CHAPTER 8
QUESTIONS
1. Management determines in advance what
the cost should be to manufacture a product
and subsequently compares the actual cost
of manufacturing the product with this
standard. Deviations from the standard can
be immediately determined, inefficiencies
can be readily detected, and appropriate
action can be taken to correct an
unfavorable situation. Under the standard
cost accounting system, management has a
specific goal for production costs. If this goal
is not reached, management also has the
information to determine why it was not
achieved.
2. Standard cost is the predetermined
calculation of what the cost should be.
Actual cost is the historical cost, which can
be determined only after a product or job
has been completed.
3. A standard is a norm against which
performance can be measured. In a
manufacturing company, it represents what
it should cost to manufacture a product
under certain given conditions. Depending
on the approach of the company,
determination of standards may or may not
take into consideration rest periods,
holidays, vacations, and inefficient
conditions such as lost time, waste, or
spoilage.
4. Standard costs are determined for direct
materials, direct labor, and factory
overhead. The standard costs, the actual
costs, and the variances are recorded in
appropriate accounts. Variances are
analyzed and investigated, and appropriate
action is taken.
5. The setting of standards involves a pooling
of knowledge and experience of all the
factory executives. Thus it is possible to
review completely every manufacturing
element that affects the cost of a completed
article, and to establish a standard cost for
each article. In setting standard materials
cost, management must accurately
determine the exact quantity of materials
that should be procured and estimate the
cost per unit that should be paid. In setting
labor standards, management must
determine, after complete analysis, the time
232
required for each operation or for each
department to finish a unit of product and
must accurately estimate cost or rate per
hour for this time.
6. A variance is a difference or deviation from
an established goal. In standard cost
accounting, it indicates a difference between
actual costs and standard costs. It is a
deviation from predetermined manufacturing
costs.
7. Variances are usually recorded in the
general journal at the end of the month,
except for the materials purchase price
variance, which is recorded at the time of
purchase.
8. Price variances in materials costs are the
differences between standard and actual
costs due to fluctuations in the price paid for
the raw materials. Quantity variances in
materials costs are the differences between
standard and actual costs due to
fluctuations in the quantities of materials
used.
9. Rate variances in labor costs are the
differences between standard and actual
costs due to fluctuations in wage rates.
Efficiency variances in labor costs are the
differences between standard and actual
costs due to fluctuations in the number of
labor hours required to complete a product
or job.
10. Not necessarily. A favorable variance simply
indicates that price and/or usage was below
standard. Analysis might determine a “good”
situation, such as more efficiency resulting
in a true savings in quantity, time, price, or
rate; or this analysis might show a “bad”
situation, such as a lower price being paid
for inferior materials or unskilled workers, or
quality being reduced by using smaller
quantity of materials, or speeding up
production. An unfavorable variance
indicates the price and/or usage was above
standard. This situation can be “bad” if it is
due to inefficiencies, but “good” if it results in
a better product.
11. Standard costs for materials, labor, and
factory overhead are charged to Work in
Process.
12. The finished goods and work in process
accounts are generally valued at standard
cost, although some companies will adjust
these accounts at the end of the accounting
period to reflect actual cost. The materials
account will reflect actual cost or standard
cost, depending on the method used by the
company.
13. The cost accountant must consider usage
and price. Consideration must be given to
the actual quantity of materials and labor
used in comparison with the standard, and a
comparison must be made of the actual unit
cost of materials and labor with the
standard.
14. a. Inefficient purchasing methods, use of
different materials, or an increase in
market price.
b. More efficient purchasing methods, use
of different materials, or a decrease in
market price.
c. Waste or spoilage of materials, the
deliberate use of more materials, or
poor quality of materials.
d. Greater efficiency in planning and usage
of materials, or the use of more highly
skilled workers.
e. The hiring of more highly skilled workers
than needed for the job, or an
unforeseen change in wage rates due to
labor-management negotiations.
f. A more efficient job in hiring employees,
or the hiring of less skilled personnel at
a lower rate.
g. Poor supervision in the factory allowing
employees to waste time, the use of
unskilled workers, machinery
breakdowns, or poor scheduling.
h. Hiring of more highly skilled personnel, a
speed-up in production, or more efficient
supervision.
15. Yes. Quite often there is a relationship
between variances. The cost accountant
and management must be alert to these
situations. For example, an unfavorable
labor rate variance caused by hiring more
highly skilled personnel at a higher rate may
be offset by time savings, as indicated by a
favorable labor efficiency variance; or there
could be a favorable materials quantity
variance due to the fact that the personnel
are more capable. The reverse is also true;
hiring less skilled personnel at a lower rate
may create a favorable labor rate variance,
but this variance might be offset by an un-
favorable labor efficiency variance or an
unfavorable materials quantity variance.
16. Definitely yes! Even when there is no net
variance, further analysis may produce a
materials price variance that exactly offsets
a materials quantity variance. These
variances, even though offsetting, must still
be analyzed by management.
17. The entry to transfer the cost of the finished
units from the first department to a
subsequent department in a standard cost
system is made at the standard cost that
should have been incurred to make the units
in the department.
18. A controllable variance is a deviation that
arises when the actual factory overhead
exceeds or is less than the overhead
expense allowed at a given level of
production.
19. A controllable variance indicates that factory
overhead was more or less than the allowed
amount. This variance must be traced to the
department in which it was incurred and the
persons responsible must account for this
variance. If the variance is unfavorable,
immediate action must be taken to eliminate
inefficient conditions. If the variance is
favorable, it must be determined whether
any advantage can be derived from this
situation.
20. A volume variance arises when actual
production is more or less than the standard
volume. Work in Process is charged with the
established standard unit cost for factory
overhead when actually, due to the effect of
fixed costs remaining the same in total and
varying on a per unit basis, it would be
logical to expect that unit cost would change
inversely with volume.
21. A volume variance indicates that the actual
volume of production was not at the
standard level. A favorable variance
indicates that volume was higher than
standard, and an unfavorable variance
indicates that it was lower. It is possible that
the actual volume was expected by
management and is the result of normal,
seasonal increases and decreases in
production; but if not planned, the reason for
the deviation must be investigated.
If actual volume was lower than
anticipated, this might be due to poor
scheduling, machine breakdowns, or
234 Chapter 8

