work in Process Inventory (4,800 X $3*) 14,400

Materials Quantity Variance 300

Raw Materials Inventory (4,700 X $3) 14,100

*$3 = $15,000 ÷ 5,000 units

*Brief Exercise 129

M&H Inc. incurred direct labour costs of $72,000 for 9,000 hours. The standard labour cost was $72,500. During the month, M&H Inc. assigned 9,000 direct labour hours costing $72,000 to production. The standard hours were 9,100.

Instructions

Journalize the transactions for M&H Inc. to account for this activity.

*Solution 129 (5 min.)

a) Factory Labour 72,500

Labour Price Variance 500

Wages Payable 72,000

b) Work in Process Inventory (9,100 x $8.06*) 73,346

Labour Quantity Variance 846

Factory Labour 72,500

*$8.06 = $72,500 ÷ 9,000 hours

EXERCISES

Exercise 130

Peter’s Pick-Me-Ups Inc. manufactures and sells a nutrition drink for children. The company wants to develop a standard cost per kilogram. The following are required for production of a 10-litre batch:

70 grams of lime Kool-Drink at $0.07 per gram

5 grams of granulated sugar $0.24 per gram

12 kiwi fruit at $0.70 each

30 protein tablets at $0.80 each

9 litres of mineral water at $0.05 per litre

Peter’s Pick-Me-Ups estimates that 3% of the lime Kool-Drink is wasted, 10% of the sugar is lost, and 5% of the kiwis cannot be used.

Instructions

Calculate the standard cost of the ingredients for one litre of the nutrition drink.

Solution 130 (15–20 min.)

Ingredient Amount Per Litre Standard Waste

Lime Kool-Drink 7 g. 3%

Sugar 0.5 g. 10%

Kiwis 1.2 5%

Protein Tablets 3 0%

Water 0.9 litres 0%

Standard Usage Standard Price Standard Cost

Lime Kool-Drink (i) 7.22 grams $.07 $.505

Sugar (ii) .556 grams .24 .133

Kiwis (iii) 1.26 .70 .882

Protein Tablets 3 .80 2.400

Water 0.9 litres .05 .045

Standard Cost per litre $3.965

(i) .97x = 7 grams x = 7.22

(ii) .90x =.0.5 grams x = .556

(iii) .95x = 1.2 kiwis x = .1.26

Exercise 131

a) How are standards developed?

b) What is the difference between ideal and normal standards?

Solution 131

a) Standards are developed by means of historical experience, engineering studies (time and motion studies) and input from operating personnel most familiar with the task.

b) Ideal standards are those that demand maximum efficiency with no allowances for break downs, slack time or poor operational skills. In essence, everything must work perfectly.

In contrast, normal standards are those that can be reasonably achieved under efficient operating conditions. Allowances are made for normal breakdowns, interruptions, and imperfect employee skills.

Exercise 132

The following direct materials data pertain to the operations of Stone Wealth Manufacturing Company for the month of March:

Standard materials price $9.00 per kilogram

Actual quantity of material purchased and used 65,000 kilograms

The standard cost card shows that a finished product contains 4.75 kilograms of material. The 65,000 kilograms were purchased in March at a discount of 10% from the standard price. In March, 13,000 units of finished product were manufactured.

Instructions

Prepare a matrix for materials and calculate the materials variances.

Price Variance Quantity Variance

Total

Materials Variance

Solution 132 (13–18 min.)

Actual Quantity Actual Quantity Standard Quantity

× Actual Rate × Standard Rate × Standard Price

65,000 × $8.10 = 65,000 × $9.00 = 61,750 × $9.00 =

$526,500 $585,000 $555,750

Price Variance Quantity Variance

$58,500 F $29,250 U

Total

Materials Variance

$29,250 F

Exercise 133

You have just been hired at SB Polo Supply 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 April. While you were gone, a janitor accidentally threw away your cost analysis sheet. You do remember, however, that each mallet requires 4 metres of wood with a standard cost of $5 per metre and that there were 3,000 mallets completed during April. In addition, you remember that the materials price variance was $700 favourable, and the total materials variance was $30 favourable.

Instructions

a) Calculate the materials quantity variance.

b) Calculate the actual price paid per metre of wood.

Solution 133 (12 min.)

Actual Quantity Actual Quantity Standard Quantity

× Actual Price × Standard Price × Standard Price

**12,134 × ***$4.94 = **12,134 × $5 = 3,000 mallets x 4 m/mallet × $5 =

$59,970 $60,670 $60,000

Price Variance Quantity Variance

$700 F *$670 U

Total

Materials Variance

$30 F

*Materials quantity variance = $670 U ($700 F – $30 F)

**Actual quantity of direct materials = $60670 / $5 = $12,134

*** Actual price per metre = $59970 / 12134 = $4.94/metre

Exercise 134

Dromedille Corporation has developed the following standards for the materials for each unit of product that it manufactures:

Direct materials 1.2 kgs @ $3.00 per kg

Monthly production 475 units

In a recent month, Dromedille produced 300 widgets and incurred the following costs:

Direct materials purchased 500 kgs @ $3.50 per kg

There were no beginning or ending inventories.

