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# CHAPTER 9

## Standard Costing: A Functional-Based

Control Approach

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe how unit input standards are developed, and explain why standard costing systems
2. Explain the purpose of a standard cost sheet.
3. Compute and journalize the direct materials and direct labor variances, and explain how they
are used for control.
6. Calculate mix and yield variances for direct materials and direct labor.

CHAPTER SUMMARY
This chapter examines the functional-based standard costing systems in managing costs, improv-
ing planning and control, and facilitating decision making and product costing. It provides detailed
discussion of cost variance analyses for all product cost elements and considers their behavioral
implications. Mix and yield variance analyses are also presented when it is possible to make input
substitutions.

CHAPTER REVIEW
I. Developing Unit Input Standards Learning Objective #1
1. Price standards specify how much should be paid for the quantity of the input to
be used.
2. Quantity standards specify how much of the input should be used per unit of out-
put.
3. The unit standard cost for a particular input = Standard price × Standard quantity.
B. Establishing Standards
1. Potential sources of quantitative standards include historical experience, engineer-
ing studies, and input from operating personnel.

187
188 Chapter 9

## a. Historical experience should be used with caution because it may perpetuate

operating inefficiencies.
b. Engineering studies and input from operating personnel help determine the
most efficient level of input quantities.
 The use of an engineering study approach by itself may produce standards
that are too rigorous.
2. Responsibilities for establishing price standards
a. Operations managers determine the quality of the inputs required.
b. Personnel and purchasing have the responsibility to acquire the input quality at
the lowest price that is limited by market forces and trade unions. Note that:
 Purchasing must consider discounts, freight, and quality.
 Personnel must consider payroll taxes, fringe benefits, and qualifications.
c. Accounting is responsible for recording the price standards and for preparing
reports.
C. Types of Standards
1. Ideal standards are standards that demand maximum efficiency.
 Can only be achieved if everything operates perfectly.
2. Currently attainable standards can be achieved under efficient operating condi-
tions.
a. These standards are demanding but achievable.
b. Allowance is made for normal breakdowns, interruptions, and differing skill levels.
c. They offer more behavioral benefits than ideal standards.
 If standards are too tight, workers can become frustrated, and performance
levels will decline.
3. Kaizen Standards are continuous improvement standards that reflect a planned
improvement.
 Kaizen standards are currently attainable and have a cost reduction focus.
4. Activity-based Costing uses standards to:
a. Facilitate cost assignment.
 An activity’s cost is determined by the amount of resources consumed by
each activity.
b. Enhance cost control and reduction.
 Focus on eliminating or reducing nonvalue-added activities.
 Identify the ideal output level of each value-added activity and reduce activi-
ty production to that ideal level.
D. Usage of Standard Costing Systems
Standard costing systems are widely adopted for:
1. Managing costs.
Standard Costing: A Functional-Based Control Approach 189

##  Standards help managers understand what needs to be done to improve current

and future performance.
 Kaizen standards help firms implement continuous improvement and cost reduc-
tion.
2. Improving planning and control.
a. Unit standards are a fundamental requirement for a flexible budgeting system.
b. Budgetary control systems compare actual costs with budgeted costs by com-
puting variances.
(1) An overall variance can be decomposed into a price and a usage or efficien-
cy variance.
(2) In principle, the use of efficiency variances enhances operational control.
 Managers have more control over the usage of inputs than over their
prices.
3. Facilitating decision making and product costing.
a. Standard costing systems use standards for material, labor, and overhead.
b. A normal costing system uses a predetermined rate for applying overhead but
uses actual materials and labor costs.
c. An actual costing system uses actual costs for all three of the manufacturing in-
puts.
d. Advantages of a standard costing system:
(1) Provides readily available unit cost information that can be used for pricing
decisions.
(2) Simplifies process costing.
(a) No need to compute unit costs for materials, transferred-in, and con-
version cost categories.
(b) No need to distinguish between FIFO and weighted average.
 Equivalent units are calculated using FIFO.

Review textbook Exhibit 9-1, which summarizes and compares the cost assignment
approaches of actual costing, normal costing, and standard costing systems.

