Chapter Eight Name________________________________________

CHAPTER 8 STANDARD COST ACCOUNTING

MATERIALS, LABOR, AND FACTORY
OVERHEAD
Review Summa!
1. The purpose of standard cost accounting is to control costs and promote efficiency. It is used in
conjunction with methods such as job order or process costing. It is based on a predetermination
of what it should cost to manufacture a product, which is compared to the actual costs incurred.
Standard costing allows for management by exception because deviations from standard can be
quickly detected and responsibility pinpointed so the company may take appropriate action.
2. Standard costs usually are determined for a period of one year and revised annually. A standard
is a norm against which performance can be measured. Some companies use ideal standards
that make no allowance for inefficient conditions such as lost time, waste, or spoilage. ost
companies reali!e that some inefficiencies cannot be completely eliminated, so they use attainable
standards that include allowances for lost time, spoilage, and waste. The standard should be
high enough to provide motivation and promote efficiency, but not so high that it is unattainable
and, thus, discourages workers.
3. A materials cost standard represents the quantity of material required for a unit of product
times the unit cost that should be paid. A labor cost standard is based on estimates of the labor
hours required to produce a unit of product times the hourly rate that should be paid. "actors to
be considered in setting standards for materials and labor might include raw materials price
trends, the use of substitute materials, labor negotiations with unions, the types of labor needed
and the use of labor#saving devices. $nce the standard cost of manufacturing a product has been
determined, the standard costs, the actual costs, and the variances are recorded in the various
journals and in the general ledger.
4. A variance represents the difference between the actual and the standard costs of materials, labor,
and overhead. The materials price variance is computed by comparing the actual unit cost of
materials to the standard unit cost and multiplying the difference by the actual quantity of
materials used or purchased if variances are recogni!ed when they are first known. The materials
quantity variance is computed by comparing the actual quantity of materials used to the standard
quantity that should have been used and multiplying the difference by the standard unit price.
The labor rate variance is computed by comparing the actual hourly rate paid to the standard
hourly rate that should have been paid and multiplying the difference by the actual number of
hours worked. The labor efficiency variance is computed by comparing the actual number of
direct labor hours worked to the standard hours that should have been worked and multiplying the
difference by the standard labor rate. A debit balance %unfavorable& in a variance account
indicates that actual costs e'ceed standard costs, and a credit balance %favorable& means that
standard costs e'ceed actual costs.
5. Sample entries for a standard cost system follow(
a. To record the entry for direct materials cost, assuming a favorable quantity variance and an
unfavorable price variance(
)ork in *rocess %at standard cost&................................. ++
aterials *rice ,ariance................................................ ++
aterials -uantity ,ariance.................................... ++
aterials %at actual cost&......................................... ++
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b. To record the entry for direct labor cost, assuming a favorable rate variance and an
unfavorable efficiency variance(
)ork in *rocess %at standard cost&................................. ++
.abor /fficiency ,ariance.............................................. ++
.abor 0ate ,ariance............................................... ++
*ayroll %at actual cost&............................................ ++
c. To record the entry applying factory overhead to work in process, assuming no variances(
)ork in *rocess............................................................ ++
Applied "actory $verhead...................................... ++
d. To record the transfer, at standard cost, of work in process to finished goods(
"inished 1oods.............................................................. ++
)ork in *rocess...................................................... ++
At the end of the accounting period, the difference between actual costs and standard costs must
be reflected in the financial statements. Some companies prorate the variances to cost of goods
sold, work in process, and finished goods. A more common approach is to show the unfavorable
or favorable variances as an addition to or reduction from the cost of goods sold for the period,
respectively.
6. In analy!ing materials and labor variances, both price and usage have to be considered. In
analy!ing materials price variances, inefficient purchasing methods, the substitution of different
materials, and increases in market price are all possible e'planations. In analy!ing materials
quantity variances, possible e'planations include spoiled or wasted materials and the decision to
use higher quality materials subsequent to the budget preparation. In analy!ing labor rate
variances, changes in labor wage rates subsequent to standard#setting and the use of employees
with wage rates different from those called for in the standards are possible reasons. In analy!ing
labor efficiency variances, the skill level of workers, the frequency of machine breakdowns, and
improper scheduling should all be considered.
