CHAPTER 22
PERFORMANCE EVALUATION USING VARIANCES
FROM STANDARD COSTS
CLASS DISCUSSION QUESTIONS
1. Standard costs assist management in
controlling costs and in motivating
employees to focus on costs.
2. Management can use standards to assist in
achieving control over costs by investigating
significant deviations of performance
(variances) from standards and taking
corrective action.
3. Reporting by the “principle of exceptions” is
the reporting of only variances (or
“exceptions”) between standard and actual
costs to the individual responsible for cost
control.
4. There is no set time period for the revision
of standards. They should be revised when
prices, product design, labor rates, and
manufacturing methods change to such an
extent that current standards no longer
represent a useful measure of performance.
5. Standard costs for direct materials, direct
labor, and factory overhead per unit of
product are used in budgetary performance
evaluation. Product standard costs are
multiplied by the planned production
volumes. Budget control is achieved by
comparing actual results with the standard
costs at actual volumes.
6. a. The two variances in direct materials
cost are:
(1) Price
(2) Quantity or usage
b. The price variance is the result of a
difference between the actual price and
the standard price. It may be caused by
such factors as a change in market
prices or inefficient purchasing
procedures. The quantity or usage
variance results from using more or less
materials than the standard quantity. It
can be caused by such factors as
excessive spoilage, carelessness in the
production processes, and the use of
inferior materials.
213
7. The offsetting variances might have been
caused by the purchase of low-priced,
inferior materials. The low price of the
materials would generate a favorable
materials price variance, while the inferior
quality of the materials would cause
abnormal spoilage and waste, thus
generating an unfavorable materials quantity
variance.
8. a. The two variances in direct labor costs
are:
(1) Rate (price or wage)
(2) Time (usage or efficiency)
b. The direct labor cost variance is usually
under the control of the production
supervisor.
9. No. Even though the assembly workers are
covered by union contracts, direct labor cost
variances still might result. For example, direct
labor rate variances could be caused by
scheduling overtime to meet production
demands or by assigning higher-paid workers
to jobs normally performed by lower-paid
workers. Likewise, direct labor time variances
could result during the training of new workers.
10. a. The variable factory overhead
controllable variance results from
incurring a total amount of variable
factory overhead cost greater or less
than the amount budgeted for the level
of operations achieved. The fixed
factory overhead volume variance
results from operating at a level above
or below 100% of normal capacity.
b. The factory overhead cost variance
report presents the standard factory
overhead cost variance data, that is, the
volume and the controllable variances.
11. The budgeted fixed costs at normal volume
are the amount of fixed costs expected to be
incurred for a volume of activity that has
been the historical norm. Actual volume that
exceeds or is less than the historical norm
gives rise to a volume variance.
12. Net unfavorable direct materials price patterns around various times of the day
variance (e.g., increasing staff during the lunch hour).
13. Net favorable direct materials quantity 15. Nonfinancial performance measures provide
variance managers additional measures beyond the
dollar impact of decisions. Nonfinancial
14. Standards can be very appropriate in
considerations may help the organization
repetitive service operations. Fast food
include external customer perspectives
restaurants can use standards for evaluating
about quality and service in performance
the productivity of the counter and food
measurements.
preparation employees. In addition,
standards could be used to plan staffing

214
215
 EXERCISES

Ex. 22–1

Ingredient Quantity × Price Total

Cocoa 455 pounds × $0.20 per pound $ 91.00
Sugar 175 pounds × $0.40 per pound 70.00
Milk 100 gallons × $1.19 per gallon 119.00
Total cost $ 280.00
Standard direct materials cost per bar of chocolate:
$280 per batch
1,000 bars
= $0.28 per bar

Ex. 22–2

Direct labor........................................................ $15.00 × 3.5 hours $ 52.50

Direct materials................................................. $7.50 × 20 board ft. 150.00
Variable factory overhead............................... $2.20 × 3.5 hours 7.70
Fixed factory overhead.................................... $0.80 × 3.5 hours 2.80
Total cost per unit....................................... $213.00

216
Ex. 22–3

a. SAMS BOTTLE COMPANY

Manufacturing Cost Budget
For the Month Ended July 31, 2006
Standard Cost at
Planned Volume
(600,000 Bottles)
Manufacturing costs:
Direct labor................................................................................... $ 7,560
Direct materials............................................................................ 30,240
Factory overhead......................................................................... 2,100
Total......................................................................................... $ 39,900
$1.26 × (600,000 ÷ 100) = $7,560
$5.04 × (600,000 ÷ 100) = $30,240
$0.35 × (600,000 ÷ 100) = $2,100
Note: The cost standards are expressed as “per 100 bottles.”

b. SAMS BOTTLE COMPANY

Manufacturing Costs—Budget Performance Report
For the Month Ended July 31, 2006
Standard Cost at Cost Variance—
Actual Volume (Favorable)
Actual Costs (640,000 bottles) Unfavorable
Manufacturing costs:
Direct labor................................ $ 8,000 $ 8,064 $ (64)
Direct materials......................... 32,600 32,256 344
Factory overhead...................... 2,500 2,240 260
Total manufacturing cost. . . $43,100 $42,560 $ 540
$1.26 × (640,000 ÷ 100) = $8,064
$5.04 × (640,000 ÷ 100) = $32,256
$0.35 × (640,000 ÷ 100) = $2,240

c. SBC’s actual costs were $540 more than budgeted. An unfavorable direct
materials cost variance and factory overhead cost variance more than offset
a smaller favorable direct labor cost variance. The unfavorable variances
should be investigated further to discover the cause. Note: The budget
prepared in (a) at the beginning of the month should not be used in the
budget performance report because actual volumes were greater than
planned (640,000 vs. 600,000).

217
Ex. 22–4

a.
Price variance:
Actual price....................................... $ 1.85 per pound
Standard price.................................. 2.00 per pound
Variance—favorable................... $(0.15) per pound
× actual quantity, 128,500 $(19,275)
Quantity variance:
Actual quantity................................. 128,500 pounds
Standard quantity............................ 126,750 pounds
Variance—unfavorable.............. 1,750 pounds
× standard price, $2.00 3,500
Total direct materials cost variance—favorable...................................... $
(15,775)

b. The direct materials price variance should normally be reported to the

Purchasing Department, which may or may not be able to control this
variance. If materials of the same quality were purchased from another
supplier at a price lower than the standard price, the variance was
controllable. On the other hand, if the variance resulted from a marketwide
price decrease, the variance was not subject to control.
The direct materials quantity variance should be reported to the proper level
of operating management for possible corrective action. For example, if
excessive amounts of direct materials had been used because of the
malfunction of equipment that had not been properly maintained or operated,
the variance would be reported to the production supervisor. On the other
hand, if the excess usage of materials had been caused by the use of inferior
raw materials, the Purchasing Department should be held responsible.
The total materials cost variance should be reported to senior plant
management, such as the plant manager or materials manager.