## II. Standard Cost Sheets Learning Objective #2

A. Standard costing systems can be used in both manufacturing and service organiza-
tions. For example, consider the standard costing in a hospital,
1. A relative value unit (RVU) is used to measure the relative amount of time re-
quired to perform a procedure.
2. A standard cost per RVU is computed by dividing the variable direct labor costs of
a hospital department by the number of RVUs performed by that department.
190 Chapter 9

3. A standard direct labor cost for a given procedure can be computed by multiplying
the RVUs of the procedure by the standard cost per RVU.
B. The standard cost sheet provides the standard costs and standard quantities of ma-
terials, labor, and overhead that should be applied to a single product or service, in-
cluding:
1. A standard cost per unit is the per-unit cost that should be achieved given mate-
rials, labor, and overhead standards. It can be computed as follows:
Standard cost per unit = Standard price × Standard usage
2. The quantity of each input that should be used to produce one unit of output is
shown.
a. Standard quantity of materials allowed (SQ) is computed as follows:
SQ = Unit quantity standard × Actual output
b. Standard hours allowed (SH) is computed as follows:
SH = Unit quantity standard × Actual output

Review textbook Exhibit 9-2, which provides an example of a standard cost sheet.

## III. Variance Analysis and Accounting: Learning Objective #3

Direct Materials and Direct Labor
A. Compute the Total Budget Variance.
1. The total budget variance is the difference between the actual cost of the input and
its planned cost.
a. The planned input cost (flexible budget amount) is SP × SQ,
where SP = Standard unit price of an input
SQ = Standard quantity of inputs allowed for the actual output
b. The actual input cost is AQ × AP,
where AP = Actual price per unit of the input
AQ = Actual quantity of input used
thus,
Total budget variance = (AP × AQ ) – (SP × SQ )
B. Calculate Direct Materials Price and Usage Variances
1. The total budget variance can be broken down into price and usage variances.
a. Price (rate) variance is the difference between the actual and standard unit
price of an input multiplied by the number of inputs used.
b. Usage (efficiency) variance is the difference between the actual and standard
quantity of inputs multiplied by the standard unit price of the input.
c. Unfavorable (U) variances occur whenever the actual prices or usage are
greater than the standard.
d. Favorable (F) variances occur whenever the actual prices or usage are less
than the standard.
Standard Costing: A Functional-Based Control Approach 191

## Review textbook Exhibit 9-4, which illustrates the three-pronged

approach to analyzing the direct materials price and usage variances.

## 2. Using formulas to compute direct materials price and usage variances.

a. The direct materials price variance (MPV) measures the difference between
what should have been paid for raw materials and what was actually paid.
MPV = (AP × AQ ) – (SP × AQ )
or
MPV = (AP – SP) × AQ
b. The direct materials usage variance (MUV) measures the difference between
the direct materials actually used and the direct materials that should have
been used for the actual output.
MUV = (SP × AQ ) – (SP × SQ )
or
MUV = (AQ – SQ ) × SP
3. Timing of the direct materials price variance computation.
a. The direct materials price variance can be calculated at one of two points:
(1) When the raw materials are purchased.
(2) When the raw materials are issued for usage.
b. Computing the price variance at the point of purchase is preferable because it
provides more timely the information that proper managerial action can be tak-
en.
c. If the direct materials price variance is computed at the point of purchase, the
formulas will be revised as follows:
MPV = (AP × AQ P ur chas e d) – (SP × AQ Pur chas e d)
or
MPV = (AP – SP) × AQ Purchased
4. Timing of the computation of direct materials usage variance.
a. The materials usage variance should be computed as materials are issued for
production using the following three forms.
(1) The standard bill of materials identifies the quantity of materials that should
be used to produce a predetermined quantity of output. It acts as a requisi-
tion form.
(2) The color-coded excess usage form is used to provide immediate feedback to
the production manager that excess direct materials are being used.
(3) The color-coded returned-materials form is used when the production man-
ager returns leftover direct materials.
5. Accounting for direct materials price and usage variances.
a. In a standard costing system, all inventories are carried at standard.
b. In recording variances,
192 Chapter 9