7. Things to remember about standard cost systems are that(
a. the actual unit cost of manufacturing a product is not determined2only the total actual and
total standard costs.
b. the fact that standards are based on estimates does not make them unreliable.
c. standards will change as conditions change.
d. a standard cost system provides continual incentive to keep costs and performance in line with
predetermined objectives.
e. a standard cost system helps focus management3s attention on prices paid for materials and
labor and on materials and labor quantity usage.
f. to allow for more timely action in correcting inefficiencies, most manufacturers calculate
variances on a weekly or even daily basis
8. The to!variance met"od, t"ree!variance met"od, and four!variance met"od commonly
are used for analy!ing overhead variances. The two variances in the two#variance method are
the controllable or budget variance and the volume variance. The controllable variance is the
difference between the actual overhead for a given period and the standard amount of overhead
allowed by the budget for that level of production. If the actual overhead e'ceeds the standard
overhead allowed, the difference is an unfavorable variance, and if the actual overhead is less than
the standard allowed, the difference is a favorable variance. The volume variance is a result of
operating at a level of production different from the standard, or
normal, level. It is computed as follows( %production for period 4 standard factory overhead unit
cost& 5 standard factory overhead budgeted for period3s production. 6ecause fi'ed costs will
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remain the same in total, whether production is above or below standard, the volume variance will
be favorable if actual production e'ceeds standard and unfavorable if actual production is less
than standard. If the factory is producing below its normal capacity, it has idle capacity that
nevertheless requires e'penditures for depreciation, insurance, property ta'es, etc.
#. The net variance is the difference between the actual factory overhead for the period and the
standard overhead costs applied to work in process. 7nder the two#variance method, its
components are the controllable variance and the volume variance.
The reasons for the individual variances should be investigated. "or e'ample, an unfavorable
volume variance may be the result of either production inefficiencies, such as machine
breakdowns and unskilled laborers, or it may be due to a lack of product demand, which
would be the responsibility of marketing and sales. An unfavorable controllable variance may be
the result of unanticipated price increases, inefficient supervision, weak control of e'penditures,
or increased maintenance and repair costs caused by utili!ation of production facilities beyond
normal capacity.
1$. The four!variance met"od recogni!es two variable cost variances and two fi'ed cost variances.
The variable cost variances are identified as a spending variance, which measures the differences
in the actual variable overhead rate and the standard variable overhead rate, and an efficiency
variance, which measures the change in the variable overhead consumption that occurs due to
efficient or inefficient use of the cost allocation base. "or fi'ed cost, a budget variance, which is
the difference between actual fi'ed overhead and budgeted fi'ed overhead, and a volume
variance, which results from operating at a level of production different than the standard, are
determined. The controllable variance under the two#variance method encompasses the spending,
efficiency, and budget variance of the four#variance method. The volume variance is a separate
item under both methods.
11. The t"ree!variance met"od of factory overhead cost analysis breaks down the difference
between actual and applied overhead into the following variances( the efficiency variance
measures the difference between the overhead applied %standard hours 4 standard rate& and the
actual hours worked multiplied by the standard rate8 the capacity variance reflects the under or
over#absorption of fi'ed costs and is measured by the difference between the actual hours worked
multiplied by the standard overhead rate and the budget allowance based on actual hours worked8
and the budget %spending& variance, which reflects the difference between the amount allowed
by the budget for the actual hours worked and the actual costs incurred. )hether the two, three,
or four#variance method of overhead analysis is used, the overhead applied to production, the
actual overhead, and the net variance would be the same.
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Pa" I
I#$"u%"i&#$'Indicate your answer in the Answers column by writing a 9T: for True or an 9": for
"alse.
A#$we$
1. Standard costs are usually determined for a period of one year.....................
..................................................................................................;;;;;;;;;
2. 9Ideal standards: include allowances for lost time, spoilage, and waste........
