STUDENT NAME: …………………………………………………

CLASS: BBF07-B

SOLUTION CHAPTER 10

Exercise 10-1

1. Number of chopping blocks.................................................................... 4,000

Number of board feet per chopping block.............................................. ×    2.5
Standard board feet allowed................................................................... 10,000
Standard cost per board foot................................................................... × $1.80
Total standard cost.................................................................................. $18,000

Actual cost incurred................................................................................ $18,700

Standard cost above................................................................................  18,000
Spending variance—unfavorable............................................................ $    700

2.
Standard Quantity Allowed
for Actual Output, Actual Quantity of Input, Actual Quantity of Input,
at Standard Price at Standard Price at Actual Price
(SQ × SP) (AQ × SP) (AQ × AP)
10,000 board feet × 11,000 board feet ×
$1.80 per board foot $1.80 per board foot
= $18,000 = $19,800 $18,700

Materials quantity variance = $1,800 Materials price variance =

U $1,100 F
Spending variance = $700 U

Alternatively, the variances can be computed using the formulas:

Materials quantity variance = SP (AQ – SQ)

= $1.80 per board foot (11,000 board feet – 10,000 board feet)
= $1,800 U

Materials price variance = AQ (AP – SP)

= 11,000 board feet ($1.70 per board foot* – $1.80 per board foot)
= $1,100 F
*$18,700 ÷ 11,000 board feet = $1.70 per board foot.
Exercise 10-2

1. Number of meals prepared.................................................. 6,000

Standard direct labor-hours per meal................................... × 0.20
Total direct labor-hours allowed.......................................... 1,200
Standard direct labor cost per hour...................................... × $9.50
Total standard direct labor cost........................................... $11,400

Actual cost incurred............................................................ $11,500

Total standard direct labor cost (above)..............................  11,400
Spending variance............................................................... $    100 Unfavorable

2.
Standard Hours Allowed
for Actual Output, Actual Hours of Input, Actual Hours of Input,
at Standard Rate at Standard Rate at Actual Rate
(SH × SR) (AH × SR) (AH × AR)
1,200 hours × 1,150 hours × 1,150 hours ×
$9.50 per hour $9.50 per hour $10.00 per hour
= $11,400 = $10,925 = $11,500

Labor efficiency variance Labor rate variance

= $475 F = $575 U
Spending variance = $100 U

Alternatively, the variances can be computed using the formulas:

Labor efficiency variance = SR(AH – SH)

= $9.50 per hour (1,150 hours – 1,200 hours)
= $475 F

Labor rate variance = AH(AR – SR)

= 1,150 hours ($10.00 per hour – $9.50 per hour)
= $575 U

Exercise 10-3

1. Number of items shipped................................................................. 140,000

Standard direct labor-hours per item................................................  × 0.04
Total direct labor-hours allowed...................................................... 5,600
Standard variable overhead cost per hour......................................... × $2.80
Total standard variable overhead cost.............................................. $15,680
 Actual variable overhead cost incurred............................................ $15,950
Total standard variable overhead cost (above).................................  15,680
Spending variance............................................................................ $   270 Unfavorable

2.
Standard Hours Allowed
for Actual Output, Actual Hours of Input, Actual Hours of Input,
at Standard Rate at Standard Rate at Actual Rate
(SH × SR) (AH × SR) (AH × AR)
5,600 hours × 5,800 hours × 5,800 hours ×
$2.80 per hour $2.80 per hour $2.75 per hour*
= $15,680 = $16,240 = $15,950

Variable overhead efficiency Variable overhead rate

variance variance
= $560 U = $290 F
Spending variance = $270 U

*$15,950 ÷ 5,800 hours = $2.75 per hour

Alternatively, the variances can be computed using the formulas:

Variable overhead efficiency variance = SR(AH – SH)

= $2.80 per hour (5,800 hours – 5,600 hours)
= $560 U

Variable overhead rate variance = AH(AR – SR)

= 5,800 hours ($2.75 per hour – $2.80 per hour)
= $290 F

Exercise 10-4

1. Number of units manufactured............................................................... 20,000

Standard labor time per unit
(6 minutes ÷ 60 minutes per hour)...................................................... ×   0.10
Total standard hours of labor time allowed............................................. 2,000
Standard direct labor rate per hour.......................................................... × $24.00
Total standard direct labor cost............................................................... $48,000

Actual direct labor cost........................................................................... $49,300

Standard direct labor cost.......................................................................  48,000
Spending variance—unfavorable............................................................ $ 1,300
2.
Standard Hours Allowed
for Actual Output, Actual Hours of Input, Actual Hours of Input,
at Standard Rate at Standard Rate at Actual Rate
(SH × SR) (AH × SR) (AH × AR)
2,000 hours* × 2,125 hours ×
$24.00 per hour $24.00 per hour
= $48,000 = $51,000 $49,300

