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CHAPTER 9STANDARD COSTING:

A FUNCTIONAL-BASED CONTROL APPROACH

QUESTIONS FOR WRITING AND DISCUSSION

1. Standard costs are essentially budgeted amounts on a per-unit basis. Unit standards serve as inputs in building budgets.

2. Unit standards are used to build flexible bud-gets. Unit standards for variable costs are the variable cost component of a flexible budgeting formula.

3. The quantity decision is determining how much input should be used per unit of out-put. The pricing decision determines how much should be paid for the quantity of input used.

4. Historical experience is often a poor choice for establishing standards because the his-torical amounts may include more ineffi-ciency than is desired.

5. Engineering studies can serve as important input to standard setting. Many feel, how-ever, that this approach by itself may pro-duce standards that are too rigorous.

6. Ideal standards are perfection standards, representing the best possible outcomes. Currently attainable standards are standards that are challenging but allow for ineffi-ciency. Currently attainable standards are often chosen because many feel they tend to motivate rather than frustrate.

7. By identifying standards and assessing devi-ations from the standards, managers can lo-cate areas where change or corrective be-havior is needed.

8. Actual costing assigns actual manufacturing costs to products. Normal costing assigns actual prime costs and estimated overhead costs to products. Standard costing assigns estimated manufacturing costs to products.

9. A standard cost sheet presents the standard amount of and price for each input and uses this information to calculate the unit stan-dard cost.

10. Managers generally tend to have more con-trol over the quantity of an input used, rather than the price paid per unit of input.

11. The materials price variance is often com-puted at the point of purchase rather than is-suance because it provides control informa-tion sooner. If the variance is computed at the point of issuance and a problem is de-tected, this problem could have been ongo-ing for weeks or months (depending on how long the direct materials were in inventory before being used).

12. No. A direct materials usage variance can be caused by factors beyond the control of the production manager, e.g., purchase of a lower quality of direct material than normal.

13. Disagree. Using higher priced workers to perform lower skilled tasks is an example of an event that will create a direct labor rate variance that is controllable.

14. Inefficient direct labor, machine downtime, bored workers, and poor quality direct mate-rials are possible causes of an unfavorable direct labor efficiency variance.

15. Part of a variable overhead spending vari-ance can be caused by inefficient use of overhead resources.

16. Agree. This variance, assuming that variable overhead costs increase as direct labor us-age increases, is caused by the efficiency of direct labor usage.

17. Fixed overhead costs are either committed or discretionary. The committed costs will not differ by their very nature. Discretionary costs can vary, but the level the company wants to spend on these items is decided at the beginning of the period. It will usually be met unless there is a conscious decision to change the predetermined levels.

18. The volume variance is caused by the actual volume differing from the expected volume used to compute the predetermined stan-dard fixed overhead rate. If the actual vol-ume is different from the expected volume, then the company has either lost or earned

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a contribution margin. The volume variance signals this outcome. If the variance is large, then the loss or gain is large since the vol-ume variance understates the effect.

19. A standard cost variance should be investi-gated if the variance is material and if the benefit of investigating and correcting the deviation is greater than the cost.

20. Control limits indicate how large a variance must be before it is judged to be material and the process is out of control. Current practice sets the control limits subjectively and bases them on past experience, intu-ition, and judgment.

21. The spending variance. This variance is computed by comparing actual expenditures with budgeted expenditures. The volume variance simply tells whether the actual vol-ume is different from the expected volume.

22. Standard costing systems improve planning and control and facilitate product costing.

23. All three approaches break the total over-head variance into component variances.

The four-variance approach divides over-head into fixed and variable categories (based on unit-level behavior). It computes the variable overhead spending and effi-ciency variances and the fixed spending and volume variances. The three-variance ap-proach computes the spending variance (the sum of the fixed and variable spending vari-ances of the four-variance approach) and the variable efficiency and fixed overhead volume variances (same as those of the four-variance analysis). The two-variance analysis computes a budget variance, which is the sum of the spending variances and the variable overhead efficiency variances and a volume variance, which is identical to that computed using a four-variance analy-sis.

24. The direct materials usage and direct labor efficiency variances can be broken into mix and yield variances. The mix variance indi-cates the deviation from the standard mix of direct materials or direct labor. The yield variance calculates the difference between the actual yield and the standard yield.

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EXERCISES

9–1

1. Likely coworkers: operating personnel, cost accountants, and engineers. The operating personnel of each cost center should be involved in setting stan-dards; they are the primary source for quantity information. The materials manager has information on material prices, and personnel have information about wages. The Accounting Department should be involved in standard setting and should provide information about past prices and usage. Finally, industrial engineers can provide input about absolute efficiency.

2. The standard prime cost per 10-gallon batch of strawberry jam is given be-low:Strawberries (7.5 qts.a @ $0.80) $ 6.00Other ingredients (10 gals. @ $0.45) 4.50Sorting labor (0.05 hrs. @ $9.00) 0.45Processing labor (0.20 hrs. @ $9.00) 1.80Packaging (40 qtsb @ $0.38) 15.20 Total standard cost $27.95a6 quarts (5/4)b4 quarts per gallon 10 gallons

3. Joe Adams has failed to prepare complete and clear reports, avoid actual or apparent conflicts of interest, refrain from subverting the organization’s legit-imate and ethical objectives, refrain from engaging in any activity that would discredit the profession, and communicate information fairly and objectively.