Instructions

a) Calculate the direct materials price variance.

b) Calculate the direct materials efficiency variance.

Solution 134

a) 500 x ($3.50 – $3.00) = $250 unfavourable

b) (500 – (300 x 1.2)) x $3.00 = $420 unfavourable

Exercise 135

(CMA adapted) SkiTwin Corporation uses a standard cost system to assist in its manufacture of water skis and uses direct labour hours to apply its overhead. The company controller provides you with the following information on the results of its most recent year end.

Budget Actual

Units produced 100,000 99,000

Units sold 100,000 96,000

Direct materials 50,000 kgs 47,840 kgs

Direct labour 40,000 DLHs 37,720 DLHs

Production costs:

Direct materials $200,000 $207,404

Direct labour $500,000 $471,500

Variable overhead $80,000 $84,640

Fixed overhead $160,000 $162,000

There were no beginning or ending work in process inventories but there were 4,000 units of finished goods at the end of the year.

Instructions

a) Calculate the standard cost of goods sold for the year just ended

b) Calculate the direct materials flexible budget variance

c) Calculate the direct labour efficiency variance

Solution 135

a) Standard cost per unit: DM $2.00

DL 5.00

VOH 0.80

FOH 1.60

$9.40 x 96,000 units sold = $902,400

b) Actual DM cost $207,404

Budgeted DM 99,000 x $2 = 198,000

$ 9,404 unfavourable

c) ($500,000 / 40,000 DLHs) x (37,720 – 39,600) = $23,500 favourable

Exercise 136

Camping Out Co. manufactures down sleeping bags. Each sleeping bag requires 4 kilograms of down and takes 3 hours of direct labour. The standard cost of the down used by Camping Out is $8 per kilogram and the standard labour cost is $10 per hour. In November, Camping Out purchased and used 15,000 kilograms of down for $120,750. During the year, the company manufactured 4,000 sleeping bags. Payroll reported a total of 1,480 direct labour hours at a cost of $14,060.

Instructions

a) Calculate the materials price and quantity variances and indicate whether the variances are favourable or unfavourable.

b) Calculate the labour price and quantity variances and indicate whether the variances are favourable or unfavourable.

Solution 136 (15 min.)

a) Actual Quantity Actual Quantity Standard Quantity

× Actual Price × Standard Price × Standard Price

15,000 × $8.05 = 15,000 × $8 = 16,000 × $8 =

$120,750 $120,000 $128,000

Price Variance Quantity Variance

$750 U $8,000 F

Total

Materials Variance

$7,250 F

b) Actual Hours Actual Hours Standard Hours

× Actual Rate × Standard Rate × Standard Rate

1,480 × $9.50 = 1,480 × $10 = 1,200 × $10 =

$14,060 $14,800 $12,000

Price Variance Quantity Variance

$740 F $2,800 U

Total

Labour Variance

$2,060 U

Exercise 137

Salt-of-the-Earth Brick Company makes fired clay bricks for construction. The company uses a standard costing system that calls for 2.75 kilograms of clay at $.20 per kilogram for each brick. The standard cost for labour is.075 hour at $32 per hour for each brick. In August, Salt-of-the-Earth anticipates production to be at a level of 200,000 bricks. During August, Salt-of-the-Earth manufactured 201,000 bricks. The company purchased 553,000 kilograms of clay at a cost of $132,720. The cost of direct labour was $485,060 for 15,350 hours.

Instructions

a) Calculate the materials price and quantity variances and indicate whether the variances are favourable or unfavourable.

b) Calculate the labour price and quantity variances and indicate whether the variances are favourable or unfavourable.

Solution 137 (15 min.)

a) Actual Quantity Actual Quantity Standard Quantity

× Actual Price × Standard Price × Standard Price

553,000 × $.24 = 553,000 × $.20 = 552,750 × $.20 =

$132,720 $110,600 $110,550

Price Variance Quantity Variance

$22,120 U $50 U

Total

Materials Variance

$22,170 U

b) Actual Hours Actual Hours Standard Hours

× Actual Rate × Standard Rate × Standard Rate

15,350 × $31.60 = 15,350 × $32 = 15,075 × $32 =

$485,060 $491,200 $482,400

Price Variance Quantity Variance

$6,140 F $8,800 U

Total

Labour Variance

$2,660 U

Exercise 138

Ducker Company has developed the following standard costs for its product for 2022:

DUCKER COMPANY

Standard Cost Card

Product A

Cost Component Standard Quantity × Standard Price = Standard Cost

Direct materials 1.5 kilograms $4 $6

Direct labour 2 hours 11 22

Manufacturing overhead 2 hours 7 14

$42

The company expected to produce 15,000 units of Product A in 2022 and work 75,000 direct labour hours.

Actual results for 2022 are as follows:

• 14,700 units of Product A were produced.
• Actual direct labour costs were $340,000 for 34,000 direct labour hours worked.
• Actual direct materials purchased and used during the year cost $89,000 for 23,000 kilograms.
• Actual variable overhead incurred was $179,000 and actual fixed overhead incurred was $87,000.