## (1) Unfavorable variances are always debits.

(2) Favorable variances are always credits.
c. Journal entry associated with the purchase of direct materials (assuming an un-
favorable MPV):
Materials SP × AQ
Materials Price Variance (AP – SP) × AQ
Accounts Payable AP × AQ
d. Journal entry associated with the use of direct materials (assuming an unfavor-
able MUV):
Work in Process SQ × SP
Materials Usage Variance (AQ – SQ) × SP
Materials AQ × SP
C. Calculating Direct Labor Variances
1. Using formulas to compute direct labor rate and efficiency variances.
a. The labor rate variance measures the difference between what was paid to di-
rect laborers and what should have been paid.
LRV = (AR × AH) – (SR × AH)
or
LRV = (AR – SR ) × AH
b. The labor efficiency variance measures the difference between the labor
hours that were actually used and the labor hours that should have been used.
LEV = (AH × SR) – (SH × SR)
or
LEV = (AH – SH) × SR

## Review textbook Exhibit 9-6, which illustrates the three-pronged

approach to analyzing direct labor rate and efficiency variances.

## 2. Accounting for direct labor rate and efficiency variances.

a. The journal entry for both variances is recorded simultaneously. (It assumes a
favorable direct labor rate variance and an unfavorable direct labor efficiency
variance.)
Work in Process SH × SR
Labor Efficiency Variance (AH – SH) × SR
Labor Rate Variance (AR – SR) × AH
Payroll AH × AR
b. Notice that only standard hours and standard rates are used to assign direct la-
bor costs to Work in Process because all inventories are carried at standard.
c. If the variance is unfavorable, it will be a debit; if it is favorable, it will be a cred-
it.
D. Decision Criteria for Investigating Variances
1. An investigation should be undertaken only if:
Standard Costing: A Functional-Based Control Approach 193

## a. The variance is material, i.e., it falls outside an acceptable range.

b. The anticipated benefits are greater than the expected costs.
2. An acceptable range is the standard, plus or minus an allowable deviation. Control
limits indicate how large a variance must be before it is judged to be material.
They are the top and bottom measures of the allowable range as follows:
 The upper control limit is the standard plus the allowable deviation.
 The lower control limit is the standard minus the allowable deviation.
3. Control limits can be expressed both as a percentage of the standard and as an
absolute dollar amount.
E. Determining Responsibility for the Direct Materials Variances
1. The responsibility for controlling the materials price variance is usually the purchas-
ing agent’s because he/she can influence controllable factors such as quality, quan-
tity discounts, distance of the source from the plant, etc.
2. The production manager is generally responsible for direct materials usage be-
cause he/she can minimize scrap, waste, rework and other ways to ensure that the
standard is met.
F. Determining Responsibility for the Direct Labor Variances
1. The direct labor rate variances occur when:
a. An average wage rate is used for the rate standard.
b. More skilled and more highly paid workers are used for less skilled tasks.
2. The production managers are responsible for the productive use of direct labor
and, thus, responsible for the direct labor rate variance and efficiency variance.
G. Limitations of Using Variances to Evaluate Performance
1. The cause of the variance may be attributable to other departments.
 Frequent breakdown of machinery may cause interruptions and nonproductive
use of direct labor. But these breakdowns are attributable to faulty maintenance
by the maintenance department, not production departments.
2. Note that too much emphasis on meeting standards can lead to dysfunctional
behavior/outcomes.
a. Focusing on the price variance for performance evaluation may cause
 Poor quality goods to be purchased.
 Too many goods to be purchased in order to obtain quantity discounts.
b. Focusing on the direct material usage variance and/or direct labor variances to
evaluate performance can tempt the manager to allow defective units to be
transferred to avoid using additional materials and/or hours because of rework.
These defective units may create customer-relation problems once a customer
gets stuck with the bad product.
H. Disposition of Materials and Labor Variances
1. Most companies dispose of variances at the end of the year.
2. If the variances are not material, they simply are closed out to Cost of Goods Sold.
194 Chapter 9

3. If the variances are material, they are prorated to Work in Process, Finished
Goods, and Cost of Goods Sold.
a. GAAP requires that inventories be reported at actual costs.
b. But it is hard to justify carrying costs of inefficiency as an asset.