9–2

1. SQ = 2.5 lbs. 120,000 = 300,000 pounds

2. SH = 0.6 hr. 120,000 = 72,000 hours

9–3

1. MPV = (AP – SP)AQMPV = ($0.045 – $0.040)570,000 = $2,850 U

MUV = (AQ – SQ)SPMUV = (570,000 – 550,000)$0.040 = $800 U

AP AQ SP AQ SP SQ$0.045 570,000 $0.040 570,000 $0.040 550,000

$2,850 U $800 UPrice Variance Usage Variance

2. LRV = (AR – SR)AHLRV = ($2.55 – $2.60)5,200 = $260 F

LEV = (AH – SH)SRLEV = (5,200 – 5,000)$2.60 = $520 U

AR AH SR AH SR SH$2.55 5,200 $2.60 5,200 $2.60 5,000

$260 F $520 URate Variance Efficiency Variance

3. Materials..................................................... 22,800Direct Materials Price Variance................ 2,850

Accounts Payable................................ 25,650

Work in Process........................................ 22,000Direct Materials Usage Variance.............. 800

Materials............................................... 22,800

Work in Process........................................ 13,000Direct Labor Efficiency Variance............. 520

Direct Labor Rate Variance................. 260Wages Payable.................................... 13,260

9–4

1. Fixed overhead analysis:

Applied FOHActual FOH Budgeted FOH $0.375 520,000

$200,000 $187,500 $195,000$12,500 U $7,500 FSpending Volume

Note: Fixed OH rate = $187,500/500,000 = $0.375 per DLH

The spending variance simply compares what we should have spent with the amount actually spent. One possible interpretation of the volume variance is that it is a measure of error in specifying the denominator volume. “We guessed wrong.” Another possibility is that it signals a gain (loss) from pro-ducing and selling more (less) than expected. If the denominator volume used was practical capacity, then it also becomes a measure of unused ca-pacity. However, since the denominator volume is based on expected output and not practical output, the first two interpretations are more appropriate for this example.

2. Variable overhead analysis:

Budgeted VOH Applied VOHActual VOH $0.50 540,000 $0.50 5 104,000

$260,000 $270,000 $260,000$10,000 F $10,000 USpending Efficiency

Note: VOH rate = $250,000/500,000 = $0.50 per DLH

The variable overhead spending variance can occur because of changes in the prices of the individual items that make up variable overhead. In this sense, it is similar to the direct materials and direct labor price variances. However, the variable overhead cost and rate can also be affected by ineffi-cient use of variable overhead inputs. Thus, even if the prices of the individ-ual items remained the same, waste or inefficiency could cause a spending variance.The variable overhead efficiency variance is perfectly correlated with the di -rect labor efficiency variance. The cause of any variance is a difference be-tween actual and standard direct labor hours. This reflects the underlying as-sumption of functional-based overhead control (within a typical standard costing system): all overhead costs are assumed to be driven by direct labor hours, a unit-level driver.

9–5

1. Two-variance analysis:

Budgeted FOH Applied OHActual OH (SVOR SH) $0.875 5 104,000$460,000 $447,500 $455,000

$12,500 U $7,500 FBudget Volume

Note: OH rate = $437,500/500,000 = $0.875 per DLH (sum of the variable and fixed overhead rates)

2. Three-variance analysis (BFOH = budgeted fixed overhead; OH = overhead):

Actual OH BFOH + (SVOR AH)

BFOH + (SVOR SH)

(SFOR + SVOR)SH

$460,000 $457,500 $447,500 $455,000$2,500 U $10,000 U $7,500 FSpending Efficiency Volume

3. Two-variance: The volume variance is the same. The budgeted variance is the sum of the fixed and variable spending variances and the efficiency vari-ance.Three-variance: The volume and the efficiency variances are the same. The spending variance is the sum of the fixed and variable overhead spending variances.

9–6

1. Yield ratio = 165/200 = 0.825

2. SPy = $3.30/165 = $0.02

3. Direct material yield variance = (Standard yield – Actual yield)SPy

= (26,400 – 25,400)$0.02 = $20 UNote: Standard yield = 0.825 32,000

4. Direct Material AQ SM AQ – SM SP (AQ – SM)SPTomatoes 25,600 28,800 (3,200) $0.015 $(48)Chili peppers 6,400 3,200 3,200 $0.030 96 Direct material mix variance $ 48 U

9–7

1. MPV = (AP – SP)AQ

Tomatoes:MPV = ($0.020 – $0.015)25,600 = $128 U

Chili peppers:MPV = ($0.028 – $0.030)6,400 = $12.80 F

Tomatoes:Materials.................................... 384.00MPV............................................ 128.00

Accounts Payable................. 512.00

Chili peppers:Materials.................................... 192.00

MPV........................................ 12.80Accounts Payable................. 179.20

Or combined:Materials.................................... 576.00MPV............................................ 115.20

Accounts Payable................. 691.20

9–7 Concluded

2. Materials usage variance:

AQ SQ* AQ – SQ SP (AQ – SQ)SP25,600 27,709 (2,109) $0.015 $ (31.64)†

6,400 3,079 3,321 0.030 99 .63 MUV $ 67 .99 U*(25,400/0.825) 0.90; (25,400/0.825) 0.10†Rounded

Tomatoes: WIP............................................. 415.64

MUV........................................ 31.64Materials................................ 384.00

Chili peppers:WIP............................................. 92.37MUV............................................ 99.63

Materials................................ 192.00

Or combined:WIP............................................. 508.01MUV............................................ 67.99

Materials................................ 576.00

3. The direct materials price and usage variances are both favorable and unfa-vorable. Reasons for price variances: random market fluctuation of the input prices; permanent changes in the input prices; changes in suppliers; quality differences; and quantity discounts (or lack thereof). Reasons for usage vari-ances: quality of direct materials; use of less skilled workers; use of more skilled workers; changes in processes; and carelessness of workers.

