CHAPTER 9
STANDARD COSTING:
A MANAGERIAL CONTROL TOOL
QUESTIONS FOR WRITING AND DISCUSSION
1. Standard costs are essentially budgeted
amounts on a per-unit basis. Unit standards
serve as inputs in building budgets.
2. Unit standards are used to build flexible
budgets. Unit standards for variable costs
are the variable cost component of a flexible
budgeting formula.
3. The quantity decision is determining how
much input should be used per unit of out-
put. The pricing decision determines how
much should be paid for the quantity of input
used.
4. Historical experience is often a poor choice
for establishing standards because the his-
torical amounts may include more inefficien-
cy than is desired.
5. Engineering studies can serve as an impor-
tant input to standard setting. Many feel that
this approach by itself may produce stan-
dards that are too rigorous.
6. Ideal standards are perfection standards,
representing the best possible outcomes.
Currently attainable standards are standards
that are challenging but allow some waste.
Currently attainable standards are often
chosen because many feel they tend to mo-
tivate rather than frustrate.
7. Standard costing systems improve planning
and control and facilitate product costing.
8. By identifying standards and assessing dev-
iations from the standards, managers can
locate areas where change or corrective be-
havior is needed.
9. Actual costing assigns actual manufacturing
costs to products. Normal costing assigns
actual prime costs and estimated overhead
costs to products. Standard costing assigns
estimated manufacturing costs to products.
10. A standard cost sheet presents the standard
amount of inputs and the price for each input
and uses this information to calculate the
unit standard cost.
275
11. Managers generally tend to have more con-
trol over the quantity of an input used rather
than the price paid per unit of input.
12. A standard cost variance should be investi-
gated if the variance is material and if the
benefit of investigating and correcting the
deviation is greater than the cost.
13. Control limits indicate how large a variance
must be before it is judged to be material
and the process is out of control. Control
limits are usually set by judgment although
statistical approaches are occasionally used.
14. The materials price variance is often com-
puted at the point of purchase rather than
issuance because it provides control infor-
mation sooner. When this is done, the va-
riance may be called the materials purchase
price variance, and it is the responsibility of
the purchasing manager rather than the
production manager.
15. Disagree. A materials usage variance can
be caused by factors beyond the control of
the production manager, e.g., purchase of a
lower-quality material than normal.
16. Disagree. Using higher-priced workers to
perform lower-skilled tasks is an example of
an event that will create a rate variance that
is controllable.
17. Some possible causes of an unfavorable
labor efficiency variance are inefficient labor,
machine downtime, and poor quality mate-
rials.
18. Part of a variable overhead spending va-
riance can be caused by inefficient use of
overhead resources.
19. Agree. This variance, assuming that variable
overhead costs increase as labor usage in-
creases, is caused by the efficiency or ineffi-
ciency of labor usage. Also labor may not be
a good driver for variable overhead.
20. Fixed overhead costs are either committed
or discretionary. The committed costs will
not differ by their very nature. Discretionary
costs can vary, but the level the company
wants to spend on these items is decided at
the beginning and usually will be met unless
there is a conscious decision to change the
22.
predetermined levels.
21. The volume variance is caused by the actual
volume differing from the expected volume
used to compute the predetermined stan-
dard fixed overhead rate. If the actual vo-
276
lume is different from the expected, then the
company has either lost or earned a contri-
bution margin. The volume variance signals
this outcome, and if the variance is large,
then the loss or gain is large since the vo-
lume variance understates the effect.
The spending variance is more important.
This variance is computed by comparing ac-
tual expenditures with budgeted expendi-
tures. The volume variance simply tells
whether the actual volume is different from
the expected volume.
 EXERCISES

9–1

1. d 4. c
2. e 5. e
3. d 6. a

9–2

1. a. The operating personnel of each cost center should be involved in setting

standards. They are the primary source for quantity information. The mate-
rials manager and purchasing manager are a source of information for ma-
terial prices, and personnel are knowledgeable on wage information. The
Accounting Department should be involved in overhead standards and
should provide information about past prices and usage. Finally, if infor-
mation about absolute efficiency is desired, industrial engineers can pro-
vide important input.
b. Standards should be attainable; they should include an allowance for
waste, breakdowns, etc. Market prices for materials as well as labor (un-
ions) should be a consideration for setting standards. Labor prices should
include fringe benefits, and material prices should include freight, taxes,
etc.

2. In principle, before formal responsibility is assigned, the causes of the va-

riances must be known. To be responsible, a manager must have the ability to
control or influence the variance. The following assignments of responsibility
are general in nature and have exceptions:
MPV: Purchasing manager
MUV: Production manager
LRV: Production manager
LEV: Production manager
OH variances: Departmental managers

277
9–3

1. SH = 1.5 × 1,700 = 2,550 hours

2. SQ = 4 × 1,700 = 6,800 components

9–4

1. SQ direct materials per unit = 340,000/40,000 = 8.5 oz per bunny

2. SH direct labor hours per unit = 10,000/40,000 = 0.25 hrs. per bunny

3. Standard Cost for Dark Chocolate Bunny:

Standard Standard Standard
Price Usage Cost
Direct materials $0.30 8.50 oz. $2.55
Direct labor 9.00 0.25 hr. 2.25
Total standard unit prime cost $4.80

9–5

1. SQ = 8.5 × 47,000 = 399,500 oz.

2. SH = 0.25 × 47,000 = 11,750 hours

3. Total standard prime cost = ($0.30 × 399,500) + ($9 × 11,750) = $225,600

9–6

1. Cases needing investigation:

Week 1: Exceeds the 2,100 rule and the 5% rule.
Week 4: Exceeds the $2,100 rule and the 5% rule.

2. The installation and repair manager. If the new workers are now properly
trained, no corrective action is required. If they are not, further training will be
required to return to the direct labor hours normally used.

278
9–7

1. Cases needing investigation:

Week 2: Exceeds the 10% rule.
Week 4: Exceeds the $8,000 rule and the 10% rule.
Week 5: Exceeds the 10% rule.

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

3. Production engineering is responsible. If the relationship is expected to pers-

ist, then the new labor method should be adopted, and standards for mate-
rials and labor need to be revised.