Instructions

Calculate the following variances showing all computations to support your answers. Indicate whether the variances are favourable or unfavourable.

a) Materials quantity variance.

b) Total direct labour variance.

c) Direct labour quantity variance.

d) Direct materials price variance.

e) Total overhead variance.

Solution 138 (20–25 min.)

a) Materials quantity variance = $3,800 unfavourable.

(AQ × SP) – (SQ × SP) = Materials quantity variance

(23,000 × $4) – (22,050 × $4) = $92,000 – $88,200= $3,800 unfavourable

SQ = 14,700 units × 1.5 kg/unit = 22,050 kilograms

b) Total direct labour variance = $16,600 unfavourable.

(AH × AR) – (SH × SR) = Total direct labour variance

(34,000 × $10) – (29,400 × $11) = $340,000 – $323,400 = $16,600 unfavourable

SH = 14,700 × 2 = 29,400 direct labour hours

c) Direct labour quantity variance = $50,600 unfavourable.

(AH × SR) – (SH × SR) = Direct labour quantity variance

(34,000 × $11) – (29,400 × $11) = $374,000 – $323,400 = $50,600 unfavourable

d) Direct materials price variance = $3,000 favourable.

(AQ × AP) – (AQ × SP) = Direct materials price variance

(23,000 × $3.87) – (23,000 × $4) = $89,000 – $92,000 = $3,000 favourable

e) Total overhead variance = $60,200 unfavourable.

(Actual overhead) – (Overhead applied) = Total overhead variance

($179,000 + $87,000) – (29,400 × $7) = $266,000 – $205,800 = $60,200 unfavourable

Standard hours = 14,700 × 2 = 29,400 direct labour hours

Exercise 139

Chefs Company developed the following standard costs for its product for 2022:

CHEFS COMPANY

Standard Cost Card

Cost Components Standard Quantity × Standard Price = Standard Cost

Direct materials 4 kilograms $ 10 $40

Direct labour 2 hours 20 40

Variable overhead 2 hours 8 16

Fixed overhead 2 hours 4 8

$104

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

Actual results for 2022 were as follows:

• 14,200 units of product were actually produced.
• Direct labour costs were $552,420 for 27,900 direct labour hours actually worked.
• Actual direct materials purchased and used during the year cost $543,320 for 57,800 kilograms.
• Total actual manufacturing overhead costs were $340,000.

Instructions

Calculate the following variances for Chefs Company for 2022 and indicate whether the variance is favourable or unfavourable.

a) Direct materials price variance.

b) Direct materials quantity variance.

c) Direct labour price variance.

d) Direct labour quantity variance.

e) Overhead budget variance.

f) Overhead volume variance.

Solution 139 (20–25 min.)

a) Direct materials price variance = $34,680 favourable.

(AQ × AP) – (AQ × SP) = Materials price variance

(57,800 × $9.40) – (57,800 × $10) = $543,320 – $578,000 = $34,680 favourable

b) Direct materials quantity variance = $10,000 unfavourable.

(AQ × SP) – (SQ × SP) = Materials quantity variance

(57,800 × $10) – (56,800 × $10) = $578,000 – $568,000 = $10,000 unfavourable

SQ = 14,200 products × 4 lbs = 56,800 lbs.

c) Direct labour price variance = $5,580 favourable.

(AH × AR) – (AH × SR) = Labour price variance

(27,900 × $19.80) – (27,900 × $20) = $552,420 – $558,000 = $5,580 favourable

d) Direct labour quantity variance = $10,000 favourable.

(AH × SR) – (SH × SR) = Labour quantity variance

(27,900 × $20) – (28,400 × $20) = $558,000 – $568,000 = $10,000 favourable

SH = 14,200 units × 2 hrs = 28,400 direct labour hours

e) Overhead budget variance = $7,200 favourable.

Actual overhead – Budgeted overhead for = Budget overhead variance

standard hours allowed

$340,000 – $347,200 = $7,200 favourable

Budgeted overhead for 28,400 direct labour hours allowed.

Variable overhead (28,400 × $8) = $227,200

Fixed overhead = 120,000

$347,200

f) Overhead volume variance = $6,400 unfavourable.

Budgeted overhead for 28,400 direct labour hours allowed

Variable overhead (28,400 × $8) = $227,200

Fixed overhead = 120,000

347,200

Overhead applied (28,400 × $12) = 340,800

Overhead volume variance $ 6,400 unfavourable

Exercise 140

Hasak Corp makes 100 kg containers of vegetable seeds, and has the following unit standard costs for direct materials and direct labour:

Direct materials (100 kg @$1.00 per kg) $100.00

Direct labour (0.5 hours at $24 per hour) $12.00

Total standard costs per 100 kg container: $112.00

The following activities were recorded in June:

1. 1,000 containers were manufactured.

2. 95,000 kg of materials costing $76,000 were purchased.

3. 102,500 kg of materials were used.

4. $12,000 was paid for 475 hours of direct labour.

There were neither beginning nor ending WIP inventories on hand.