218
Ex. 22–5

Product finished..................................................................... 7,500 units

Standard finished product for direct materials used
(39,000 lbs. ÷ 5 lbs.).......................................................... 7,800 units
Deficiency of finished product for materials used....... (300) units
Standard cost for direct materials:
Quantity variance divided by deficiency of product
for materials used ($2,025 ÷ 300 units)..................... $ 6.75
Alternate solution:
Materials used................................................................... 39,000 lbs.
Price variance.................................................................... $2,730
Price variance per pound (price variance divided
by materials used)....................................................... $ 0.07
Unit price of direct materials........................................... $ 1.42
Less price variance per pound....................................... 0.07
Standard price per pound................................................ $ 1.35
Pounds per unit of product............................................. × 5
Standard direct materials cost per unit of product...... $ 6.75

219
Ex. 22–6

a.
Standard Standard Standard Cost
Quantity × Price = per Batch
Whole tomatoes 2,500 $0.30 $ 750.00
Vinegar 120 2.40 288.00
Corn syrup 15 6.50 97.50
Salt 50 2.25 112.50
$ 1,248.00
Pounds per batch ÷ 1,600 pounds
$ 0.78 per pound

b.
Actual Standard Materials
Quantity for Quantity per Quantity Standard Quantity
Batch W196 Batch Difference × Price = Variance
2,600 2,500 100 $0.30 $30.00 U
108 120 (12) 2.40 (28.80) F
17 15 2 6.50 13.00 U
49 50 (1) 2.25 (2.25) F
$11.95 U

Ex. 22–7

a. Rate variance:
Actual rate.................................. $18.16 per hour
Standard rate............................. 18.00 per hour
Variance—unfavorable............. $ 0.16 per hour × actual time,
17,350 hours $ 2,776
Time variance:
Actual time................................. 17,350 hours
Standard time............................ 17,500 hours
Variance—favorable.................. (150) hours
× standard rate, $18.00 (2,700)
Total direct labor cost variance—unfavorable........................................ $ 76

b. The employees may have been more experienced or better trained, thereby
requiring a higher labor rate than planned. The higher level of experience or
training may have resulted in more efficient performance. Thus, the actual
time required was less than standard. Unfortunately, the gained efficiency
did not offset the higher labor rate.

220
Ex. 22–8

a. Rate variance:
Actual rate................................................................... $ 16.40
Standard rate.............................................................. 15.75
Difference.................................................................... $ 0.65
Actual hours used..................................................... × 1,300
Rate variance—unfavorable..................................... $ 845
Time variance:
Actual hours.................................................................. 1,300
Standard hours (5.60 hours × 250 units)................... 1,400
Difference...................................................................... (100)
Standard rate................................................................. × $15.75
Time variance—favorable........................................ (1,575)
Direct labor cost variance—favorable............................ $ (730)

b. Debit to work in process:

Standard hours at actual production...................... 1,400
Standard rate.............................................................. × $15.75
Standard direct labor cost........................................ $ 22,050

221
Ex. 22–9

Step 1: Determine the standard direct materials and direct labor per unit.
Standard direct materials quantity per unit:
Direct materials pounds budgeted for April:
$24,000
$0.40 per pound
= 60,000 pounds

Standard pounds per unit:

60,000 pounds
12,000 units
= 5.0 standard pounds per unit

Standard direct labor time per unit:

Direct labor hours budgeted for September:
$21,600
$12.00 per hour
= 1,800 direct labor hours

Standard direct labor hours per unit:

1,800 hours
12,000 units
= 0.15 standard direct labor hour per unit

Step 2: Using the standard quantity and time rates in Step 1, determine the
standard costs for the actual April production.
Standard direct materials at actual volume: 12,800
units × 5.0 pounds per unit × $0.40 =............................................. $ 25,600
Standard direct labor at actual volume: 12,800 units ×
0.15 direct labor hour per unit × $12.00 =...................................... 23,040
Total......................................................................................................... $ 48,640
Step 3: Determine the direct materials quantity and direct labor time variances,
assuming no direct materials price or direct labor rate variances.
Actual direct materials used in production......................................... $ 24,880
Standard direct materials (Step 2)........................................................ 25,600
Direct materials quantity variance—favorable.................................... $ (720)*
*$24,880 ÷ $0.40 = 62,200 lbs.
(62,200 lbs. – 64,000 lbs.) × $0.40 = $(720) F
Actual direct labor.................................................................................. $ 23,940
Standard direct labor (Step 2)............................................................... 23,040
Direct labor time variance—unfavorable............................................. $ 900**
**12,800 units × 0.15 hours = 1,920 hours
$23,940 ÷ $12 = 1,995 hours
(1,995 hours – 1,920 hours) × $12 = $900 U

222
Ex. 22–10

JARRETT WOOD PRODUCTS COMPANY

Factory Overhead Cost Budget—Press Department
For the Month Ended March 31, 2006
Direct labor hours............................................... 6,000 9,000 12,000
Variable overhead cost:
Indirect factory labor..................................... $ 16,800 $ 25,200 $ 33,600
Power and light.............................................. 2,700 4,050 5,400
Indirect materials........................................... 13,200 19,800 26,400
Total variable factory overhead.............. $ 32,700 $ 49,050 $ 65,400
Fixed factory overhead cost:
Supervisory salaries..................................... $ 32,400 $ 32,400 $ 32,400
Depreciation of plant and equipment.......... 27,000 27,000 27,000
Insurance and property taxes...................... 7,200 7,200 7,200
Total fixed factory overhead................... $ 66,600 $ 66,600 $ 66,600
Total factory overhead....................................... $ 99,300 $115,650 $132,000

Ex. 22–11

Variable factory overhead controllable variance:

Actual variable factory overhead cost incurred...... $500,000
Budgeted variable factory overhead for 35,000 hrs.
[35,000 × ($16.00 – $1.85)]..................................... 495,250
Variance—unfavorable.......................................... $ 4,750
Fixed factory overhead volume variance:
Productive capacity at 100%...................................... 40,000 hours
Standard for amount produced................................. 35,000 hours
Productive capacity not used.................................... 5,000 hours
Standard fixed factory overhead rate....................... × $1.85
Variance—unfavorable.......................................... 9,250
Total factory overhead cost variance—unfavorable.... $ 14,000*