## IV. Variance Analysis: Overhead Costs Learning Objective #4

A. The total overhead variance is the difference between the actual and the applied
a. the variable overhead spending variance, and
b. the variable overhead efficiency variance.
a. the fixed overhead spending variance, and
b. the fixed overhead volume variance.
1. The total variable overhead variance is the difference between the actual and the
 Can be split into a spending and efficiency variance.
2. The variable overhead spending variance (VOSV) measures the aggregate effect
of differences in the actual variable overhead rate and the standard variable over-
VOSV = (AVOR × AH ) – (SVOR × AH)
or
VOSV = (AVOR – SVOR ) × AH
a. Variable overhead is not a homogeneous input and, thus, the standard variable
overhead rate represents a weighted average for all of the variable overhead
items.
b. A spending variance is affected by price changes and by how efficiently over-
 Waste or inefficient use of variable overhead causes an unfavorable varia-
c. To the extent that the consumption of variable overhead can be traced, respon-
sibility can be assigned.
 Controllability is a prerequisite for assigning responsibility.
3. The variable overhead efficiency variance (VOEV) measures the change in vari-
able overhead consumption that occurs because of efficient (or inefficient) usage of
the activity.
VOEV = (AH – SH ) × SVOR
a. The variable overhead efficiency variance is directly related to the direct labor
efficiency variance if the variable overhead cost driver is direct labor hours.
Standard Costing: A Functional-Based Control Approach 195

b. The causes of variable overhead efficiency variance are generally the same as
those for the direct labor usage variance.

## Review textbook Exhibit 9-7, which summarizes the variable

overhead spending and efficiency variance computations.

## C. Analyzing Fixed Overhead Variances

1. The total fixed overhead variance is the difference between actual fixed overhead
2. The fixed overhead spending variance (FOSV) is the difference between the actu-
FOSV = AFOH – BFOH
3. The fixed overhead volume variance (FOVV) is the difference between budgeted
FOVV = [Standard fixed overhead rate × SH(D) ] – (Standard fixed overhead rate × SH)
where SH(D) = Standard hours allowed for the denominator output volume used to
compute the predetermined standard fixed overhead rate
SH = Standard hours allowed for the actual output volume achieved
4. The fixed overhead volume variance occurs whenever the actual output differs from
the denominator output volume.
a. The volume variance measures the effect of the actual output differing from the
output used to determine the standard fixed overhead rate.
b. The volume variance occurs because the actual output differs from the predict-
ed output volume. It may represent
(1) A prediction errora measure of inability of management to select the cor-
(2) A measure of capacity utilization

## Review textbook Exhibit 9-10, which summarizes the fixed

overhead spending and volume variance computations.

## 5. Accounting for overhead variances:

a. To assign overhead to production:
Work in Process xxx
Miscellaneous Accounts xxx
196 Chapter 9

## c. Variances will be debited or credited as necessary to balance the variable and

D. Two- and Three-Variance Analyses
1. These variances do not require knowledge of actual variable and actual fixed overhead.
a. They are simply combined into actual overhead.
b. These methods provide less detail and, thus, less useful information.
2. The two-variance analysis computes two variances: budget and volume.
a. The budget variance is the sum of the four-variance spending and efficiency
variances.
b. The volume variance is the same as the fixed overhead volume variance of the
four-variance method.

## Review textbook Exhibit 9-13, which summarizes the two-variance method.

3. The three-variance analysis computes the spending variance, the efficiency variance,
and the volume variance.
a. The spending variance is the sum of the variable and fixed overhead spending
variances.
b. The efficiency variance is the same as the variable overhead efficiency vari-
ance of the four-variance method.
c. The volume variance is the same as the fixed overhead volume variance of the
four-variance method.

## V. Mix and Yield Variances: Materials and Labor Learning Objective #5

A. General Concept
1. If it is possible to substitute one direct material input for another or one type of di-
rect labor for another, variances can occur.
a. A mix variance results whenever the actual mix of inputs differs from the
standard mix.
b. A yield variance results whenever the actual yield (output) differs from the
standard yield.
2. For direct materials, the sum of the mix and yield variances equals the material usage
variance; for direct labor, the sum is the labor efficiency variance.
B. Direct Materials Mix and Yield Variances
1. The direct materials mix variance is the difference between the standard cost of the
actual mix of inputs used and the standard cost of the mix of inputs that should
have been used.
Materials mix variance for each input = (AQ – SM) × SP
where SM = Standard mix proportion × Total actual input quantity
Standard Costing: A Functional-Based Control Approach 197

