CHAPTER 24

STANDARD COSTS and balanced scorecard

CHAPTER LEARNING OBJECTIVES

1. Describe standard costs. Both standards and budgets are predetermined costs. The primary 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 a number of advantages. They (a) facilitate management planning, (b) promote greater economy (c) are useful in setting selling prices, (d) contribute to management control, (e) permit “management by exception,” and (f) 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 labor price standard should be based on current wage rates and anticipated adjustments such as COLAs. It also generally includes payroll taxes and employee benefits. Direct labor 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 labor hours or standard machine hours.

2. Determine direct materials variances. The equations for direct materials variances are as follows:

(Actual quantity × Actual price) – (Standard quantity × Standard price) = Total materials variance

(Actual quantity × Actual price) – (Actual quantity × Standard price) = Materials price variance

(Actual quantity × Standard price) – (Standard quantity × Standard price) = Materials quantity variance

3. Determine direct labor and total manufacturing overhead variances. The equations for the direct labor variances are as follows:

(Actual hours × Actual rate) – (Standard hours × Standard rate) = Total labor variance

(Actual hours × Actual rate) – (Actual hours × Standard rate) = Labor price variance

(Actual hours × Standard rate) – (Standard hours × Standard rate) = Labor quantity variance

The equation for the total manufacturing overhead variance is as follows:

(Actual overhead) – (Overhead applied at standard hours allowed) = Total overhead variance

4. Prepare variance reports and balanced scorecards. Variances are reported to management in variance reports. The reports facilitate management by exception by highlighting significant differences. Under a standard costing system, an income statement prepared for management will report cost of goods sold at standard cost and then disclose each variance separately,

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

^a5. Identify the features of a standard cost accounting system. In a standard cost accounting system, companies journalize and post standard costs, and they maintain separate variance accounts in the ledger.

^a6. Compute overhead controllable and volume variances. The total overhead variance is generally analyzed through a price variance and a quantity variance. The name usually given to the price variance is the overhead controllable variance. The quantity variance is referred to as the overhead volume variance.

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 while a budget is a total amount.

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

5. An advantage of using standard costs is that it simplifies costing of inventories and reduces 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 can indicate inefficiencies.

9. Ideal standards will generally result in favorable variances.

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

11. Once set, normal standards should not be changed.

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

13. Another name for the direct labor price standard is the direct labor efficiency standard.

14. The standard activity index for the standard predetermined overhead rate can be based on direct labor hours or machine hours.

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 produced.

20. The standard cost plus the price variance plus the quantity variance equals the 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. The production department may be 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. The total overhead variance is the difference between actual overhead costs and overhead costs applied to production.

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 with 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.

31. Conceptually, standards and budgets are essentially the same.

32. Standards may be useful in setting selling prices for finished goods.

33. The materials price standard is based on the purchasing department's best estimate of the cost of raw materials.

34. The materials price variance is normally caused by the production department.

35. The use of an inexperienced worker instead of an experienced employee can result in a favorable labor price variance but an unfavorable quantity variance.

36. In using variance reports, top management normally looks carefully at every variance.

37. The use of standard costs in inventory costing is prohibited in financial statements.

^a38. The overhead controllable variance is the difference between the actual overhead costs incurred and the budgeted costs for the standard hours allowed.

MULTIPLE CHOICE QUESTIONS

39. What is a standard cost?

a. The total number of units times the budgeted amount expected

b. Any amount that appears on a budget

c. The total amount that appears on the budget for product costs

d. The amount management thinks should be incurred to produce a good or service

40. A standard cost is

a. the cost 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.

41. 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 while budgets are generally incorporated into the cost accounting system.

42. Standard costs may be used by

a. universities.

b. governmental agencies.

c. charitable organizations.

d. All of these answers are correct.

43. 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. Conceptually, standards and budgets are essentially the same.

d. The standard cost of a product is equivalent to the budgeted cost per unit of product.