*Proof: ($500,000 + $74,000) – $560,000

223
Ex. 22–11 Concluded

Alternative Computation of Overhead Variances

Factory Overhead

Actual Costs 574,000 560,000 Applied Costs

Balance
(underapplied) 14,000

Actual Factory Budgeted Factory Applied Factory

Overhead Overhead for Amount Overhead
Produced
$574,000 Variable cost [35,000 × ($16.00 – $1.85)] $495,250 $560,000
Fixed cost 74,000
Total $569,250

$4,750 U $9,250 U
Controllable Volume
Variance Variance

$14,000 U
Total Factory Overhead
Cost Variance

224
Ex. 22–12

a. Controllable variance:
Actual variable factory overhead
($122,250 – $48,000).................................. $ 74,250
Standard variable factory overhead at
actual production:
Standard hours at actual production 27,250
Variable factory overhead rate 1............... × $2.80
Standard variable factory overhead 76,300
Controllable variance—favorable............ $(2,050)

b. Volume variance:
Volume at 100% of normal capacity........ 30,000
Less: Standard hours............................... 27,250
Idle capacity............................................... 2,750
Fixed overhead rate2................................. × $1.60
Volume variance—unfavorable................ 4,400
Total factory overhead cost
variance—unfavorable.............................. $ 2,3503
1
$70,000
Variable factory overhead rate: 25,000 hours = $2.80 per hour

2
$48,000
Fixed factory overhead rate: 30,000 hours = $1.60 per hour

3
Proof: $122,250 – [($2.80 + $1.60) × 27,250 hours] = $2,350

225
Ex. 22–12 Concluded

Alternative Computation of Overhead Variances

Factory Overhead

Actual Costs 122,250 119,900 Applied Costs

Balance
($4.40 × 27,250)
(underapplied) 2,350

Actual Factory Budgeted Factory Applied Factory

Overhead Overhead for Amount Overhead
Produced
$122,250 Variable cost (27,250 × $2.80) $ 76,300 $119,900
Fixed cost 48,000
Total $124,300

$2,050 F $4,400 U
Controllable Volume
Variance Variance

$2,350 U
Total Factory Overhead
Cost Variance

226
Ex. 22–13

TRI-STATE MOLDED PRODUCTS INC.

Factory Overhead Cost Variance Report—Trim Department
For the Month Ended July 31, 2006
Productive capacity for the month..................................................... 24,000 hours
Actual productive capacity used for the month................................ 20,000 hours
Budget
(at actual Variances
production) Actual Favorable Unfavorable

Variable factory overhead costs: 1

Indirect factory labor............... $ 49,000 $ 48,750 $ 250
Power and light........................ 12,000 13,000 $1,000
Indirect materials..................... 32,000 32,500 500
Total variable factory
overhead cost................. $ 93,000 $ 94,250
Fixed factory overhead costs:
Supervisory salaries................ $ 30,000 $ 30,000
Depreciation of plant and
equipment........................... 27,300 27,300
Insurance and property taxes 20,700 20,700
Total fixed factory over-
head cost......................... $ 78,000 $ 78,000
Total factory overhead cost......... $ 171,000 $ 172,250
Total controllable variances................................................. $ 250 $ 1,500
Net controllable variance—unfavorable.............................. $ 1,250
Volume variance—unfavorable:
Idle hours at the standard rate for fixed factory
overhead—4,000 hours × $3.25 2................................ 13,000
Total factory overhead cost variance—unfavorable......... $ 14,250

1
The budgeted variable factory overhead costs are determined by multiplying
20,000 hours by the variable factory overhead cost rate for each variable cost
category. These rates are determined by dividing each budgeted amount
(estimated at the beginning of the month) by the planned (budgeted) volume of
18,000 hours.
2
$78,000
Fixed factory overhead rate: 24,000 hours = $3.25

227
Ex. 22–13 Concluded

Alternative Computation of Overhead Variances

Factory Overhead

Actual Costs 172,250 158,000 Applied Costs

Balance
[20,000 × ($4.65 + $3.25)]
(underapplied) 14,250

Actual Factory Budgeted Factory Applied Factory

Overhead Overhead for Amount Overhead
Produced
$172,250 Variable cost (20,000 × $4.65) $ 93,000 $158,000
Fixed cost 78,000
Total $171,000

$1,250 U $13,000 U
Controllable Volume
Variance Variance

$14,250 U
Total Factory Overhead
Cost Variance

228
Ex. 22–14

a. Materials (1,200 × $40).................................................... 48,000

Direct Materials Price Variance (1,200 × $3.50)............ 4,200
Accounts Payable (1,200 × $43.50).......................... 52,200
b. Work in Process (840 × $40).......................................... 33,600
Direct Materials Quantity Variance (15 × $40)........ 600
Materials (825 × $40).................................................. 33,000

Ex. 22–15

BEARTOOTH COMPANY
Income Statement
For the Month Ended January 31, 2006
Sales.............................................................................................................. $1,200,000
Cost of goods sold—at standard............................................................... 812,500
Gross profit—at standard........................................................................... $ 387,500
Favorable Unfavorable
Less variances from standard cost:
Direct materials price................................. $1,500
Direct materials quantity............................ $ 2,750
Direct labor rate.......................................... 1,000
Direct labor time.......................................... 3,750
Factory overhead controllable.................. 4,750
Factory overhead volume.......................... 10,000 9,250
Gross profit....................................................... $378,250
Operating expenses:
Selling expenses......................................... $114,375
Administrative expenses........................... 55,000 169,375
Income from operations.................................. $208,875
Other expense:
Interest expense......................................... 2,375
Income before income tax............................... $206,500

229
Ex. 22–16

In determining the volume variance, the productive capacity not used (3,000
hours) should be multiplied by the standard fixed factory overhead rate of $2.80
($6.30 – $3.50) to yield an unfavorable variance of $8,400.
A correct determination of the factory overhead cost variances is as follows:
Variable factory overhead controllable variance:
Actual variable factory overhead cost incurred...... $ 258,950
Budgeted variable factory overhead for 72,000
hours (72,000 × $3.50)................................................. 252,000
Variance—unfavorable........................................... $ 6,950
Fixed factory overhead volume variance:
Productive capacity at 100%...................................... 75,000 hours
Standard for amount produced................................. 72,000 hours
Productive capacity not used.................................... 3,000 hours
Standard fixed factory overhead rate....................... × $2.80
Variance—unfavorable........................................... 8,400
Total factory overhead cost variance—unfavorable.... $ 15,350

230
Ex. 22–16 Concluded

Alternative Computation of Overhead Variances

Factory Overhead

Actual Costs 468,950 453,600 Applied Costs

Balance
(72,000 × $6.30)
(underapplied) 15,350

Actual Factory Budgeted Factory Applied Factory

Overhead Overhead for Amount Overhead
Produced
$468,950 Variable cost (72,000 × $3.50) $252,000 $453,600
Fixed cost 210,000
Total $462,000