9–8

1. MPV = (AP – SP)AQ

= ($0.047 – $0.046)6,420,000 = $6,420 U
MUV = (AQ – SQ)SP
= (6,420,000 – 6,656,000*)$0.046 = $10,856 F

* SQ = 52,000 × 128 = 6,656,000

2. LRV = (AR – SR)AH

= ($12.50 – $12.00)2,000 = $1,000 U
LEV = (AH – SH)SR
= (2,000 – 1,976*)$12.00 = $288 U

* SH = 52,000 × 0.038 = 1,976

279
9–9

1. Variable overhead analysis:

Actual VOH Budgeted VOH Applied VOH
$160,000 $3.00 × 52,000 $3.00 × 54,750*
$4,000 U $8,250 F
Spending Efficiency

* SH for direct labor = 73,000 × 0.75 = 54,750

2. Fixed overhead analysis:

Actual FOH Budgeted FOH Applied FOH
$710,000 $14 × 50,000 $14 × 54,750
$10,000 U $66,500 U
Spending Volume

280
9–10

1. Materials: $35 × 34,000 = $1,190,000

Labor: $21 × 34,000 = $714,000

2. Actual Cost* Budgeted Cost Variance

Materials $1,183,270 $1,190,000 $ 6,730 F
Labor 687,150 714,000 26,850 F
*$173,500 × $6.82; 50,900 × $13.50

3. MPV = (AP – SP)AQ

= ($6.82 – $7.00)173,500 = $31,230 F
MUV = (AQ – SQ)SP
= (173,500 – 170,000)$7 = $24,500 U

AP × AQ SP × AQ SP × SQ
$6.82 × 173,500 $7 × 173,500 $7 × 170,000
$31,230 F $24,500 U
Price Usage

4. LRV = (AR – SR)AH

= ($13.50 – $14.00)50,900 = $25,450 F
LEV = (AH – SH)SR
= (50,900 – 51,000)$14 = $1,400 F

AR × AH SR × AH SR × SH
$13.50 × 50,900 $14 × 50,900 $14 × 51,000
$25,450 F $1,400 F
Rate Efficiency

281
9–11

1. MPV = (AP – SP)AQ

= ($8.05 – $7.95)222,500 = $22,250 U
MUV = (AQ – SQ)SP
= [220,400 – (20,100 × 11)]$7.95 = $5,565 F
(A three-pronged variance diagram is not shown because MPV is for materials
purchased and not materials used.)

2. LRV = (AR – SR)AH

= ($9.50 – $9.40)79,900 = $7,990 U
Note: AR = $759,050/79,900 = $9.50
LEV = (AH – SH)SR
= [79,900 – (20,100 × 4)]$9.40 = $4,700 F

AR × AH SR × AH SR × SH
$9.50 × 79,900 $9.40 × 79,900 $9.40 × 80,400
$7,990 U $4,700 F
Rate Efficiency

3. Materials Inventorya .................................. 1,768,875

MPV ............................................................ 22,250
Accounts Payableb .............................. 1,791,125
Work in Processc ....................................... 1,757,745
MUV ....................................................... 5,565
Materials Inventoryd ............................ 1,752,180
Work in Processe ....................................... 755,760
LRV ............................................................. 7,990
LEV ........................................................ 4,700
Accrued Payrollf .................................. 759,050
a
$7.95 × 222,500 =1,768,875
b
$8.05 × 222,500 =1,791,125
c
$7.95 × 221,100 =1,757,745
d
$7.95 × 222,500 = 1,768,875
e
$9.40 × 80,400 = 755,760
f
$9.50 × 79,900 = 759,050

282
9–12

1. Fixed overhead rate = $0.55/(1/2 hr. per unit) = $1.10 per DLH
SH = 786,000 × 0.5 = 393,000
Applied FOH = $1.10 × 393,000 = $432,300

2. Fixed overhead analysis:

Actual FOH Budgeted FOH Applied FOH
$430,300 $1.10 × 400,000* $1.10 × 393,000
$9,700 F $7,700 U
Spending Volume

*400,000 expected hours = 0.5 hour × 800,000 units)

3. Variable OH rate = ($1,120,000 – $440,000)/400,000

= $1.70 per DLH

4. Variable overhead analysis:

Actual VOH Budgeted VOH Applied VOH
$695,000 $1.70 × 390,000 $1.70 × 393,000
$32,000 U $5,100 F
Spending Efficiency

283
9–13

1. Standard fixed overhead rate = $864,000/(120,000 × 3)

= $2.40 per DLH
Standard variable overhead rate = $1,440,000/360,000
= $4.00 per DLH

2. Fixed: 120,600 × 3 × $2.40 = $868,320

Variable: 120,600 × 3 × $4.00 = $1,447,200
Total FOH variance = $940,320 – $868,320
= $72,000 U
Total VOH variance = $1,447,200 – $1,443,500
= $3,700 F

3. Fixed overhead analysis:

Actual FOH Budgeted FOH Applied FOH
$940,320 $864,000 $868,320
$76,320 U $4,320 F
Spending Volume

The spending variance is the difference between planned and actual costs.
Each item’s variance should be analyzed to see if these costs can be reduced.
The volume variance is the incorrect prediction of volume, or alternatively, it
is a signal of the loss or gain that occurred because of producing at a level
different from the expected level.

4. Variable overhead analysis:

Actual VOH Budgeted VOH Applied VOH

$1,443,500 $4 × 361,800 $1,447,200
$3,700 F $0
Spending Efficiency

The variable overhead spending variance is the difference between the actual
variable overhead costs and the budgeted costs for the actual hours used.
The variable overhead efficiency variance is the savings or extra cost attri-
butable to the efficiency of labor usage.

284
9–14

1. MPV = (AP – SP)AQ

= ($6.60 – $6.40)1,684,700
= $336,940 U
MUV = (AQ – SQ)SP
= (1,684,000 – 1,680,000)$6.40
= $25,600 U
Note: There is no three-pronged analysis for materials because materials pur-
chased is different from the materials used. (MPV uses materials purchased
and MUV uses materials used.)