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

a. applied manufacturing overhead.

b. direct labor budgets.

c. direct materials budgets.

d. cash budget data.

45. Inventories may be reported in the financial statements at

a. budgeted costs.

b. standard costs.

c. both budgeted and standard costs.

d. None of these answers are correct.

46. A standard differs from a budget because a standard

a. is a predetermined cost.

b. contributes to management planning and control.

c. is a unit amount.

d. none of these; a standard does not differ from a budget.

47. Marburg Co. expects direct materials cost of $6 per unit for 100,000 units (a total of $600,000 of direct materials costs). Marburg’s standard direct materials cost and budgeted direct materials cost is

Standard Budgeted

a. $6 per unit $600,000 per year

b. $6 per unit $6 per unit

c. $600,000 per year $6 per unit

d. $600,000 per year $600,000 per year

48. The use of standard costs

a. makes employees less “cost-conscious.”

b. provides a basis for evaluating cost control.

c. makes management by exception more difficult.

d. increases clerical costs.

49. The use of standard costs

a. can make management planning more difficult.

b. promotes greater economy.

c. does not help in setting prices.

d. weakens management control.

50. 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 shareholders may be required.

51. Standard costs

a. can simplify costing of inventories.

b. can help in setting prices.

c. are the current budgeted cost per unit.

d. All of these answers are correct.

52. 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.

53. 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."

54. 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 in order to motivate people.

55. 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.

56. 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.

57. The final decision as to what standard costs should be is the responsibility of

a. the quality control engineer.

b. the managerial accountants.

c. the purchasing agent.

d. management.

58. The labor time requirements for standards may be determined by the

a. sales manager.

b. product manager.

c. industrial engineers.

d. payroll department manager.

59. The two levels at which standards may be set are

a. normal and fully efficient.

b. normal and ideal.

c. ideal and less efficient.

d. fully efficient and fully effective.

60. The ___________ is the most rigorous level of standard.

a. normal standard

b. realistic standard

c. ideal standard

d. conceivable standard

61. 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.

62. 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. 1

b. 2

c. 3

d. 2 and 3

63. The cost of freight-in

a. is 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.

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

a. pounds.

b. barrels.

c. dollars.

d. board feet.

65. 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.

66. The direct labor quantity standard is sometimes called the direct labor

a. volume standard.

b. effectiveness standard.

c. efficiency standard.

d. quality standard.

67. A manufacturing company would include the time needed for setup and downtime in their direct

a. materials price standard.

b. materials quantity standard.

c. labor price standard.

d. labor quantity standard.

68. An allowance for spoilage is part of the direct

a. materials price standard.

b. materials quantity standard.

c. labor price standard.

d. labor quantity standard.

69. 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.

70. An unfavorable materials quantity variance would occur if

a. more materials were purchased than were 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.

71. Oxnard Industries produces a product that requires 2.6 pounds of materials per unit. The allowance for waste and spoilage per unit is .3 pounds and .1 pounds, respectively. The purchase price is $2 per pound, but a 2% discount is usually taken. Freight costs are $.10 per pound, and receiving and handling costs are $.07 per pound. The hourly wage rate is $12.00 per hour, but a raise which will average $.30 will go into effect soon. Payroll taxes are $1.20 per hour, and employee benefits average $2.40 per hour. Standard production time is 1 hour per unit, and the allowance for rest periods and setup is .2 hours and .1 hours, respectively. The standard direct materials price per pound is

a. $1.96.

b. $2.00.

c. $2.13

d. $2.17

72. Oxnard Industries produces a product that requires 2.6 pounds of materials per unit. The allowance for waste and spoilage per unit is .3 pounds and .1 pounds, respectively. The purchase price is $2 per pound, but a 2% discount is usually taken. Freight costs are $.10 per pound, and receiving and handling costs are $.07 per pound. The hourly wage rate is $12.00 per hour, but a raise which will average $.30 will go into effect soon. Payroll taxes are $1.20 per hour, and employee benefits average $2.40 per hour. Standard production time is 1 hour per unit, and the allowance for rest periods and setup is .2 hours and .1 hours, respectively. The standard direct materials quantity per unit is

a. 2.6 pounds.

b. 2.7 pounds.

c. 2.9 pounds.

d. 3.0 pounds.

