Professional Documents
Culture Documents
Standard Costing
Standard Costing
STANDARD COSTS
TRUE-FALSE STATEMENTS
1.
2.
3.
4.
Standard costs may be incorporated into the accounts in the general ledger.
5.
An advantage of standard costs is that they simplify costing of inventories and reduce
clerical costs.
6.
7.
8.
Actual costs that vary from standard costs always indicate inefficiencies.
9.
Ideal standards will generally result in favorable variances for the company.
10.
11.
Once set, normal standards should not be changed during the year.
12.
In developing a standard cost for direct materials, a price factor and a quantity factor must
be considered.
13.
A direct labor price standard is frequently called the direct labor efficiency standard.
14.
The standard predetermined overhead rate must be based on direct labor hours as the
standard activity index.
15.
Standard cost cards are the subsidiary ledger for the Work in Process account in a
standard cost system.
16.
17.
If actual costs are less than standard costs, the variance is favorable.
18.
A materials quantity variance is calculated as the difference between the standard direct
materials price and the actual direct materials price multiplied by the actual quantity of
direct materials used.
19.
An unfavorable labor quantity variance indicates that the actual number of direct labor
hours worked was greater than the number of direct labor hours that should have been
worked for the output attained.
82
20.
21.
22.
23.
If production exceeds normal capacity, the overhead volume variance will be favorable.
24.
There could be instances where the production department is responsible for a direct
materials price variance.
25.
The starting point for determining the causes of an unfavorable materials price variance is
the purchasing department.
26.
27.
*28.
A credit to a Materials Quantity Variance account indicates that the actual quantity of
direct materials used was greater than the standard quantity of direct materials allowed.
*29.
A standard cost system may be used with a job order cost system but not a process cost
system.
*30.
A debit to the Overhead Volume Variance account indicates that the standard hours
allowed for the output produced was greater than the standard hours at normal capacity.
1.
2.
3.
4.
5.
Ans.
F
F
T
T
T
Item
6.
7.
8.
9.
10.
Ans.
F
T
F
F
T
Item
11.
12.
13.
14.
15.
Ans.
F
T
F
F
F
Item
16.
17.
18.
19.
20.
Ans.
T
T
F
T
F
Item
21.
22.
23.
24.
25.
Ans.
Item
Ans.
F
T
T
T
T
26.
27.
*28.
*29.
*30.
T
T
F
F
F
8-3
A standard cost is
a. a cost which is paid for a group of similar products.
b. the average cost in an industry.
c. a predetermined cost.
d. the historical cost of producing a product last year.
32.
33.
34.
35.
Budget data are not journalized in cost accounting systems with the exception of
a. the application of manufacturing overhead.
b. direct labor budgets.
c. direct materials budgets.
d. cash budget data.
36.
37.
38.
Standard costs
a. may show past cost experience.
b. help establish expected future costs.
c. are the budgeted costs per unit in the present.
d. all of these.
84
39.
40.
41.
42.
43.
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.
44.
45.
46.
48.
49.
A managerial accountant
1.
does not participate in the standard setting process.
2. provides knowledge of cost behaviors in the standard setting process.
3. provides input of historical costs to the standard setting process.
a.
b.
c.
d.
1
2
3
2 and 3
50.
51.
52.
53.
The direct labor quantity standard is sometimes called the direct labor
a. volume standard.
b. effectiveness standard.
c. efficiency standard.
d. quality standard.
54. A manufacturing company would include setup and downtime in their direct
a. materials price standard.
b. materials quantity standard.
c. labor price standard.
d. labor quantity standard.
8-5
The per-unit standards for direct materials are 2 gallons at $4 per gallon. Last month,
5,600 gallons of direct materials that actually cost $21,200 were used to produce 3,000
units of product. The direct materials quantity variance for last month was
a. $1,600 favorable.
b. $1,200 favorable.
c. $1,600 unfavorable.
d. $2,800 unfavorable.
8-7
63.
The per-unit standards for direct labor are 2 direct labor hours at $12 per hour. If in
producing 1,200 units, the actual direct labor cost was $25,600 for 2,000 direct labor
hours worked, the total direct labor variance is
a. $960 unfavorable.
b. $3,200 favorable.
c. $2,000 unfavorable.
d. $3,200 unfavorable.