9–8

1. Yield ratio = 25/5 = 5

2. Standard cost = $75/25 = $3 per unit of yield

3. Direct labor yield variance = (170,000 – 150,000)$3= $60,000 F

4. Direct labor mix variance:

Direct Labor Type AH SM AH – SM SP (AH – SM)SPSoldering 30,000 27,200 2,800 $16 $44,800Testing 4,000 6,800 (2,800) 11 (30,800)Direct labor mix variance $14,000 U

9–9

1. MPV = (AP – SP)AQMPV = ($2.90 – $3.00)78,200 = $7,820 F

MUV = (AQ – SQ)SPMUV = (78,200 – 75,000)$3.00 = $9,600 U

AP AQ SP AQ SP SQ$2.90 78,200 $3.00 78,200 $3.00 75,000

$7,820 F $9,600 UPrice Variance Usage Variance

9–9 Concluded

2. LRV = (AR – SR)AHLRV = ($5.20 – $5.00)90,000 = $18,000 U

LEV = (AH – SH)SRLEV = (90,000 – 87,500)$5.00 = $12,500 U

AR AH SR AH SR SH$5.20 90,000 $5.00 90,000 $5.00 87,500

$18,000 U $12,500 URate Variance Efficiency Variance

3. Materials..................................................... 234,600Direct Materials Price Variance.......... 7,820Accounts Payable................................ 226,780

Work in Process........................................ 225,000Direct Materials Usage Variance............. 9,600

Materials............................................... 234,600

Work in Process........................................ 437,500Direct Labor Efficiency Variance............. 18,000Direct Labor Rate Variance...................... 12,500

Wages Payable.................................... 468,000

4. For direct materials, the flexible budget variance is the sum of the price and usage variances; for direct labor, it is the sum of the rate and efficiency vari -ances.

9–10

1. Cases needing investigation:Week 2: Exceeds the 10 percent ruleWeek 4: Exceeds the $16,000 rule and the 10 percent ruleWeek 5: Exceeds the 10 percent rule

2. The purchasing agent. Corrective action would require a return to the pur-chase of the higher-quality direct material normally used.

3. Production engineering is responsible. If the relationship is expected to per-sist, then the new direct labor method should be abandoned. If the favorable variance were larger and this is expected to persist, then the new direct labor method should be kept and the standards revised to reflect the new circum-stances.

9–11


Applied FOHActual FOH Budgeted FOH $1.20 0.25 900,000

$300,000 $300,000 $270,000$0 $30,000 U

Spending Volume

Note: Fixed OH rate = $300,000/250,000 = $1.20 per DLH

One possible interpretation of the volume variance is that it is a measure of error in specifying the denominator volume. “We guessed wrong.”Another possibility is that it signals a gain (loss) from producing and selling more (less) than expected. If the denominator volume used was practical ca-pacity (as it was for Jackman), then it also becomes a measure of the cost of unused capacity.

9–11 Concluded


Budgeted VOH Applied VOHActual VOH $1.80 230,000 $1.80 0.25 900,000

$500,000 $414,000 $405,000$86,000 U $9,000 USpending Efficiency

Note: VOH rate = $450,000/250,000 = $1.80 per DLH

The variable overhead spending variance can occur because of changes in the prices of the individual items that make up variable overhead. In this sense, it is similar to the direct materials and direct labor price variances. However, the variable overhead cost and rate can also be affected by ineffi -cient use of variable overhead inputs. Thus, even if the prices of the individ-ual items remained the same, waste or inefficiency could cause a spending variance.

3. Journal entries:

a. Work in Process................................................... 675,000Variable Overhead Control............................ 405,000Fixed Overhead Control................................ 270,000

Variable Overhead Control................................. 500,000Fixed Overhead Control...................................... 300,000

Miscellaneous Accounts............................... 800,000

Fixed Overhead Volume Variance...................... 30,000Variable Overhead Spending Variance.............. 86,000Variable Overhead Efficiency Variance............. 9,000

Fixed Overhead Control................................ 30,000Variable Overhead Control............................ 95,000

Cost of Goods Sold............................................. 125,000Fixed Overhead Volume Variance................ 30,000Variable Overhead Spending Variance........ 86,000Variable Overhead Efficiency Variance........ 9,000

PROBLEMS

9–12

1. Direct Materials: $15 4,000 = $60,000Direct Labor: $12 4,000 = $48,000

2. Actual Cost Budgeted Cost VarianceLeather $61,752 $60,000 $1,752 UDirect Labor 52,500 48,000 4,500 U

3. MPV = (AP – SP)AQMPV = ($4.98 – $5.00)12,400 = $248 F

MUV = (AQ – SQ)SPMUV = (12,400 – 12,000)$5.00 = $2,000 U

AP AQ SP AQ SP SQ$4.98 12,400 $5.00 12,400 $5.00 12,000

$61,752 $62,000 $60,000$248 F $2,000 U

Price Variance Usage Variance

Materials.......................................... 62,000MPV............................................ 248Accounts Payable..................... 61,752

Work in Process............................. 60,000MUV................................................. 2,000

Materials.................................... 62,000

9–12 Concluded

4. LRV = (AR – SR)AHLRV = ($6.25 – $6.00)8,400 = $2,100 U

LEV = (AH – SH)SRLEV = (8,400 – 8,000)$6.00 = $2,400 U

AR AH SR AH SR SH$6.25 8,400 $6.00 8,400 $6.00 8,000

$52,500 $50,400 $48,000$2,100 U $2,400 U

Rate Variance Efficiency Variance

Work in Process............................. 48,000LRV.................................................. 2,100LEV.................................................. 2,400