73. Oxnard Industries produces a product that requires 2.6 pounds of materials per unit. The allowance for waste and spoilage per unit is .3 pounds and .1 pounds, respectively. The purchase price is $2 per pound, but a 2% discount is usually taken. Freight costs are $.10 per pound, and receiving and handling costs are $.07 per pound. The hourly wage rate is $12.00 per hour, but a raise which will average $.30 will go into effect soon. Payroll taxes are $1.20 per hour, and employee benefits average $2.40 per hour. Standard production time is 1 hour per unit, and the allowance for rest periods and setup is .2 hours and .1 hours, respectively. The standard direct labor rate per hour is

a. $ 12.00.

b. $ 12.30.

c. $15.60.

d. $15.90.

74. Oxnard Industries produces a product that requires 2.6 pounds of materials per unit. The allowance for waste and spoilage per unit is .3 pounds and .1 pounds, respectively. The purchase price is $2 per pound, but a 2% discount is usually taken. Freight costs are $.10 per pound, and receiving and handling costs are $.07 per pound. The hourly wage rate is $12.00 per hour, but a raise which will average $.30 will go into effect soon. Payroll taxes are $1.20 per hour, and employee benefits average $2.40 per hour. Standard production time is 1 hour per unit, and the allowance for rest periods and setup is .2 hours and .1 hours, respectively. The standard direct labor hours per unit is

a. 1 hour.

b. 1.1 hours.

c. 1.2 hours.

d. 1.3 hours.

75. The standard direct materials quantity does not include allowances for

a. unavoidable waste.

b. normal spoilage.

c. unexpected spoilage.

d. all of the above are included.

76. Allowances should not be made in the direct labor quantity standard for

a. unexpected downtime.

b. rest periods.

c. cleanup.

d. machine downtime.

77. The standard predetermined overhead rate used in setting the standard overhead cost is determined by dividing

a. budgeted overhead costs by an estimated standard activity index.

b. actual overhead costs by an estimated standard activity index.

c. budgeted overhead costs by actual activity.

d. actual overhead costs by actual activity.

78. Hofburg’s standard quantities for one unit of product include 2 pounds of materials and 1.5 labor hours. The standard rates are $2 per pound and $20 per hour. The standard overhead rate is $8 per direct labor hour. The total standard cost per unit of Hofburg’s product is

a. $14.50.

b. $22.00.

c. $34.00.

d. $46.00.

79. Which of the following statements is true?

a. Variances are the differences between total actual costs and total standard costs.

b. When actual costs exceed standard costs, the variance is favorable.

c. An unfavorable variance results when actual costs are decreasing but standards are not changed.

d. All of the above are true.

80. Unfavorable materials price and quantity variances are generally the responsibility of the

Price Variance Quantity Variance

a. Purchasing department Purchasing Department

b. Purchasing department Production Department

c. Production department Production Department

d. Production Department Purchasing Department

81. Scorpion Production Company planned to use 1 yard of material per unit budgeted at $81 a yard. However, the material actually cost $80 per yard. The company actually made 3,900 units, although it had planned to make only 3,300 units. Total yards used for production were 3,960. What is the total materials variance?

a. $48,600 U

b. $4,860 U

c. $3,960 F

d. $900 U

82. If actual direct materials 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 direct materials or the actual quantities of direct materials used was greater than the standard unit price or standard quantities of direct materials expected.

d. the purchasing agent or the production foreman is inefficient.

83. 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.

84. 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.

85. A company developed the following per-unit standards for its product: 2 pounds of direct materials at $4 per pound. Last month, 1,500 pounds of direct materials were purchased for $5,700 and entered into production. The direct materials price variance for last month was

a. $5,700 favorable.

b. $300 favorable.

c. $150 favorable.

d. $300 unfavorable.