Instructions

a) Compute the direct materials variances.

b) Compute the direct labour variances.

c) Suggest rational explanations for each variance.

Solution 140

a) Materials Price Variance: $76,000 – (95,000 x 1.00) = $19,000 F

Materials Usage Variance: 102,500 – 1,000(100) x 1.00 = $2,500 U

b) Labour Rate Variance: $12,000 – (475 hours x $24) = $600 U

Labour Efficiency Variance: [(0.5 x 1000) – 475 hours] x $24 = $600 F

c) Any of the variances above could be caused by out of date or inappropriate standards.

With respect to the materials price variance, the firm could be purchasing in larger quantities and receiving quantity discounts, purchasing lower quality materials, or perhaps the supplier was forced to offer purchase discounts because of economic factors beyond its control.

Regarding the materials usage variance, the following reasons are relevant: lower quality materials than the standard provided for, lower skilled workers, less efficient machines, employee dissatisfaction.

For the labour rate variance, it could be that more highly skilled workers were used than the standard, or employees with more seniority – either case would mean a higher pay rate than expected.

Regarding the labour efficiency variance, the firm could have used a more experienced work force than originally planned.

Exercise 141

The following direct labour data pertain to the operations of Bell Chime Manufacturing Company for the month of January:

Actual labour rate $15.50 per hr.

Actual hours used 17,000

Standard labour rate $15.00 per hr.

Standard hours allowed 16,700

Instructions

Prepare a matrix and calculate the labour variances.

Price Variance Quantity Variance

Total

Labour Variance

Solution 141 (15–20 min.)

Actual Hours Actual Hours Standard Hours

× Actual Rate × Standard Rate × Standard Rate

17,000 × $15.50 = 17,000 × $15.00 = 16,700 × $15.00 =

$263,500 $255,000 $250,500

Price Variance Quantity Variance

$8,500 U $4,500 U

Total

Labour Variance

$13,000 U

Exercise 142

Preston Well Company planned to produce 25,000 units of product and work 100,000 direct labour hours in 2022. Manufacturing overhead at the 100,000 direct labour hours level of activity was estimated to be:

Variable manufacturing overhead $ 700,000

Fixed manufacturing overhead 300,000

Total manufacturing overhead $1,000,000

At the end of 2022, 26,000 units of product were actually produced and 107,000 actual direct labour hours were worked. Total actual overhead costs for 2022 was $1,015,000, of which $295,000 was fixed manufacturing overhead.

Instructions

a) Calculate the total overhead variance.

b) Calculate the variable overhead budget variance.

c) Calculate the fixed overhead volume variance.

Solution 142 (11–16 min.)

a) Actual overhead – Overhead applied = Total overhead variance

$1,015,000 – $1,040,000 = $25,000 favourable

Overhead applied = 26,000 units × 4 hrs = 104,000 standard hours allowed

104,000 × $10 = $1,040,000

b) Actual variable overhead – Variable overhead budgeted = Variable overhead budget

variance

$720,000 – $728,000 = $8,000 favourable

Actual variable overhead = $1,015,000 – $295,000 = $720,000

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

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

c) Budgeted fixed overhead – Fixed overhead applied = Fixed overhead volume variance

$300,000 – $312,000 = $12,000 favourable

Fixed overhead applied = 26,000 units x 4 hours/unit x $3/hour = $312,000.

Exercise 143

Centre Black Company planned to produce 40,000 units of product and work at the 100,000 direct labour hours level of activity for 2022. Manufacturing overhead at this level of activity and the predetermined overhead rate is as follows:

Predetermined

Overhead Rate per

Direct Labour Hour

Variable manufacturing overhead $600,000 $6

Fixed manufacturing overhead 300,000 3

Total manufacturing overhead $900,000 $9

At the end of 2022, 44,000 units were actually produced and 107,400 direct labour hours were actually worked. Total actual manufacturing overhead costs were $950,000, of which $610,000 was variable.

Instructions

Calculate the following variances and indicate whether they are favourable or unfavourable:

a) Variable overhead budget variance.

b) Fixed overhead volume variance.

Solution 143 (12–17 min.)

a) Variable overhead budget variance = $50,000 favourable.

Overhead budgeted for standard hours allowed

Variable overhead (110,000 × $6) = $660,000

Actual overhead incurred 610,000

Variable overhead budget variance $ 50,000 favourable

b) Fixed overhead volume variance = $30,000 favourable.

Overhead budgeted for standard hours allowed

Fixed overhead applied (110,000 × $3) = $330,000

Fixed overhead = 300,000

Fixed overhead volume variance $ 30,000 favourable

Exercise 144

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

Variable manufacturing overhead costs $124,000

Fixed manufacturing overhead costs $93,000

Normal production level in direct labour hours 62,000

Normal production level in units 31,000

During the year, 30,000 units were produced, 64,000 hours were worked, and the actual manufacturing overhead costs were $225,000, of which $90,000 was fixed. The actual fixed manufacturing overhead costs did not deviate from the budgeted fixed manufacturing overhead costs. Overhead is applied on the basis of direct labour hours.