Wages Payable.......................... 52,500

9–13

1. Standard fixed overhead rate = $1,286,400/(120,000 4)= $2.68 per DLH

Standard variable overhead rate = $888,000/480,000= $1.85 DLH

2. Fixed: 119,000 4 $2.68 = $1,275,680Variable: 119,000 4 $1.85 = $880,600

Total fixed overhead variance = $1,300,000 – $1,275,680= $24,320 Underapplied

Total variable overhead variance = $927,010 – $880,600= $46,410 Underapplied

9–13 Continued


Actual FOH Budgeted FOH Applied FOH$1,300,000 $1,286,400 $1,275,680

$13,600 U $10,720 USpending Volume

The spending variance is the difference between planned and actual costs. Each item’s variance should be analyzed to see if these costs can be re-duced. The volume variance is the incorrect prediction of volume, or alterna-tively, it is a signal of the loss or gain that occurred because of producing at a level different from the expected level. If practical volume is used to com-pute the fixed overhead rate, it is a measure of unused productive capacity.


Budgeted VOH Applied VOHActual VOH $1.85 487,900 $1.85 476,000


The variable overhead spending variance is the difference between the actual variable overhead costs and the budgeted costs for the actual hours used. It is similar in some ways to the direct materials and direct labor price vari -ances, but variances can also be caused by inefficiency. The variable over-head efficiency variance is the savings or extra cost attributable to the effi -ciency of direct labor usage.

5. The efficiency and volume variances are the same as those of a four-variance analysis; only a total spending variance can be computed. Thus, the three-variance analysis would provide the following values:

Volume variance: $10,720 UVOH efficiency variance: $22,015 USpending variance: $24,395 U + $13,600 U = $37,995 U

9–13 Concluded

6. Work in Process................................................... 2,156,280Variable Overhead Control............................ 880,600Fixed Overhead Control................................ 1,275,680

Variable Overhead Control................................. 927,010Fixed Overhead Control...................................... 1,300,000

Miscellaneous Accounts............................... 2,227,010

Fixed Overhead Spending Variance.................. 13,600Fixed Overhead Volume Variance...................... 10,720Variable Overhead Spending Variance.............. 24,395Variable Overhead Efficiency Variance............. 22,015

Fixed Overhead Control................................ 24,320Variable Overhead Control............................ 46,410

Cost of Goods Sold............................................. 70,730Fixed Overhead Spending Variance............. 13,600Fixed Overhead Volume Variance................ 10,720Variable Overhead Spending Variance........ 24,395Variable Overhead Efficiency Variance........ 22,015

9–14

1. MPV = (AP – SP)AQMPV = ($1.50 – $1.60)744,000

= $74,400 FMUV = (AQ – SQ)SPMUV = (736,000 – 700,000*)$1.60

= $57,600 U*SQ = 10 70,000

Note: Since direct materials purchased does not equal direct materials used, a three-pronged diagram is not given.

2. LRV = (AR – SR)AHLRV = ($17.90 – $18.00)56,000

= $5,600 FLEV = (AH – SH)SRLEV = (56,000 – 52,500*)$18.00

= $63,000 U*SH = 0.75 70,000

AR AH SR AH SR SH$17.90 56,000 $18.00 56,000 $18.00 52,500

$1,002,400 $1,008,000 $945,000$5,600 F $63,000 U

Rate Variance Efficiency Variance


Budgeted FOH Applied FOHActual FOH $4.00 54,000 $4.00 52,500

$214,000 $216,000 $210,000$2,000 F $6,000 U

Spending Volume

Note: Practical volume in hours = 0.75 72,000 = 54,000 hours. The use of practical volume implies that the volume variance is a measure of unused ca-pacity.

9–14 Continued




5. a. Materials.......................................................... 1,190,400MPV.............................................................. 74,400Accounts Payable...................................... 1,116,000

b. WIP................................................................... 1,120,000MUV................................................................. 57,600

Materials...................................................... 1,177,600

c. WIP................................................................... 945,000LEV.................................................................. 63,000

LRV.............................................................. 5,600Wages Payable........................................... 1,002,400

d. WIP................................................................... 367,500Variable Overhead Control........................ 157,500Fixed Overhead Control............................ 210,000

e. Variable Overhead Control............................ 175,400Fixed Overhead Control................................ 214,000

Miscellaneous Accounts........................... 389,400

9–14 Concluded

f. Closing direct materials and direct labor variances:

Cost of Goods Sold......................................... 40,600MPV................................................................... 74,400LRV.................................................................... 5,600

MUV............................................................. 57,600LEV.............................................................. 63,000

Overhead:

Fixed Overhead Volume Variance.................. 6,000Variable Overhead Spending Variance.......... 7,400Variable Overhead Efficiency Variance......... 10,500

Fixed Overhead Spending Variance......... 2,000Fixed Overhead Control............................ 4,000Variable Overhead Control........................ 17,900

Closing overhead variances:

Cost of Goods Sold......................................... 23,900Fixed Overhead Volume Variance............ 6,000Variable Overhead Spending Variance.... 7,400Variable Overhead Efficiency Variance.... 10,500

Fixed Overhead Spending Variance.............. 2,000Cost of Goods Sold.................................... 2,000

9–15

1. VOH efficiency variance = (AH – SH)SVOR$30,000 = (1.15SH – SH)$4$30,000 = $0.6SH

SH = 50,000AH = 1.15SH = 57,500

2. LEV = (AH – SH)SR$40,000 = (57,500 – 50,000)SR$40,000 = 7,500

SR = $5.33*LRV = (AR – SR)AH

$25,000 = (AR – $5.33)57,500$0.43* = AR – $5.33

AR = $5.76*Rounded

3. SH = 2 Units produced50,000 = 2 Units produced

Units produced = 25,000

9-16

1. MPV = (AP – SP)AQMPV = ($3.70 – $4.00)130,000 = $39,000 FMUV = (AQ – SQ)SPMUV = (140,000 – 125,000)$4.00 = $60,000 UNote: A three-pronged representation is not given because the direct materi-als used are not equal to direct materials purchased.

