558 CONTROLLING COSTS AND PROFITS PART 8

SUMMARY OF FACTORY OVERHEAD

CD (2) (3) (4)
>• •' Budget Budget
Allowance Allowance
for Factory for Factory Actual
Overhead Overhead Hours x
Actual (Actual. (Standard Standard
Factory Hours Hours Overhead
Method Overhead Worked) Allowed) Rate*
Two-
Variance $7,384 $7,280
Method

Three-
Variance $7,384 $7,370 $6,950
Method

Four- •
*8 •Variance $7,384“ $7,370 $7,280 $6,950
VMethod

*3,475 actual hours worked.x $2 standard factory overhead rate.

versa.. Thus, any apparent advantage created by one may be canceled out by
the other.

Yield Yield can be defined as the amount of prime product manufactured from a
Variance . given amount of materials. The yield variance is.the result of obtaining a yield
different from the one expected on the basis of input. In a gray iron foundry * i

the'raaterials charged into the cupola include coke, flux material, and all alloy
materials and innoculants used as ladle additions. Cupola operation involves
the application of heat to melt the metal as well as a complex thermochemical
• reaction. This process results in yield, meaning good castings made from, the
"melted metal, expressed as a percent of total metal charged..
In sugar refining, a normal loss of yield develops because, on the average,
Jt takes approximately 102.5 pounds of sucrose in raw sugar form to produce
100 pounds of sucrose in refined sugars. Part of this sucrose emerges as black­
strap molasses, but a small percentage is completely lost.
In the canning industry, it is customary to estimate the expected yield of
grades per ton of fruit purchased .or delivered to the plant. The actual yield
/
 CHAPTER 19 • STANDARD COSTING: SETTING STANDARDS; VARIANCE ANALYSIS 559

VARIANCE ANALYSIS METHODS

(5)

. OVERAIL
Factory (or Net) '
Overhead Factory.
Charged Overhead
TO , Variances for Variance
Production** Each Method (Unfavorable)
Controllable variance (Col. I - Col. 3) $104 |
$6,800 $584
Volume variance (Col. 3 - Col. 5)...... $480 J
Spending variance (Col. I Cof. 2).... $ 14

$6,800 Idle capacity variance (Col. 2 - Col. 4) $420 • $584

Efficiency variance (Col. 4 - Col. 5)... S150 -
Spending variance (Col. 1 - Col. 2).... $ 14

Variable efficiency variance (Col. 2 -

$6,800 coi. 3).......:.......... ................. . . $ '90 $584
Fixed efficiency variance***.... $60
Idle capacity variance****...... .: $420 F
• -V
••3,400 standard hours allowed x $2 standard factory overhead rate. .
(3,475 actual hours worked - 3,400 standard hours allowed) x'$:S0. fixed factory over­
head rate. ,
**••(4,000 normal capacity hours - 3,475 actual hours worked) x $.80 fixed factory overhead
' rate. Tfiis variance can also be computed by subtracting Column 4 from Column 2.

should be compared to the one expected and should be evaluated in terms of

cost. If the actual yield deviates from predetermined percentages', cost and
profit will differ. .
Since the final product cost contains not only materials but also labor and
factory overhead, a,yield variance for labor and factory overhead should be
* / determined when the.product is finished. The actual quantities resulting from /
the processes are multiplied by the standard cost, which includes all .three
cost elements. A labor yield variance must be looked upon as the result of the
quality and/or quantity of the materials handled, while the factory overhead
yield variance is due to the greater or smaller number of hours worked.- It
should be noted that the overhead yield variance may have a significant effect
on the amount of over- or underabsorbed factory overhead.

To illustrate the calculation of mix and yield variances*, assume that the Illustration
Spririgmint Company, a manufacturer of chewing gum, uses a standard cost of
system. Standard product and cost specifications for 1,000 lbs. of chewing Variances
gum are as follows:

!
 560 CONTROLLING COSTS AND PROFITS PART 6

Quantity x Price = Cost

Gum base.. 800 $.25 per lb. $200
Corn syrup 200 .40 80
Sugar.. 200 .10 20
Input 1,200 lbs. $300; $300 + 1,200 lbs. = $.25 per lb.*
Output..? 1,000 lbs. $300; $300 - 1,000 lbs. = $.30 per lb.*
•Weighted averages.

