DISCUSSION

1. Define the following terms: standard cost system, total variance, material price variance, and labor efficiency
variance.
 Standard cost system - records both standard costs and actual costs in the accounting records.
This process allows for better cost control because actual costs can be easily compared to
standard costs.

 Total variance - is the difference between actual input cost for material or labor and the standard
cost for material or labor for the output produced.

 Material price variance - is the difference between the actual price paid for material and the
standard price of the material times the actual quantity used or purchased.

 Labor efficiency variance - compares the number of hours actually worked with the standard hours
allowed for the production achieved and values this difference at the standard labor rate.

2. Discuss why standards may need to be changed after they have been in effect for some period of time.

 Standards may need to be changed from time to time because of the changing economic
conditions, availability of materials, quality of materials and labor rates or skills levels. Standards
should be reviewed periodically in order to assure the management that the current standards are
being established and used.

3. Discuss how variable and fixed overhead application rates are calculated.

 The variable overhead application rate is calculated by dividing total budgeted variable overhead
by its related level of activity. Any level of activity within the applicable range may be selected since
VOH cost per unit is constant throughout the relevant range. The fixed overhead application rate is
calculated by dividing total budgeted fixed overhead by the specific capacity level expected for the
period.

4. Why are fixed overhead variances considered noncontrollable?

 Management has limited ability to control fixed overhead costs in the short run because these
costs are incurred to provide the capacity to produce. Fixed costs can be controllable to a limited
extent at the point of commitment; therefore, the FOH spending variance can be considered, in
part, controllable.

5. Provide the correct term for each of the following definitions:

a. a cost that fluctuates with large changes in level of activity

 step fixed cost
b. a range of activity over which costs behave as predicted
 relevant range
c. the capacity level at which a firm believes it will operate at during the coming production cycle
 expected annual capacity
 d. the difference between actual variable overhead and budgeted variable overhead based on inputs
 variable overhead spending variance
e. the difference between total actual overhead and total applied overhead
 total overhead variance
f. the difference between total budgeted overhead based on inputs and applied overhead
 volume variance
g. the difference between total actual overhead and total budgeted overhead based on output
 efficiency variance
h. the difference between actual fixed overhead and budgeted fixed overhead
 fixed overhead spending variance

PROBLEM 1
1. Refer to Fitzhugh Company. Compute the material purchase price and quantity variances.

 Material price variance:

100,000 x P2.50 P 250,000
100,000 x P2.60 (260,000)
P 10,000 F

Material quantity variance:

95,625 x P2.60 P 248,625
89,250 x P2.60 (232,050)
P 16,575 U

2. Refer to Fitzhugh Company. Compute the labor rate and efficiency variances.

 Labor rate variance:

122,400 x P8.35 P 1,022,040
122,400 x P8.50 (1,040,400)
P 18,360 F

Labor efficiency variance:

122,400 x P8.50 P1,040,400
127,500 x P8.50 (1,083,750)
P 43,350 F
PROBLEM 2

1. Refer to Taylor Company. Compute all the appropriate variances using the two-variance approach.

 Actual (P6,400 + P17,500) P23,900

Budget Variance: P240 U
BFOH (8,900 x P1.90) P16,910
VOH (1,800 x 5 x P.75) 6,750 P23,660
Volume Variance: P190 F
Applied OH:
(1,800 x 5 x P2.65) P23,850

2. Refer to Taylor Company. Compute all the appropriate variances using the four-variance approach.

 Actual VOH P6,400

Variable Spending Variance: P275 F
Flex. Bud. Based on Actual
Input Hours (8,900 x P.75) P6,675
Variable Efficiency Variance: P75 F
Applied VOH
(1,800 x 5 x P.75) P6,750

Actual FOH P17,500

FOH Spending Variance: P590 U
BUDGETED FOH P16,910
FOH Volume Variance: P190 F
Applied FOH
(1,800 x 5 x P1.90) P17,100

3. Refer to Taylor Company. Compute all the appropriate variances using the three-variance approach.

 Actual P23,900
Spending Variance: P315 U
Flexible Budget Based on Actual Input
BFOH P16,910
VOH (8,900 x P.75) 6,675 P23,585
Efficiency Variance: P75 F
Flexible Budget Based on Standard DLHs
BFOH P16,910
VOH (1,800 x 5 x P.75) 6,750 P23,660
Volume Variance: P190 F
Applied OH:
(1,800 x 5 x P2.65) P23,850
PROBLEM 3

Determine the following items:

a. material purchase price variance

 Actual material cost P314,000

Actual pieces at standard cost (80,000 x P4) (320,000)
Material purchase price variance P 6,000 F

b. standard quantity allowed for material

 3,900 units x 20 pieces per unit = 78,000 standard quantity allowed

c. total standard cost of material allowed

 78,000 x P4 = P312,000 - total standard cost of material

d. actual quantity of material used

 Standard cost of actual material used:

P312,000 + P6,400 U quantity variance = P318,400
P318,400 ÷ P4 = 79,600 actual pieces used

e. labor rate variance

 Actual labor cost P 40,120

Actual DLHs 5,900 X P6 (35,400)
Labor rate variance P 4,720 U

f. standard hours allowed for labor

 3,900 units x1.5 standard hours per unit = 5,850 standard hours allowed (SHA)

g. total standard cost of labor allowed

 5,850 SHA x P6 = P 35,100

h. labor efficiency variance

 Actual hours x standard rate (from e) P 35,400

Standard cost of labor allowed (from g) (35,100)
Labor efficiency variance P 300 U
i. actual variable overhead incurred

 Actual machine hours x standard VOH rate (18,900 x P2.50) P 47,250

VOH spending variance (50) U
Actual VOH P 47,300
j. standard machine hours allowed

 3,900 units x 4.8 standard hours per unit = 18,720 machine hours allowed
k. variable overhead efficiency variance

 Standard hours allowed (from j) x standard VOH rate

(18,720 x P2.50) P 46,800
Actual machine hours  standard rate (from i)
(18,900 x P2.50) (47,250)
Variable overhead efficiency variance P 450 U

l. budgeted fixed overhead

 19,000 machine hours x P3 = P 57,000

m. applied fixed overhead

 3,900 units x 4.8 hours per unit x P3.00 = P56,160

n. fixed overhead spending variance

 Actual fixed overhead P 60,000

Budgeted fixed overhead (from l) (57,000)
Fixed overhead spending variance P 3,000 U

o. volume variance

 Budgeted fixed overhead (from l) P 57,000

Applied fixed overhead (from m) (56,160)
Volume variance P 840 U

p. total overhead variance

 Total actual overhead P107,300

[P60,000 + P47,300 (from i)]
Total applied overhead (18,720 SHA x P5.50) (102,960)
Total overhead variance P 4,340 U