Instructions

a) Calculate the total, fixed, and variable predetermined manufacturing overhead rates.

b) Calculate the total, variable overhead budget, and fixed overhead volume variances.

Solution 144 (13–18 min.)

a) Item Amount Hours Rate

Variable Overhead $124,000 62,000 $2.00

Fixed Overhead 93,000 62,000 1.50

Total 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)

Variable overhead budget variance:

Overhead incurred – Overhead budgeted = $15,000 U

($135,000) [(60,000 × $2)]

Fixed overhead volume variance:

Overhead budgeted – Overhead applied = $3,000 U

($93,000) (60,000 hours × $1.50)

Exercise 145

Dromedille Corporation has developed the following standards for labour for the product that it manufactures:

Direct labour 1.8 hours @ $10.00 per hour

Monthly production 475 direct labour hours

In a recent month, Dromedille produced 300 widgets and incurred the following costs:

Direct labour 480 hours @ $10.75 per hour

There were no beginning or ending inventories.

Instructions

a) Calculate the direct labour price variance.

b) Calculate the direct labour efficiency variance.

Solution 145

a) 480 x ($10.75 – $10.00) = $360 unfavourable

b) $10 x (480 – (300 x 1.8) = $600 favourable

Exercise 146

Robinson Corporation had the following variances: materials price $500 F, materials

quantity $2,200 F, labour price $1,400 U, labour quantity $600 F, and overhead $1,600 F. Sales

revenue was $205,400, and cost of goods sold (at standard) was $123,800.

Instructions

Determine the actual gross profit.

Solution 146 (7–9 min.)

Sales revenue $205,400

Cost of goods sold (at standard) 123,800

Standard gross profit 81,600

Variances

Materials price $ 500 F

Materials quantity 2,200 F

Labour price 1,400 U

Labour quantity 600 F

Overhead 1,600 F

Total variance favourable 3,500

Gross profit (actual) $ 85,100

Exercise 147

M&H Inc. uses a standard cost accounting system. During January 2022, the company reported the following manufacturing variances:

Material price variance $1,500 F

Material quantity variance 1,300 U

Labour price variance 750 U

Labour quantity variance 1,300 U

Overhead controllable 600 F

Overhead volume 4,000 U

In addition, 12,000 units of product were sold at $20 per unit. Each unit sold had a standard cost of $14. Selling and administrative expenses for the month were $11,000.

Instructions

Prepare an income statement for management for the month ending January 31, 2022.

Solution 147 (15–20 min.)

M&H INC.

Income Statement

For the Month Ended January 31, 2022

Sales (12,000 × $20) $240,000

Cost of goods sold (12,000 × $14) 168,000

Gross profit (at standard) 72,000

Variances:

Materials price $(1,500)

Materials quantity 1,300

Labour price 750

Labour quantity 1,300

Overhead controllable (600)

Overhead volume 4,000

Total variances (unfavourable) (5,250)

Gross profit (actual) 66,750

Selling and administrative expenses 11,000

Net income $ 55,750

Exercise 148

a) Why does the balanced scorecard differ from company to company?

b) Whose responsibility is its implementation?

Solution 148

a) A company’s scorecard should be directly derived from its established corporate strategy. Since strategy differs from company to company, so will the respective Balanced Scorecards.

b) No one person is responsible for implementing the balanced scorecard. It is a company-wide initiative and requires the commitment and contribution of the entire organization for successful implementation and acceptance.

Exercise 149

a) How can management communicate strategy?

b) What management failure can keep strategy from being actionable?

Solution 149

a) Strategy can be communicated to employees and lower level managers through the balanced scorecard, which shows objectives, performance measures, targets and initiatives. This provides a guideline for what employees should focus attention on. To align corporate objectives with employee objectives, employees must be fully informed of the strategies, and share ownership for implementation. Further, incentives must support the strategy for employees to own it.

b) For strategy to become actionable and fully implemented, it is critical that management commit sufficient resources to its support.

Exercise 150

The following measures belong to one of the four perspectives within the balanced scorecard:

1) Product cost per unit

2) Satisfaction of employees

3) Satisfaction of the customer

4) Cycle time

Instructions

a) Identify the relevant perspective for each measure listed above.

b) Suggest a possible strategic objective that might be associated with each measure.

Solution 150

a) 1) Product cost per unit – Financial Perspective

2) Satisfaction of employees – Learning and Growth Perspective

3) Satisfaction of the customer – Customer Perspective

4) Cycle time – Internal Process Perspective.

b) 1) product cost per unit – Reduce product costs

2) Satisfaction of employees – Increase motivation and alignment of employee goals and corporate goals

3) Satisfaction of the customer – Increase repeat customer business

4) Cycle time – Decrease total production time

*Exercise 151

The standard cost of a litre of paint manufactured by By-the-Numbers, Inc. includes 2 litres of direct materials at $4.75 per litre. During February, 75,000 litres of direct materials are purchased at a cost of $4.70 per litre, and 72,000 litres of direct materials are used to produce 36,500 litres of paint.

Instructions

a) Calculate 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.