The production of 1,000 lbs. of chewing gum requires 1, 200 lbs. of raw
materials. Hence, the expected yield is 1,000 lbs. 1,200 lbs., or 5/s of input.
Materials records indicate: •• i

Beginning Purchases Ending

Inventory in January Inventory
Gum base .. 10,000 lbs. 162,000 lbs. @$.24 15,000 lbs.
Corn syrup. .'. 12,000 30,000 @ .42 4,000
Sugar......... .. 15,000 32,000 @ .11 11,000

To convert 1,200 lbs. of raw materials into 1,000 lbs. of finished product
JtS requires 20 hours at $6 per hour, or $.12 per lb. of finished product. Actual
direct labor hours and cost for January are 3,800 hours at $23,104.
I Factory overhead is applied on a direct labor hour basis at a rate of $5 per
hour ($3 fixed, $2 variable), or $.10 per lb. of finished product. Normal over­
head is $20,000 with 4,000 direct labor hours. Actual overhead for the month
> . is $22,000. Actual finished production for January is 200,000 lbs.
The standard cost per pound of finished chewing gum is:
Materials............. $.30 per lb.
Labor............. . .12
Factory overhead .10
$.52 per lb.

Materials Variances. The materials variances for January consist of (1) price
variances, (2) a mix variance, (3) a yield variance, and (4) quantity variances.
The company computes the materials price variances as follows, using the
procedure illustrated on page 548, and recognizes these variances when the
materials are purchased.
Actual Standard Unit Price Price
Material Quantity Price Price Variance Variance
Gum base , 162,000 $.24 $.25 $(.01) $(1,620)
Corn syrup..^........... 30,000 .40 ’ .02 600
42 ) 320
Sugar 32,000 .11 .10 .01
Net materials purchase price variance... $ (700) fav.

The materials mix variance results from combining materials in a ratio

different from the standard materials specifications. It is computed as follows:

t
 CHAPTER 19 STANDARD COSTING: SETTING STANDARDS; VARIANCE ANALYSIS 561

Actual quantities at individual standard materials costs:

Gum base — 157,000 lbs. @ $.25........................... $39,250
Com syrup — 38,000 @$.40 15,200
Sugar 36,000 @$.10 3,600 $58,050
231,000 lbs.
Actual quantity at weighted average of standard materials
cost input (231,000 lbs. * $.25)........................................ 57,750*
Materials mix variance........................................................ $ 300 unfav.
•This figure can also be determined by multiplying the standard (expected) output from actual
input (192,500 lbs., or Vo of 231.000 lbs.) by $.30 weighted average of standard materials cost
output.
The yield variance is computed as follows:
Actual quantity at standard materials cost......................................... $57,750
Actual output quantity at standard materials cost (200,000 lbs. x
$.30).............................. ...... ................... ........................... .......... 60,000*
Materials yield variance..................................................................... $(2,250) fav.
•This figure can also be determined by mulu'plying the input needed to produce 200.000 lbs.
(240,000 lbs.) by $.25.
The yield variance occurred because the actual production of 200,000 lbs.
exceeded the expected output of 192,500 lbs. (5/6 of 231,000 lbs.) by 7,500 lbs.
The yield difference multiplied by the standard weighted materials cost of $.30
per output pound equals the favorable yield variance of $2,250.
The materials quantity variance can be computed for each item as fol­
lows, using the procedure illustrated on page 549.
Standard Materials
Unit Quantity
Unit x Cost = Amount Variance
Gum base: Actual quantity used....... 157.000 lbs. $.25 $39,250
160.000 lbs.* .25 40,000 $ (750) fav.
Standard quantity allowed
Corn syrup: Actual quantity used....... 38.000 lbs. $.40 $15,200
40.000 lbs.** .40 16,000 (800) fav.
Standard quantity allowed
Sugar: Actual quantity used....... 36.000 lbs. $.10 S 3,600
Standard quantity allowed 40.000 lbs.*** .10 4,000 (400) fav.
$(1,950) fav.
Total materials quantity variance......