2. LRV = (AR – SR)AH

= ($18.10 – $18.00)515,000
= $51,500 U
LEV = (AH – SH)SR
= [515,000 – (1.8 × 280,000 units)]$18.00
= $198,000 U

AR × AH SR × AH SR × SH
$18.10 × 515,000 $18 × 515,000 $18 × 504,000
$51,500 U $198,000 U
Rate Efficiency

3. Fixed overhead analysis:

Actual FOH Budgeted FOH Applied FOH
$4,140,200 $8 × 518,400 $8 × 504,000
$7,000 F $115,200 U
Spending Volume

Note: Practical volume in hours = 1.8 × 288,000 = 518,400 hours

4. Variable overhead analysis:

Actual VOH Budgeted VOH Applied VOH

$872,000 $1.50 × 515,000 $1.50 × 504,000
$99,500 U $16,500 U
Spending Efficiency

285
9–15

1. Materials Inventory ................................... 10,782,080

MPV ............................................................ 336,940
Accounts Payable ................................ 11,119,020

2. Work in Process ........................................ 10,752,000

MUV ............................................................ 25,600
Materials Inventory .............................. 10,777,600

3. Work in Process ........................................ 9,072,000

LRV ............................................................. 51,500
LEV ............................................................. 198,000
Accrued Payroll ................................... 9,321,500

4. Work in Process ........................................ 4,788,000

Fixed Overhead Control ...................... 4,032,000
Variable Overhead Control ................. 756,000

5. Materials and labor:

Cost of Goods Sold ................................... 612,040
MPV ....................................................... 336,940
MUV ....................................................... 25,600
LRV........................................................ 51,500
LEV ........................................................ 198,000
Overhead disposition:
Cost of Goods Sold ................................... 108,200
Fixed Overhead Control ...................... 108,200
Cost of Goods Sold ................................... 116,000
Variable Overhead Control ................. 116,000

286
9–16

1. Tom purchased the large quantity to obtain a lower price so that the price
standard could be met. In all likelihood, given the reaction of Jackie Iverson,
encouraging the use of quantity discounts was not an objective of setting
price standards. Usually, material price standards are to encourage the pur-
chasing agent to search for sources that will supply the quantity and quality
of material desired at the lowest price.

2. It sounds like the price standard may be out of date. Revising the price stan-
dard and implementing a policy concerning quantity purchases would likely
prevent this behavior from reoccurring.

3. Tom apparently acted in his own self-interest when making the purchase. He
surely must have known that the quantity approach was not the objective.
Yet, the reward structure suggests that there is considerable emphasis
placed on meeting standards. His behavior, in part, was induced by the re-
ward system of the company. Probably, he should be retained with some ad-
ditional training concerning the goals of the company and a change in em-
phasis and policy to help encourage the desired behavior.

9–17

Materials:
AP × AQ SP × AQ SP × SQ
$38,295 $2.00 × 20,700 $2.00 × 20,650
$3,105 F $100 U
Price Usage

Labor:
AR × AH SR × AH SR × SH
$57,226 $9 × 6,200 = $55,800 $9 × 6,195 = $55,755
$1,426 U $45 U
Rate Efficiency

287
9–18

1. Materials Inventory ................................... 41,400

MPV ....................................................... 3,105
Accounts Payable ................................ 38,295

2. Work in Process ........................................ 41,300

MUV ............................................................ 100
Materials Inventory .............................. 41,400

3. Work in Process ........................................ 55,755

LRV........................................................ 1,426
LEV ........................................................ 45
Accrued Payroll ................................... 57,226

4. Cost of Goods Sold ................................... 100

MUV ....................................................... 100
MPV ............................................................ 3,105
LRV ............................................................. 1,426
LEV ............................................................. 45
Cost of Goods Sold ............................. 4,576

288
9–19

1. VOH efficiency variance = (AH – SH)SVOR

$8,000 = (1.2SH – SH)$2
$8,000 = $0.4SH
SH = 20,000
AH = 1.2SH = 24,000

2. LEV = (AH – SH)SR

$20,000 = (24,000 – 20,000)SR
$20,000 = 4,000SR
SR = $5
LRV= (AR – SR)AH
$6,000= (AR – $5)24,000
$0.25= AR – $5
AR= $5.25

3. SH = 4 × Units produced
20,000 = 4 × Units produced
Units produced = 5,000

289
 PROBLEMS

9–20

1. Materials:
AP × AQ SP × AQ SP × SQ
$1.72 × 38,500 $1.70 × 38,500 $1.70 × 40,000
$770 U $2,550 F
Price Usage

The new process saves 0.25 × 4,000 × $1.70 = $1,700. Thus, the net savings
attributable to the higher-quality material are (2,550 – $1,700) – $770 = $80.
Keep the higher-quality material.

2. Labor for new process:

AR × AH SR × AH SR × SH
$26,500 $10 × 2,500 $10 × 2,400
$1,500 U $1,000 U
Rate Efficiency

The new process gains $80 in materials (see Requirement 1) but loses $2,500
from the labor effect, giving a net loss of $2,420. If this pattern is expected to
persist, then the new process should be abandoned.

3. Labor for new process, one week later:

AR × AH SR × AH SR × SH
$22,400 $10 × 2,200 $10 × 2,400
$400 U $2,000 F
Rate Efficiency

If this is the pattern, then the new process should be continued. It will save
$87,360 per year ($1,680 × 52 weeks). The weekly savings of $1,680 is the ma-
terials savings of $80 plus labor savings of $1,600.

290
9–21

1. e 9. m
2. h 10. l
3. k 11. j
4. n 12. c
5. d 13. a
6. g 14. i
7. o 15. f
8. b

9–22

1. Material quantity standards:

1.25 feet per cutting board
× 6
7.50 feet for five good cutting boards

Unit standard for lumber = 7.50/5 = 1.50 feet

Unit standard for foot pads = 4.0

Material price standards:

Lumber: $3.00 per foot
Pads: $0.05 per pad

Labor quantity standards:

Cutting: 0.2 hrs. × 6/5 = 0.24 hours per good unit
Attachment: 0.25 hours per good unit
Unit labor standard 0.49 hours per good unit

Labor rate standard: $8.00 per hour

Standard prime cost per unit:

Lumber (1.50 ft. @ $3.00) $4.50
Pads (4 @ $0.05) 0.20
Labor (0.49 hr. @ $8.00) 3.92
Unit cost $8.62

291
9–22 Concluded

2. Standards allow managers to compare planned and actual performance. The

difference can be broken down into price and efficiency variances to identify
the cause of a variance. With this feedback, managers are able to improve
productivity as they attempt to produce without cost overruns.

3. a. The purchasing manager identifies suppliers and their respective prices

and quality of materials.
b. The industrial engineer often conducts time and motion studies to deter-
mine the standard direct labor time for a unit of product. They also can de-
termine how much material is needed for the product.
c. The cost accountant has historical information as well as current informa-
tion from the purchasing agent, industrial engineers, and operating per-
sonnel. He or she can compile this information to obtain an achievable
standard.