*Solution 151 (15–20 min.)

a) Materials Price Variance:

$352,500ⁱ – $356,250ⁱⁱ = $3,750 F

ⁱ(75,000 × $4.70)

ⁱⁱ(75,000 × $4.75)

Materials Quantity Variance:

$342,000ⁱⁱⁱ – $346,750^iv = $4,750 F

ⁱⁱⁱ(72,000 × $4.75)

^iv(73,000^v × $4.75)

^v36,500 × 2 litres = 73,000

b) Raw Materials Inventory 356,250

Materials Price Variance 3,750

Accounts Payable 352,500

Work in Process Inventory 346,750

Materials Quantity Variance 4,750

Raw Materials Inventory 342,000

*Exercise 152

Universal Bats, Inc. manufactures aluminum baseball bats that it sells to university athletic departments. It has developed the following per-unit standard costs for 2022 for each baseball bat:

Manufacturing

Direct Materials Direct Labour Overhead

Standard Quantity 2 Kilograms (Aluminum) 1/2 hour 1/2 hour

Standard Price $4.00 $10.00 $6.00

Unit Standard Cost $8.00 $5.00 $3.00

In 2022, the company planned to produce 40,000 baseball bats at a level of 20,000 hours of direct labour.

Actual results for 2022 are presented below:

1. Direct materials purchased were 82,000 kilograms of aluminum, which cost $344,400.

2. Direct materials used were 73,000 kilograms of aluminum.

3. Direct labour costs were $187,200 for 19,500 direct labour hours actually worked.

4. Total manufacturing overhead was $117,000.

5. Actual production was 38,000 baseball bats.

Instructions

a) Calculate the following variances:

Direct materials price.

Direct materials quantity.

Direct labour price.

Direct labour quantity.

Total overhead variance.

b) Prepare the journal entries to record the transactions and events in 2022.

*Solution 152 (40–45 min.)

a) 1. Direct materials price variance = $16,400 unfavourable.

(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 favourable.

(AQ × SP) – (SQ × SP)

(73,000 × $4.00) – (76,000* × $4.00) = $292,000 – $304,000 = $12,000

*SQ = 38,000 × 2 kilograms = 76,000 kilograms

3. Direct labour price variance = $7,800 favourable.

(AH × AR) – (AH × SR)

(19,500 × $9.60) – (19,500 × $10.00) = $187,200 – $195,000 = $7,800

4. Direct labour quantity variance = $5,000 unfavourable.

(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 unfavourable

*SH 19,000 × $6.00 = $114,000

b) 1. Raw Materials Inventory 328,000

Materials Price Variance 16,400

Accounts Payable 344,400

(To record purchase of materials)

2. Work in Process Inventory 304,000

Materials Quantity Variance 12,000

Raw Materials Inventory 292,000

(To record issuance of direct materials)

3. Factory Labour 195,000

Labour Price Variance 7,800

Wages Payable 187,200

(To record direct labour costs)

4. Work in Process Inventory 190,000

Labour Quantity Variance 5,000

Factory Labour 195,000

(To assign factory labour to jobs)

5. Manufacturing Overhead 117,000

Accounts Payable/Cash etc. 117,000

(To record overhead incurred)

6. Work in Process Inventory 114,000

Manufacturing Overhead 114,000

(To assign overhead to jobs)

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

Work in Process Inventory 608,000

(To record transfer of completed work to finished goods)

*Exercise 153

Starlight Company's standard labour cost of producing one unit of product is 4 hours at the rate of $28.00 per hour. During December, 77,000 hours of labour are incurred at a cost of $27.60 per hour to produce 19,000 units of product.

Instructions

a) Calculate the labour price and quantity variances.

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

*Solution 153 (15–20 min.)

a) Labour Price Variance:

$2,125,200ⁱ – $2,156,000ⁱⁱ = $30,800 F

ⁱ(77,000 × $27.60)

ⁱⁱ(77,000 × $28.00)

Labour Quantity Variance:

$2,156,000ⁱⁱⁱ – $2,128,000^iv = $28,000 U

ⁱⁱⁱ(77,000 × $28.00)

^iv(76,000 × $28.00)

b) Factory Labour 2,156,000

Labour Price Variance 30,800

Wages Payable 2,125,200

Work in Process Inventory 2,128,000

Labour Quantity Variance 28,000

Factory Labour 2,156,000

*Exercise 154

The following direct labour data pertain to the operations of Blue Vanity Company for the month of June:

Standard labour rate $20.00 per hr.

Actual hours incurred and used 9,000

The standard cost card shows that 5 hours are required to complete one unit of product. The actual labour rate incurred exceeded the standard rate by 10%. Two thousand units were manufactured in June.

Instructions

a) Calculate the price, quantity, and total labour variances.

b) Journalize the entries to record the labour variances.

*Solution 154 (15–20 min.)