••The 240,000 lbs. x (200 lbs. + 1,200 lbs.) corn syrup portion of the formula - 40.UW ids.
•••The 240,000 lbs. x (200 lbs. + 1,200 lbs.) sugar portion of the formula - 40,000 IDs.
The total materials quantity variance can also be determined by compar­
ing actual quantities at standard prices, $58,050 ($39,250 + $15,200 + $3,600),
to actual output quantity at standard materials cost, $60,000 (200,000 lbs. x
$.30) for a total favorable variance'of $1,950. The mix and yield variances
separate the materials quantity variance into two parts:
Materials mix variance...... $ 300 unfav.
Materials yield variance..... (2,250) fav.
Materials quantity variance $(1,950) fav.
 562 CONTROLLING COSTS AND PROFITS PART 6

The influence of individual raw materials on the total materials mix

variance can be computed in the following manner:
Actual
Quantity
Total Using . Standard Materials
Actual Standard Actual Standard Quantity UnIt Mix
Material QuantiW Formula x Quantity = Formula Variation x Price = Variance
Gum base .... 157,000 lbs. 800
1,200 231,000 lbs. 154,000 lbs. 3.000 lbs. $.25 $750
Corn synip... 38,000 200
1,200
231,000 38,500 (500) .40 (200)

Sugar 36.0Q0 200

231,000 38.500 (2,500) ' .10 (250)
1,200
231,000 lbs. 231,000 lbs. -O- $300

Labor Variances. The expected output of 192,500 lbs. of chewing gum should
require 3,850 standard labor hours (20 hours per thousand pounds of chewing
gum produced). Similarly, the actual output of 200,000 lbs. of chewing gum
should require 4,000 standard labor hours.
i The labor variances are the (1) rate variance, (2) efficiency variance, and
(3) yield variance. The computation of these variances for January is as fol­
lows:
! Actual payroll.................................. .............:........................... $23,104
Actual hours (3,800) x standard labor rate ($6)........................ 22,800
Labor rate variance....................................... ........................... $ 304 unfav.
Actual hours x standard labor rate........................................... $22,800
Standard hours allowed for expected output (3,850) x standard
labor rate ($6)......................................................................... 23,100
Labor efficiency variance.......................................................... $ (300) fav.
Standard hours allowed for expected output x standard labor
rate....................................................... ................................. $23,100
Standard hours allowed for actual output (4,000) x standard
labor rate *($6>..........................*...... ....................................... 24,000
Labor yield variance.........................I....................................... $ (900) fav.

The labor rate variance is computed as shown on page 550. The tradi­
tional labor efficiency variance, as illustrated on page 550, is computed as fol­
lows:
Time x Rate = Amount
Actual hours worked....... 3,800 $6 $22,800
Standard hours allowed... 4,000 6 24,000
Labor efficiency variance. (200) 6 $(1,200) fav. .

The labor yield variance identifies the portion of the labor efficiency
variance attributable to obtaining'an unfavorable or, as in this illustration's
favorable yield [(3,850 standard hours allowed for expected output - 4,00C
standard hours allowed for actual output) x $6 standard labor rate = $900].
 CHAPTER 19 STANDARD COSTING: SETTING STANDARDS; VARIANCE ANALYSIS
563
The favorable labor efficiency variance of $300 is the portion of the traditional
labor efficiency variance that is attributable to factors other than yield. The
sum of the two variances, $900 plus $300, equals the $1,200 traditional labor
efficiency variance.

Factory Overhead Variances. A yield variance can also be computed for factory
overhead. When the three-variance method is used, the overhead variances
consist of the (1) spending variance, (2) idle capacity variance, (3) efficiency
variance, and (4) yield variance. These variances are computed as follows:

THREE-VARIANCE METHOD ADAPTED TO COMPUTE A YIELD VARIANCE

Actual factory overhead............................................ $22,000
Budget allowance (based on actual hours):
Fixed expense budgeted............ .....................*. ... $12,000
Variable expense (3,800 hours x $2)................... 7,600 19,600
Spending variance.......................................'............... S 2,400 unfav.
Budget allowance (based on actual hours).............. $19,600
Actual hours (3,800) x standard overhead rate ($5) 19,000
Idle capacity variance................................................ $ 600 unfav.
Actual hours x standard overhead rate................... $19,000
Standard hours allowed for expected output (3,850) x standard
overhead rate ($5)........................................... .'................................ 19,250
Overhead efficiency variance............................................................... $ (250) fav.
Standard hours allowed for expected output x standard overhead
rate................................................................... .................................. $19,250
Standard hours allowed for actual output (4,000) x standard over­
head rate ($5)..................................................................................... 20,000
Overhead yield variance............................................ .......................... $ (750) fav.