86. The per-unit standards for direct materials are 2 gallons at $4 per gallon. Last month, 11,200 gallons of direct materials that actually cost $42,400 were used to produce 6,000 units of product. The direct materials quantity variance for last month was

a. $3,200 favorable.

b. $2,400 favorable.

c. $3,200 unfavorable.

d. $5,600 unfavorable.

87. The purchasing agent of the Poplin, Inc. ordered materials of lower quality in an effort to economize on price. Which of the following variances will most likely result?

a. Favorable materials quantity variance

b. Favorable total materials variance

c. Unfavorable materials price variance

d. Unfavorable materials quantity variance

88. The per-unit standards for direct labor are 2 direct labor hours at $15 per hour. If in producing 1,800 units, the actual direct labor cost was $48,000 for 3,000 direct labor hours worked, the total direct labor variance is

a. $1,800 unfavorable.

b. $6,000 favorable.

c. $3,750 unfavorable.

d. $6,000 unfavorable.

89. The standard rate of pay is $20 per direct labor hour. If the actual direct labor payroll was $117,600 for 6,000 direct labor hours worked, the direct labor price variance is

a. $2,400 unfavorable.

b. $2,400 favorable.

c. $3,000 unfavorable.

d. $3,000 favorable.

90. The standard number of hours that should have been worked for the output attained is 6,000 direct labor hours and the actual number of direct labor hours worked was 6,300. If the direct labor price variance was $3,150 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 hour

b. $7.50 per direct labor hour

c. $9.50 per direct labor hour

d. $9.00 per direct labor hour

91. Which one of the following statements is true?

a. If the materials price variance is unfavorable, then the materials quantity variance must also be unfavorable.

b. If the materials price variance is unfavorable, then the materials quantity variance must be favorable.

c. Price and quantity variances move in the same direction. If one is favorable, the others will be as well.

d. There is no correlation of favorable or unfavorable for price and quantity variances.

92. 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 answers are correct.

93. A favorable variance

a. indicates 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.

94. The total materials variance is equal to the

a. materials price variance.

b. difference between the materials price variance and labor 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.

95. Information on Jayhawk's direct labor costs for the month of August is as follows:

Actual labor rate $10

Standard hours 11,000

Actual hours 10,000

Direct labor price variance—unfavorable $4,000

What was the standard labor rate for August?

a. $9.96

b. $9.60

c. $10.40

d. $10.04

96. The total variance is $35,000 unfavorable. The total materials variance is $14,000 unfavorable. The total labor variance is twice the total overhead variance. What is the total overhead variance?

a. $3,500 U

b. $7,000 U

c. $10,500 U

d. $14,00 U

97. The equation 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).

98. The equation 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).

99. A company uses 8,400 pounds of materials and exceeds the standard quantity by 300 pounds. The quantity variance is $1,800 unfavorable. What is the standard materials price?

a. $2

b. $4

c. $6

d. Cannot be determined from the data provided.

100. A company purchases 20,000 pounds of materials. The materials price variance is $4,000 favorable. What is the difference between the standard price and the actual price paid for the materials?

a. $1.00

b. $0.20

c. $5.00

d. Cannot be determined from the data provided.

Ex. 202

Pane Corp. manufactures and sells a nutrition drink for children. It 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 $.12 per ounce

40 pounds of powdered honey at $.60 per pound

63 kiwi fruit at $.50 each

100 protein tablets at $.90 each

4,000 ounces of water at $.003 per ounce

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

Instructions

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

Ex. 203

Engines Done Right Co. is trying to establish the standard labor cost of a typical engine tune-up. The following data have been collected from time and motion studies conducted over the past month.

Actual time spent on the tune-up 1.0 hour

Hourly wage rate $16

Payroll taxes 10% of wage rate

Setup and downtime 10% of actual labor time

Cleanup and rest periods 20% of actual labor time

Employee benefits 25% of wage rate

Instructions

(a) Determine the standard direct labor hours per tune-up

(b) Determine the standard direct labor hourly rate.