9-16 Continued

2. LRV = (AR – SR)AHLRV = ($10.75 – $10.50)36,500 = $9,125 ULEV = (AH – SH)SRLEV = (36,500 – 35,000)$10.50 = $15,750 U

AR AH SR AH SR SH$10.75 36,500 $10.50 36,500 $10.50 35,000

$392,375 $383,250 $367,500$9,125 U $15,750 U

Rate Variance g Efficiency Variance

3. Two-variance analysis:

Budgeted FOH Applied OHActual OH (SVOR SH) (SFOR + SVOR)SH$305,000 $304,500 $315,000

$500 U $10,500 FBudget Volume

Budgeted Fixed OH = $3.00 1.4 22,500 = $94,500SVOR SH = $6.00 1.4 25,000 = $210,000Applied OH = $9.00 1.4 25,000 = $315,000

4. Four-variance analysis:

Variable overhead variances:


$210,000 $219,000 $210,000$9,000 F $9,000 U

Spending Efficiency

9-16 Continued

Formula approach:

VOH spending variance = Actual VOH – (SVOR AH)= $210,000 – ($6.00 36,500)= $9,000 F

VOH efficiency variance = (AH – SH)SVOR= (36,500 – 35,000)$6.00= $9,000 U

Fixed overhead variances:

Budgeted FOH Applied FOHActual FOH $3.00 1.4 22,500 $3.00 1.4 25,000

$95,000 $94,500 $105,000$500 U $10,500 F

Spending Volume

5. The company should discontinue the purchase of the inferior direct materials as it costs the company more. The budgeted cost of direct materials at the 25,000 units production level is $500,000 ($4 5 25,000), and the actual cost was $521,000 ($481,000 + $40,000). As seen from the detailed analysis, this cost overrun was caused by a large, unfavorable usage variance, proba-bly attributable to the lower quality of direct material. Also, the unfavorable direct labor efficiency variance may be caused by the inferior direct materi-als. If the favorable price variance had been greater than the unfavorable us-age variances, then continued purchase of the cheaper direct materials would have been recommended, with a revision in the usage standards.

6. Materials............................................................... 520,000MPV.................................................................. 39,000Accounts Payable.......................................... 481,000

Work in Process................................................... 500,000MUV....................................................................... 60,000

Materials.......................................................... 560,000

9-16 Concluded

Work in Process................................................... 367,500LRV........................................................................ 9,125LEV........................................................................ 15,750

Wages Payable............................................... 392,375

Cost of Goods Sold............................................. 84,875MUV................................................................. 60,000LRV.................................................................. 9,125LEV.................................................................. 15,750

MPV....................................................................... 39,000Cost of Goods Sold........................................ 39,000

Variable OH Control............................................. 210,000Miscellaneous Accounts............................... 210,000

Fixed OH Control................................................. 95,000Miscellaneous Accounts............................... 95,000

Work in Process................................................... 210,000Variable OH Control....................................... 210,000

Work in Process................................................... 105,000Fixed OH Control............................................ 105,000

Fixed Overhead Control...................................... 10,000Variable OH Efficiency Variance......................... 9,000Fixed OH Spending Variance.............................. 500

Variable OH Spending Variance.................... 9,000Fixed Overhead Volume Variance................ 10,500

Cost of Goods Sold............................................. 9,500Variable OH Efficiency Variance................... 9,000Fixed OH Spending Variance........................ 500

Variable OH Spending Variance......................... 9,000Fixed Overhead Volume Variance...................... 10,500

Cost of Goods Sold........................................ 19,500

9-17

1. Small staplers:Standard Standard Standard Price Usage Cost

Direct materials $ 1.60 0.375 lbs. $0.60Direct labor 8.00 0.100 hrs. 0.80Fixed overhead 30.00 0.100 hrs. 3.00Variable overhead 40.00 0.100 hrs. 4.00

Unit cost $8.40Note: 6/16 = 0.375 pounds

Regular staplers:Standard Standard Standard Price Usage Cost

Direct materials $ 1.60 0.625 lbs. $ 1.00Direct labor 8.00 0.150 hrs. 1.20Fixed overhead 30.00 0.150 hrs. 4.50Variable overhead 40.00 0.150 hrs. 6.00

Unit cost $12.70Note: 10/16 = 0.625 pounds

2. MPV = (AP – SP)AQMPV = ($1.55 – $1.60)56,000 = $2,800 F

MUV = (AQ – SQ)SPMUV (Small) = [13,000 – (0.375 35,000)]$1.60 = $200 FMUV (Regular) = [43,000 – (0.625 70,000)]$1.60 = $1,200 F

Materials.......................................... 89,600MPV............................................ 2,800Accounts Payable..................... 86,800

Work in Process............................. 91,000MUV............................................ 1,400Materials.................................... 89,600