inefficient super-vision of labor. These 24. The controllable variance from the two-
conditions must be corrected. variance method encompasses the
If the volume was higher than expected, spending, efficiency, and budget variances
this might be due to extra-efficient from the four-variance method.
conditions, but it is not necessarily 25. The primary difference between the two
favorable. Overproduction can put a strain methods of calculation is that the three-
on facilities and can require extra variance method determines the budget
expenditures for handling, insurance, and allowances based on actual hours worked
taxes, as well as the extra investment in rather than on the standard number of hours
unneeded inventory. allowed for the units produced.
22. No. It is possible that there would be no
controllable variance if actual overhead is
the same as the amount allowed for the
actual level of production; however, when
production volume is more or less than the
standard level, there will be a volume
variance.
23. The controllable variance with a debit
balance indicates that the actual overhead
exceeded the flexible budget for overhead at
the level of activity attained.
The volume variance with a debit
balance indicates an underutilization of
capacity.

234
Chapter 8 235

EXERCISES
E8-1

a. Standard Cost Summary

Materials—2 lbs. @ $8.............................................. $16
Labor—1 hr. @ $10.................................................. 10
Factory overhead—$4,000 ¸ 1,000 units................. 4
Standard unit cost..................................................... $30
Note: The standard cost is the same for E8-2 through E8-5.

b. Materials price variance = AQ (AP-SP)

= 2,000 ($8.50-$8.00)
= $1,000 unfav.

Materials quantity variance = SP (AQ-SQ)

= $8 [1,900 - (1,000 x 2)]
= $800 fav.

c. Case 1
(1) Work in Process (2,000$8)........................... 16,000
Materials Price Variance (Unfavorable)
(2,000$0.50)............................................... 1,000
Materials (2,000$8.50)............................. 17,000
(2) Work in Process (1,000 hrs.$10).................. 10,000
Payroll.......................................................... 10,000
(3) Work in Process................................................ 4,000
Factory Overhead........................................ 4,000
Case 2
(1) Work in Process................................................ 16,000
Materials Quantity Variance (Favorable)
(100  $8).................................................... 800
Materials (1,900  $8).................................. 15,200
(2) Work in Process................................................ 10,000
Payroll.......................................................... 10,000
(3) Work in Process................................................ 4,000
Factory Overhead........................................ 4,000

d. Cases 1 and 2
Finished Goods................................................. 30,000
Work in Process........................................... 30,000

Note: This entry is the same for E8-2 and E8-3.