Standard mix quantity (SM) is the quantity of each input that should have been
used given the total actual input quantity.
Thus, the materials mix variance for all input materials =  (AQi – SMi) × Spi
2. The direct materials yield variance is the difference between the standard cost of
the actual yield of output units and the standard cost of the yield of output that
should have been produced. Steps to compute the yield variance are as follows:
a. Identify the total standard input units and the expected standard yield units. Use
the standard input-output relationship to compute the standard yield ratio.
Standard yield units
Standard yield ratio =
Standard input units
b. Compute the standard cost of yield per unit (SPy ).
Total input standard cost
SPy =
Standard yield units

## c. Compute the standard yield.

Standard yield = Standard yield ratio × Total actual input quantity
d. Compute the yield variance.
Yield variance = (Standard yield – Actual yield) × SPy
C. Labor Mix and Yield Variances
 Labor mix and yield variances are computed in the same way as those for the ma-
terials mix and yield variances.
198 Chapter 9

## KEY TERMS TEST

From the list that follows, select the term that best completes each statement and write it in
the space provided.

## control limit quantity standard

currently attainable standard relative value unit (RVU)
direct labor efficiency variance (LEV) standard bill of materials
direct labor rate variance (LRV) standard cost per unit
direct materials price variance (MPV) standard cost sheet
direct materials usage variance (MUV) standard hours allowed
favorable (F) variance standard quantity of materials allowed
fixed overhead spending variance total budget variance
fixed overhead volume variance unfavorable (U) variance
ideal standard unit standard cost
kaizen standards usage (efficiency) variance
mix variance variable overhead efficiency variance
price standard variable overhead spending variance
price (rate) variance yield variance

1. The difference between actual fixed overhead and budgeted fixed overhead is the
___________________________________________________.

2. The difference between what was paid and what should have been paid for actual inputs is
called the ______________________ or the ______________________.

3. The difference between the direct materials actually used and the direct materials allowed for
actual output multiplied by the standard price is the ________________________________.

## 4. A(n) _________________________________ is produced whenever the actual dollars spent

are greater than the standard allowance.

5. The ____________________________ is the price that should have been paid per unit of
input; the quantity of input allowed per unit of output is the _____________________________.

6. The difference between the actual payroll and what should have been paid for the actual hours
worked is the _______________________________________.

## 7. The __________________________________________________ is a measure of capacity

utilization.

8. The difference between the actual labor hours worked and the standard hours allowed multiplied
by the variable overhead rate is the _____________________________________________
______________; the difference between what was spent and what should have been spent
for variable overhead at actual hours is the ____________________________
_______________________________.

9. The per-unit cost that should be achieved given materials, labor, and overhead standards is
the _____________________________________ or_______________________________.
Standard Costing: A Functional-Based Control Approach 199

10. A listing of the standard costs and standard quantities of materials, labor, and overhead that
should apply to a single product is the ________________________________.

11. The maximum allowable deviation from a standard is called the _____________________.

## 12. A(n) ________________________ reflects perfect operating conditions.

13. The difference between the actual cost of an input and its planned cost is the _________
_________________________.

14. The difference between standard quantities and actual quantities multiplied by the standard
price is the _____________________________.

15. The difference between the standard material cost of the standard yield and the standard
material cost of the actual yield is the _______________________.

16. The difference between the standard cost of the mix of actual material inputs and the
standard cost of the material input mix that should have been used is the
______________________.

## 17. A(n) ______________________________________________ reflects an efficient operating

state.

18. A(n) ______________________________ is produced whenever the actual dollars spent are
less than the standard allowances.

19. A detailed listing of the type and quantity of materials allowed for a given level of output is
called the ________________________________.

20. The difference between what was paid for materials purchased and what should have been
paid is the _____________________________________.

21. The direct labor hours that should have been used to produce the actual output is the
_____________________________________; the quantity of materials that should have
been used to produce the actual output is the _________________________________
____________________________.

22. The difference between the actual direct labor hours used and the standard labor hours
allowed multiplied by the standard hourly wage rate is the _______________________
______________.