64.
The standard rate of pay is $10 per direct labor hour. If the actual direct labor payroll was
$39,200 for 4,000 direct labor hours worked, the direct labor price (rate) variance is
a. $800 unfavorable.
b. $800 favorable.
c. $1,000 unfavorable.
d. $1,000 favorable.
65.
The standard number of hours that should have been worked for the output attained is
8,000 direct labor hours and the actual number of direct labor hours worked was 8,400. If
the direct labor price variance was $4,200 unfavorable, and the standard rate of pay was
$9 per direct labor hour, what was the actual rate of pay for direct labor?
a. $8.50 per direct labor hour
b. $7.50 per direct labor hour
c. $9.50 per direct labor hour
d. $9.00 per direct labor hour
66.
67.
A favorable variance
a. is an indication that the company is not operating in an optimal manner.
b. implies a positive result if quality control standards are met.
c. implies a positive result if standards are flexible.
d. means that standards are too loosely specified.
68.
69.
88
70.
71.
72.
73.
A company uses 6,300 pounds of materials and exceeds the standard by 300 pounds.
The quantity variance is $900 unfavorable. What is the standard price?
a. $1.00.
b. $2.00.
c. $3.00.
d. Cannot be determined from the data provided.
74.
A company purchases 15,000 pounds of materials. The materials price variance is $3,000
favorable. What is the difference between the standard and actual price paid for the
materials?
a. $1.00.
b. $.20.
c. $5.00.
d. Cannot be determined.
75.
A company uses 20,000 pounds of materials for which they paid $4.50 a pound. What is
the materials price variance?
a. $.50.
b. $1.00.
c. $2.50.
d. Cannot be determined from the data provided.
76.
If the materials price variance is $1,200 F and the materials quantity and labor variances
are each $900 U, what is the total materials variance?
a. $1,200 F
b. $900 U
c. $300 F
d. $1,350 U
8-9
78.
79.
80.
81.
82.
83.
84.
87.
88.
89.
If the standard hours allowed are less than the standard hours at normal capacity,
a. the overhead volume variance will be unfavorable.
b. variable overhead costs will be underapplied.
c. the overhead controllable variance will be favorable.
d. variable overhead costs will be overapplied.
90.
91.
92.
8-11
93.
If the standard hours allowed are less than the standard hours at normal capacity, the
volume variance
a. cannot be calculated.
b. will be favorable.
c. will be unfavorable.
d. will be greater than the controllable variance.
94.
The budgeted overhead costs for standard hours allowed and the overhead costs applied
to product are the same amount
a. for both variable and fixed overhead costs.
b. only when standard hours allowed is less than normal capacity.
c. for variable overhead costs.
d. for fixed overhead costs.
95.
96.
97.
The overhead variance that indicates whether plant facilities were efficiently used is the
a. budget variance.
b. controllable variance.
c. spending variance.
d. volume variance.
98.
99.
The difference between actual overhead costs and overhead costs applied is the
a. budget variance.
b. controllable variance.
c. total overhead variance.
d. volume variance.
100.
All of the following variances are reported to the production department except the
a. labor price variance.
b. materials price variance.
c. overhead controllable variance.
d. labor price and materials price variances.
103. The costing of inventories at standard cost for external financial statement
reporting purposes is
a. not permitted.
b. preferable to reporting at actual costs.
c. in accordance with generally accepted accounting principles if significant differences
exist between actual costs and standard costs.
d. in accordance with generally accepted accounting principles if significant differences
do not exist between actual and standard costs.
104.
106.
107. If 20,000 pounds of direct materials are purchased for $14,400 on account and the
standard cost is $.70 per pound, the journal entry to record the purchase is
a. Raw Materials Inventory .....................................................
14,400
Accounts Payable ......................................................
14,400
b. Work In Process Inventory ..................................................
14,400
Accounts Payable ......................................................
14,000
Materials Quantity Variance .......................................
400
c. Raw Materials Inventory .....................................................
14,400
Accounts Payable ......................................................
14,000
Materials Price Variance ............................................
400
d. Raw Materials Inventory .....................................................
14,000
Materials Price Variance .....................................................
400
Accounts Payable ......................................................