$6,950 U $8,400 U
Controllable Volume
Variance Variance

$15,350 U
Total Factory Overhead
Cost Variance

231
Ex. 22–17

a. Actual weekly expenditure: 2 people × $18.00 per hour × 40 hours per week =
$1,440

b. Standard time used for the volume of admissions:

Unscheduled Scheduled Total
Number of admissions.... 54 160
Standard time................... × 40 minutes × 20 minutes
Total.................................. 2,160 minutes 3,200 minutes 5,360 minutes
or
89.3 hours
c. Productive minutes available
(2 employees × 40 hours × 60 minutes)................................... 4,800
Less: Standard minutes used at actual volume..................... 5,360
Time difference from standard................................................. (560)
Standard rate per minute........................................................... ×
$0.301
Direct labor time (efficiency) variance—favorable................. $ (168)
or

$1,440 (a) – $1,6082 = $(168)

1
Standard direct labor rate:
$18 ÷ 60 min. = $0.30 per minute
2
Standard labor cost at actual volume:
Productive time (5,360/60) × $18 = $1,608

The Admissions Department was more efficient than standard. However,

administrative processes are much less repetitive than manufacturing
processes; thus, the reported variance may be an error in measuring time.

232
Ex. 22–18

a. Standard sorts per minute × Standard minutes per hour = Standard sorts per
hour (per employee)
60 sorts per minute × 60 minutes per hour = 3,600 standard sorts per hour

Pieces of mail ÷ Standard sorts per hour = Number of hours planned

31,104,000 letters ÷ 3,600 sorts per hour = 8,640 hours planned

Number of hours planned ÷ Hours per temporary employee per month =

Number of hires
8,640 hours ÷ 160 hours = 54 temporary hires for December

b. Actual pieces sorted = 31,320,000

Actual pieces of mail sorted ÷ Standard sorts per hour = Standard number of
hours for actual production
31,320,000 ÷ 3,600 standard sorts per hour = 8,700 standard hours for actual
production
Actual hours staffed............................................................................. 8,640
Standard hours for actual production................................................ 8,700
Excess of standard over actual hours................................................ (60)
Standard hourly rate............................................................................. × $18
Direct labor time variance—favorable................................................ $
(1,080)

233
Ex. 22–19

a. Possible Input Measures

Registration staffing per student
Technology investment per period for registration process
Training hours per registration personnel
Amount of faculty staffing short of demand
Amount of technology capacity (size of computer, number of input lines) for
registration process
Maintenance dollars spent on the registration system
Employee satisfaction score
Number of hours per day registration is available
Possible Output Measures
Cycle time for a student to register for classes
Number of times a course is unavailable
Number of separate registration events or steps (log-ons or line waits) per
student
Number of times a replacement course was used by a student
Number of registration errors
Student satisfaction score with the registration process
Number of student complaints about registration process
Number of registration rework steps per student
Cost of registration per student
Number of personnel overtime hours during registration
Labor time variance for registration process (standard hours less actual
hours at standard labor rate)
Reliability of registration system (computer uptime, number of downtime
events)
b. City College is interested in not only the efficiency of the process but also
the quality of the process. This means that the process must meet multiple
objectives. The college wants this process to meet the needs of students,
which means it should not pose a burden to students. Students should be
able to register for classes quickly, get the courses they want, and avoid
registration errors, hassles, and problems. Thus, the nonfinancial measures
are used to balance the need for a cost-efficient process with one that will
meet the needs of the student.

234
Ex. 22–20
Input
Measure
Average computer
response time to
customer “clicks”
Dollar amount of returned
goods
Elapsed time between
customer order and
product delivery
Maintenance dollars
divided by hardware
investment
Number of customer
complaints divided by the
number of orders
Number of misfilled
orders
Number of orders per
warehouse employee
Number of page faults or
errors due to software
programming errors
Server (computer)
downtime
System capacity divided
by customer demands
Training dollars per
programmer
Output
Measure Explanation
X A measure of the speed of the ordering
process. If the speed is too slow, we may
lose customers.
X An important measure of customer
satisfaction with the final product that was
ordered.
X An important overall measure of process
responsiveness. If the company is too slow
in providing product, we may lose
customers.
X A driver of the ordering system’s reliability
and downtime. The maintenance dollars
should be scaled to the amount of
hardware in order to facilitate comparison
across time.
X An extreme measure of customer dis-
satisfaction with the ordering process.
X Incorrectly filled orders reduce the
customer’s satisfaction with the order
process. A measure of output quality of the
process.
X This measure is related to the capacity of
the warehouse relative to the demands
placed upon it. This relationship will
impact the delivery cycle time.
X The page errors will negatively impact the
customer’s ordering experience. It’s a
measure of process output quality.
X A measure of ordering system reliability.
X The system capacity relative to the
demands on the system will drive the
response time and customer satisfaction
with ordering.
X Trained programmers should enhance the
software’s responsiveness and reliability.
235
 PROBLEMS

Prob. 22–1A

a. Standard
Materials and
Labor Cost
per Faucet
Direct materials ($9.00 × 1.8 pounds)...................................... $16.20
Direct labor ($16.00) × (15 min. ÷ 60 min.)............................... 4.00
$20.20

b. Direct Materials Cost Variance

Price variance:
Actual price................................. $ 8.80
Standard price............................ 9.00
Variance—favorable............... $ (0.20)
× actual quantity, 18,175 pounds $ (3,635)
Quantity variance:
Actual quantity............................ 18,175 pounds
Standard quantity
(1.8 lbs. × 10,000)........................ 18,000
Variance—unfavorable.......... 175 pounds
× standard price, $9.00 1,575
Total direct materials cost variance—favorable...................................... $ (2,060)

c. Direct Labor Cost Variance

Rate variance:
Actual wage rate......................... $16.25
Standard rate.............................. 16.00
Variance—unfavorable.......... $ 0.25 × 2,356 hours
actual time (62 employees
× 38 hrs.) $ 589
Time variance:
Actual productive time
62 employees × 38 hours....... 2,356 hours
Standard time for actual units
(10,000) × (15 min. ÷ 60 min.). 2,500
Variance—favorable............... (144) hours
× standard rate, $16 (2,304)
Total direct labor cost variance—favorable............................................. $ (1,715)

236
Prob. 22–2A

1. a.