The spending and idle capacity variances are computed in the same man­
ner as discussed on page 555. The overhead efficiency variance and the over­
head yield variance, when combined, equal the efficiency variance discussed
earlier in this chapter. The overhead yield variance measures that portion of
the total overhead variance resulting from a favorable yield [(3,850 hours -.
4,000 hours) x $5 = $750].
When the two-variance method is used, the overhead variances are the (1)
controllable variance, (2) volume variance,.and (3) yield variance. These
variances are computed as shown on page 564.
The $2,300 unfavorable controllable variance equals the unfavorable
spending variance, $2,400, combined with the $100 variable part of the favor­
able overhead efficiency variance [(3,800 hours - 3,850 hours) x $2]. The
$450 unfavorable overhead volume variance equals the unfavorable idle ca­
pacity variance, $600, combined with the $150 fixed part of the favorable
overhead efficiency variance [(3,800 hours — 3,850 hours) x $3].
366 CONTROLLING COSTS AND PROFITS PART 6

(c) Of the different types of standards listed below, the one which best de­
scribes labor costs that should be incurred under forthcoming efficient
operating conditions is: (1) ideal; (2) basic; (3) maximum efficiency; (4)
normal.
(d) In standard costing, standard hours allowed is a means of measuring: (1)
standard output at standard hours; (2) actual output at standard hours;
(3) standard output at actual hours; (4) actual output at actual hours.
(e) In preparing the cost report at standard for process costing: (1) equiva­
lent units are not used; (2) equivalent units are computed using an ap­
proach that ignores inventories; (3) the actual equivalent units are mul­
tiplied by the standard cost per unit;.(4) the standard equivalent units are
multiplied by the actual cost per unit.
(f) In a standard cost system, the materials purchase price variance is ob­
tained by multiplying the: (1) actual price by the difference between ac­
tual quantity purchased and standard quantity allowed; (2) actual quantity
purchased by the difference between actual price and standard price; (3)
standard price by the difference between standard quantity purchased
and standard quantity allowed; (4) standard quantity purchased by the
difference between actual price and standard price.
(g) A favorable labor efficiency variance indicates: (1) the average wage rate
paid was less than the standard rate; (2) the standard labor hours allowed
for the units produced were greater than actual labor hours used; (3) the
actual total labor cost incurred was less than the standard labor cost al­
lowed for the Units produced; (4) the number of units produced was less
than .the number of units budgeted for the period.
(h) Given below are notations and their respective meanings:
AH = Actual hours
SHA = Standard hours allowed for actual production
AR = Actual rate
SR = Standard rate
The formula that represents the calculation of the labor efficiency
variance is: (1) SR x (AH - SHA); (2) AR x (AH - SHA); (3) AH x (AR -
SR); (4) SHA x (AR - SR).
(i) The standard cost variance representing the difference between actual
factory overhead incurred and. budgeted factory overhead based on ac­
tual hours worked is the: (1) volume variance; (2) spending variance; (3)
efficiency variance; (4) quantity variance.
(j) The fixed portion of the standard factory overhead application rate is a
function of a predetermined "normal” activity level. If standard hours al­
lowed for good output equal this "normal" activity level for a given
period, the volume variance will be: (1) zero; (2) favorable; (3) unfavor­
able; (4) either favorable or unfavorable, depending on the budgeted
overhead.
(AICPA adapted)

' EXERCISES
Whenever variances are required In the following exercises, indicate whether they are favorable or unfa­
vorable.
1. Materials variance analysis. The Schlosser Lawn Furniture Company uses 12 meters of alumi­
num pipe at $.80 per meter as standard for the production of its Type A lawn chair. During one
 CHAPTER 19 STANDARD COSTING: SETTING STANDARDS; VARIANCE ANALYSIS 567