(a) Actual Hours Actual Hours Standard Hours

× Actual Rate × Standard Rate × Standard Rate

9,000 × $22.00 = 9,000 × $20.00 = 10,000 × $20.00 =

$198,000 $180,000 $200,000

Price Variance Quantity Variance

$18,000 U $20,000 F

Total

Labour Variance

$2,000 F

(b) Factory Labour 180,000

Labour Price Variance 18,000

Wages Payable 198,000

Work in Process Inventory 200,000

Labour Quantity Variance 20,000

Factory Labour 180,000

*Exercise 155

Presented below is a flexible manufacturing budget for Bestwood Company, which manufactures fine dining chairs:

Activity Index:

Standard direct labour hours 2,000 3,200 3,600 4,000

Variable costs

Indirect materials $ 4,000 $ 6,400 $ 7,200 $ 8,000

Indirect labour 2,300 3,680 4,140 4,600

Utilities 3,200 5,120 5,760 6,400

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

Fixed costs

Supervisory salaries 1,000 1,000 1,000 1,000

Rent 3,000 3,000 3,000 3,000

Total fixed 4,000 4,000 4,000 4,000

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

The company applies total overhead on the basis of direct labour hours at $6.00 per direct labour hour and the standard hours per dining chair is 1/2 hour each. The company's actual production was 5,800 dining chairs with 3,000 actual hours of direct labour. Actual overhead was $18,200, of which $4,100 was fixed.

Instructions

a) Calculate the variable overhead budget and fixed 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.

*Solution 155 (16–21 min.)

a) Computation of variances:

Actual variable overhead – variable overhead = budget variance

$14,100 – [(5,800 × 1/2 × $4.75)] = $325 unfavourable

Fixed overhead variance:

Budgeted overhead – Overhead applied

$4,100 – (5,800 × 1/2 × $1.25) = $475 unfavourable

b) 1. Manufacturing Overhead 18,200

Accounts Payable, Cash, Etc. 18,200

(To record overhead incurred)

2. Work in Process Inventory 17,400

Manufacturing Overhead 17,400

(To assign overhead to production)

3. Variable overhead budget variance 325

Fixed overhead Variance 475

Manufacturing Overhead 800

(To recognize overhead variances)

*Exercise 156

Journalize the following transactions for Beapack Manufacturing:

a. Purchased 15,000 units of raw materials on account for $36,000. The standard cost was

$37,500.

b. Incurred direct labour costs of $72,000 for 9,000 hours. The standard labour cost was

$75,600.

c. Issued 14,550 units of raw materials for production. The standard units were 14,250 units of

raw materials.

d. Assigned 9,000 direct labour hours costing $75,600 to production. Standard hours allowed

were 8,700.

*Solution 156 (15 min.)

a.

Raw Materials Inventory 37,500

Accounts Payable 36,000

Materials Price Variance 1,500

To record purchase of materials.

b.

Factory Labour 75,600

Labour Price Variance 3,600

Wages Payable 72,000

To record direct labour costs.

c.

Work in Process Inventory 34,200

($36,000 / 15,000 x 14,250)

Materials Quantity Variance 2,175

Raw Materials Inventory 36,375

($37,500 / 15,000 x 14,550)

To record issue of raw materials.

d.

Work in Process Inventory 73,080

($75,600 / 9,000 x 8,700)

Labour Quantity Variance 2,520

Factory Labour 75,600

*Exercise 157

Sparkles Company produces and sells a single product with the following standard for the product:

Direct Materials 5 kgs. @ 1.50/kg = $7.50/unit

Direct Labour 1.5 hrs. @ $11.00/hr. = $16.50/unit

Actual costs and usage for the month is as follows:

Units produced 1,400

Direct materials purchased $12,800 (8,000 kilograms)

Direct materials used 7,500 kilograms

Direct Labour Cost $22,500 (2,000 hours)

Instructions

a) Compute the price and quantity variances for both materials and labour for the month.

b) Prepare the appropriate journal entries.

*Solution 157

1. Materials Price Variance = $12,800 – (8,000 x $1.50) = $800 U

Materials Quantity Variance = (7,500 x $1.50) – (5 x 1,400 x $1.50) = $750 U

Labour Price Variance = $22,500 – (2,000 x $11.00) = $500 U

Labour Quantity Variance = (2,000 x $11.00) – (1.5 x 1,400 x $11.00) = $1,100 F

1. Raw Materials Inventory 12,000

Materials Price Variance 800

Accounts Payable 12,800

Work in Process Inventory (5 x 1,400 x $1.50) 10,500

Materials Quantity Variance 750

Raw Materials Inventory (7,500 X $1.50) 11,250

Factory Labour 22,000

Labour Price Variance 500

Accounts Payable 22,500

Work in Process Inventory (1.5 x 1,400 x $11.00) 23,100

Labour Quantity Variance 1,100

Factory Labour (2,000 X $11.00) 22,000

*Exercise 158

Cactus Company developed the following standards for 2022:

CACTUS COMPANY

Standard Cost Card

Cost Components Standard Quantity × Standard Price = Standard Cost

Direct materials 5 kilograms $ 5 $25

Direct labour 1 hour $18 18

Manufacturing overhead 1 hour $10 10

$53

The company planned to produce 30,000 units of product and work at the 30,000 direct labour level of activity in 2022. The company uses a standard cost accounting system that records standard costs in the accounts and recognizes variances in the accounts at the earliest opportunity. During 2022, 29,000 actual units of product were produced.