14,400
8-13
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
Ans.
c
c
d
a
a
b
a
d
c
c
b
d
Item
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
Ans.
c
d
c
b
c
a
d
a
c
c
c
d
Item
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
Ans.
b
c
d
c
b
a
b
a
b
b
c
a
Item
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
Ans.
b
d
c
b
b
c
c
b
d
c
b
a
Item
79.
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
Ans.
Item
Ans.
Item
Ans.
a
d
c
c
b
a
b
c
b
b
a
c
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
b
a
c
c
b
d
d
d
c
c
b
b
103.
104.
105.
106.
*107.
*108.
*109.
*110.
d
a
a
d
d
d
b
c
81
4
EXERCISES
Ex. 111
Betty Short manufactures and sells a nutrition drink for children. She wants to develop a standard
cost per gallon. The following are required for production of a 100-gallon batch:
1,960 ounces of lime Kool-Drink at $.15 per ounce
40 pounds of granulated sugar $.60 per pound
63 kiwi fruit at $.80 each
100 protein tablets at $.90 each
4,000 ounces of water at $.0025 per ounce
Betty estimates that 2% of the lime Kool-Drink is wasted, 20% of the sugar is lost, and 10% of the
kiwis cannot be used.
Instructions
Compute the standard cost of the ingredients for one gallon of the nutrition drink.
Solution 111
(1520 min.)
Ingredient
Lime Kool-Drink
Sugar
Kiwis
Protein Tablets
Water
Lime Kool-Drink
Sugar
Kiwis
Protein Tablets
Water
(a)
(b)
(c)
Standard Waste
2%
20%
10%
0%
0%
Standard Usage
Standard Price
(a) 20.00 oz
$ .15
(b)
.50 lb.
.60
(c)
.70
.80
1
.90
40 oz.
.0025
Standard Cost per Gallon
Standard Cost
$3.00
.30
.56
.90
.10
$4.86
X = 20.00
X=
.50
X=
.70
Ex. 112
The following direct labor data pertain to the operations of Laird Manufacturing Company for the
month of November:
Actual labor rate
Actual hours used
Standard labor rate
Standard hours allowed
Instructions
Prepare a matrix and calculate the labor variances.
Price Variance
Quantity Variance
Total
Labor Variance
Solution 112
(1520 min.)
Actual Hours
Actual Hours
Standard Hours
Actual Rate
Standard Rate
Standard Rate
10,000 $9.20 =
$92,000
10,000 $9.00 =
$90,000
9,500 $9.00 =
$85,500
Price Variance
Quantity Variance
$2,000 U
$4,500 U
Total
Labor Variance
$6,500 U
8-15
The standard cost card shows that a finished product contains 4 pounds of material. The 16,400
pounds were purchased in December at a discount of 5% from the standard price. In December,
4,000 units of finished product were manufactured.
Instructions
Prepare a matrix for materials and calculate the materials variances.
Price Variance
Quantity Variance
Total
Materials Variance
Solution 113
(1318 min.)
Actual Quantity
Actual Rate
16,400 $4.75 =
$77,900
Actual Quantity
Standard Rate
16,400 $5.00 =
$82,000
Price Variance
$4,100 F
Standard Quantity
Standard Price
16,000 $5.00 =
$80,000
Quantity Variance
$2,000 U
Total
Materials Variance
$2,100 F
8-17
Ex. 114
Sweet Dreams, Inc. makes down pillows. Each king pillow requires 4 pounds of down and takes .
3 hours of direct labor. The standard cost of the down used by Sweet Dreams is $8 per pound
and the standard labor cost is $10 per hour. In January, Sweet Dreams purchased 7,500 pounds
of down for $60,375. During the year, the company manufactured 2,000 king pillows. Payroll
reported a total of 740 direct labor hours at a cost of $7,030.
Instructions
a. Compute the materials price and quantity variances and indicate whether the variances are
favorable or unfavorable.
b. Compute the labor price and quantity variances and indicate whether the variances are
favorable or unfavorable.
Solution 114
a.
(15 min.)
Actual Quantity
Actual Price
7,500 $8.05 =
$60,375
Actual Quantity
Standard Price
7,500 $8 =
$60,000
Price Variance
$375 U
Standard Quantity
Standard Price
8,000 $8 =
$64,000
Quantity Variance
$4,000 F
Total
Materials Variance
$3,625 F
b.