236 Chapter 8

E8-2

a. Same as E8-1.

b. Labor rate variance = AQ (AP – SP)

= 1,000 ($10.20 - $10.00)
= $200 unfav.
Labor efficiency variance = SP (AQ – SQ)
= $10 [ 900 – (1000 x 1)]
= $1,000 fav.

c. Case 1
(1) Work in Process................................................ 16,000
Materials...................................................... 16,000
(2) Work in Process................................................ 10,000
Labor Rate Variance (Unfavorable)
(1,000$0.20).................................................. 200
Payroll (1,000$10.20).............................. 10,200
(3) Work in Process................................................ 4,000
Factory Overhead........................................ 4,000
Case 2
(1) Work in Process................................................ 16,000
Materials...................................................... 16,000
(2) Work in Process................................................ 10,000
Labor Efficiency Variance (Favorable)
(100$10)................................................... 1,000
Payroll (900$10)...................................... 9,000
(3) Work in Process................................................ 4,000
Factory Overhead........................................ 4,000

d. Same as E8-1
Chapter 8 237

E8-3
a. Same as E8-1.

b. Materials price variance = AQ (AP – SP)

= 1,900 ($8.50 - $8.00)
= $950 unfav.
Materials quantity variance --- same as in E8-1 ($800 . fav)

Labor rate variance = AQ (AP – SP)

= 900 ($10.20 - $10.00)
= $180 unfav.
Labor efficiency variance = same as in E8-2 ($1,000 fav.)

c. (1) Work in Process................................................ 16,000

Materials Price Variance (Unfavorable)
(1,950$0.50).................................................. 950
Materials Quantity Variance (Favorable)
(100  $8).................................................... 800
Materials (1,900$8.50)............................. 16,150
(2) Work in Process................................................ 10,000
Labor Rate Variance (Unfavorable)
(900$0.20)..................................................... 180
Labor Efficiency Variance (Favorable)
(100$10)................................................... 1,000
Payroll (900$10.20)................................. 9,180
(3) Work in Process................................................ 4,000
Factory Overhead........................................ 4,000

d. Same as E8-1.
238 Chapter 8

E8-4

a. Same as E8-1.

b. Materials price variance—same as in E 8-3.

Materials quantity variance = SP (AQ – SQ)
= $8 [1,900 – (950 x 2)]
= $-0-
Labor rate variance --- same as in E8-3
Labor efficiency variance = SP (AQ – SQ)
= $10 [ 900 – (950 x 1)]
= $500 fav.

c. (1) Work in Process (950$16)............................ 15,200

Materials Price Variance (Unfavorable)
(1,900$0.50).................................................. 950
Materials (1,900$8.50)............................. 16,150
(2) Work in Process (950$10)............................ 9,500
Labor Rate Variance (Unfavorable)
(900$0.20)..................................................... 180
Labor Efficiency Variance (Favorable)
(50$10)..................................................... 500
Payroll (900$10.20)................................. 9,180
(3) Work in Process................................................ 3,800
Factory Overhead (950$4)...................... 3,800

d. Finished Goods (950$30)............................. 28,500

Work in Process........................................... 28,500
Chapter 8 239

E8-5
a. Same as E8-1.

b. Materials price variance--- same as in E8-3.

Materials quantity variance = SP (AQ – SQ)
= $8 [ 1,900 – (1,050 x 2)]
= $1,600 fav.
Labor rate variance--- same as in E8-3.
Labor efficiency variance = SP (AQ – SQ)
= $10 [ 900 – (1,050 x 1)]
= $1,500 fav.