Direct Materials Variance Filler Liner Total

Price variance:
Actual price............................................... $ 27.50 $ 4.10
Standard price.......................................... 28.00 4.00
Variance.................................................... $ (0.50) $ 0.10
Actual quantity......................................... × 20,100 × 45,300
Direct materials price variance......... $ (10,050) F $ 4,530 U $(5,520)
F
Quantity variance:
Actual quantity used................................ 20,100 45,300
Standard quantity used 1.......................... 19,600 46,000
Variance.................................................... 500 (700)
Standard price.......................................... × $28.00 × $4.00
Direct materials quantity variance.... $ 14,000 U $ (2,800) F 11,200 U
Total direct materials cost variance...... $ 5,680 U
Total direct materials cost variance:
Actual cost2............................................... $ 552,750 $ 185,730
Standard cost3.......................................... 548,800 184,000
Total direct materials cost variance. $ 3,950 U $ 1,730 U $ 5,680 U

1
19,600 = (2 lbs. × 2,800 actual production of women’s coats) + (3.5 lbs. × 4,000
actual production of men’s coats)
46,000 = (5 yds. × 2,800) + (8 yds. × 4,000)
2
$552,750 = 20,100 lbs. × $27.50
$185,730 = 45,300 yds. × $4.10
3
$548,800 = 19,600 lbs. × $28.00
$184,000 = 46,000 yds. × $4.00

237
Prob. 22–2A Concluded

b.
Women’s Men’s
Direct Labor Variance Coats Coats Total
Rate variance:
Actual rate.................................................... $ 13.60 $ 15.20
Standard rate............................................... 14.00 15.00
Variance....................................................... $ (0.40) $ 0.20
Actual time................................................... × 615 × 1,120
Direct labor rate variance..................... $ (246) F $ 224 U $ (22)
F
Time variance:
Actual time................................................... 615 1,120
Standard time1............................................. 560 1,200
Variance....................................................... 55 (80)
Standard rate............................................... × $14.00 × $15.00
Direct labor time variance.................... $ 770 U $ (1,200) F (430) F
Total direct labor cost variance...................... $ (452)
F
Total direct labor cost variance:
Actual cost2................................................. $ 8,364 $ 17,024
Standard cost3............................................. 7,840 18,000
Total direct labor cost variance........... $ 524 U $ (976) F $ (452)
F

1
560 = 0.20 × 2,800 actual production of women’s coats
1,200 = 0.30 × 4,000 actual production of men’s coats
2
$8,364 = 615 hrs. × $13.60
$17,024 = 1,120 hrs. × $15.20
3
$7,840 = 560 hrs. × $14.00
$18,000 = 1,200 hrs. × $15.00

2. The variance analyses should be based on the standard amounts at actual

volumes. The budget must flex with the volume changes. If the actual volume
is different from the planned volume, as it was in this case, then the budget
used for performance evaluation should reflect the change in direct materials
and direct labor that will be required for the actual production. In this way,
spending from volume changes can be isolated from efficiency and price
variances.

238
239
Prob. 22–3A

a. Direct Materials Cost Variance

Price variance:
Actual price....................................... $ 4.80 per pound
Standard price.................................. 4.50 per pound
Variance—unfavorable................ $ 0.30 per pound
× actual quantity, 73,100 $ 21,930
Quantity variance:
Actual quantity................................. 73,100 pounds
Standard quantity............................ 72,000 pounds
Variance—unfavorable................ 1,100 pounds
× standard price, $4.50 4,950
Total direct materials cost variance—unfavorable.................................. $ 26,880

b. Direct Labor Cost Variance

Rate variance:
Actual rate......................................... $17.88
Standard rate.................................... 18.00
Variance—favorable.................... $ (0.12) per hour
× actual time, 18,500 $ (2,220)
Time variance:
Actual time........................................ 18,500 hours
Standard time................................... 18,000 hours
Variance—unfavorable................ 500 hours
× standard rate, $18 9,000
Total direct labor cost variance—unfavorable......................................... $ 6,780

c. Factory Overhead Cost Variance

Variable factory overhead controllable variance:
Actual variable factory overhead cost incurred...... $ 42,870
Budgeted variable factory overhead for 18,000 hrs. 43,200
Variance—favorable................................................ $ (330)
Fixed factory overhead volume variance:
Normal capacity at 100%............................................ 20,000 hours
Standard for amount produced................................. 18,000
Productive capacity not used.................................... 2,000 hours
Standard fixed factory overhead cost rate.............. × $3.75
Variance—unfavorable........................................... 7,500
Total factory overhead cost variance—unfavorable.... $ 7,170

240
Prob. 22–3A Concluded

Alternative Computation of Overhead Variances

Factory Overhead

Actual Costs 117,870 110,700 Applied Costs

($42,870 + $75,000) [18,000 × ($2.40 + $3.75)]
Balance
7,170
(underapplied)

Actual Factory Budgeted Factory Applied Factory

Overhead Overhead for Amount Overhead
Produced
$117,870 Variable cost (18,000 × $2.40) $ 43,200 $110,700
Fixed cost 75,000
Total $118,200

$330 F $7,500 U
Controllable Volume
Variance Variance

$7,170 U
Total Factory Overhead
Cost Variance

241
Prob. 22–4A

WETHINGTON COMPANY
Factory Overhead Cost Variance Report—Assembly Department
For the Month Ended October 31, 2006
Normal capacity for the month............................................................ 25,000 hours
Actual production for the month......................................................... 23,750 hours

Variances
1
Budget Actual Favorable Unfavorable
Variable costs:
Indirect factory wages............... $209,000 $207,500 $(1,500)
Power and light........................... 152,000 153,200 $ 1,200
Indirect materials........................ 38,000 37,400 (600)
Total variable cost.................. $399,000 $398,100
Fixed costs:
Supervisory salaries.................. $120,000 $120,000
Depreciation of plant and
equipment............................... 95,000 95,000
Insurance and property taxes... 27,000 27,000
Total fixed cost....................... $242,000 $242,000
Total factory overhead cost............ $641,000 $640,100
Total controllable variances................................................. $(2,100) $ 1,200
Net controllable variance—favorable.................................. $ (900)
Volume variance—unfavorable:
Idle hours at standard rate for fixed factory overhead
(25,000 hrs. – 23,750 hrs.) × $9.68 2............................. 12,100
Total factory overhead cost variance—unfavorable......... $11,200

1
The budgeted variable costs are determined by multiplying the variable
overhead rate (the October budget divided by 25,000 hours for each variable
overhead cost) by 23,750 actual hours.
2
$242,000 ÷ 25,000 hours = $9.68

242
Prob. 22–4A Continued

Alternative Computation of Overhead Variances

Factory Overhead
628,90
Actual Costs
640,100 0 Applied Costs
Balance
[23,750  ($16.80 + $9.68)]
(underapplied) 11,200

Actual Factory Budgeted Factory Applied Factory

Overhead Overhead for Amount Overhead
Produced
$640,100 Variable cost (23,750 × $16.80) $399,000 $628,900
Fixed cost 242,000
Total $641,000

$900 F $12,100 U
Controllable Volume
Variance Variance

$11,200 U
Total Factory Overhead
Cost Variance

243
Prob. 22–4A Concluded

This solution is applicable only if the P.A.S.S. Software that accompanies the
text is used.