Actual Hours
Actual Hours
Standard Hours
Actual Rate
Standard Rate
Standard Rate
740 $9.50 =
$7,030
740 $10 =
$7,400
600 $10 =
$6,000
Price Variance
$370 F
Total
Labor Variance
$1,030 U
Quantity Variance
$1,400 U
(12 min.)
Actual Quantity
Actual Price
(1)32,800 (2)$1.95 =
$63,960
Actual Quantity
Standard Price
32,800 $2 =
$65,600
(1)
Price Variance
$1,640 U
Standard Quantity
Standard Price
32,000 $2 =
$64,000
Quantity Variance
$1,600 U
Total
Materials Variance
$40 F
a. Materials quantity variance = $1,600 U ($1,640 F $40 F)
b. Actual price paid per foot of wood = $1.95.
Ex. 116
Cattybrook Brick Company makes fired clay bricks for construction. The company uses a
standard costing system that calls for 2.75 pounds of clay at $.10 per pound for each brick. The
standard cost for labor is .075 hour at $16 per hour for each brick. In September, Cattybrook
anticipates production to be at a level of 200,000 bricks. During September, Cattybrook
manufactured 201,000 bricks. The company purchased 553,000 pounds of clay at a cost of
$66,365. The cost of direct labor was $242,530 for 15,350 hours.
Instructions
a. Compute the materials price and quantity variances and indicate whether the variances are
favorable or unfavorable.
b. Compute the labor price and quantity variances and indicate whether the variances are
favorable or unfavorable.
8-19
(15 min.)
Actual Quantity
Actual Price
553,000 $.12 =
$293,090
Actual Quantity
Standard Price
553,000 $.10 =
$55,300
Price Variance
$11,060 U
Standard Quantity
Standard Price
552,750 $.10 =
$55,275
Quantity Variance
$25 U
Total
Materials Variance
$11,035 F
b.
Actual Hours
Actual Hours
Standard Hours
Actual Rate
Standard Rate
Standard Rate
15,350 $15.80 =
$242,530
15,350 $16 =
$245,600
15,075 $16 =
$241,200
Price Variance
$3,070 F
Quantity Variance
$4,400 U
Total
Labor Variance
$1,330 U
Ex. 117
Fryer Company has developed the following standard costs for its product for 2002:
FRYER COMPANY
Standard Cost Card
Product A
Cost Element
Standard Quantity
Direct materials
4 pounds
Direct labor
3 hours
Manufacturing overhead
3 hours
Standard Price
$3
8
4
Standard Cost
$12
24
12
$48
The company expected to produce 30,000 units of Product A in 2002 and work 90,000 direct
labor hours.
Actual direct labor costs were $759,000 for 92,000 direct labor hours worked.
Actual direct materials purchased and used during the year cost $352,800 for 126,000
pounds.
Actual variable overhead incurred was $155,000 and actual fixed overhead incurred was
$205,000.
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.
Solution 117
(2025 min.)
8-21
Ex. 118
Greene Company developed the following standard costs for its product for 2002:
GREENE COMPANY
Standard Cost Card
Cost Elements
Direct materials
Direct labor
Variable overhead
Fixed overhead
Standard Quantity
4 pounds
2 hours
2 hours
2 hours
Standard Price
$ 5
10
4
2
Standard Cost
$20
20
8
4
$52
The company expected to work at the 30,000 direct labor hours level of activity and produce
15,000 units of product.
Actual results for 2002 were as follows:
Direct labor costs were $276,210 for 27,900 direct labor hours actually worked.
Actual direct materials purchased and used during the year cost $271,660 for 57,800 pounds.
Solution 118
(2025 min.)
Ex. 119
American Sporting Goods Company manufactures aluminum baseball bats that it sells to
university athletic departments. It has developed the following per unit standard costs for 2002
for each baseball bat:
Manufacturing
Direct Materials
Direct Labor
Overhead
Standard Quantity
2 Pounds (Aluminum)
1/2 hour
1/2 hour
Standard Price
$4.00
$10.00
$6.00
Unit Standard Cost
$8.00
$5.00
$3.00
In 2002, the company planned to produce 40,000 baseball bats at a level of 20,000 hours of
direct labor.