Labor efficiency variance Labor rate variance

= $3,000 U = $1,700 F
Spending variance = $1,300 U

*20,000 units × 0.10 hour per unit = 2,000 hours

Alternatively, the variances can be computed using the formulas:

Labor efficiency variance = SR (AH – SH)

= $24.00 per hour (2,125 hours – 2,000 hours)
= $3,000 U

Labor rate variance = AH (AR – SR)

= 2,125 hours ($23.20 per hour* – $24.00 per hour)
= $1,700 F
*$49,300 ÷ 2,125 hours = $23.20 per hour
Exercise 10-4

3.
Standard Hours Allowed
for Actual Output, Actual Hours of Input, Actual Hours of Input,
at Standard Rate at Standard Rate at Actual Rate
(SH × SR) (AH × SR) (AH × AR)
2,000 hours × 2,125 hours ×
$16.00 per hour $16.00 per hour
= $32,000 = $34,000 $39,100

Variable overhead efficiency Variable overhead rate

variance variance
= $2,000 U = $5,100 U
Spending variance = $7,100 U

Alternatively, the variances can be computed using the formulas:

 Variable overhead efficiency variance = SR (AH – SH)
=$16.00 per hour (2,125 hours – 2,000 hours)
= $2,000 U

Variable overhead rate variance = AH (AR – SR)

= 2,125 hours ($18.40 per hour* – $16.00 per hour)
= $5,100 U
*$39,100 ÷ 2,125 hours = $18.40 per hour

Exercise 10-5

1. If the total labor spending variance is $330 unfavorable, and if the labor rate variance is $150
favorable, then the labor efficiency variance must be $480 unfavorable, because the labor rate and
labor efficiency variances taken together equal the total labor spending variance.

Knowing that the labor efficiency variance is $480 unfavorable, one approach to the solution would
be:

Labor efficiency variance = SR (AH – SH)

$12 per hour (AH – 210 hours*) = $480 U
$12 per hour × AH – $2,520 = $480**
$12 per hour × AH = $3,000
AH = 250 hours

* 168 batches × 1.25 hours per batch = 210 hours

** When used with the formula, unfavorable variances are positive and favorable variances are
negative.

2. Knowing that 250 hours of labor time were used during the week, the actual rate of pay per hour can
be computed as follows:
Labor rate variance = AH (AR – SR)
250 hours (AR – $12 per hour) = $150 F
250 hours × AR – $3,000 = -$150*
250 hours × AR = $2,850
AR = $11.40 per hour

* When used with the formula, unfavorable variances are positive and favorable variances are
negative.

Exercise 10-5

An alternative approach would be to work from known to unknown data in the columnar model for
 variance analysis:

Standard Hours Allowed

for Actual Output, Actual Hours of Input, Actual Hours of Input,
at Standard Rate at Standard Rate at Actual Rate
(SH × SR) (AH × SR) (AH × AR)
210 hours§ × 250 hours × 250 hours ×
$12.00 per hour* $12.00 per hour* $11.40 per hour
= $2,520 = $3,000 = $2,850

Labor efficiency variance Labor rate variance

= $480 U = $150 F*
Spending variance = $330 U*
§
168 batches × 1.25 hours per batch = 210 hours

Exercise 10-6

1.
Standard Quantity Allowed
for Actual Output, Actual Quantity of Input, Actual Quantity of Input,
at Standard Price at Standard Price at Actual Price
(SQ × SP) (AQ × SP) (AQ × AP)
18,000 ounces* × 20,000 ounces × 20,000 ounces ×
$2.50 per ounce $2.50 per ounce $2.40 per ounce
= $45,000 = $50,000 = $48,000

Materials quantity variance = $5,000 Materials price variance =

U $2,000 F
Spending variance = $3,000 U

*2,500 units × 7.2 ounces per unit = 18,000 ounces

Alternatively, the variances can be computed using the formulas:

Materials quantity variance = SP (AQ – SQ)

= $2.50 per ounce (20,000 ounces – 18,000 ounces)
= $5,000 U

Materials price variance = AQ (AP – SP)

= 20,000 ounces ($2.40 per ounce – $2.50 per ounce)
= $2,000 F
Exercise 10-6

2.
Standard Hours Allowed
for Actual Output, Actual Hours of Input, Actual Hours of Input,
at Standard Rate at Standard Rate at Actual Rate
(SH × SR) (AH × SR) (AH × AR)
1,000 hours* × 900 hours ×
$10.00 per hour $10.00 per hour
= $10,000 = $9,000 $10,800

Labor efficiency variance Labor rate variance

= $1,000 F = $1,800 U
Spending variance = $800 U

*2,500 units × 0.4 hour per unit = 1,000 hours

Alternatively, the variances can be computed using the formulas:

Labor efficiency variance = SR (AH – SH)

= $10 per hour (900 hours – 1,000 hours)
= 1,000 F

Labor rate variance = AH (AR – SR)

= 900 hours ($12 per hour* – $10 per hour)
= $1,800 U
*10,800 ÷ 900 hours = $12 per hour

Exercise 10-7

Notice in the solution below that the materials price variance is computed on the entire amount of
materials purchased, whereas the materials quantity variance is computed only on the amount of materials
used in production.