(c) Determine the standard direct labor cost per tune-up.

(d) If a tune-up took 1.5 hours at the standard hourly rate, what was the direct labor quantity variance?

Ex. 204

Riggins, Inc. manufactures one product called tybos. The company uses a standard cost system and sells each tybo for $8. At the start of monthly production, Riggins estimated 9,500 tybos would be produced in March. Riggins has established the following material and labor standards to produce one tybo:

Standard Quantity Standard Price

Direct materials 2.5 pounds $3 per pound

Direct labor 0.6 hours $10 per hour

During March 2022, the following activity was recorded by the company relating to the production of tybos:

1. The company produced 9,000 units during the month.

2. A total of 24,000 pounds of materials were purchased at a cost of $66,000.

3. A total of 24,000 pounds of materials were used in production.

4. 5,000 hours of labor were incurred during the month at a total wage cost of $55,000.

Instructions

Calculate the following variances for March for Riggins, Inc.

(a) Materials price variance

(b) Materials quantity variance

(c) Labor price variance

(d) Labor quantity variance

Ex. 205

The following direct labor data pertain to the operations of Pearce Corp. for the month of November:

Actual labor rate $12.25 per hr.

Actual hours used 18,000

Standard labor rate $12.00 per hr.

Standard hours allowed 17,100

Instructions

Prepare a matrix and calculate the labor variances.

Price Variance Quantity Variance

Total

Labor Variance

Ex. 206

The following direct materials data pertain to the operations of Wright Co. for the month of December.

Standard materials price $5.00 per pound

Actual quantity of materials purchased and used 16,500 pounds

The standard cost card shows that a finished product contains 4 pounds of materials. The 16,500 pounds were purchased in December at a discount of 4% from the standard price. In December, 4,000 units of finished product were manufactured.

Instructions

Prepare a matrix for materials and calculate the materials variances.

Price Variance Quantity Variance

Total

Materials Variance

Ex. 207

Seacoast Company provided the following information about its standard costing system for 2022:

Standard Data Actual Data

Materials 10 lbs. @ $4 per lbs. Produced 4,000 units

Labor 3 hrs. @ $21 per hr. Materials purchased 50,000 lbs. costing $215,000

Budgeted production 3,500 units Materials used 41,000 lbs.

Labor worked 11,000 hrs. costing $220,000

Instructions

Calculate the labor price variance and the labor quantity variance.

Ex. 208

Lumberman Manufacturing provided the following information about its standard costing system for 2022:

Standard Data Actual Data

Materials 10 lbs. @ $4 per lbs. Produced 4,000 units

Labor 3 hrs. @ $21 per hr. Materials purchased 50,000 lbs. for $215,000

Budgeted production 3,500 units Materials used 41,000 lbs.

Labor worked 11,000 hrs. costing $220,000

Instructions

Determine the amount of the materials price variance. By how much will the materials price variances differ if the price variance is determined at the time of production?

Ex. 209

Shep Corporation estimated it would produce 6,200 compost bins, though actual production was 6,000 during August. The standard labor cost is based on producing 2 bins per hour at $18.00 per hour. Actual cost per hour was $18.40 with a total labor cost of $53,360.

Instructions

Determine the amounts of the labor price and the labor quantity variances for August.

Ex. 210

Purvis Manufacturing, which produces a single product, has prepared the following standard cost sheet for one unit of the product.

Direct materials (6 pounds at $2 per pound) $12

Direct labor (2 hours at $12 per hour) $24

During the month of April, the company manufactures 300 units and incurs the following actual costs.

Direct materials purchased and used (1,850 pounds) $4,070

Direct labor (620 hours) $7,130

Instructions

Compute the total, price, and quantity variances for materials and labor.