4. Lumber:
MPV = (AP – SP)AQ
= ($3.10 – $3.00)16,000 = $1,600 U
MUV = (AQ – SQ)SP
= (16,000 – 15,000)$3 = $3,000 U

Rubber pads:
MPV = (AP – SP)AQ
= ($0.048 – $0.05)51,000 = $102 F
MUV = (AQ – SQ)SP
= (51,000 – 40,000)$0.05 = $550 U

Labor:
LRV = (AR – SR)AH
= ($8.05 – $8.00)5,550 = $277.50 U
LEV = (AH – SH)SR
= (5,550 – 4,900)$8 = $5,200 U

292
9–23

1. The cumulative average time per unit is an average. It includes the 2.5 hours
per unit when 40 units are produced as well as the 1.024 hours per unit when
640 units are produced. As more units are produced, the cumulative average
time per unit will decrease.

2. The standard should be 0.768 hour per unit as this is the average time taken
per unit once efficiency is achieved:
[(1.024 × 640) – (1.28 × 320)]/(640 – 320)

3. Std. Price Std. Usage Std. Cost

Direct materials $ 4 25.000 $100.00
Direct labor 15 0.768 11.52
Variable overhead 8 0.768 6.14
Fixed overhead 12 0.768 9.22*
Standard cost per unit $126.88*
*Rounded

4. There would be unfavorable efficiency variances for the first 320 units be-
cause the standard hours are much lower than the actual hours at this level.
Actual hours would be approximately 409.60 (320 × 1.28), and standard hours
would be 245.76 (320 × 0.768).

9–24

1. MPV = (AP – SP)AQ

= ($5.80 – $6.00)465,000 = $93,000 F
MUV = (AQ – SQ)SP
= (491,400* – 490,000)$6 = $8,400 U

* AQ = 26,400 + 465,000 − 0 = 491,400

The materials usage variance is viewed as the most controllable because
prices for materials are often market-driven and thus not controllable. Re-
sponsibility for the variance in this case likely would be assigned to purchas-
ing. The lower-quality materials are probably the cause of the extra usage.

293
9–24 Continued

2. LRV = (AR – SR)AH

= ($13 – $12)150,000 = $150,000 U
LEV = (AH – SH)SR
= (150,000 – 140,000)$12 = $120,000 U

AR × AH SR × AH SR × SH
$13 × 150,000 $12 × 150,000 $12 × 140,000
$150,000 U $120,000 U
Rate Efficiency

Production is usually responsible for labor efficiency. In this case, efficiency

may have been affected by the lower-quality materials, thus purchasing may
have significant responsibility for the outcome. Other possible causes are
less demand than expected, poor supervision, lack of proper training, and
lack of experience.

3. Variable overhead variances:

Actual VOH Budgeted VOH Applied VOH

$1,470,000 $10 × 150,000 $10 × 140,000
$30,000 F $100,000 U
Spending Efficiency

Formula approach:
VOH spending variance = Actual VOH – (SVOR × AH)
= $1,470,000 – ($10 × 150,000)
= $30,000 F
VOH efficiency variance = (AH – SH)SVOR
= (150,000 – 140,000)$10
= $100,000 U
10,000 × $10 = $100,000

294
9–24 Continued

4. Fixed overhead variances:

Actual FOH Budgeted FOH Applied FOH
$913,000 $6 × 2 × 75,000 $6 × 2 × 70,000
$13,000 U $60,000 U
Spending Volume

The volume variance is a measure of unused capacity. This cost is reduced

as production increases. Thus, selling more goods is the key to reducing this
variance (at least in the short run).

5. Four variances are potentially affected by material quality:

MPV $ 93,000 F
MUV 8,400 U
LEV 150,000 U
VOH efficiency 100,000 U
$ 165,400 U
If the variance outcomes are largely attributable to the lower-quality materials,
then the company should discontinue using this material.

6. (Appendix required)
Materials Inventorya .................................. 2,790,000
MPV ....................................................... 93,000
Accounts Payableb .............................. 2,697,000
Work in Processc ....................................... 2,940,000
MUV ............................................................ 8,400
Materials Inventoryd ............................ 2,948,400

a
465,000 × $6 = $2,790,000
b
465,000 × $5.80 = $2,697,000
c
490,000 × $6 = $2,940,000
d
(465,000 + 26,400) × $6 = $2,948,400

295
9–24 Concluded

Work in Processe ....................................... 1,680,000

LRV ............................................................. 150,000
LEV ............................................................. 120,000
Accrued Payroll ................................... 1,950,000
Cost of Goods Sold ................................... 278,400
MUV ....................................................... 8,400
LRV........................................................ 150,000
LEV ........................................................ 120,000
MPV ............................................................ 93,000
Cost of Goods Sold ............................. 93,000
VOH Control ............................................... 1,470,000
Various Credits .................................... 1,470,000
FOH Control ............................................... 913,000
Various Credits .................................... 913,000
Work in Processf ....................................... 1,400,000
VOH Control ......................................... 1,400,000
Work in Processg....................................... 840,000
FOH Control ......................................... 840,000
Cost of Goods Sold ................................... 20,000
VOH Control ......................................... 20,000
Cost of Goods Sold ................................... 73,000
FOH Control ......................................... 73,000

e
2 × $12 × 70,000 = $1,680,000
f
2 × $10 × 70,000 = $1,400,000
g
2 × $6 × 70,000 = $840,000

296
9–25

1. Fixed overhead rate = $2,400,000/600,000 hours*

= $4 per hour
*Standard hours allowed = 2 × 300,000 units

2. Little Rock plant:

Actual FOH Budgeted FOH Applied FOH
$2,500,000 $2,400,000 $4 × 480,000
$100,000 U $480,000 U
Spending Volume

Athens plant:
Actual FOH Budgeted FOH Applied FOH
$2,500,000 $2,400,000 $4 × 600,000
$100,000 U $0
Spending Volume

The spending variance is almost certainly caused by supervisor’s salaries

(for example, an unexpected midyear increase due to union pressures). It is
unlikely that the lease payments or depreciation would be greater than bud-
geted. Changing the terms on a 10-year lease in the first year would be un-
usual (unless there is some sort of special clause permitting increased pay-
ments for something like unexpected inflation). Also, the depreciation should
be on target (unless more equipment was purchased or the depreciation
budget was set before the price of the equipment was known with certainty).
The volume variance is easy to explain. The Little Rock plant produced less
than expected, and so there was an unused capacity cost: $4 × 120,000 hours
= $480,000. The Athens plant had no unused capacity.