Actual results for 2002 are presented below:
1. Direct materials purchased were 82,000 pounds of aluminum which cost $344,400.
2. Direct materials used were 73,000 pounds of aluminum.
3. Direct labor costs were $187,200 for 19,500 direct labor hours actually worked.
4. Total manufacturing overhead was $117,000.
5. Actual production was 38,000 baseball bats.
Instructions
(a) Compute the following variances:
Direct materials price.
Direct materials quantity.
Direct labor price.
Direct labor quantity.
Total overhead variance.
*(b) Prepare the journal entries to record the transactions and events in 2002.
8-23
(4045 min.)
328,000
16,400
304,000
195,000
190,000
5,000
117,000
114,000
344,400
12,000
292,000
7,800
187,200
195,000
117,000
114,000
608,000
Ex. 120
The standard cost of Product 245 manufactured by Starr Company includes 2 pounds of direct
materials at $5.00 per pound. During September, 40,000 pounds of direct materials are
purchased at a cost of $4.80 per pound, and 37,000 pounds of direct materials are used to
produce 19,000 units of Product 245.
Instructions
(a) Compute the materials price and quantity variances.
*(b) Journalize the purchase of the materials and the issuance of the materials, assuming a
standard cost system is used.
Solution 120
(1520 min.)
$200,000
(40,000 $4.80)
Materials Quantity Variance:
$185,000
$190,000
(37,000 $5.00)
= $8,000 F
(40,000 $5.00)
= $5,000 F
*(38,000 $5.00)
200,000
190,000
8,000
192,000
5,000
185,000
Ex. 121
Lankford Company's standard labor cost of producing one unit of product is 2 hours at the rate of
$14.00 per hour. During February, 38,500 hours of labor are incurred at a cost of $13.80 per
hour to produce 19,000 units of product.
Instructions
(a) Compute the labor price and quantity variances.
*(b) Journalize the incurrence of the labor costs and the assignment of direct labor to production,
assuming a standard cost system is used.
8-25
(1520 min.)
$539,000
= $7,700 F
(38,500 $13.80)
(38,500 $14.00)
Labor Quantity Variance:
$539,000
$532,000
= $7,000 U
(38,500 $14.00)
(38,000 $14.00)
*(b) Factory Labor ..............................................................................
Labor Price Variance ............................................................
Wages Payable ....................................................................
539,000
532,000
7,000
7,700
531,300
539,000
Ex. 122
The following direct labor data pertain to the operations of Foster Manufacturing Company for the
month of November:
Standard labor rate
Actual hours incurred and used
The standard cost card shows that 2.5 hours are required to complete one unit of product. The
actual labor rate incurred exceeded the standard rate by 10%. Two thousand units were manufactured in November.
Instructions
(a) Calculate the price, quantity, and total labor variances.
*(b) Journalize the entries to record the labor variances.
Solution 122
(a)
(1520 min.)
Actual Hours
Actual Hours
Standard Hours
Actual Rate
Standard Rate
Standard Rate
4,500 $11.00 =
$49,500
4,500 $10.00 =
$45,000
5,000 $10.00 =
$50,000
Price Variance
$4,500 U
Quantity Variance
$5,000 F
Total
Labor Variance
$500 F
45,000
4,500
50,000
49,500
5,000
45,000
Ex. 123
Reagan Company planned to produce 25,000 units of product and work 100,000 direct labor
hours in 2002. Manufacturing overhead at the 100,000 direct labor hours level of activity was
estimated to be:
Variable manufacturing overhead
$ 700,000
Fixed manufacturing overhead
300,000
Total manufacturing overhead
$1,000,000
At the end of 2002, 26,000 units of product were actually produced and 107,000 actual direct
labor hours were worked. Total actual overhead costs for 2002 was $1,015,000.
Instructions
(a) Compute the total overhead variance.
(b) Compute the overhead controllable variance.
(c) Compute the overhead volume variance.
Solution 123
(1116 min.)