Ex. 211

Platt Company produces one product, a putter called PAR-putter. Platt uses a standard cost system and determines that it should take one hour of direct labor to produce one PAR-putter. The normal production capacity for the putter is 100,000 units per year. The total budgeted overhead at normal capacity is $500,000 comprised of $200,000 of variable costs and $300,000 of fixed costs. Platt applies overhead on the basis of direct labor hours.

During the current year, the company produced 85,000 putters, paid employees for 89,000 direct labor hours, and incurred variable overhead costs of $160,000 and fixed overhead costs of $300,000.

Instructions

(a) Compute the predetermined variable overhead rate and the predetermined fixed overhead rate.

(b) Compute the applied overhead for Platt for the year.

(c) Compute the total overhead variance.

Ex. 212

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

HECTOR COMPANY

Standard Cost Card

Product A

Cost Component Standard Quantity × Standard Price = Standard Cost

Direct materials 4 pounds $3 $12

Direct labor 3 hours 8 24

Manufacturing overhead 3 hours 4 12

$48

The company expected to produce 30,000 units of Product A in 2022 using 90,000 direct labor hours.

Actual results for 2022 are as follows:

• 31,000 units of Product A were produced.
• Actual direct labor costs were $746,200 for 91,000 direct labor hours worked.
• Actual direct materials purchased and used during the year cost $346,500 for 126,000 pounds.
• Actual variable overhead incurred was $155,000 and actual fixed overhead incurred was $205,000.

Instructions

Compute 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.

Ex. 213

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

DART COMPANY

Standard Cost

Cost Components Standard Quantity × Standard Price = Standard Cost

Direct materials 4 pounds $ 5 $20

Direct labor 2 hours 10 20

Variable overhead 2 hours 4 8

Fixed overhead 2 hours 2 4

$52

The company expected to work at the 120,000 direct labor hours level of activity and produce 60,000 units of product.

Actual results for 2022 were as follows:

• 56,800 units of product were actually produced.
• Direct labor costs were $1,092,000 for 112,000 direct labor hours actually worked.
• Actual direct materials purchased and used during the year cost $1,108,800 for 231,000 pounds.
• Total actual manufacturing overhead costs were $680,000.

Instructions

Compute the following variances for Dart Company for 2022 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.

^a5. Overhead controllable variance.

^a6. Overhead volume variance.

Ex. 214

Flagstaff, Inc. uses standard costing for its one product, baseball bats. The standards call for 3 board-feet of wood at $1.40 per board-foot, and 45 minutes of work at $12 per hour per bat. Total manufacturing overhead costs were estimated at $9,450, of which the variable portion was $0.50 per bat and the fixed portion was $1.00 per bat with an estimate of 6,300 bats to be produced. Flagstaff identifies price variances at the earliest possible point in time.

During March, the company had the following results:

Direct labor used = 4,800 hours at a cost of $56,400

Actual manufacturing overhead fixed costs = $6,000

Actual manufacturing overhead variable costs = $3,100

Bats produced = 6,000

Instructions

Compute the following variances for March.

1. Labor quantity variance

2. Total labor variance

^a3. Overhead controllable variance

^a4. Overhead volume variance

Ex. 215

Prescott Manufacturing manufactures widgets for distribution. The standard costs for the manufacture of widgets follow:

Standard Cost Actual Cost

Direct materials 3 lbs. per widget at 31,000 lbs. at $34

$35 per pound per pound

Direct labor 2.5 hours per widget 22,500 hours at

at $11 per hour $11.80 per hour

Factory overhead Variable cost, $24/widget $241,500 variable cost

Fixed cost, $40/widget $381,250 fixed cost

Budgeted factory overhead was $640,000. Overhead applied is based on the number of widgets produced. The company estimated that 10,000 widgets would be produced; however, only 9,600 were produced.

Instructions

Calculate the following amounts.

1. Rate at which total factory overhead is applied

2. Materials price variance

3. Total materials variance

^a4. Overhead volume variance

^a5. Overhead controllable variance

Ex. 216

More Hits Company 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 Labor Overhead

Standard Quantity 2 Pounds (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 120,000 baseball bats at a level of 60,000 hours of direct labor.