;;;;;;;;;
3. In establishing standard costs, the standard should be high enough to provide
motivation and promote efficiency, but not so high that it is unattainable......
;;;;;;;;;
4. If variances are to be recogni!ed at the time when they are first known, the
materials price variance is computed by comparing the actual unit cost of
materials to the standard unit cost and multiplying the difference by the standard
quantity of materials used............................................................................
;;;;;;;;;
5. A variance is favorable if the actual cost incurred is less than the standard cost
allowed........................................................................................................
;;;;;;;;;
6. A debit balance in a variance account indicates that standard costs e'ceed actual
costs............................................................................................................
;;;;;;;;;
7. A method of disposing of the difference between actual costs and standard costs
prior to financial statement preparation is to close the variance accounts to <ost
of 1oods Sold.............................................................................................
;;;;;;;;;
8. Inefficient purchasing methods, the substitution of different materials, and
increases in market price are all possible e'planations for materials price
variances.....................................................................................................
;;;;;;;;;
#. It is not necessary to investigate the reasons behind favorable variances.
;;;;;;;;;
1$. The volume variance in a two#variance analysis of factory overhead is equal to
the volume variance in a four#variance analysis of factory overhead.............
..................................................................................................;;;;;;;;;
11. The standards used in a standard cost system will change as conditions change.
..................................................................................................;;;;;;;;;
12. The fact that standards are based on estimates tends to make a standard cost
system unreliable.........................................................................................
..................................................................................................;;;;;;;;;
13. A standard cost system can be used in conjunction with process costing or job
order costing...............................................................................................
..................................................................................................;;;;;;;;;
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14. In a standard cost system, the entry to record the issuance of materials into
production would include a debit to )ork in *rocess for the actual cost of the
materials.....................................................................................................
..................................................................................................;;;;;;;;;
15. Some companies reflect the difference between actual and standard costs in the
financial statements by prorating the variances to <ost of 1oods Sold, )ork in
*rocess, and "inished 1oods........................................................................
;;;;;;;;;
16. The two#variance method of analy!ing overhead variances is the most commonly
used approach.............................................................................................
;;;;;;;;;
17. A credit balance in the factory overhead account indicates that the factory did
not incur as much overhead as was allowed by the standard at that level of
production...................................................................................................
;;;;;;;;;
18. An unfavorable volume variance may be the result of inefficiencies in labor and
supervision, machine breakdowns due to faulty maintenance, and even lack of
sales demand...............................................................................................
;;;;;;;;;
1#. )hen factory overhead is applied to production, "actory $verhead is debited
and )ork in *rocess is credited....................................................................
;;;;;;;;;
2$. $n the financial statements, overhead variances usually are treated as additions
to or subtractions from cost of goods sold....................................................
..................................................................................................;;;;;;;;;
Pa" II
I#$"u%"i&#$'In the Answers column, place the letter from the list below that identifies the term that
best matches the statement. =o letter should be used more than once.
a. Attainable standard j. 7nfavorable variance
b. "avorable variance k. .abor efficiency variance
c. aterials price variance l. .earning effect
d. aterials usage variance m. anagement by e'ception
e. Ideal standard n. <ontrollable variance
f. Standard o. <apacity variance
g. .abor rate variance p. "our#variance method
h. .abor cost standard q. ,olume variance
i. aterials cost standard r. 6udget variance
A#$we$
''''' 1. This is the e'planation as to why employees become more proficient at a task the more
often that they perform it.
;;;;; 2. This is represented by a debit balance in a variance account.
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;;;;; 3. A norm against which performance can be measured.
;;;;; 4. It can be achieved only under the most efficient operating conditions, and for all practical
purposes it is unattainable.
;;;;; 5. Some inefficiencies were built into this so that it can be met or bettered in efficient
production situations.
;;;;; 6. This represents the quantity of material required for a unit of product times the cost per
unit of material.
;;;;; 7. In determining this, the services of work#study engineers may be used to establish the time
necessary to perform each operation.