Overhead applied
$1,040,000
Overhead budgeted
$1,028,000
Budgeted overhead
$1,028,000
$ 728,000
300,000
$1,028,000
8-27
Ex. 124
Stone Company planned to produce 20,000 units of product and work at the 50,000 direct labor
hours level of activity for 2002. Manufacturing overhead at this level of activity and the
predetermined overhead rate is as follows:
Predetermined
Overhead Rate per
Direct Labor Hour
Variable manufacturing overhead
$300,000
$6
Fixed manufacturing overhead
150,000
3
Total manufacturing overhead
$450,000
$9
At the end of 2002, 22,000 units were actually produced and 53,700 direct labor hours were
actually worked. Total actual manufacturing overhead costs were $475,000.
Instructions
Using a two-variance analysis of manufacturing overhead, calculate the following variances and
indicate whether they are favorable or unfavorable:
(a) Overhead controllable variance.
(b) Overhead volume variance.
Solution 124
(1217 min.)
=
=
$330,000
150,000
480,000
475,000
$ 5,000 favorable
=
=
$330,000
150,000
480,000
495,000
$ 15,000 favorable
The following information was taken from the annual manufacturing overhead cost budget of
Olson Company:
Variable manufacturing overhead costs
Fixed manufacturing overhead costs
Normal production level in direct labor hours
Normal production level in units
$124,000
$93,000
62,000
31,000
Solution 125
(1318 min.)
(a) Item
Variable Overhead
Fixed Overhead
Total Overhead
(b) Total overhead variance:
Overhead incurred
($225,000)
Amount
$124,000
93,000
$217,000
Hours
62,000
62,000
62,000
Overhead applied
(60,000 hours $3.50)
Rate
$2.00
1.50
$3.50
= $15,000 U
Overhead applied
($213,000)
(60,000 hours $3.50)
= $3,000 U
Ex. 126
Presented below is a flexible manufacturing budget for Waner Company, which manufactures fine
timepieces:
Activity Index:
Standard direct labor hours
Variable costs
Indirect materials
Indirect labor
Utilities
Total variable
Fixed costs
Supervisory salaries
Rent
Total fixed
Total costs
2,000
3,200
3,600
4,000
$ 4,000
2,300
3,200
9,500
$ 6,400
3,680
5,120
15,200
$ 7,200
4,140
5,760
17,100
$ 8,000
4,600
6,400
19,000
1,000
3,000
4,000
$13,500
1,000
3,000
4,000
$19,200
1,000
3,000
4,000
$21,100
1,000
3,000
4,000
$23,000
8-29
Instructions
(a) Compute the controllable and volume overhead variances.
*(b) Prepare the entries for manufacturing overhead during the period and the entry to recognize
the overhead variances at the end of the period.
Solution 126
(1621 min.)
=
=
18,200
17,400
425
375
18,200
17,400
800
Ex. 127
Voss Company uses a standard cost accounting system. During March, 2002, the company
reported the following manufacturing variances:
Material price variance
Material quantity variance
Labor price variance
Labor quantity variance
Overhead controllable
Overhead volume
$2,000
2,400
800
1,200
500
3,000
F
U
U
U
F
U
In addition, 15,000 units of product were sold at $18 per unit. Each unit sold had a standard cost
of $12. Selling and administrative expenses for the month were $10,000.
Instructions
Prepare an income statement for management for the month ending March 31, 2002.
Solution 127
(1520 min.)
Voss COMPANY
Income Statement
For the Month Ended March 31, 2002
$270,000
180,000
90,000
$(2,000)
2,400
800
1,200
(500)
3,000
4,900
85,100
10,000
$ 75,100
*Ex. 128
Norris Company developed the following standards for 2002:
NORRIS COMPANY
Standard Cost Card
Cost Elements
Direct materials
Direct labor
Manufacturing overhead
Standard Quantity
5 pounds
1 hour
1 hour
Standard Price
$ 5
$18
$10
Standard Cost
$25
18
10
$53
The company planned to produce 30,000 units of product and work at the 30,000 direct labor
level of activity in 2002. The company uses a standard cost accounting system which records
standard costs in the accounts and recognizes variances in the accounts at the earliest
opportunity. During 2002, 29,000 actual units of product were produced.
Instructions
Prepare the journal entries to record the following transactions for Norris Company during 2002.
(a) Purchased 147,000 pounds of raw materials for $4.90 per pound on account.
(b) Actual direct labor payroll amounted to $527,000 for 28,500 actual direct labor hours
worked. Factory labor cost is to be recorded and distributed to production.