MPV.................................................. 2,800MUV................................................. 1,400

Cost of Goods Sold.................. 4,200

9-17 Continued

3. LRV = (AR – SR)AHLRV = ($7.75 – $8.00)14,800 = $3,700 F

LEV = (AH – SH)SRLEV (Small) = [3,600 – (0.1 35,000)]$8.00 = $800 ULEV (Regular) = [11,200 – (0.15 70,000)]$8.00 = $5,600 U

Work in Process............................. 112,000*LEV.................................................. 6,400

LRV............................................. 3,700Wages Payable.......................... 114,700

*[(0.1 35,000) + (0.15 70,000)] $8 = $112,000

Cost of Goods Sold........................ 2,700LRV.................................................. 3,700

LEV............................................. 6,400

4. Fixed overhead variances:

Applied FOHActual FOH Budgeted FOH $30 14,000

$350,000 $360,000 $420,000$10,000 F $60,000 FSpending Volume

Note: SH = (0.1 35,000) + (0.15 70,000) = 14,000

Variable overhead variances:

Budgeted VOH Applied VOHActual VOH $40 14,800 $40 14,000


Note: SH = (0.1 35,000) + (0.15 70,000) = 14,000

9-17 Concluded

Work in Process........................................ 560,000Variable Overhead Control................. 560,000

Work in Process........................................ 420,000Fixed Overhead Control...................... 420,000

Variable Overhead Control....................... 607,500Miscellaneous Accounts.................... 607,500

Fixed Overhead Control........................... 350,000Miscellaneous Accounts.................... 350,000

Fixed Overhead Control........................... 70,000Variable OH Spending Variance.............. 15,500Variable OH Efficiency Variance.............. 32,000

Fixed OH Spending Variance............. 10,000Fixed OH Volume Variance................. 60,000Variable Overhead Control................. 47,500

Cost of Goods Sold.................................. 47,500Variable OH Spending Variance......... 15,500Variable OH Efficiency Variance........ 32,000

Fixed OH Spending Variance................... 10,000Fixed OH Volume Variance...................... 60,000

Cost of Goods Sold............................. 70,000

5. Yes, computations are shown below:

MUV = (56,000 – 13,125 – 43,750)$1.60 = $1,400 FLEV = (14,800 – 14,000)$8.00 = $6,400 U

9-18

1. Direct Material AQ SM AQ – SM SP (AQ – SM)SPSol-A 140,000 160,000 (20,000) $1.50 $ (30,000)Sol-B 60,000 40,000 20,000 7.50 150,000 Mix variance $120,000 UYield variance = (Standard yield – Actual yield)SPy

= (180,000 – 162,000)$3.00= $54,000 U

Note: Standard yield = 0.9 200,000; SPy = $54,000/18,000

2. Total standard input = Actual yield/Yield ratio= 162,000/0.9= 180,000 gallons

SQ(Sol-A) = 180,000 0.8 = 144,000 gallonsSQ(Sol-B) = 180,000 0.2 = 36,000 gallons

Direct materials usage variance:

AQ SQ AQ – SQ SP (AQ – SQ)SP140,000 144,000 (4,000) $1.50 $ (6,000)

60,000 36,000 24,000 7.50 180,000 MUV $174,000 U

MUV = Mix variance + Yield variance= $120,000 U + $54,000 U= $174,000 U

9–19

1. Direct Labor Type AH SM AH – SM SP (AH – SM)SPMixing 18,000 20,000 (2,000) $10.50 $ (21,000)Drum-filling 12,000 10,000 2,000 6.00 12,000 Direct labor mix variance $ (9,000 ) FDirect labor yield variance = (Standard yield – Actual yield)SPy

= (180,000 – 162,000)$1.50= $27,000 U

Note: Standard Yield = (18,000/3,000) 30,000; SPy= $27,000/18,000

2. Direct labor efficiency variance:

Total hours allowed = Actual yield/Yield ratio= 162,000/(18,000/3,000)= 27,000

SH(Mixing) = 27,000 2/3 = 18,000 hoursSH(Drum-filling) = 27,000 1/3 = 9,000 hours

Direct Labor Type AH SH AH – SH SR (AH – SH)SRMixing 18,000 18,000 0 $10.50 $ 0Drum-filling 12,000 9,000 3,000 6.00 18,000 Labor efficiency variance $ 18,000 U

LEV = Mix variance + Yield variance= $9,000 F + $27,000 U= $18,000 U

9–20

Total direct materials usage variance:Total cost of direct materials allowed = $135 140 batches (SP SQ)

= $18,900Standard cost of actual quantity used:

DirectMaterial AQ SP Echol $0.200 26,600 = $ 5,320Protex $0.425 12,880 = 5,474Benz $0.150 37,800 = 5,670CT-40 $0.300 7,140 = 2,142

Total $ 18,606 Usage variance = $18,606 – $18,900 = $294 F

Mix variance:Chemical AQ SM AQ – SM SP (AQ – SM)SP

Echol 26,600 28,140 (1,540) $0.200 $(308.00)Protex 12,880 14,070 (1,190) 0.425 (505.75)Benz 37,800 35,175 2,625 0.150 393.75CT-40 7,140 7,035 105 0.300 31 .50

84,420 84,420 $(388 .50 ) FYield variance = (Standard yield – Actual yield)SPy

= (70,350 – 70,000)($0.27) = $94.50 UNote: Standard yield = (5/6)84,420 = 70,350SPy = $135/500 = $0.27