c. (1) Work in Process (1,050$16)......................... 16,800

Materials Price Variance (Unfavorable)
(1,900$0.50).................................................. 950
Materials Quantity Variance (Favorable)
(200$8)..................................................... 1,600
Materials (1,900$8.50)............................. 16,150
(2) Work in Process (1,050$10)......................... 10,500
Labor Rate Variance (Unfavorable)
(900$0.20)..................................................... 180
Labor Efficiency Variance (Favorable)
(150$10)................................................... 1,500
Payroll (900$10.20)................................. 9,180
(3) Work in Process................................................ 4,200
Factory Overhead (1,050$4)................... 4,200

d. Finished Goods (1,050$30).......................... 31,500

Work in Process........................................... 31,500
240 Chapter 8

E8-6

1. Actual quantityactual price = total cost of purchases

200,000 ´ $0.175 = $35,000
2. (Actual price – Standard price) x Actual quantity purchased = Materials Pr. Var.
($.175 - $.17) x 200,000 = $1,000 unfav.
3. (Actual quantity – standard quantity) x Standard price = Materials Qty. Var.
(185,000 – 170,000) x $.17 = $2,550 unfav.
4. Materials price variance +/- Materials quantity variance = Net materials variance
$1,000 unfav. + $2,550 unfav. = $3,550 unfav.

E8-7
Units producedstandard
Actual labor hours  labor hours per unit 
Actual labor cost standard rate per hour standard rate per hour
31,110 hrs.$13.05* = 31,110 hrs.$12.50 = 6,1004.5 hrs.$12.50 =
$405,985.50 $388,875 $343,125

Labor Rate Labor Efficiency

Variance Variance
1. $17,110.50 (unfav) 2. $45,750 (unfav)

Net Labor Variance

3. $62,860.50 (unfav)

* $405,985.50 ¸ 31,110 hours = $13.05

Chapter 8 241

E8-8

1. Standard Cost Summary

Materials—1 lb. @ $4 per lb............................................................................. $ 4.00
Labor—2 hrs. @ $9.00 per hr. ........................................................................ 18.00
Factory overhead—$10,000 ¸ 10,000 units..................................................... 1.00
Standard cost per unit......................................................................................
$23.00

2.
(Actual price – Standard price) Actual quantity = Materials price variance
($ 4.20* - $4.00) 9,400 = $1,880 (unfav)

(Actual quantity – Standard quantity) Standard price = Materials quantity variance

(9,400 – 9,500) $4 = $400 (fav)

(Actual rate – Standard rate) Actual hours = Labor rate variance

($8.90** - $9.00) 20,000 = $2,000 (fav)

(Actual hours – Standard hours) Standard rate = Labor efficiency variance

(20,000 – 19,000) $9 = $9,000 (unfav)

*$39,480  9,400 pounds

**$178,000  20,000 hours
242 Chapter 8

E8-9

Case 1 Case 2
Units produced 1,200 2,000
Standard hours per unit 2 0.6
Standard hours allowed 2,400 1,200
Standard rate per hour $5 $2
Actual hours used 2,340 1,220
Actual labor cost $12,425 $2,730
Labor rate variance $725 U $290 U
Labor efficiency variance $300 F $40 U

Case 1
Standard hours allowed = 1,2002 = 2,400 hours
Actual Labor Cost =
(Actual hours used x Standard rate per hour) +/- Labor rate variance
(2,340 x $5) + $725 = $12,425

Labor Efficiency Variance = SP (AQ – SQ)

Labor Efficiency Variance = $5 (2,340 – 2,400) = $300 F

Case 2
Units produced = 1,200 ¸ 0.6 = 2,000
Labor Efficiency Variance = SP (AQ – SQ)
$40 = SP (1,220 – 1,200)
$40 = 20 SP
$2 = Standard rate per hour

Actual Labor Cost =

(Actual hours used x Standard rate per hour) +/- Labor rate variance
(1,220 x $2) + $290 = $2,730
Chapter 8 243

E8-10

1. Materials—6 lbs. @ $2.00 per lb.............................................. $12.00

Labor—2 hrs. @ $10 per hr...................................................... 20.00
Factory overhead—$40,000 ¸ 20,000 units............................. 2.00
Standard cost per unit............................................................... $34.00

2. Work in Process (18,000$12)....................................... 216,000

Materials Price Variance (Unfavorable)
(105,000$0.04)............................................................. 4,200
Materials Quantity Variance (Favorable)
(3,000$2)................................................................. 6,000
Materials (105,000$2.04)....................................... 214,200
Work in Process (18,000$20.00).................................. 360,000
Labor Efficiency Variance (Favorable)
(1,200$10).............................................................. 12,000
Labor Rate Variance (Favorable)
(34,800$0.50)......................................................... 17,400
Payroll (34,800$9.50)............................................. 330,600