(c) Direct materials issued for production amounted to 147,000 pounds which actually cost
$4.90 per pound.
(d) Actual manufacturing overhead costs incurred were $288,000 in 2002.
(e) Manufacturing overhead was applied when the 29,000 units were completed.
(f)
Transferred the 29,000 completed units to finished goods.
*Solution 128 (2025 min.)
(a) Raw Materials Inventory ................................................................
Materials Price Variance .....................................................
Accounts Payable ...............................................................
(To record purchase of materials)
735,000
14,700
720,300
513,000
14,000
522,000
725,000
10,000
288,000
290,000
(f)
8-31
527,000
9,000
513,000
735,000
288,000
290,000
1,537,000
83
2
COMPLETION STATEMENTS
standard, budget
ideal, normal
price, quantity
price
overhead applied
quantity
unfavorable, favorable
controllable, volume
volume
significant
8-33
MATCHING
139. Match the items in the two columns below by entering the appropriate code letter in the
space provided.
A.
B.
C.
D.
E.
Variances
Standard costs
Standard cost accounting system
Normal standards
Ideal standards
F.
G.
H.
I.
J.
____
1. The difference between actual overhead incurred and overhead budgeted for the
standard hours allowed.
____
2. The hours that should have been worked for the units produced.
____
3. The difference between the actual quantity times the actual price and the actual
quantity times the standard price.
____
4. The difference between total actual costs and total standard costs.
____
5. The difference between actual hours times the standard rate and standard hours times
the standard rate.
____
____
7. The difference between overhead budgeted for the standard hours allowed and the
overhead applied.
____
____
____ 10. A double-entry system of accounting in which standard costs are used in making
entries and variances are recognized in the accounts.
Answers to Matching
1.
2.
3.
4.
5.
H
J
F
A
G
6.
7.
8.
9.
10.
B
I
D
E
C
83
4
S-A E 140
Rand Company computes variances as a basis for evaluating the performance of managers
responsible for controlling costs. For several months, the labor quantity variance has been
unfavorable. Briefly explain what could be causing the unfavorable labor quantity variance and
indicate what type of corrective action, if any, might be taken.
Solution 140
Since labor quantity variances relate to the efficiency of labor, the cause of an unfavorable
variance could be poor training, poor maintenance of machinery, fatigue, carelessness, or similar
problems that affect efficiency.
The management of Rand Company would need to identify the likely causes of the variance and
correct the situation with additional training, improved maintenance, better scheduling or similar
appropriate actions.
S-A E 141
In reviewing the activities of the Mixing Department for the month of June, the manager of the
department notices that there was an unfavorable materials price variance for the month and
there was an unfavorable materials quantity variance. Under what circumstances, if any, can the
responsibility for each variance be placed on (a) the purchasing department and (b) the
production department?
Solution 141
(a)
Purchasing department. The investigation of a materials price variance usually begins with
this department. If the price standard has been properly set, purchasing is responsible.
However, it should be recognized that in a period of inflation, prices may rise faster than
expected. Also, there may be extenuating circumstances such as oil cartel price increases.
The purchasing department may be responsible for an unfavorable quantity variance if it
purchased raw materials of inferior quality.
(b)
8-35
Solution 142
1. Ideal standards are not necessarily unethical. They may be used unethically, such as in the
case in which employees are denied bonuses or other rewards because of not meeting a
standard which was out of their reach. If they are used as a guide to maximum attainable
performance, however, and not tied directly to the reward system, they may be ethical.
2. It is unethical for Mary simply to refuse to accept a particular standard. However, if the
company intends to use the standard unethically, she may refuse to hold her workers
accountable while she pursues a permanent disposition of the matter. If she simply refuses to
accept it, she may be indirectly sabotaging the company by hindering it from accomplishing its
legitimate objectives. This would be unethical.
Mike,
Last month was a tough one for all of us, wasn't it? Your workers certainly did go
the extra mile, no doubt about it.
You asked about your efficiency variance. When we calculate it, we count the
number of hours it took to get good output. Since we had such high spoilage, we
got fewer units, but used more hours. That is why your efficiency variance was
negative. It does not imply that you didn't do your best. It just means that we
investigate to see what happened.
Good luck, and I hope this month is a better one for all of us.
(signed)