9–21

1. The budgeted overhead costs are broken down into fixed and variable costs by the high-low method:

SVOR = ($240,000 – $160,000)/(20,000 – 10,000)= $8.00

Budgeted fixed overhead = $160,000 – $8.00(10,000) = $80,000

Spending variance (FOH) = Actual FOH – Budgeted FOHSpending variance = $82,670 – $80,000 = $2,670 U

2. To find SH:Fixed OH volume variance = Budgeted fixed overhead – Fixed

overhead rate SH$3,500 = $80,000 – ($4.50* SH)

$76,500 = $4.50 SHSH = 17,000

*$12.50 – $8.00

Next, the actual hours need to be found:

VOH efficiency variance = (AH – SH)SVOR–$3,200 = (AH – 17,000)$8.00

–400 = AH – 17,000AH = 16,600

VOH spending variance = Actual VOH – VOH rate AH= $135,000 – ($8.00 16,600)= $135,000 – $132,800= $2,200 U

3. 17,000/2,000 = 8.5 hours per unit

4. LEV = (AH – SH)SR = (16,600 – 17,000)$9.50 = $3,800 F

9–22

1. Correr CompanyPerformance Report

Production Actual Budgeteda

Costs Costs Costs Variance Direct materials $320,000 $300,000 $ 20,000 UDirect labor 220,000 240,000 (20,000) FVariable overhead 125,000 120,000 5,000 UFixed overheadb 89,000 75,000 14,000 U

$754,000 $735,000 $ 19,000 UaUses the variable unit standard costs for direct materials, direct labor and variable overhead; fixed overhead = $3.00 25,000.

bSpending variance only

2. a. Total variance = MPV + MUV$20,000 U = $5,000 U + MUV

MUV = $15,000 U

b. LRV = (AR – SR)AHSH = 39,000/1.04

= 37,500 hoursAR AH = $220,000

SR = $240,000/37,500= $6.40

LRV = $220,000 – ($6.40 39,000)= $29,600 F

c. LEV = (AH – SH)SR= (39,000 – 37,500)$6.40= $9,600 U

9–22 Continued

d. Spending variance (FOH) = Actual FOH – Budgeted FOH= $89,000 – $75,000= $14,000 U

Volume variance = Budgeted FOH – Standard FOH rate SH= $75,000 – ($2.40* 37,500)= $15,000 F

*Hours allowed per unit = 37,500/30,000= 1.25 DLH per unit

Standard FOH rate = $3.00 per unit/1.25 DLH per unit= $2.40 per hour

Standard variable OH rate = $120,000/37,500= $3.20

e. VOH spending variance = Actual VOH – SVOR AH= $125,000 – ($3.20 39,000)= $200 U

VOH efficiency variance = (AH – SH)SVOR= (39,000 – 37,500)$3.20= $4,800 U

9–22 Concluded

3.Raw Materials Work in Process

(a) 315,000 315,000 (b) (b) 300,000 750,000 (f)(c) 240,000(d) 120,000(e) 90,000

Finished Goods(f) 750,000 750,000 (g)

MPV MUV Accounts Payable(a) 5,000 5,000 (h) (b) 15,000 15,000 (i) 320,000 (a)

Wages Payable LRV LEV220,000 (c) (j) 29,600 29,600 (c) (c) 9,600 9,600 (k)

Variable Overhead Control Fixed Overhead Control125,000 120,000 (d) 89,000 90,000 (e)

5,000 (l) (m) 1,000

Cost of Goods Sold(g) 750,000 29,600 (j)(h) 5,000 1,000 (m)(i) 15,000(k) 9,600(l) 5,000

9–23

1. Tracer Company must put 50,000 units of lower-quality direct material into production in order to produce 47,000 finished units:

Good units/(1 – Rejection rate) = Units required

47,000/0.94 = 50,000 units

2. In order to produce 50,000 units (47,000 good units and 3,000 rejects), Tracer Company must utilize the following labor:

New team = 8 Assembler A, 1 Assembler B, 1 MachinistNew team will work at 80% of the efficiency of the old team.

Assembler A: 8 hrs. (50,000/80*) = 5,000 hrs.Assembler B: 1 hr. (50,000/80) = 625 hrs.Machinist: 1 hr. (50,000/80) = 625 hrs.*80% 100 units

3. Tracer Company should include an additional $13,140 in its operating budget for the planned direct labor variance. This variance consists of $3,390 for the change in direct material and $9,750 for the direct labor change caused by the reduced efficiency of the new team, calculated as follows:

Cost for new team to produce 80 units:Assembler A (8 hrs. $10/hr.) $ 80Assembler B (1 hr. $11/hr.) 11Machinist (1 hr. $15/hr.) 15

Direct labor cost for 80 units $106Direct labor cost per unit $1.325 ($106/80)

Direct labor change due to reduced efficiency:New direct labor cost = January units New direct labor cost

= 50,000 $1.325 = $66,250Old direct labor cost = January units Standard cost

= 50,000 ($113/100) = $56,500Direct labor change = $66,250 – $56,500 = $9,750

9–23 Concluded

Increased direct labor due to direct material change:Direct labor change = (New direct material – Standard direct material)

Standard cost= (50,000 – 47,000)($113/100) = $3,390

Total planned direct labor variance = $9,750 + $3,390= $13,140

9–24

1. The FIFO method is used because it provides a measure of the current pe-riod’s output—an amount needed to calculate the hours allowed and the di-rect materials allowed in a standard costing system.