23. Hospital standard costing systems often use a homogeneous work unit called a ________
_________________ to measure the relative amount of time required to perform a proce-
dure.
200 Chapter 9

MULTIPLE-CHOICE QUIZ
Complete each of the following statements by circling the letter of the best answer.

1. If more direct materials were used for production than were allowed for the output, then the:
a. direct labor efficiency variance will be unfavorable.
b. direct labor rate variance will be favorable.
c. direct materials price variance will be favorable.
d. direct materials usage variance will be unfavorable.
e. overhead budget variance will be unfavorable.

## 2. The direct labor rate variance is computed as:

a. (Actual labor hours worked – Standard labor hours allowed) × Actual labor rate.
b. (Actual labor hours worked – Standard labor hours allowed) × Standard labor rate.
c. (Actual labor rate – Standard labor rate) × Standard hours allowed.
d. (Actual labor rate – Standard labor rate) × Actual hours worked.
e. none of the above.

3. Which of the following variances would be least likely if the materials used were of much poorer
quality than the standard?
a. unfavorable direct materials price variance
b. unfavorable direct materials efficiency variance
c. unfavorable direct labor efficiency variance
d. unfavorable variable overhead efficiency variance
e. All of the above would be equally likely to occur.

4. If the direct labor force is poorly trained, which of the following variances is most likely to occur?
a. unfavorable direct labor efficiency variance
b. unfavorable direct labor rate variance
c. favorable direct materials efficiency variance
d. favorable fixed overhead spending variance
e. unfavorable variable overhead spending variance

5. Which of the following circumstances is least likely to cause a direct materials usage variance?
a. inexperienced workers
b. lack of regular maintenance of automated production machinery
c. materials of poorer than expected quality
d. price increases by suppliers
e. unanticipated changes in the design of the product

6. Which of the following would accompany an unfavorable direct labor efficiency variance?
a. favorable direct materials usage variance
b. unfavorable direct materials price variance
c. unfavorable direct labor rate variance
d. unfavorable variable overhead efficiency variance
e. unfavorable fixed overhead spending variance
Standard Costing: A Functional-Based Control Approach 201

## 7. The overhead spending variance computed using a three-variance analysis:

a. consists only of fixed costs; no variable costs are included.
b. consists only of variable costs; no fixed costs are included.
c. consists of both variable and fixed costs.
d. is favorable when the direct materials price variance is favorable.
e. None of the above are true.

## 8. The overhead efficiency variance computed using a three-variance analysis:

a. is (Flexible budget for actual hours worked – Flexible budget for standard hours allowed).
b. consists only of variable costs; no fixed costs are included.
c. is [(Actual hours worked – Standard hours allowed) × Standard variable overhead rate].
d. is unfavorable when the direct labor efficiency is unfavorable.
e. All of the above are true.

9. The direct materials standard for XYZ Company is 10 pounds of input at \$4.00 per pound. XYZ
purchased 25,000 pounds of material for \$97,600. The company used 22,000 pounds of mate-
rial to produce 2,250 units of output. The direct materials price variance is:
a. \$2,000 unfavorable.
b. \$2,400 favorable.
c. \$7,600 unfavorable.
d. \$9,600 unfavorable.
e. none of the above.

10. Assume the same information as in Question 9 above. The direct materials usage variance
is:
a. \$2,000 unfavorable.
b. \$2,400 favorable.
c. \$7,600 unfavorable.
d. \$9,600 unfavorable.
e. none of the above.

11. The direct labor standard for XYZ Company is 2 hours per unit of output at a standard rate of
\$15 per hour. During August, 2,250 units were produced using 4,760 hours. Direct labor payroll
totaled \$73,675. The direct labor rate variance is:
a. \$2,275 favorable.
b. \$2,275 unfavorable.
c. \$3,900 favorable.
d. \$6,175 unfavorable.
e. none of the above.

12. Assume the same information as in Question 11 above. The direct labor efficiency variance
is:
a. \$2,275 favorable.
b. \$2,275 unfavorable.
c. \$3,900 favorable.
d. \$6,175 unfavorable.
e. none of the above.
202 Chapter 9

PRACTICE TEST

EXERCISE 1
ABC Company produced 25,000 units of Product XP-1 during 2000. Each product required
6 pounds of material at \$11 per pound and 2 hours of direct labor at \$15 per hour. During 2003,
160,000 pounds of material were purchased and used for \$1,750,000; payroll totaled \$743,900 for
49,000 hours.