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;;;;; 8. This is represented by a credit balance in a variance account.
;;;;; #. This indicates the number of actual direct labor hours worked above or below the
standard hours times the standard labor rate.
;;;;; 1$. This indicates the actual unit cost of materials above or below the standard unit cost
multiplied by the actual quantity of materials used or purchased.
;;;;; 11. This represents the average of the actual hourly direct labor rates paid above or below the
standard hourly rate multiplied by the actual number of hours worked.
;;;;; 12. This represents the actual quantity of direct materials used above or below the standard
quantity allowed for the actual level of production times the standard price.
;;;;; 13. This is the practice of e'amining those occurrences that vary greatly from the norm.
;;;;; 14. To compute this, a comparison must be made between the actual factory overhead for a
given period and the standard amount of overhead allowed by the budget at a given level
of production.
;;;;; 15 It results from operating at a level of production different from the standard, or normal,
level.
''''' 16. This method of variance analysis identifies a spending variance and an efficiency
variance for variable costs.
;;;;; 17. In the three#variance method, this is measured by the difference between the actual hours
worked multiplied by the standard overhead rate and the budget allowance based on
actual hours worked.
;;;;; 18. In the four#variance method, this measures the difference between actual fi'ed cost
e'penditures and the amount of fi'ed cost budgeted.
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Pa" III
I#$"u%"i&#$'In the Answers column, place the letter of the choice that most correctly completes
each item.
A#$we$
;;;;; 1. The best basis upon which cost standards should be set to measure controllable
production efficiencies is(
a. Theoretical standards c. Attainable standards
b. /'pected actual standards d. *ractical capacity
;;;;; 2. If a company follows a practice of isolating variances at the earliest time, the
appropriate time to isolate and recogni!e a direct material price variance would be(
a. )hen material is issued
b. )hen material is purchased
c. )hen material is used in production
d. )hen the purchase order is originated
;;;;; 3. )orkbench <ompany manufactures tables with vinyl tops. The standard material cost for
the vinyl used for one type of table is >?.@A, based on si' square feet of vinyl at a cost of
>B.CA per square foot. A production run of B,AAA tables in Danuary resulted in usage of
E,FAA square feet of vinyl at a cost of >B.GA per square foot, for a total cost of >?,E@A.
The materials quantity variance resulting from this production run was(
a. >BGA favorable c. >F@A unfavorable
b. >HGA unfavorable d. >EFA favorable
;;;;; 4. Actual units of direct materials used were GA,AAA at an actual cost of >FA,AAA. Standard
unit cost is >G.BA. Assuming the materials price variance is recogni!ed when the materials
are used, the materials price variance is(
a. >B,AAA favorable c. >G,AAA favorable
b. >B,AAA unfavorable d. >G,AAA unfavorable
;;;;; 5. Information on 0odgers <ompany3s direct labor costs for the month of Danuary follows(
Actual direct labor hours.......................... CF,HAA
Standard direct labor hours...................... CH,AAA
Total direct labor payroll.......................... >GFB,HAA
Standard direct labor rate......................... >E.FA
0odgers3 direct labor rate variance is(
a. >B?,GHA unfavorable c. >GB,AAA unfavorable
b. >GA,?AA unfavorable d. >GB,AAA favorable
;;;;; 6. The direct labor standards for producing a unit of a product are two hours at >BA per
hour. 6udgeted production was B,AAA units. Actual production was IAA units, and direct
labor cost was >BI,AAA for G,AAA direct labor hours. The direct labor efficiency variance
was(
a. >B,AAA favorable c. >G,AAA favorable
b. >B,AAA unfavorable d. >G,AAA unfavorable
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;;;;; 7. $f the following, the most probable reason a company would e'perience an unfavorable
labor rate variance and a favorable labor efficiency variance is that(
a. The mi' of workers assigned to the particular job was weighted heavily toward the
use of higher#paid, e'perienced individuals
b. The mi' of workers assigned to the particular job was weighted heavily toward the
use of new, relatively low paid, unskilled workers
c. 6ecause of the production schedule, workers from other production areas were
assigned to assist this particular process