297
9–25 Concluded

3. It appears that the 120,000 hours of unused capacity (60,000 subassemblies)

is permanent for the Little Rock plant. This plant has 10 supervisors, each
making $50,000. Supervision is a step-cost driven by the number of produc-
tion lines. Unused capacity of 120,000 hours means that two lines can be shut
down, saving the salaries of two supervisors ($100,000 at the original salary
level). The equipment for the two lines is owned. If it could be sold, then the
money could be reinvested, and the depreciation charge would be reduced by
20 percent (two lines shut down out of 10). There is no way to directly reduce
the lease payments for the building. Perhaps the company could use the
space to establish production lines for a different product. Or perhaps the
space could be subleased. Another possibility is to keep the supervisors and
equipment and try to fill the unused capacity with special orders⎯orders for
the subassembly below the regular selling price from a market not normally
served. If the selling price is sufficient to cover the variable costs and cover
at least the salaries and depreciation for the two lines, then the special order
option may be a possibility. This option, however, is fraught with risks, e.g.,
the risk of finding enough orders to justify keeping the supervisors and
equipment, the risk of alienating regular customers who pay full price, and
the risk of violating price discrimination laws. Note: You may wish to point
out the value of the resource usage model in answering this question (see
Chapter 3).

4. For each plant, the standard fixed overhead rate is $4 per direct labor hour.
Since each subassembly should use two hours, the fixed overhead cost per
unit is $8, regardless of where they are produced. Should they differ? Some
may argue that the rate for the Little Rock plant needs to be recalculated. For
example, one possibility is to use expected actual capacity, instead of prac-
tical capacity. In this case, the Little Rock plant would have a fixed overhead
rate of $2,400,000/480,000 hours = $5 per hour and a cost per subassembly of
$10. The question is: Should the subassemblies be charged for the cost of the
unused capacity? ABC suggests a negative response. Products should be
charged for the resources they use, and the cost of unused capacity should
be reported as a separate item—to draw management’s attention to the need
to manage this unused capacity.

298
9–26

1. Normal Patient Day:

Standard Standard Standard
Price Usage Cost
Direct materials $10.00 8.00 lb. $ 80.00
Direct labor 16.00 2 hr. 32.00
Variable overhead 30.00 2 hr. 60.00
Fixed overhead 40.00 2 hr. 80.00
Unit cost $252.00

Cesarean Patient Day:

Standard Standard Standard
Price Usage Cost
Direct materials $10.00 20.00 lb. $200.00
Direct labor 16.00 4 hr. 64.00
Variable overhead 30.00 4 hr. 120.00
Fixed overhead 40.00 4 hr. 160.00
Unit cost $544.00

2. MPV = (AP – SP)AQ

= ($9.50 – $10.00)172,000 = $86,000 F
MUV = (AQ – SQ)SP
MUV (Normal) = [30,000 – (8 × 3,500)]$10 = $20,000 U
MUV (Cesarean) = [142,000 – (20 × 7,000)]$10 = $20,000 U

Materials ..................................................... 1,720,000

MPV ....................................................... 86,000
Accounts Payable ................................ 1,634,000
Work in Process ........................................ 1,680,000
MUV ............................................................ 40,000
Materials ............................................... 1,720,000
MPV ............................................................ 86,000
MUV ............................................................ 40,000
Cost of Services Sold .......................... 46,000

299
9–26 Continued

3. LRV = (AR – SR)AH

= ($15.90 – $16.00)36,500 = $3,650 F
LEV = (AH – SH)SR
LEV (Normal) = [7,200 – (2 × 3,500)]$16 = $3,200 U
LEV (Cesarean) = [29,300 – (4 × 7,000)]$16 = $20,800 U

Work in Process ........................................ 560,000*

LEV ............................................................. 24,000
LRV........................................................ 3,650
Accrued Payroll ................................... 580,350

*[(2 × 3,500) + (4 × 7,000)] × $16 = $560,000

Cost of Services Sold ............................... 20,350

LRV ............................................................. 3,650
LEV ........................................................ 24,000

4. Variable overhead variances:

Actual VOH Budgeted VOH Applied VOH
$1,215,000 $40 × 36,500 $40 × 35,000
$245,000 F $60,000 U
Spending Efficiency

Fixed overhead variances:

Actual FOH Budgeted FOH Applied FOH
$700,000 $720,000 $30 × 35,000
$20,000 F $330,000 F
Spending Volume

Note: SH = (2 × 3,500) + (4 × 7,000) = 35,000

300
9–26 Concluded

Work in Process ........................................ 1,400,000

Variable Overhead Control ................. 1,400,000
Work in Process ........................................ 1,050,000
Fixed Overhead Control ...................... 1,050,000
Variable Overhead Control ....................... 1,215,000
Various Credits .................................... 1,215,000
Fixed Overhead Control ........................... 700,000
Various Credits .................................... 700,000
Variable Overhead Control ....................... 185,000
Cost of Services Sold .......................... 185,000
Fixed Overhead Control ........................... 350,000
Cost of Goods Sold ............................. 350,000

5. Yes. Computations are shown below:

MUV = (172,000 – 28,000 – 140,000)$10 = $40,000 F
LEV = (36,500 – 35,000)$16 = $24,000 U

9–27

1. The budgeted overhead costs are broken down into fixed and variable costs
by the high-low method:
Standard VOH rate = Change in cost/Change in activity
= $288,000/24,000
= $12/hour
FOH rate = Total rate – VOH rate
= $18 – $12
= $6

301
9–27 Concluded

2. Budgeted fixed overhead = Y2 – VX2

= $1,080,000 – $12(60,000)
= $360,000
FOH spending variance = Actual FOH – Budgeted FOH
= $380,000 – $360,000 = $20,000 U

3. To find the VOH spending variance, we need to find the actual hours. To find
AH, we first need to find the standard hours, SH:
Fixed OH volume variance = Budgeted fixed overhead – (Fixed
overhead rate × SH)
$36,000 = $360,000 – ($6.00 × SH)
$324,000 = $6.00 × SH
SH = 54,000
Next, the actual hours need to be found:
VOH efficiency variance = (AH – SH)SVOR
–$24,000 = (AH – 54,000)$12
–2,000 = AH – 54,000
AH = 52,000
VOH spending variance = Actual VOH – (VOH rate × AH)
= $620,000 – ($12 × 52,000)
= $620,000 – $624,000
= $4,000 F