Actual results for 2022 are presented below:

1. Direct materials purchases were 220,000 pounds of aluminum which cost $913,000.

2. Direct materials used were 220,000 pounds of aluminum.

3. Direct labor costs were $575,260 for 58,700 direct labor hours actually worked.

4. Total manufacturing overhead was $352,000.

5. Actual production was 114,000 baseball bats.

Instructions

(a) Compute the following variances:

1. Direct materials price.

2. Direct materials quantity.

3. Direct labor price.

4. Direct labor quantity.

5. Total overhead variance.

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

Ex. 217

The standard cost of Product 245 manufactured by Albert Industries includes 2 pounds of direct materials at $4.00 per pound. During September, 40,000 pounds of direct materials are purchased at a cost of $3.85 per pound, and all of the direct materials are used to produce 19,000 units of Product 245.

Instructions

(a) Compute the materials price and quantity variances.

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

Ex. 218

Aztec, Inc.'s standard labor cost of producing one unit of product is 2 hours at the rate of $14.00 per hour. During February, 52,000 hours of labor are incurred at a cost of $13.80 per hour to produce 25,000 units of product.

Instructions

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

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

Ex. 219

The following direct labor data pertain to the operations of Murray Industries for the month of November:

Standard labor rate $15.00 per hr.

Actual hours incurred 9,000

Standard costs are 2.5 direct labor hours to complete one unit of product. The actual labor rate incurred exceeded the standard rate by 10%. Four thousand units were manufactured in November.

Instructions

(a) Construct a matrix to calculate the price, quantity, and total labor variances.

^a(b) Journalize the entries to record the labor variances.

Ex. 221

Caroline, Inc. planned to produce 20,000 units of product and work 100,000 direct labor hours in 2022. Manufacturing overhead at the 100,000 direct labor 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, 19,000 units of product had been produced and 98,000 actual direct labor hours had been worked. Total actual overhead costs for 2022 were $935,000.

Instructions

(a) Compute the total overhead variance.

^a(b) Compute the overhead controllable variance.

^a(c) Compute the overhead volume variance.

Ex. 223

Adam Corporation prepared the following variance report.

ADAM CORPORATION

Variance Report—Purchasing Department

for Week Ended January 9, 2022

Type of Quantity Actual Standard Price

Materials Purchased Price Price Variance Explanation

Brown ? lbs. $5.25 $5.00 $6,000 ? Price increase

Green 8,000 oz. ? 3.25 1,600 U Rush order

White 22,000 units $0.45 ? 660 F Bought larger quantity

Instructions

Fill in the appropriate amounts or letters for the question marks in the report.

Ex. 224

Pepper Industries uses a standard cost accounting system. During March, 2022, the company reported the following manufacturing variances:

Materials price variance $1,600 F

Materials quantity variance 2,400 U

Labor price variance 600 U

Labor quantity variance 2,200 U

Overhead controllable 500 F

Overhead 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 $14. Selling and administrative expenses for the month were $15,000.

Instructions

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

Ex. 227

The following information was taken from the annual manufacturing overhead cost budget of Cinnamon Manufacturing:

Variable manufacturing overhead costs $186,000

Fixed manufacturing overhead costs $124,000

Normal production level in direct labor hours 62,000

Normal production level in units 31,000

During the year, 30,000 units were produced, 64,000 hours were worked and actual manufacturing overhead costs were $322,000. 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.

^a(b) Compute the total, controllable, and volume overhead variances.

Ex. 228

Monte Industries uses a standard costing system. The following data are available for July:

a. Actual manufacturing overhead cost incurred: $22,000

b. Actual machine hours worked: 1,600

c. Overhead volume variance: $3,600 Unfavorable

d. Total overhead variance: $2,000 Unfavorable

e. Overhead is assigned to production on the basis of machine hours

Instructions

Determine the amount of (1) the controllable overhead variance and (2) the overhead applied.