Required:
Calculate the direct materials price and usage variances and the direct labor rate and efficiency
variances.

EXERCISE 2
Acme Corp. applies overhead to production using a rate of \$75 per machine hour (\$35 variable,
\$40 fixed). Acme produced 15,000 units and incurred overhead of \$3,710,000 (of which \$1,495,000
was variable overhead) while using 43,500 machine hours. The overhead standards assumed
each product would use 3 machine hours. The practical capacity of 18,000 units was used as the
denominator activity.

Required:
Calculate the overhead variances using a four-variance analysis.
Standard Costing: A Functional-Based Control Approach 203

EXERCISE 3
XYZ Company produces a compound by mixing 3 gallons of AB-5 (costing \$2.25 per gallon) and
4 gallons of CR-3 (costing \$7.50 per gallon). The output is 5 gallons of the compound. During
August, 21,000 gallons of AB-5, costing \$46,500, were purchased and used; 26,000 gallons of
CR-3, costing \$198,000, were purchased and used. A total of 37,000 gallons of output were ob-
tained.
Required:
1. Calculate the direct materials price and usage variances.

## 2. Calculate the direct materials mix and yield variances.

204 Chapter 9

EXERCISE 4
Scooter Company has the following standard cost sheet using an expected capacity of 120,000
units:
Direct materials ..................... 25 pounds @ \$ 1.20 \$ 30.00
Direct labor ........................... 2 hours @ 12.50 25.00
Variable............................. 3 machine hours @ 8.00 24.00
Fixed ................................. 3 machine hours @ 12.00 36.00
Total...................................... \$115.00

During the year, 125,000 units were produced. Actual costs included the following:
Direct materials ..................... 3,200,000 pounds purchased for \$3,725,000.
3,110,000 pounds were used in production.
Direct labor ........................... 260,000 hours worked; payroll totaled \$3,320,000.
Fixed: \$4,275,000
Machine hours. ..................... 378,000 actually used

Required:
Calculate as many variances as possible.
Standard Costing: A Functional-Based Control Approach 205

## “CAN YOU?” CHECKLIST

 Can you identify potential sources of quantitative standards and the personnel responsible for
establishing price standards?
 Can you explain the difference between ideal standards and currently attainable standards?
 Can you explain the difference between an actual costing system, a normal costing system,
and a standard costing system?
 Can you compute the price (rate) and usage (efficiency) variances for direct materials (direct
labor)? Can you prepare the journal entries for these variances?
 Can you prepare overhead variances using the two-variance, three-variance, and four-
variance methods?
 Can you compute mix and yield variances for both direct materials and direct labor?

## KEY TERMS TEST

1. fixed overhead spending variance 13.total budget variance
2. price variance, rate variance 14.usage variance
3. direct materials usage variance 15.yield variance
4. unfavorable variance 16.mix variance
5. price standard, quantity standard 17.currently attainable standard
6. direct labor rate variance 18.favorable variance
7. fixed overhead volume variance 19.standard bill of materials
8. variable overhead efficiency variance, variable 20.direct materials price variance
overhead spending variance 21.standard hours allowed, standard quantity of
9. standard cost per unit, unit standard cost materials allowed
10. standard cost sheet 22. direct labor efficiency variance
11. control limit 23. relative value unit (RVU)
12. ideal standard

MULTIPLE-CHOICE QUIZ
1. d 7. c
2. d 8. e
3. a 9. b \$97,600 – (25,000 × \$4) = \$97,600 – \$100,000 = –\$2,400 Favorable
4. a 10. e [22,000 – (2,250 × 10)] × \$4 = (22,000 – 22,500) × \$4 = –500 × \$4 = –\$2,000 Favorable
5. d 11. b \$73,675 – (4,760 × \$15) = \$73,675 – \$71,400 = \$2,275 Unfavorable
6. d 12. e [4,760 – (2,250 × 2)] × \$15 = (4,760 – 4,500) × \$15 = 260 × \$15 = \$3,900 Unfavorable
206 Chapter 9