4. 54,000 hours/100,000 units = 0.54 hour per unit

5. LEV = (AH – SH)SR

= (52,000 – 54,000)$13 = $26,000 F

302
9–28

1. Liquid standard: 4.2 × 250,000 × $0.25 = $262,500

Upper control limit (UCL): $288,750 or $282,500; lesser = $282,500
Lower control limit (LCL): $236,250 or $242,500; greater = $242,500
Bottle standard = 250,000 × $0.05 = $12,500
UCL: $13,750
LCL: $11,250
Direct labor standard = 0.2 × 250,000 × $12.50 = $625,000
UCL: $687,500 or $645,000; lesser = $645,000
LCL: $562,500 or $605,000; greater = $605,000
Variable overhead budgeted = 0.2 × 250,000 × $4.70 = $235,000
UCL: $258,500 or $255,000; lesser = $255,000
LCL: $211,500 or $215,000; greater = $215,000
Fixed overhead budgeted = 0.2 × 250,000 × $1 = $50,000
UCL: $55,000 or $70,000; lesser = $55,000
LCL: $45,000 or $30,000; greater = $45,000

2. Total liquid variance = $310,500 – $262,500 = $48,000 U

MPV = ($0.27 – $0.25)1,150,000 = $23,000 U
MUV = (1,150,000 – 1,050,000)$0.25 = $25,000 U
The liquid variances would be investigated as the total variance exceeds
$20,000, as does each individual variance.
Total bottle variance = $12,000 – $12,500 = $500 F
MPV = ($0.048 – $0.05)250,000 = $500 F
MUV = (250,000 – 250,000)$0.05 = 0
The bottle variances would not be investigated as the total variance is within
the accepted limits.

303
9–28 Concluded

3. Total labor variance = $622,425 – $625,000 = $2,575 F

LRV = ($12.90 – $12.50)48,250 = $19,300 U
LEV = (48,250 – 50,000)$12.50 = $21,875 F
The total variance is within the limits. However, the labor efficiency variance
is greater than $20,000 and should be investigated.

4. Variable overhead variances:

Actual VOH Budgeted VOH Applied VOH
$239,000 $4.70 × 48,250 $4.70 × 50,000
$12,225 U $8,225 F
Spending Efficiency

Fixed overhead variances:

Actual FOH Budgeted FOH Applied FOH
$50,500 $50,000 $1 × 50,000
$500 U $0
Spending Volume

None of the overhead variances would be investigated as the total variances

are within the prescribed limits. Overhead variances are not as meaningful in
total. Individual overhead items should be analyzed for significant variances.

304
9–29

1. Performance Report
Actual Budgeted
Costs Costs* Variance
Direct materials $ 775,000 $ 750,000 $25,000 U
Direct labor 590,000 600,000 10,000 F
Variable overhead 310,000 300,000 10,000 U
Fixed overhead 180,000 165,000 15,000 U
Total $1,855,000 $1,815,000 $40,000 U
*Uses the variable unit standard costs for materials, labor and variable over-
head (e.g., DM = $15 × 50,000); fixed overhead = $3.00 × 55,000 (the FOH rate
is based on expected production).

2. a. Total materials variance = MPV + MUV

$25,000 U = $5,000 U + MUV
MUV = $20,000 U

b. LRV = (AR – SR)AH

SH = 63,000/1.05 = 60,000
SR × SH = $600,000
SR = $600,000/60,000 hours
SR = $10.00 per hour
LRV = $590,000 – ($10 × 63,000)
= $40,000 F

c. LEV = (AH – SH)SR

= (63,000 – 60,000)$10
= $30,000 U

305
9–29 Continued

d. FOH variances:
Spending variance = Actual FOH – Budgeted FOH
= $180,000 – $165,000
= $15,000 U
Volume variance = Budgeted FOH – (FOH rate × SH)
= $165,000 – ($2.50 × 60,000)
= $15,000 U
Note: FOH rate is calculated as follows:
Hours allowed = 60,000 hours/50,000 units
= 1.20 hours per unit
Standard FOH rate = $3.00 per unit/1.20 hours per unit
= $2.50 per hour

e. VOH variances:
Variable OH rate = $300,000/60,000 hours
= $5.00 per hour
Spending variance = Actual VOH – (SVOR × AH)
= $310,000 – ($5.00 × 63,000)
= $5,000 F
Efficiency variance = (AH – SH)SVOR
= (63,000 – 60,000)$5.00
= $15,000 U

306
9–29 Concluded

3.
Materials Work in Process
(a) 770,000 770,000 (b) (b) 750,000 1,800,000 (f)
(c) 600,000
(d) 300,000
(e) 150,000

Finished Goods
(f) 1,800,000 1,800,000 (g)

MPV MUV Accounts Payable

(a) 5,000 5,000 (h) (b) 20,000 20,000 (i) 775,000 (a)

Accrued Payroll LRV LEV

590,000 (c) (j) 40,000 40,000 (c) (c) 30,000 30,000 (k)

Variable Overhead Control Fixed Overhead Control

310,000 300,000 (d) 180,000 150,000 (e)
10,000 (l) 30,000 (m)

Cost of Goods Sold

(g) 1,800,000 40,000 (j)
(h) 5,000
(i) 20,000
(k) 30,000
(l) 10,000
(m) 30,000

307
9–30

1. April (UCL = Upper control limit, and LCL = Lower control limit)
Materials:
Price standard: $0.25 × 723,000 = $180,750
UCL: 0.08 × $180,750 = $14,460
LCL: ($14,460)
Quantity standard: 8 × 90,000 × $0.25 = $180,000
UCL: 0.08 × $180,000 = $14,400
LCL: ($14,400)
Labor:
Price standard: $7.50 × 36,000 = $270,000
UCL: 0.08 × $270,000 = $21,600
LCL: ($21,600)
Quantity standard: 0.4 × 90,000 × $7.50 = $270,000
UCL: 0.08 × $270,000 = $21,600
LCL: ($21,600)

May
Materials:
Price standard: $0.25 × 870,000 = $217,500
UCL: 0.08 × $217,500 = $17,400
LCL: ($17,400)
Quantity standard: 8 × 100,000 × $0.25 = $200,000
UCL: 0.08 × $200,000 = $16,000
LCL: ($16,000)
Labor:
Price standard: $7.50 × 44,000 = $330,000
UCL: 0.08 × $330,000 = $26,400
LCL: ($26,400)
Quantity standard: 0.4 × 100,000 × $7.50 = $300,000
UCL: 0.08 × $300,000 = $24,000
LCL: ($24,000)