d. Jefective materials caused more labor to be used in order to produce a standard unit
;;;;; 8. A debit balance in the labor#efficiency variance account indicates that(
a. Standard hours e'ceed actual hours
b. Actual hours e'ceed standard hours
c. Standard rate and standard hours e'ceed actual rate and actual hours
d. Actual rate and actual hours e'ceed standard rate and standard hours
;;;;; #. Kow should a usage variance that is significant in amount be treated at the end of an
accounting periodL
a. 0eported as a deferred charge or credit
b. Allocated among work#in#process inventory, finished goods inventory, and cost of
goods sold
c. <harged or credited to cost of goods manufactured
d. Allocated among cost of goods manufactured, finished goods inventory, and cost of
goods sold
;;;;; 1$. The following journal entry has been recorded(
)ork in *rocess............................................. BA,AAA
.abor 0ate ,ariance....................................... G,AAA
.abor /fficiency ,ariance........................ B,AAA
*ayroll..................................................... BB,AAA
This entry indicates that(
a. Actual labor cost is less than standard labor cost
b. The labor rate variance is favorable
c. The labor efficiency variance is unfavorable
d. Actual labor cost is more than standard labor cost
''''' 11. 7nder the two#variance method for analy!ing factory overhead, the factory overhead
applied to production is used in the computation of(
(ontrollable )olume
)ariance )ariance
a. Mes =o
b. Mes Mes
c. =o Mes
d. =o =o
85
''''' 12. A spending variance for factory overhead is the difference between actual factory
overhead cost and factory overhead cost that should have been incurred for the actual
hours worked. It results from(
a. *rice differences for factory overhead costs
b. -uantity differences for factory overhead costs
c. *rice and quantity differences for factory overhead costs
d. Jifferences caused by production volume variation
''''' 13. 7nder the two#variance method for analy!ing factory overhead, the difference between the
actual factory overhead and the factory overhead applied to production is the(
a. <ontrollable variance c. /fficiency variance
b. =et overhead variance d. ,olume variance
*tems 14 and 15 are based on t"e folloing information+
The data below relate to the month of ay for Sosa Inc., which uses a standard cost
system and two#variance analysis of overhead(
Actual total direct labor.................................................................... >FC,FAA
Actual hours used............................................................................. BF,AAA
Standard hours allowed for good output............................................ BH,AAA
Jirect labor rate variance2debit...................................................... >B,FAA
Actual total overhead........................................................................ >FA,GHA
6udgeted fi'ed costs......................................................................... >I,AAA
9=ormal: activity in hours................................................................ B@,AAA
Total overhead application rate per standard direct labor hour........... >C.AA
;;;;; 14. )hat was Sosa3s volume variance for ayL
a. >B,GHA favorable c. >B,HAA favorable
b. >B,GHA unfavorable d. >B,HAA unfavorable
;;;;; 15. )hat was Sosa3s controllable variance for ayL
a. >B,GHA favorable c. >B,HAA favorable
b. >E,GHA favorable d. >B,HAA unfavorable
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Chapter Eight Name________________________________________
Pa" IV
(omputing materials and labor variances
)onderland, Inc. has a budgeted normal monthly capacity of GA,AAA labor hours with a standard
production of BA,AAA units at this capacity. )onderland records the materials price variance when the
materials are used. Standard costs are as follows(
aterials.................................... C lbs. N >B
.abor.......................................... >BH per hour
Juring arch, BI,HAA actual labor hours cost >G@G,?HA, and I,HAA units were produced using
GI,GAA pounds of materials at a cost of >B.BA per pound.
I#$"u%"i&#$'
1. <ompute the materials cost variances and label each as favorable or unfavorable.
,ounds -nit (ost .mount
Actual quantity used................. > Actual >
Actual quantity used................. Standard
aterials price variance............ > >
Actual quantity used................. > Standard >
Standard quantity allowed......... Standard
aterials quantity variance....... >
2. <ompute the labor cost variances and label each as favorable or unfavorable.