WETHINGTON COMPANY
Budget Report
For the Period Ended October 31, 2006
Difference
Budget Actual from Budget %
Operating revenue........................... $900,000 $852,060 $ (47,940) (5.33)
Operating expenses:
Indirect factory wages............... $209,000 $207,500 $ (1,500) (0.72)
Power and light........................... 152,000 153,200 1,200 0.79
Indirect materials........................ 38,000 37,400 (600) (1.58)
Supervisory salaries.................. 120,000 120,000
Depreciation of plant and
equipment.............................. 95,000 95,000
Insurance and property tax....... 27,000 27,000
Total operating expenses.... $641,000 $640,100 $ (900) (0.14)
Net income........................................ $259,000 $211,960 $ (47,040) (18.16)

244
Prob. 22–5A

1. Actual hours provided (3 × 40 hours)........................... 120

Standard hours required for the original plan............. 115*
Labor time difference...................................................... 5
Standard labor rate......................................................... × $18.00
Direct labor time variance—unfavorable...................... $ 90.00
69,000 lines
* 600 lines per hour = 115 hours

2. Actual hours provided (3 × 40 hours)........................... 120

Standard hours required for the actual results........... 125*
Labor time difference...................................................... (5)
Standard labor rate......................................................... × $18.00
Direct labor time variance—favorable.......................... $ (90.00)
75,000 lines
* 600 lines per hour = 125 hours

3. Actual labor rate.............................................................. $ 20.00

Standard labor rate......................................................... 18.00
Difference......................................................................... $ 2.00
Actual hours provided (3 × 40 hours)........................... × 120
Direct labor rate variance—unfavorable....................... $ 240.00
The labor cost variance is $150 unfavorable ($240 unfavorable rate variance –
$90 favorable time variance).
4. Actual hours provided (4 × 40 hours)........................... 160
Standard hours required for the actual results........... 125
Labor time difference...................................................... 35
Standard labor rate......................................................... × $18.00
Direct labor time variance—unfavorable...................... $ 630.00
5. The bonus is the better approach by $480. The cost variance for paying the
bonus was $150 unfavorable, while the cost variance that would result from
hiring another employee would have been $630 unfavorable. Note that there
will be no labor rate variance if a fourth transcriptionist is hired.
6. The labor rate and time variances fail to consider the number of errors in the
report from typist fatigue. A report that has many errors will require
significant time for correction at a later date. In addition, report errors can
cause doctors to draw incorrect conclusions from the test analyses. Thus,
managers should consider not only the efficiency of doing the work but also
the quality of the work.

245
Prob. 22–1B

a. Standard
Materials and
Labor Cost
per Dress
Direct materials ($2.75 × 3.8 yards)..................................................... $10.45
Direct labor [$10.65 × (20 min. ÷ 60 min.)].......................................... 3.55
$14.00

b. Direct Materials Cost Variance

Price variance:
Actual price.................................. $2.80
Standard price.............................. 2.75
Variance—unfavorable............ $0.05
× actual quantity, 7,500 yards $ 375
Quantity variance:
Actual quantity............................. 7,500 yards
Standard quantity
(3.8 yds. × 2,100)...................... 7,980 yards
Variance—favorable................ (480) yards
× standard price, $2.75 (1,320)
Total direct materials cost variance—favorable...................................... $ (945)

c. Direct Labor Cost Variance

Rate variance:
Actual wage per hour ................. $ 10.80
Standard wage per hour.............. 10.65
Variance—unfavorable............ $ 0.15 × 720 hours
actual time (20 employees
× 36 hrs.) $ 108
Time variance:
Actual productive time
(20 employees × 36 hours)..... 720 hours
Standard time for actual
dresses [2,100 ×
(20 min. ÷ 60 min.)].................. 700 hours
Variance—unfavorable............ 20 hours
× standard rate, $10.65 213
Total direct labor cost variance—unfavorable.................................. $ 321

246
Prob. 22–2B

1. a.
Direct Materials Variance Cocoa Sugar Total
Price variance:
Actual price............................................ $ 7.75 $ 1.68
Standard price....................................... 8.00 1.50
Variance.................................................. $ (0.25) $ 0.18
Actual quantity...................................... × 75,500 × 113,800
Direct materials price variance....... $ (18,875) F $ 20,484 U $ 1,609 U
Quantity variance:
Actual quantity used............................. 75,500 113,800
1
Standard quantity used ....................... 76,000 110,000
Variance.................................................. (500) 3,800
Standard price....................................... × $8.00 × $1.50
Direct materials quantity variance. $ (4,000) F $ 5,700 U 1,700 U
Total direct materials cost variance......... $ 3,309 U
Total direct materials cost variance:
Actual cost2............................................ $ 585,125 $ 191,184
Standard cost3....................................... 608,000 165,000
Total direct materials cost variance $ (22,875) F $ 26,184 U $ 3,309 U

1
76,000 = (12 lbs. × 3,000 actual production of dark chocolate) + (8 lbs. × 5,000
actual production of light chocolate)
110,000 = (10 lbs. × 3,000 actual production of dark chocolate) + (16 lbs. × 5,000
actual production of light chocolate)
2
$585,125 = $7.75 × 75,500
$191,184 = $1.68 × 113,800
3
$608,000 = $8.00 × 76,000
$165,000 = $1.50 × 110,000

247
Prob. 22–2B Concluded

b.
Dark Light
Direct Labor Variance Chocolate Chocolate Total
Rate variance:
Actual rate........................................... $ 16.40 $ 16.40
Standard rate....................................... 16.20 16.15
Variance............................................... $ 0.20 $ 0.25
Actual time........................................... × 800 × 1,800
Direct labor rate variance............. $ 160 U $ 450 U $ 610 U
Time variance:
Actual time........................................... 800 1,800
Standard time1..................................... 750 2,000
Variance............................................... 50 (200)
Standard rate....................................... × $16.20 × $16.15
Direct labor time variance............ $ 810 U $ (3,230) F (2,420)
F
Total direct labor cost variance.............. $(1,810)
F
Total direct labor cost variance:
Actual cost2......................................... $ 13,120 $ 29,520
Standard cost3..................................... 12,150 32,300
Total direct labor cost variance... $ 970 U $ (2,780) F $(1,810)
F

1
750 = 0.25 hr. × 3,000 actual production of dark chocolate
2,000 = 0.40 hr. × 5,000 actual production of light chocolate
2
$13,120 = 800 hrs. × $16.40
$29,520 = 1,800 hrs. × $16.40
3
$12,150 = 750 hrs. × $16.20
$32,300 = 2,000 hrs. × $16.15

2. The variance analyses should be based on the standard amounts at actual

volumes. The budget must flex with the volume changes. If the actual volume
is different from the planned volume, as it was in this case, then the budget
used for performance evaluation should reflect the change in direct materials
and direct labor that will be required for the actual production. In this way,
spending from volume changes can be separated from efficiency and price
variances.