308
9–30 Continued

June
Materials:
Price standard: $0.25 × 885,000 = $221,250
UCL: 0.08 × $221,250 = $17,700
LCL: ($17,700)
Quantity standard: 8 × 110,000 × $0.25 = $220,000
UCL: 0.08 × $220,000 = $17,600
LCL: ($17,600)
Labor:
Price standard: $7.50 × 46,000 = $345,000
UCL: 0.08 × $345,000 = $27,600
LCL: ($27,600)
Quantity standard: 0.4 × 110,000 × $7.50 = $330,000
UCL: 0.08 × $330,000 = $26,400
LCL: ($26,400)

2. April Limit Actual*

MPV = ($0.2614 – $0.25)723,000 = $8,242 U $ ± 14,460 4.6%
MUV = (723,000 – 720,000)$0.25 = $750 U ± 14,400 0.4%
LRV = ($7.50 – $7.50)36,000 = 0 ± 21,600 0.0
LEV = (36,000 – 36,000)$7.50 = 0 ± 21,600 0.0
May
MPV = ($0.2506 – $0.25)870,000 = $522 U ± 17,400 0.3%
MUV = (870,000 – 800,000)$0.25 = $17,500 U ± 16,000** 8.8%
LRV = ($7.341 – $7.50)44,000 = $6,996 F ± 26,400 (2.3%)
LEV = (44,000 – 40,000)$7.50 = $30,000 U ± 24,000** 10.0%
June
MPV = ($0.2599 – $0.25)885,000 = $8,762 U ± 17,700 4.0%
MUV = (885,000 – 880,000)$0.25 = $1,250 U ± 17,600 0.6%
LRV = ($7.826 – $7.50)46,000 = $14,996 U ± 27,600 4.5%
LEV = (46,000 – 44,000)$7.50 = $15,000 U ± 26,400 4.5%
*The actual deviation divided by the total price or quantity
**Investigate May’s MUV and LEV

309
9–30 Continued

3. Control charts allow us to see when the variances are outside an acceptable
range. They may also show a pattern that may help in pinpointing when the
problem began.
Control charts: To simplify the presentation, the variances are expressed as a
percentage of the total quantity or price standard, and the Y-axis is used for
variances. These percentages were calculated in Requirement 2.
MPV:
%

10.0

8.0

x
x

0.0 x

–8.0
APRIL MAY JUNE

310
9–30 Continued

MUV:
%

10.0
x
8.0

0.0 x x

–8.0
APRIL MAY JUNE

311
9–30 Continued

LRV:
%

10.0

8.0

0.0
x
x

–8.0
APRIL MAY JUNE

312
9–30 Concluded

LEV:
%

10.0 x

8.0

0.0
x

–8.0
APRIL MAY JUNE

9–31

1. Hepler Company must put 60,000 units of lower-quality material into produc-
tion in order to produce 54,000 finished units:
Good units/(1 – Rejection rate) = Units required
54,000/0.9 = 60,000 units

2. In order to produce 60,000 units (54,000 good units and 6,000 rejects), Hepler
Company must utilize the following labor:
New team = 8 Assembler A, 1 Assembler B, 1 Machinist
New team will work at 80 percent of the efficiency of the old team.
Assembler A: 8 hours × (60,000/80) = 6,000 hours
Assembler B: 1 hour × (60,000/80) = 750 hours
Machinist: 1 hour × (60,000/80) = 750 hours

313
9–31 Concluded

3. Hepler Company should include an additional $18,480 in its operating budget

for the planned labor variance. This variance consists of $6,780 for the
change in materials and $11,700 for the labor change caused by the reduced
efficiency of the new team, calculated as follows:
Cost for new team to produce 80 units:
Assembler A (8 hrs. × $10) $ 80
Assembler B (1 hr. × $11) 11
Machinist (1 hr. × $15) 15
Labor cost $ 106
Units ÷ 80
Labor cost per unit $ 1.325
Labor change due to reduced efficiency:
New labor cost = January units × New labor cost
= 60,000 × $1.325
= $79,500
Old labor cost = January units × Standard cost
= 60,000 × ($113/100)
= $67,800
Labor change = $79,500 – $67,800
= $11,700
Increased labor due to materials change:
Labor change = (New materials – Standard materials) × Standard cost
= (60,000 – 54,000)($113/100)
= $6,780
Total planned labor variance = $11,700 + $6,780
= $18,480

314
9–32

1. Standard cost sheet:

Direct materials (0.6 lb. @ $5)* $3.00
Direct labor (0.20 hr. @ $8)** 1.60
Variable overhead (0.20 hr. @ $10)** 2.00
Fixed overhead (0.20 hr. @ $5.00)** 1.00
Unit cost $7.60
* (AP × AQ) – (AQ × SP) = $1,000
$51,000 – (10,000 × SP) = $1,000
10,000 × SP = $50,000
SP = $5.00
(AQ – SQ)SP = ($10,000)
(10,000 – SQ)$5.00 = ($10,000)
$50,000 – $5.00SQ = ($10,000)
$5.00SQ = $60,000
SQ = 12,000
SQ/unit = 12,000/20,000
= 0.6 lb. per unit
**Actual VOH – (Standard VOH rate × AH) = $2,000
$46,000 – (Standard VOH rate × 4,400) = $2,000
4,400(Standard VOH rate) = $44,000
Standard VOH rate = $10
(AH – SH)Standard VOH rate = $4,000
(4,400 – SH)$10 = $4,000
44,000 – $10(SH) = $4,000
$10(SH) = $40,000
SH = 4,000

315
9–32 Concluded

Standard hours per unit = 4,000/20,000 = 0.20 hours

(AH – SH)SR = $3,200
(4,400 – 4,000)SR = $3,200
400(SR) = $3,200
SR = $8.00
Actual FOH – (Standard FOH rate × SH) = $3,000
$23,000 – (Standard FOH rate × 4,000) = $3,000
4,000 × Standard FOH rate = $20,000
Standard FOH rate = $5.00

2. Budgeted FOH – (Standard FOH rate × SH) = $4,000

Budgeted FOH – ($5.00 × 4,000) = $4,000
Budgeted FOH – $20,000 = $4,000
Budgeted FOH = $24,000
FOH spending variance = Actual FOH – Budgeted FOH
= $23,000 – $24,000
= $1,000 F

3. LRV = (AR – SR)AH

= ($7.80 – $8.00)4,400
= $880 F

4. Standard FOH rate = Budgeted FOH/Expected activity

$5.00 = $24,000/Expected activity
Expected activity = $24,000/$5.00
= 4,800 hours

316
 MANAGERIAL DECISION CASES

9–33

1. The major advantages of using a standard costing system include:

• Budgeting: Standard costs can be the building blocks for budget prepara-
tion and allow the development of flexible budgeting.
• Performance evaluation: Comparison of actual costs to standard costs fa-
cilitates evaluation of the performance at the company, department, cost
center, or individual level. Standards also allow employees to more clearly
understand what is expected of them.
• Decision making: Having predetermined costs facilitates and simplifies
pricing decisions, make-or-buy decisions, etc.