Standard Quantity Allowed for Actual Quantity Actual Quantity

Actual Output, of Input, of Input,
at Standard Price at Standard Price at Actual Price
(SQ × SP) (AQ × SP) (AQ × AP)
14,400 ounces* × 16,000 ounces × 20,000 ounces ×
$2.50 per ounce $2.50 per ounce $2.40 per ounce
= $36,000 = $40,000 = $48,000

Materials quantity variance = $4,000

 U

20,000 ounces ×
$2.50 per ounce
= $50,000

Materials price variance

= $2,000 F

*2,000 bottles × 7.2 ounces per bottle = 14,400 ounces

Alternatively, the variances can be computed using the formulas:

Materials quantity variance = SP (AQ – SQ)

= $2.50 per ounce (16,000 ounces – 14,400 ounces)
= $4,000 U

Materials price variance = AQ (AP – SP)

= 20,000 ounces ($2.40 per ounce – $2.50 per ounce)
= $2,000 F

Exercise 10-8

1. a. Notice in the solution below that the materials price variance is computed on the entire amount of
materials purchased, whereas the materials quantity variance is computed only on the amount of
materials used in production.

Standard Quantity Allowed for Actual Quantity Actual Quantity

Actual Output, of Input, of Input,
at Standard Price at Standard Price at Actual Price
(SQ × SP) (AQ × SP) (AQ × AP)
40,000 diodes* × 50,000 diodes × 70,000 diodes ×
$0.30 per diode $0.30 per diode $0.28 per diode
= $12,000 = $15,000 = $19,600

Materials quantity variance = $3,000

U

70,000 diodes ×
$0.30 per diode
= $21,000

Materials price variance

 = $1,400 F

*5,000 toys × 8 diodes per toy = 40,000 diodes

Alternatively, the variances can be computed using the formulas:

Materials quantity variance = SP (AQ – SQ)

= $0.30 per diode (50,000 diodes – 40,000 diodes)
= $3,000 U

Materials price variance = AQ (AP – SP)

= 70,000 diodes ($0.28 per diode – $0.30 per diode)
= $1,400 F

Exercise 10-8

b. Direct labor variances:

Standard Hours Allowed

for Actual Output, Actual Hours of Input, Actual Hours of Input,
at Standard Rate at Standard Rate at Actual Rate
(SH × SR) (AH × SR) (AH × AR)
3,000 hours* × 3,200 hours ×
$14.00 per hour $14.00 per hour
= $42,000 = $44,800 $48,000

Labor efficiency variance Labor rate variance

= $2,800 U = $3,200 U
Spending variance = $6,000 U

*5,000 toys × 0.6 hours per toy = 3,000 hours

Alternatively, the variances can be computed using the formulas:

Labor efficiency variance = SR (AH – SH)

= $14.00 per hour (3,200 hours –3,000 hours)
= $2,800 U

Labor rate variance = AH (AR – SR)

= 3,200 hours ($15.00* per hour – $14.00 per hour)
= $3,200 U
*$48,000 ÷ 3,200 hours = $15.00 per hour

Exercise 10-8
2. A variance usually has many possible explanations. In particular, we should always keep in mind that
the standards themselves may be incorrect. Some of the other possible explanations for the variances
observed at Topper Toys appear below:

Materials Price Variance Since this variance is favorable, the actual price paid per unit for the material
was less than the standard price. This could occur for a variety of reasons including the purchase of a
lower grade material at a discount, buying in an unusually large quantity to take advantage of quantity
discounts, a change in the market price of the material, and particularly sharp bargaining by the
purchasing department.

Materials Quantity Variance Since this variance is unfavorable, more materials were used to produce
the actual output than were called for by the standard. This could also occur for a variety of reasons.
Some of the possibilities include poorly trained or supervised workers, improperly adjusted machines,
and defective materials.