/ime 0ate .mount
Actual hours worked................. > Actual >
Actual hours worked................. Standard
.abor rate variance................... > >
Actual hours worked................. > Standard >
Standard hours allowed............. Standard
.abor efficiency variance.......... >
3. *repare the same variance analysis as above, using the diagram format as illustrated in "igure @#F
of the te't.
87
Pa" V
1ournal entries for materials and labor variances
Oarl <orp., which uses a standard cost accounting system, determines that the following variances
arose in production during Dune(
)ariance .mount
aterials purchase price.................... > IAA favorable
aterials quantity............................. ?HA unfavorable
.abor efficiency................................. B,AAA unfavorable
.abor rate......................................... EAA unfavorable
Jirect materials purchases totaled >IA,AAA at standard cost, while >?H,AAA in materials were taken
from inventory for use in production. Actual direct labor totaled >@A,AAA, while actual overhead
incurred was >EA,AAA. %Assume no variance for factory overhead.& Ten thousand units were
transferred to "inished 1oods at a standard cost of >BH per unit.
I#$"u%"i&#$'*repare the journal entries to record(
1. The purchase of materials %The materials price variance is recorded at the time of purchase.&
2. The use of materials in production
3. The use of labor in production
4. The charging of overhead to production
5. The transfer of finished goods to the storeroom
.ccount 2ebit (redit
%1&
%2&
%3&
%4&
%5&
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Chapter Eight Name________________________________________
Pa" V(
/o!variance over"ead analysis
"actory overhead for /li!abeth <ompany has been estimated as follows(
"i'ed factory overhead.............................................. >HA,AAA
,ariable factory overhead.......................................... >BAA,AAA
/stimated direct labor hours...................................... GA,AAA
*roduction for the month reached BBAP of the budget, and actual factory overhead totaled >BEC,AAA.
I#$"u%"i&#$'
1. Jetermine the over or underapplied factory overhead.
Actual factory overhead................................................. >
Applied factory overhead...............................................
$ver or underapplied factory overhead.......................... >
2. Jetermine the controllable and volume variances.
Actual factory overhead................................................. >
$verhead for capacity attained(
"i'ed factory overhead.............................................. >
,ariable factory overhead..........................................
<ontrollable variance..................................................... >
"actory overhead for capacity attained........................... >
"actory overhead applied...............................................
,olume variance............................................................ >
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Pa" VI(
/o!variance and four!variance over"ead analysis
6ass <ompany has a budgeted normal monthly capacity of GA,AAA labor hours with a standard
production of BA,AAA units at this capacity. Standard costs for factory overhead are as follows(
"actory overhead at normal capacity(
"i'ed................................................. >GA,AAA
,ariable............................................. >H per labor hour
Juring arch, actual factory overhead totaled >BB?,AAA, of which >I?,AAA was for variable overhead8
and BI,HAA labor hours were required to produce I,HAA units.
I#$"u%"i&#$'
1. <ompute the factory overhead variances using the two#variance method.
Actual factory overhead................................................. >
6udget allowance based on standard hours allowed(
"i'ed overhead budgeted........................................... >
,ariable overhead......................................................
<ontrollable variance............................................ >
6udget allowance based on standard hours allowed........ >
$verhead charged to production.....................................
,olume variance........................................................ >
2. <ompute the factory overhead variances using the four#variance method %appendi'&.
Actual variable factory overhead......................................................... >
6udget allowance based on actual hours worked(
,ariable overhead...........................................................................
Spending variance...................................................................... >
6udget allowance based on actual hours worked.................................
,ariable overhead........................................................................... >
,ariable overhead charged to production.............................................
/fficiency variance......................................................................... >
Actual fi'ed cost................................................................................. >
6udgeted fi'ed cost.............................................................................
6udget variance.............................................................................. >
6udgeted fi'ed cost............................................................................. >
Standard hours 4 fi'ed rate.................................................................
,olume variance............................................................................. >
90