month’s operations, 100 000 meters of the pipe were purchased at $.78 a meter, and 7.200 chairs
were produced using 87 300 meters of pipe. The materials price Variance is recognized when mate­
rials are purchased. .
Required: The materials price and quantity variances. c
2. Materials variance analysis. The standard price for Material 3-291 is $3.65 per liter. During
November, 2 000 liters were purchased at $3.60 per liter. The quantity of Material 3-291 issued
during the month was 1 775 liters and the quantity allowed for November production was 1 825
liters. s
Required: Materials price variance, assuming that:
(1) It is recorded a! the time of purchase. "
(2) It is recorded at the time of issue. -
3. Labor variance analysis. The processing of a product requires a standard of .8 direct labor
hours per unit for Operation 4-802 at a standard wage rate of $6.75 per hour. The 2,000 units
actually required 1,580 direct labor hours at a cost of $6.90 per hour.
Required: The labor rate and efficiency variances.
4. Factory overhead variance analysis. The Osage Company uses a standard cost system. The
factory overhead standard rate per direct labor hour is:
$4,500
Fixed: = $ .90
5,000 hours
$7,500
Variable: = 1.50
5,000 hours
$2.40

For October, actual factory overhead was $11,000, actual labor hours worked were 4,400, and
the standard hours allowed for actual production were 4,500.
Required: Factory overhead variance analysis using the two-, three-, and four-variance methods.
* 5. Actual hours worked; standard hours allowed. The following information relates to the Finish­
ing Department of Bourne Company for the fourth quarter:
Total actual overhead......................... .$178,500
Budget allowance formula................. .$110,000 plus $.50 per direct labor hour
Predetermined factory overhead rate .$1.50 per direct labor hour
Spending variance............ .... ........... . .$8,000 unfavorable
Efficiency variance............................. .$9,000 unfavorable
The total factory overhead variance is divided into three variances — spending, idle capacity,
and efficiency.
Required:
(1) Actual direct labor hours worked in the Finishing Department during the fourth quarter.
(2) Standard direct labor hours allowed for production in the Finishing Department during the
fourth quarter.
(AICPA adapted)
6. Factory overhead controllable and volume variances. The following data are available:
Proouct A Proouct B
Standard cost per direct labor hour:
Fixed factory overhead.................. $1.00 $1.00
Variable factory overhead............. 1.50 2.00
Actual data:
Sales............................................... 10,000 units 12,000 units
Production..................................... 8,000 units 14,000 units
Each product unit requires two hours of direct labor when operating at standard; fixed factory
overhead was budgeted at $40,000; actual factory overhead was $125,000.
 568 CONTROLLING COSTS AND PROFITS PART 0

Required:
(1) Factory overhead controllable and volume variances.
(2) Additional information required to compute factory overhead variances using the three-
and four-variance methods.

T. Factory overhead variance analysis. The normal capacity of a plant is 20,000 direct labor
^hours per month. At normal capacity, the budgeted factory overhead is $2.10 per direct labor hour,
consisting of $12,000 fixed expense and $1.50 per hour variable expense. During June, the plant
operated 18,000 direct labor hours, with actual factory overhead of $40,000. The standard for the
capacity attained is 17,500 hours.
• Required: An analysis of factory overhead using the two-, three-, and four-variance methods.

8. Variance analysis: materials, labor, factory overhead. The DeVries Company has a budgeted
normal monthly capacity of 10,000 labor hours, with a standard production of 8,000 units at this
capacity. Standard costs are:
Materials.............. ........................... .2 kilograms @$.50
Labor...... ................’.............................. .$9 per hour
Factory overhead at normal capacity:
Fixed expense........ .......... ........... .$5,000
Variable expense........................... ,$1.50 per labor hour
During May. actual factory overhead totaled $17,550 and 9,000 labor hours cost $76,500. Dur­
i*. ing the month, 7,000 units were produced using 14 400 kg of materials at a cost of $.51 per kg.
Required: Two variances for materials, two variances for labor, and variances for factory over­
head, using the two-, three-, and four-variance methods.
9. Variance analysis: materials, labor, and factory overhead; process costing. The Redman
Company manufactures a product whose standard unit cost is as follows:
) Direct materials: 24 kilograms (kg) @ $3.00 $ 72.00
Direct labor: 6 hours @ $6.50...... ............ 39.00
Factory overhead: 6 hours @ $.75.......... . 4.50
Total unit standard cost............................ $115.50

The factory overhead was based on the following flexible budget, in which 90% is normal ca­
pacity.
80% 90% 100%
Hours (direct labor).... 40,000 45,000 50,000
Variable expenses..... $20,000 $22,500 - $25,000
Fixed expenses.......... 11,250 11,250 11,250
Total factory overhead $31,250 $33,750 $36,250

Actual data for November:

Planned production, 7,500 units.
Materials put into production. 192 410 kg @ $3.04 (average cost).
Direct labor, 46.830 hours @ $6.60 average labor cost.
Actual factory overhead, $36,340.
Other data:
Beginning Inventory, work in process, 80 units, all materials, 50% converted.
Ending inventory, work In process. 100 units, all materials, 60% converted.
Started in process during November. 7,850 units.
Roqulrod: A variance analysis of (1) direct materials, (2) direct l^bor cost, and (3) factory overhead
(two-variance method).