PRACTICE TEST
EXERCISE 1 (ABC Company)
MPV: \$1,750,000 – (160,000 × \$11) = \$1,750,000 – \$1,760,000 = –\$10,000 Favorable
MUV: (160,000 × \$11) – (25,000 × 6 × \$11) = \$1,760,000 – \$1,650,000 = \$110,000 Unfavorable
LRV: \$743,900 – (49,000 × \$15) = \$743,900 – \$735,000 = \$8,900 Unfavorable
LEV: (49,000 × \$15) – (25,000 × 2 × \$15) = \$735,000 – \$750,000 = –\$15,000 Favorable

## EXERCISE 2 (Acme Corp.)

VOH spending: Actual VOH – Budgeted VOH
\$1,495,000 – (43,500 × \$35) = \$1,495,000 – \$1,522,500 = –\$27,500 Favorable
VOH efficiency: Budgeted VOH – Applied VOH
(43,500 × \$35) – (15,000 × 3 × \$35) = \$1,522,500 – \$1,575,000 = –\$52,500 Favorable
FOH spending: Actual FOH – Budgeted FOH
\$2,215,000 – (18,000 × 3 × \$40) = \$2,215,000 – \$2,160,000 = \$55,000 Unfavorable
FOH volume: Budgeted FOH – Applied FOH
\$2,160,000 – (15,000 × 3 × \$40) = \$2,160,000 – \$1,800,000 = \$360,000 Unfavorable

## EXERCISE 3 (XYZ Company)

1. MPV: AB-5: \$46,500 – (21,000 × \$2.25) = \$46,500 – \$47,250 = –\$750 Favorable
CR-3: \$198,000 – (26,000 × \$7.50) = \$198,000 – \$195,000 = \$3,000 Unfavorable
MUV: Total standard input = Actual yield / Yield ratio = 37,000 / [5/(3 + 4)] = 37,000 / .714 = 51,800*
SQ(AB-5) = 51,800 × 3/7 = 22,200
SQ(CR-3) = 51,800 × 4/7 = 29,600
*rounded
AQ SQ AQ – SQ (AQ – SQ)SP
21,000 22,200 –1,200 –\$ 2,700
26,000 29,600 –3,600 – 27,000
–\$29,700 Favorable
2. Mix variance
AQ SQ AQ – SQ SP (AQ – SQ)SP
21,000 20,143 a 857 \$2.25 \$1,928.25
26,000 26,857 b –857 \$7.50 – 6,427.50
–\$4,499.25 Favorable
a
(21,000 + 26,000) × 3/(3 + 4) = 20,143
b
(21,000 + 26,000) × 4/(3 + 4) = 26,857

## Yield variance = (Standard yield – Actual yield) × SPy

= (33,571 – 37,000) × \$7.35 = –3,429 × \$7.35 = –\$25,203.15 Favorable
where Standard yield = (21,000 + 26,000) × 5/7 = 33,571
SPy = [(3 × \$2.25) + (4 × \$7.50)] / 5 gallons = \$36.75 / 5 = \$7.35

## EXERCISE 4 (Scooter Company)

MPV: \$3,725,000 – (3,200,000 × \$1.20) = \$3,725,000 – \$3,840,000 = –\$115,000 Favorable
MUV: [3,110,000 – (125,000 × 25)] × \$1.20 = (3,110,000 – 3,125,000) × \$1.20 = –15,000 × \$1.20 = –\$18,000 Favorable
LRV: \$3,320,000 – (260,000 × \$12.50) = \$3,320,000 – \$3,250,000 = \$70,000 Unfavorable
LEV: [260,000 – (125,000 × 2)] × \$12.50 = (260,000 – 250,000) × \$12.50 = 10,000 × \$12.50 = \$125,000 Unfavorable
VOSV: \$3,025,000 – (378,000 × \$8) = \$3,025,000 – \$3,024,000 = \$1,000 Unfavorable
VOEV: [378,000 – (125,000 × 3)] × \$8 = (378,000 – 375,000) × \$8 = 3,000 × \$8 = \$24,000 Unfavorable
FOSV: \$4,275,000 – (120,000 × \$36) = \$4,275,000 – \$4,320,000 = –\$45,000 Favorable
FOVV: \$4,320,000 – (125,000 × \$36) = \$4,320,000 – \$4,500,000 = –\$180,000 Favorable