Labor Rate Variance Since this variance is unfavorable, the actual average wage rate was higher than
the standard wage rate. Some of the possible explanations include an increase in wages that has not been
reflected in the standards, unanticipated overtime, and a shift toward more highly paid workers.
Labor Efficiency Variance Since this variance is unfavorable, the actual number of labor
hours was greater than the standard labor hours allowed for the actual output. As with the other variances, this
variance could have been caused by any of a number of factors. Some of the possible explanations include
poor supervision, poorly trained workers, low-quality materials requiring more labor time to process, and
machine breakdowns. In addition, if the direct labor force is essentially fixed, an unfavorable labor efficiency
variance could be caused by a reduction in output due to decreased demand for the company’s products.

SOLUTION CHAPTER 11
Exercise 11-1

Net operating income

Margin =
Sales
$5,400,000
= = 30%
$18,000,000

Sales
Turnover =
Average operating assets

$18,000,000
= = 0.5
$36,000,000

ROI = Margin × Turnover

= 30% × 0.5 = 15%
Exercise 11-2

Average operating assets.......................................................... £2,200,000

Net operating income................................................................. £400,000
Minimum required return:
16% × £2,200,000...................................................................  352,000
Residual income........................................................................... £ 48,000
Exercise 11-3

1. Throughput time = Process time + Inspection time + Move time + Queue time
= 2.8 days + 0.5 days + 0.7 days + 4.0 days
= 8.0 days

2. Only process time is value-added time; therefore the manufacturing cycle efficiency (MCE) is:

Value-added time 2.8 days

MCE= = =0.35
Throughput time 8.0 days

3. If the MCE is 35%, then 35% of throughput time was spent in value-added activities, the other
65% was spent in non-value-added activities.

4. Delivery cycle time = Wait time + Throughput time

= 16.0 days + 8.0 days
= 24.0 days

5. If all queue time is eliminated, then the throughput time drops to only 4 days (0.5 + 2.8 + 0.7).
The MCE becomes:

Value-added time 2.8 days

MCE= = =0.70
Throughput time 4.0 days
Thus, the MCE increases to 70%. This exercise shows quite dramatically how lean production
approach can improve operations and reduce throughput time.

Exercise 11-6
 Net operating income
Margin =
Sales
$800,000
= = 10%
$8,000,000
Sales
Turnover =
Average operating assets
$8,000,000
= = 2.5
$3,200,000
ROI = Margin × Turnover
= 10% × 2.5 = 25%
 Net operating income
Margin =
Sales
$800,000(1.00 + 4.00)
=
$8,000,000(1.00 + 1.50)

$4,000,000
= = 20%
$20,000,000
Sales
Turnover =
Average operating assets

$8,000,000 (1.00 + 1.50)

=
$3,200,000
$20,000,000
= = 6.25
$3,200,000
ROI = Margin × Turnover

= 20% × 6.25 = 125%

Exercise 11-6 (continued)

Net operating income

Margin =
Sales
$800,000 + $250,000
=
$8,000,000 + $2,000,000
$1,050,000
= = 10.5%
$10,000,000
Sales
Turnover =
Average operating assets

$8,000,000 + $2,000,000
=
$3,200,000 + $800,000
$10,000,000
= = 2.5
$4,000,000
ROI = Margin × Turnover

= 10.5% × 2.5 = 26.25%

Exercise 11-7

1. ROI computations:

Net operating income Sales

ROI = ×
Sales Average operating assets
$630,000 $9,000,000
× = 7% × 3 = 21%
Perth: $9,000,000 $3,000,000
$1,800,000 $20,000,000
× = 9% × 2 = 18%
Darwin: $20,000,000 $10,000,000

2. Perth Darwin
Average operating assets...................................................... $3,000,000 $10,000,000
Net operating income............................................................. $630,000 $1,800,000
Minimum required return on average operating
assets—16% × Average operating assets..................  480,000  1,600,000
Residual income....................................................................... $150,000 $  200,000

3. No, the Darwin Division is simply larger than the Perth Division and for this reason one would
expect that it would have a greater amount of residual income. Residual income can’t be used to
compare the performance of divisions of different sizes. Larger divisions will almost always look
better. In fact, in the case above, Darwin does not appear to be as well managed as Perth. Note
from Part (1) that Darwin has only an 18% ROI as compared to 21% for Perth.

Exercise 11-8

Company A Company B Company C

Sales............................................................................... $400,000 * $750,000 * $600,000 *
Net operating income............................................. $32,000 $45,000 * $24,000
Average operating assets....................................... $160,000 * $250,000 $150,000 *
Return on investment (ROI)................................. 20% * 18% * 16%
Minimum required rate of return:
Percentage.............................................................. 15% * 20% 12% *
Dollar amount....................................................... $24,000 $50,000 * $18,000
Residual income........................................................ $8,000 $(5,000) $6,000 *