2. Units completed = Units started + Units, BWIP – Units, EWIP= 25,000 + 1,250 – 2,500 = 23,750

Cost of goods transferred out = $84 23,750= $1,995,000

First, there is no need to calculate unit cost because the standard unit cost applies. Second, the same standard cost applies to units completed, regard-less of when they are produced, so there is no need to distinguish between units finished from BWIP and units started and completed.

3. First, an equivalent units schedule is needed:

Direct Materials Conversion CostsStarted and completed 22,500 22,500

BWIP 0 500EWIP 2,500 1,000

Equivalent units 25,000 24,000MPV = (AP – SP)AQ

= ($4.25 – $4.50)102,000= $25,500 F

9–24 Concluded

Using the equivalent units schedule and the standard cost sheet:

SQ = 4 25,000

thus,

MUV = (AQ – SQ)SP= (102,000 – 100,000)$4.50= $9,000 U

LRV = (AR – SR)AH= ($19 – $18)47,000= $47,000 U

Using the equivalent units schedule and the standard cost sheet:

SH = 2 24,000

thus,

LEV = (AH – SH)SR= (47,000 – 48,000)$18= $18,000 F

9–25

1. MPV = (AP – SP)AQ= ($8.10 – $7.50) 8,500= $5,100 U

MUV = (AQ – SQ)SP= (8,500 – 8,700)$7.50= $1,500 F

where SQ = 3 2,900

LRV = (AR – SR)SH= ($14.10 – $14.00)1,837.6= $183.76 F

where SH = (45/60) 2,900

LEV = (AH – SH)SR= (1,837.6 – 2,175)$14= $4,723.60 F

9–25 Concluded

2. Trends: The MPV is unfavorable but improving; MUV is favorable but de-creasing; LRV is stable and insignificant; and the LEV is favorable but de-creasing. Since this is a union shop, we would not expect to see significant direct labor rate variances. The other variances raise some questions. They are all systematically unfavorable or favorable. Normally, we would expect to see fluctuation between favorable and unfavorable variances. Since we do not, this suggests that the standards have not been properly set and are not effective control tools.

3. Knowing that they were under observation during the period of setting stan-dards might have caused the workers to believe that having tighter stan-dards would mean that they would need to work harder. Thus, an incentive existed for them to work at a pace that would ensure that the standards were not very demanding and easily met. By slowing their work and wasting di-rect materials during the observation period, they would effectively sabotage the standards (producing very slack standards for direct materials and direct labor).

4. To produce more accurate standards, the cooperation of workers, supervi-sors, and the union needs to be sought. It is important to communicate to the workers that the standards are not being set for punitive reasons and will not produce job losses. The workers can be told of the competitive pres-sures, and a team spirit can be encouraged. The workers should also be en-couraged by offering rewards based on productivity gains. Standards should also be set by those who are knowledgeable and familiar with the work envi-ronment but who do not have a vested interest in the variance outcomes. Fi-nally, it may be advisable to move to kaizen standards to promote and en-courage gains.

COLLABORATIVE LEARNING EXERCISE

9–26

1. By using a standard costing system with price and quantity standards for each input, Tasty Apple can increase control of the manufacturing inputs. For example, since managers have the most control over usage of inputs, knowing the usage variances provides specific information about where ac-tion is needed. Moreover, by breaking out price variances which are not as controllable, performance evaluation is improved.

2. The engineering standards are ideal standards. The president’s concern probably reflects doubt that the direct labor standards can be achieved. If workers are pressured to achieve perfection, they may become frustrated and lower their performance as a consequence. Many firms elect to use cur-rently attainable standards in lieu of ideal standards. The standard sug-gested by the president is a good starting point. If experience indicates that it is too loose, then the standard can be adjusted later.

9–26 Concluded

3. Standard cost sheet (for one box of chips):Direct materials:

Apples (17 lbs. @ $0.245)a $4.165Cooking oil (52.8 oz. @ $0.04) 2.112Bags (16 @ $0.12) 1.920Boxes (1 @ $0.62) 0 .620 $ 8.817

Direct labor:b

Apple inspection (0.006 hr. *@ $17.68) $0.106*Finished chip inspection (0.023 hr. *@ $13.00) 0.300*Frying monitor (0.012 hr. *@ $16.00) 0.192Boxing (0.031 hr. *@ $13.68) 0.424*Machine operators (0.012 hr. *@ $15.00) 0 .180 1.202

Variable overhead ($1.202* 1.12) 1.346*Fixed overhead ($1.202* 3.50)c 4 .207

Cost per box $15 .572 Cost per bag ($15.572/16) $ 0 .973 *

*RoundedaPounds per box = 16 4 4.25/16 = 17; Price per pound = $0.245 less scrap value; scrap per box = 16 (17.0 ounces – 16.2 ounces) = 12.8 ounces. Scrap value/ounce = $0.24/16 = $0.015 per ounce. Scrap savings per box is $0.015 12.8 = $0.192; savings per pound of apples is $0.192/17 = $0.011. Thus, the standard price per pound of apples is $0.256 – $0.011 = $0.245.

bNumber of boxes/year = 9,200,000/16 = 575,000 boxesHours/box:

Apple inspection: (3,150 1.1)/575,000Chip inspection: (12,000 1.1)/575,000Frying monitor: (6,300 1.1)/575,000Machine operators: (6,300 1.1)/575,000Boxing: (16,250 1.1)/575,000

c($2,419,026)/($1.202 575,000) = Fixed OH rate based on labor dollars

4. MUV = (AQ – SQ)SP= (9,800,000 – 9,775,000)$0.245 = $6,125 U

SQ = (17 9,200,000)/16 = 9,775,000

CYBER RESEARCH CASE

9–27

Answers will vary.

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