248
Prob. 22–3B

a. Direct Materials Cost Variance

Price variance:
Actual price....................................... $ 6.15 per pound
Standard price.................................. 6.20 per pound
Variance—favorable.................... $ (0.05) per pound
× actual quantity, 6,900 $(345)
Quantity variance:
Actual quantity................................. 6,900 pounds
Standard quantity............................ 6,750 pounds
Variance—unfavorable................ 150 pounds
× standard price, $6.20 930
Total direct materials cost variance—unfavorable.................................. $585

b. Direct Labor Cost Variance

Rate variance:
Actual rate......................................... $20.50
Standard rate.................................... 20.10
Variance—unfavorable................ $ 0.40 per hour
× actual time, 2,200 $ 880
Time variance:
Actual time........................................ 2,200 hours
Standard time................................... 2,160 hours
Variance—unfavorable................ 40 hours
× standard rate, $20.10 804
Total direct labor cost variance—unfavorable......................................... $1,684

c. Factory Overhead Cost Variance

Variable factory overhead controllable variance:
Actual variable factory overhead cost incurred.......... $ 5,750
Budgeted variable factory overhead for 2,160 hrs...... 5,940
Variance—favorable........................................................ $ (190)
Fixed factory overhead volume variance:
Normal capacity at 100%................................................ 2,100 hours
Standard for amount produced..................................... 2,160
Productive capacity used............................................... (60) hours
Standard fixed factory overhead cost rate................... × $16.50
Variance—favorable........................................................ (990)
Total factory overhead cost variance—favorable.............. $(1,180)

249
Prob. 22–3B Concluded

Alternative Computation of Overhead Variances

Factory Overhead

Actual Costs 40,400 41,580 Applied Costs

($5,750 + $34,650) 1,180 Balance (overapplied)
[2,160 × ($16.50 + $2.75)]

Actual Factory Budgeted Factory Applied Factory

Overhead Overhead for Amount Overhead
Produced
$40,400 Variable cost (2,160 × $2.75) $ 5,940 $41,580
Fixed cost 34,650
Total $40,590

$190 F $990 F
Controllable Volume
Variance Variance

$1,180 F
Total Factory Overhead
Cost Variance

250
Prob. 22–4B

OLD FAITHFUL INC.

Factory Overhead Cost Variance Report—Welding Department
For the Month Ended July 31, 2006
Normal capacity for the month............................................................ 5,000 hours
Actual production for the month......................................................... 5,200 hours
Variances
1
Budget Actual Favorable Unfavorable
Variable costs:
Indirect factory wages............... $ 15,340 $ 15,000 $(340)
Power and light........................... 8,320 8,500 $ 180
Indirect materials........................ 9,620 9,450 (170)
Total variable cost.................. $ 33,280 $ 32,950
Fixed costs:
Supervisory salaries.................. $ 17,000 $ 17,000
Depreciation of plant and
equipment............................... 41,250 41,250
Insurance and property taxes... 7,250 7,250
Total fixed cost....................... $ 65,500 $ 65,500
Total factory overhead cost............ $ 98,780 $ 98,450
Total controllable variances................................................. $(510) $ 180
Net controllable variance—favorable.................................. $ (330)
Volume variance—favorable:
Idle hours at standard rate for fixed factory overhead
(5,000 hrs. – 5,200 hrs.) × $13.10 2............................... (2,620)
Total factory overhead cost variance—favorable.............. $ (2,950)

1
The budgeted variable costs are determined by multiplying the variable
overhead rate (the July budget divided by 5,000 hours for each variable
overhead cost) by 5,200 actual hours.
2
$65,500 ÷ 5,000 hours = $13.10

251
Prob. 22–4B Continued

Alternative Computation of Overhead Variances

Factory Overhead

Actual Costs 98,450 101,400 Applied Costs

2,950 Balance (overapplied)
[5,200 × ($6.40 +
$13.10)]

Actual Factory Budgeted Factory Applied Factory

Overhead Overhead for Amount Overhead
Produced
$98,450 Variable cost (5,200 × $6.40) $33,280 $101,400
Fixed cost 65,500
Total $98,780

$330 F $2,620 F
Controllable Volume
Variance Variance

$2,950 F
Total Factory Overhead
Cost Variance

252
Prob. 22–4B Concluded

This solution is applicable only if the P.A.S.S. Software that accompanies the
text is used.

OLD FAITHFUL INC.

Budget Report
For the Period Ended July 31, 2006
Difference
Budget Actual from Budget %
Operating revenue........................... $145,000 $139,000 $(6,000) (4.14)
Operating expenses:
Indirect factory wages............... $ 15,340 $ 15,000 $ (340) (2.22)
Power and light........................... 8,320 8,500 180 2.16
Indirect materials........................ 9,620 9,450 (170) (1.77)
Supervisory salaries.................. 17,000 17,000
Depreciation of plant and
equipment.............................. 41,250 41,250
Insurance and property tax....... 7,250 7,250
Total operating expenses.... $ 98,780 $ 98,450 $ (330) (0.33)
Net income........................................ $ 46,220 $ 40,550 $(5,670) (12.27)

253
Prob. 22–5B

1. Actual hours provided (4 × 40 hours)........................... 160

Standard hours required for the original plan............. 158*
Labor time difference...................................................... 2
Standard labor rate......................................................... × $30.00
Direct labor time variance—unfavorable...................... $ 60.00
6,320 lines
* 40 lines per hour = 158 hours

2. Actual hours provided (4 × 40 hours)........................... 160

Standard hours required for the actual results........... 175*
Labor time difference...................................................... (15)
Standard labor rate......................................................... × $30.00
Direct labor time variance—favorable.......................... $
(450.00)
7,000 lines
* 40 lines per hour = 175 hours

3. Actual labor rate.............................................................. $ 34.00

Standard labor rate......................................................... 30.00
Difference......................................................................... $ 4.00
Actual hours provided (4 × 40 hours)........................... × 160
Direct labor rate variance—unfavorable....................... $ 640.00
The labor cost variance is $190 unfavorable
($640 unfavorable rate variance – $450 favorable time variance).
4. Actual hours provided (5 × 40 hours)........................... 200
Standard hours required for the actual results........... 175
Labor time difference...................................................... 25
Standard labor rate......................................................... × $30.00
Direct labor time variance—unfavorable...................... $ 750.00
5. Hiring an extra employee is more costly than the bonus by $560. The cost
variance for paying the bonus was $190 unfavorable, while the cost variance
that would result from hiring another employee would have been $750
unfavorable. Note that there will be no labor rate variance if a fifth
programmer is hired.
6. The labor rate and time variances fail to consider the number of errors in the
code from programmer fatigue. A program that has many errors will require
significant time for debugging at a later date. In addition, hidden errors can
cause possible field failures with customers. Thus, managers should
consider not only the efficiency of doing the work, but also the quality of the
work.