2. The disadvantages that can result from using a standard costing system in-
clude the following:
• Cost standards that are too tight can have negative implications which may
cause demotivation.
• Standards may ignore qualitative characteristics which may jeopardize
product quality.
• Variance analysis at the operational level may limit the emphasis on conti-
nual improvement found in the new manufacturing environment.

3. A standard costing system must be supported by top management to be suc-

cessful. The parties who should participate in the standard-setting process
include all levels of the organization, e.g., purchasing, engineering, produc-
tion, and cost accounting.

4. Standard setting can be a participative process with those individuals most

familiar with the variables associated with standard setting available to pro-
vide the most accurate information. Participation provides benefits such as
helping establish the legitimacy of the standards, giving the participants a
greater feeling of being part of the operation, and encouraging participants to
internalize the standards as their own goals.

317
9–33 Concluded

Standards that are set for routine activities, which can be identifiable and
measurable, can be associated with specific cost factors of uniform products
in long production runs.
Standards promote cost control through the use of variance analysis and per-
formance reports.

5. There could be negative employee reaction as the employees did not partici-
pate in the standard-setting process.
There could be dissatisfaction if the standards contain cost elements that are
not controllable by the production groups who are then held responsible for
any unfavorable variances.
The outside firm may not fully understand the manufacturing process; this
could result in poor management decisions based on faulty information.

9–34

1. By using a standard cost system, Sabroso Chips can increase control of its
manufacturing inputs. By developing price and quantity standards for each
input, management can compute price and usage variances for each input.
Since a standard cost system provides more information, control is en-
hanced. For example, since managers have the most control over usage of
inputs, knowing the usage variances provides specific information about
where action is needed. Moreover, by breaking out price variances which are
not as controllable, performance evaluation is improved.

2. The engineering standards are ideal standards. The president’s concern is

probably reflecting doubt that the labor standards can be achieved. If pres-
sure is applied to workers to achieve perfection standards, the outcome is
likely to be unsatisfactory. Workers may become frustrated and lower their
performance as a consequence. Many firms elect to use currently attainable
standards in lieu of ideal standards. The standard suggested by the president
is a good starting point. If experience indicates that his standard is too loose,
then the standard can be adjusted later on.

318
9–34 Concluded

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

Direct materials
Potatoes (15.9375 lbs. @ $0.238)* $3.7931
Cooking oil (49.5 ounces @ $0.04) 1.9800
Bags (15 @ $0.11) 1.6500
Boxes (1 @ $0.52) 0.5200 $ 7.9431
Direct labor**
Potato inspection (0.006 hr. @ $15.20) $0.0912
Chip inspection (0.0225 hr. @ $10.30) 0.2318
Frying monitor (0.0118 hr. @ $14.00) 0.1652
Boxing (0.0311 hr. @ $11.00) 0.3421
Machine operators (0.0118 hr. @ $13.00) 0.1534 0.9837
Variable overhead ($0.9837 × 1.16) 1.1410
Fixed overhead ($0.9837 × 1.967)*** 1.9349
Cost per box $12.0027
Cost per bag ($12.0027/15) $ 0.8002
*Pounds per box = 15 × 4 × 4.25/16 = 15.9375
Price per pound = $0.245 less scrap value; scrap per box = 15 × (17.0
ounces – 16.3 ounces) = 10.5 ounces. Scrap value/ounce = $0.16/16 = $0.01
per ounce. Scrap savings per box is $0.01 × 10.5 = $0.105, and the savings
per pound of potato is $0.105/15.9375 = $0.007. Thus, the standard price per
pound of potato is $0.245 – $0.007 = $0.238.
**Number of boxes/year = 8,800,000/15 = 586,667
Hours/box:
Potato inspection: (3,200 × 1.1)/586,667
Chip inspection: (12,000 × 1.1)/586,667
Frying monitor: (6,300 × 1.1)/586,667
Boxing: (16,600 × 1.1)/586,667
Machine operators: (6,300 × 1.1)/586,667
***($1,135,216)/($0.9837 × 586,667) = Fixed OH rate based on labor dollars

4. MUV = (AQ – SQ)SP

= (9,500,000 – 9,350,000)$0.238
= $35,700 U
SQ = 15.9375 × 8,800,000/15 = 9,350,000

319
9–35

1. Pat’s decision was wrong and not in the best interests of the company. His
concern for his bonus and promotion was apparently more important than his
company’s reputation for a quality product. Unfortunately, his assessment of
personal risk was probably a significant input to the decision to buy the infe-
rior component. All too often, individuals decide to take an unethical course
of action based on their assessment of their chances of getting caught. This
obviously should not be a factor. What is right should be the driving concern
for this type of decision.

2. The use of standards to evaluate performance and assess rewards apparently

was influential in Pat’s decision. He clearly had a desire to receive his annual
bonus and wanted to present an impressive performance profile so that he
could secure a position at division headquarters. Perhaps altering the factors
used for evaluating and rewarding performance and increasing the tenure of
managers may decrease this type of behavior. Or perhaps we ought to spend
more time emphasizing ethical behavior—maybe the problem isn’t so much
the systems we use for evaluating and rewarding performance but rather the
lack of commitment to ethical decision making.

3. Purchasing agents have ethical responsibilities similar to accountants. Integr-

ity is a universally desirable characteristic. Pat and other purchasing agents
should refrain from engaging in any activity that would prejudice their abili-
ties to carry out their duties ethically (III-2); and refrain from a conflict of in-
terest, either actual or apparent (III-1). Organizations would be well advised to
adopt a set of ethical standards. All employees should understand that cer-
tain behaviors are unacceptable.

RESEARCH ASSIGNMENTS

9–36

Answers will vary.

9–37

Answers will vary.

320