1G. Price, mix, and yield variances. Malmuta Company uses a standard cost system. The standard
cost card for one of its products shows the following materials standards: ■
j
CHAPTER 19 STANDARD COSTING: SETTING STANDARDS; VARIANCE ANALYSIS 569

Standard Price
Material Pounds x per Pound a Amount
A 20 .70 $14
B 5 .40 2
C 25 .20 5
Total materials cost per unit. $21
The standard 50 lb. mix cost per lb. is $.42 ($21 50 lbs.). The standard mix should produce
40 lbs. of finished product, and the standard cost of finished product per lb. is $.525 ($21 -f- 40
lbs.).
Materials of 500,000 lbs. were used as follows:
Material A..... ....... ......... ................................. .230.000 lbs. @ $.80
Material B......................... ............................... . 50.000 @ $.35
Material C......................................................... ,220.000 @ $.25
The output of the finished product was 390,000 lbs.
Required: Product analysis showing materials price, mix, and yield variances.
11. Price, mix, and yield variances. Cordell Chemical, Inc., produces Petrochloronal, using the
following standard proportions and costs of materials:
Cost *
Kilograms per Kilogram Amount
Material A.... 50 $5.00 $250.00
Material B.... 40 6.00 240.00
Material C.... 60 3.00 180.00
150 4.4667 $670.00
Standard shrinkage (3316%) 50
Net weight and cost............ 100 6.70 $670.00 '

A recent production run yielding 100 output kilograms required an input of:
Cost
Kilograms per Kilogram
Material A........ .v....................................... •40 $5.15 •
Material B................................................. 50 6.00
Material C.................................................. 65 2.80
Required: Materials price, mix, and yield variances.
12, Price, mix, and yield variances. The standard mix for producing 8,000 bottles of Product X is:
Material A: 1 000 liters @ $.10
Material B: 2 000 @ $.40
During May, 10,000 bottles of Product X were produced from an input of:
Material A: 1 500 liters @ $.11
Material B: 3 300 @$.37
Required: Materials price, mix, and yield variances for May.
13. Price, mix, and yield variances. The standard product mix for making 12,500 tubes of liquid
solder is:
Material A: 1 500 kilograms @ $.06 $ 90
Material B: 625 @ .40., 250
Material C: 1 000 @ .25.. 250
During April, 77,500 tubes of solder were produced from an input of:
Material A: 8 750 kilograms @ $.056................................................................... , $ 490
Material B: 3 750 @ .380...... ............................................................. . t.425
Material C: 6 250 @ .280................................................................... . 1,750
Required: Materials price, mix, and yield variances, including an analysis of the portion of the mix
variance attributable to each material.
 570 CONTROLLING COSTS AND PROFITS PART 6