Instructions

Prepare the journal entries to record the following transactions for Cactus Company during 2022.

a) Purchased 147,000 kilograms of raw materials for $4.90 per kilogram on account.

b) Actual direct labour payroll amounted to $527,000 for 28,500 actual direct labour hours worked. Factory labour cost is to be recorded and distributed to production.

c) Direct materials issued for production amounted to 147,000 kilograms, which actually cost $4.90 per kilogram.

d) Actual manufacturing overhead costs incurred were $288,000 in 2022.

e) Manufacturing overhead was applied when the 29,000 units were completed.

f) Transferred the 29,000 completed units to finished goods.

*Solution 158 (20–25 min.)

a) Raw Materials Inventory 735,000

Materials Price Variance 14,700

Accounts Payable 720,300

(To record purchase of materials)

b) Factory Labour 513,000

Labour Price Variance 14,000

Wages Payable 527,000

(To record direct labour costs)

Work in Process Inventory 522,000

Labour Quantity Variance 9,000

Factory Labour 513,000

(To assign factory labour to jobs)

c) Work in Process Inventory 725,000

Materials Quantity Variance 10,000

Raw Materials Inventory 735,000

(To record issuance of raw materials)

d) Manufacturing Overhead 288,000

Accounts Payable/Cash/Acc. Depreciation 288,000

(To record overhead incurred)

e) Work in Process Inventory 290,000

Manufacturing Overhead 290,000

(To assign overhead to jobs)

f) Finished Goods Inventory 1,537,000

Work in Process Inventory 1,537,000

(To record transfer of completed units to finished goods)

COMPLETION STATEMENTS

159. When considering budgets and standards, a ___ is expressed as a unit amount, whereas a ___ is expressed as a total amount.

160. Standards that represent optimum performance under perfect operating conditions are called ___ standards, but most companies use ___ standards that are rigorous but attainable.

161. 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.

162. The difference between actual quantity of materials times the standard price and standard quantity times the standard price is the materials ___ variance.

163. The difference between actual hours times the actual pay rate and actual hours times the standard pay rate is the labour ___ variance.

164. The standard number of hours allowed times the predetermined overhead rate is the amount of ___ to the products produced.

165. If the actual direct labour hours worked is greater than the standard hours, the labour quantity variance will be ___, and the labour rate variance will be ___ if the standard rate of pay is greater than the actual rate of pay.

166. In using variance reports, top management normally looks for ___ variances.

ANSWERS TO COMPLETION STATEMENTS

159. standard, budget

160. ideal, normal

161. price, quantity

162. quantity

163. price

164. overhead applied

165. unfavourable, favourable

166. significant or material

MATCHING

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

A. Variances F. Materials price variance

B. Standard costs G. Labour quantity variance

C. Standard cost accounting system H. Variable overhead budget variance

D. Normal standards I. Overhead volume variance

E. Ideal standards J. Standard hours allowed

___ 1. The difference between actual variable overhead incurred and variable 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 of material used times the actual price of materials purchased, and the actual quantity of material used times the standard price of materials.

___ 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 fixed overhead budgeted for the standard hours allowed and the fixed 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

2. J

3. F

4. A

5. G

6. B

7. I

8. D

9. E

10. C

SHORT-ANSWER ESSAY QUESTIONS

SAE 168

Tinikits, Inc. is the manufacturer of miniature models, especially of automobiles with historical interest. The company is developing new standard costs. Trent Roswell, the production manager, 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.

Instructions

a) Are ideal standards unethical? Explain briefly.

b) Is it unethical for Mary to refuse to support the standards? Explain.

Solution 168

a) 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.

b) 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.

SAE 169

In reviewing the activities of the Mixing Department for the month of June, the manager of the department notices that there was an unfavourable materials price variance for the month and there was an unfavourable 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 169

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.

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

b) Production department. Ordinarily, responsibility for an unfavourable quantity variance rests with this 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 unfavourable price variance when the materials must be ordered on a rush basis at a higher price than planned.

SAE Essay 170

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

Solution 170

Since labour quantity variances relate to the efficiency of labour, the cause of an unfavourable 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.

SAE 171

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 unfavourable labour efficiency variance. He cites as an example the workers' effort and 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 unfavourable, but he certainly didn't think his workers had been inefficient.

Instructions

Write a short note to Mike explaining the probable cause of the unfavourable labour efficiency variance.

Solution 171

To: Mike,

From: name

Date: today’s date

Re: Cause of labour efficiency variance

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.

SAE 172

According to IFRS and ASPE requirements, explain when standard costs can be used and not used for financial statements prepared for shareholders and other external users.

Solution 172

In financial statements prepared for shareholders and other external users, standard costing will meet the IFRS and ASPE requirements and will be in accordance with generally

accepted accounting principles when there are no significant differences between actual costs

and standard costs. However, if there are significant differences between actual

and standard costs, inventories and the cost of goods sold must be reported at actual costs.

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