254
 SPECIAL ACTIVITIES

Activity 22–1

The use of ideal standards is a legitimate concern for Lynn. It is likely that such
standards are too tight and do not include the necessary fatigue factors that are
likely in this type of operation. It seems as though Lynn is arguing for practical
standards that can be attained if the operation is running well. Maybe some
standard in between is warranted, but that is not the issue. The issue is Cecil’s
method of operation. Cecil has effectively agreed to have this dispute arbitrated
with a senior official. However, Cecil is trying to seal the fate of the argument
behind the scenes, before the issue is discussed openly, as agreed. Moreover,
Cecil is attributing poor motives to Lynn behind her back. Cecil may get away
with this method of operation in the short run, but in the long term he will likely
alienate himself within the organization. He may create a distrustful environment
that may eventually hamper his ability to provide open, honest feedback. People
may eventually avoid him and hide the truth from him.

Activity 22–2

Although the Moncrief Company performance measurement system uses both

financial and nonfinancial measures, there may still be some serious
performance omissions. The financial measures are good measures of financial
performance. Likewise, employee satisfaction should be measured, since
satisfied employees may lead to overall business success. There is, however, at
least one major shortcoming to the proposed measures. None of the three
measures has a customer orientation. The management of Moncrief Company
should also select a performance measure that reflects how well the business is
performing from a customer’s perspective. Thus, measures about customer
satisfaction, product quality, warranty experience, or on-time delivery would be
excellent additions to the three measures already proposed.

255
Activity 22–3

1. The scrap is measured in sales dollars rather than cost in order to

communicate the total value of potential lost sales. If an item is scrapped and
not sold, then the company not only loses the cost of making the product but
also the profit that could have been made from selling the product. The cost
plus the profit is the sales value. Such a measure makes the most sense
when an operation is producing all that it can sell (100% of capacity) and any
scrapped items represent lost sales.

2. The “orders past due” is a common measure of the aggregate sales value of
orders past due. The “buyer’s misery index” measures how many customers
are waiting for orders to be filled. It is a more pure measure of customer
satisfaction. The “buyer’s misery index” and the sales value of orders past
due can measure two different things but can be used in combination to
evaluate process performance. For example, assume that a company has
$1,000,000 in sales and 100 customers. The following are two possible
scenarios:
Sales Value of Buyer’s
Scenario Orders Past Due Misery Index
1 $150,000 1
2 150,000 50
In the first scenario, 15% of sales are past due to a single customer. The
single customer is probably very upset, but all the other customers are being
satisfied. Apparently, one large order was not delivered to the customer. This
could be an isolated problem.
In the second scenario, the same 15% of sales are past due. However, 50% of
the customers are experiencing shipping delays. There will be widespread
dissatisfaction with the delivery service in the marketplace. This is not an
isolated problem but a systemic problem that is affecting half the customers.
The sales value of orders past due gives an indication of the “depth” of a
delivery problem, while the “buyer’s misery index” gives an indication of the
breadth of delivery problems.

256
Activity 22–4

This is a case where there is strong evidence that the poor performance that is
occurring inside the Assembly Department may be the result of behaviors
outside of the department. This is one of the classic problems with variance
analysis. Often, the variances reflect causes outside of the responsibility center
manager’s control. That is what appears to be happening here. The Assembly
supervisor complains that both the purchased parts and incoming material from
the Fabrication Department have been giving trouble. A review of performance
reports reveals the following: (1) the materials price variance is very favorable;
(2) the Fabrication Department’s labor time variance is also very favorable. A
possible explanation is that the Purchasing Department found a low-price
supplier. The low price translated into a favorable variance. Unfortunately, it
appears the company is “getting what it paid for.” Specifically, it appears that the
quality of the purchased parts has gone down, thus making assembly much
more difficult in the Assembly Department. The Fabrication Department may be
performing work faster than standard—again, resulting in a favorable labor time
variance. It may be that the department is working too fast. Specifically, the
speed is resulting in poor fabrication quality. Again, the Assembly Department is
bearing the cost of poorly fabricated parts. The problem in both instances is that
the variances measure only productivity and price savings and not quality. As a
result, there are strong incentives to purchase from lowest bidders, work fast,
cut corners, and push work on through. Unfortunately, the company is worse off,
as a whole, due to this set of situations. The sum of the unfavorable variances in
Assembly exceeds the favorable variances in the other departments. The analyst
will need to confirm these suspicions. If they are supported, the company may
wish to introduce quality measures in addition to the variance information in
order to avoid the counterproductive behaviors in Purchasing and Fabrication.

257
Activity 22–5

The plant manager is placing pressure on the controller because the controllable
variance is very unfavorable. The claim is that these costs are not really variable
at all. This is a very difficult claim to accept. This is a small company, so it
purchases its power from the outside. The power and light bill is variable to the
amount of energy used in the plant. Energy usage is likely a function of the
number of units produced. Likewise, the supplies are likely variable to machine
usage, which is also related to the number of units produced. However, these
two costs are not where the problem lies. The problem is with the indirect factory
wages.
The indirect wages may not be completely variable. However, the variance is
$5,712 or 28% higher than the standard. This is much greater than the 15%
difference between the existing production volume and full capacity. In other
words, even granting the plant manager’s position on the indirect wages still
does not explain the overall size of the variance. More is being spent on indirect
wages than would be implied by even 100% production. Something appears
amiss.
The controller should discuss these matters with the plant manager and attempt
to discover why the indirect labor costs are so completely out of line with the
standards. The plant manager has not complained about the standards yet but
may do so in the future. It’s very common for the standards to be criticized as
too tight.

258
Activity 22–6

Use this activity to compare performance measures from different groups and
their selected cities.

The following are examples of performance measures from Worcester, MA:

259
Activity 22–6 Concluded

Source: Benchmarking Municipal Performance: A Tool for Streamlining

Municipal Government

Michael D. Goodman and Roberta R. Schaefer

Worcester Municipal Research Bureau

260