PROBLEMS
Whenever variances are required in the following problems, indicate whether they are favorable or unfa-
vorable.
19*1. Standard cost sheet; labor variance analysis. Olano, Inc., plans to sell its new skin care
lotion, Lanosof, in a 4-ounce bottle at a suggested retail price of $1. Cost and production studies
show these standard costs:
Container:
Allowance for
Item No. Description Cost Waste and Breakage
2147 4-oz. bottle $5.75 per gross 2%
315 Label 3.30 per 1,000 4%
Materials:
Quantity Used per
Item No. Description .Cost 125 Gallon Batch*
4247 Compound 34A $40 per 100 lbs. 70 lbs.
3126 Alcohol and glycerin 40 per 100 lbs. 68
4136B Perfume oil 4
*One gallon contains 128 oz.
Standard costs of a 90 lb. batch of perfume oil are as follows:
Ingredients................................. $2,169.95
Direct labor: 4.4 hours @ $9.12 40.13
Factory overhead: $7.50 per batch plus $1.95 per standard labor hour.
Allowance tor lost materials:
Allow 5% of standard materials cost for overfilling, waste, and breakage.
•» Direct labor per gross:
Compounding....... 0.15 hours @ $7.60
Filling and packing 1.00 @$7.00
Factory Overhead:
Compounding....... . $3.00 per standard labor hour
Filling and packing . $1.75 per standard labor hour plus $.95 per gross
Required:
(1) A standard cost sheet for one gross of this product, arranging the data under the five
subheadings listed above. (Calculations should be made to the nearest cent per gross.)
(2) An analysis of the labor variance from standard, assuming that the company expected to
produce 1,000 gross of Lanosof Lotion in its first week of production, but actually pro-
duced only 850 gross, and its direct labor cost for 825 hours of filling and packing was
$5,871.
(AICPA adapted)
i9*2. Variance analysis. On May 1, Bovar Company began the manufacture of a new mechanical
device known as "Dandy.” The company installed a standard cost system in accounting for man­
ufacturing costs. The standard costs for a unit of Dandy are:
Materials: 6 lbs. at$1 per lb......................... $ 6.00
Direct labor: 1 hour at $4 per hour.............. 4.00
Factory overhead: 75% of direct labor cost 3.00
$13.00

rhe following data were obtained from Bovar's records for May:
Actual production of Dandy.....
\ 4,000 units
Units sold of Dandy.................... 2,500
' Sales.................;.......................... $50,000
Purchases (26,000 pounds)....... 27,300
CHAPTER 18 STANDARD COSTING: SETTING STANDARDS; VARIANCE ANALYSIS 571

Materials price variance (applicable to May purchases) ..... .. $1,300 unfav.

Materials quantity variance.............. ,............................. ... 1,000 u'nfav.
Direct labor rate variance............ '................................... 760 unfav.
Direct labor efficiency variance....................................... 800 fav.
Factory overhead total variance...................................... 500 unfav.
Required:
(1) Standard quantity of materials allowed (in pounds).
(2) Actual quantity of materials used (in pounds).
(3) Standard hours allowed.
(4) Actual hours worked.
(5) Actual direct labor rate.
(6) Actual total factory overhead. (AICPA adapted)

18-3. Variance analysis — materials, labor, and factory overhead. The Organet Stamping Com­
pany manufactures.a variety of products made of plastic and aluminum components. During the
winter months, substantially all of the production capacity is devoted to the production of lawn
sprinklers for the following spring and summer. Other products are manufactured during the re­
mainder of the year. Because a variety of products are manufactured throughout the year, factory
activity is measured by production labor hours rather than units of product.
Production and sales volume have grown steadily for the past several years as can be seen
from the following schedule of standard production labor content of annual output:
Year Hours
19A 26,000
19B 28,000
19C. 27.000
19D 30.000
19E..». 32.000
The company has developed standard costs for its several products, setting the costs for each
year in the preceding October. The standard cost of a sprinkler for 19F is $2.50, computed as fol­
lows:
Direct materials:
Aluminum: .21b. @$.40............................................................. $ .08
Plastic: 1.0 lb. @$.38.................................................................. .38
Production labor: .3 hr. @ $4.00.............. ..................................... . 1.20
Factory overhead (calculated using 30,000 annual production labor
hours as normal capacity):
Variable: .3 hr. @$1.60.............................................................. .48
Fixed: .3 hr. @$1.20.............. ................................................... .36
Total.................................................................:........................... $2.50

During February 19F, 8,500 good sprinklers were manufactured. Due to plastic shortages, the
purchasing agent had to purchase lower grade plastic than called for in the standards, causing an
increase in the number of sprinklers rejected by quality control. The following costs were incurred:
Materials requisitioned for production:
Aluminum: 1,900 lbs. @ $.40................ $ 760
Plastic:
Regular grade: 6,000 lbs. @ $.38......:. 2,280
Low grade: 3,500 lbs. @ $.38........... 1,330
Production labor:
Straight time: 2,300 hrs. @ $4.00......... 9,200
Overtime: 400 hrs. @ $6.00................. 2,400
Factory overhead:
Variable.............. :............................. 5,200
Fixed............ ;......................................... 3,100
Cost charged to production................... ... $24,270