E8-11

Work in Process (21,000$12).............................................. 252,000

Materials Quantity Variance (Unfavorable)
(4,000$2).............................................................................. 8,000
Materials Price Variance (Favorable)
(130,000$0.02).............................................................. 2,600
Materials (130,000$1.98).............................................. 257,400
Work in Process (21,000$20).............................................. 420,000
Labor Rate Variance (Unfavorable)
(41,000$0.04)....................................................................... 1,640
Labor Efficiency Variance (Favorable)
(1,000$10)..................................................................... 10,000
Payroll (41,000  $10.04)................................................. 411,640
244 Chapter 8

E8-12

Conclusions to be drawn from the four variances:

 Materials price variance—indicates that materials were purchased at a price above
standard.
 Materials quantity variance—indicates fewer materials were used in the product
than called for by the standard.
 Labor rate variance—indicates that the wage rate paid to production workers was
less than the standard.
 Labor efficiency variance—indicates that less time was spent on production than
was called for by the standard.

E8-13

1.
Work in Process – Mixing......................................................... 185,000
Work in Process – Blending..................................................... 130,000
Materials Price Variance – Mixing............................................ 10,000
Materials Quantity Variance – Mixing............................... 2,000
Materials Price Variance – Blending................................. 4,000
Materials Quantity Variance – Blending........................... 2,000
Materials ........................................................................... 317,000

2.
Work in Process – Mixing......................................................... 110,000
Work in Process – Blending..................................................... 95,000
Labor Rate Variance – Mixing.................................................. 10,000
Labor Efficiency Variance – Mixing.................................. 3,000
Labor Rate Variance – Blending....................................... 8,000
Labor Efficiency Variance – Blending............................... 7,000
Payroll............................................................................... 197,000

3.
Factory Overhead.................................................................... 145,000
Various Credits.................................................................. 145,000

Work in Process – Mixing......................................................... 85,000

Work in Process – Blending..................................................... 70,000
Factory Overhead ............................................................. 155,000
Chapter 8 245

E8-13 Concluded

4.
Work in Process – Blending..................................................... 380,000*
Work in Process – Mixing................................................. 380,000

Finished Goods........................................................................ 675,000**

Work in Process – Blending.............................................. 675,000

*$185,000 + $110,000 + $85,000

**$380,000 + $130,000 + $95,000 + $70,000

E8-14

Calculation of factory overhead allowed:

Standard Month 1 Month 2
8,000 7,200 8,400
Units Units Units
Fixed overhead............................................ $ 4,000* $ 4,000 $ 4,000
Variable overhead ($1.50 per unit)............. 12,000 10,800 12,600
Total............................................................. $ 16,000 $ 14,800 $ 16,600
* $0.50 per unit x 8,000 standard units

Month 1 Month 2

Budget Actual Variance Budget Actual Variance

$14,800 $14,500 $300 F $16,600 $17,600 $1,000 U

246 Chapter 8

E8-15

a. and b.
Actual factory overhead Budget based on standard hours Standard hours ´ standard rate

Fixed costs....... $ 52,000 Fixed cost: 9,000 units ´ $8 /unit =

10,000 x $5.00 = $50,000
Variable costs..... 28,500 Variable cost:
9,000 ´ $3.00 = 27,000
$ 80,500 $ 77,000 $ 72,000

Controllable Variance Volume Variance

(a) $3,500 (unfavorable) (b) $5,000 (unfavorable)

Net Factory Overhead Variance

$8,500 (unfavorable)

c. Actual factory overhead (total).......................................... $ 80,500

Applied factory overhead (18,000 hours ´ $4*)................ 72,000
Underapplied factory overhead........................................ $ 8,500
Net variance:
Controllable variance (unfavorable).............................. $ 3,500
Volume variance (unfavorable)..................................... 5,000
Net variance (underapplied)............................................. $ 8,500
*$8 /unit ¸ 2 hrs/unit = $4 /hr
Chapter 8 247

E8-16

June 30 Work in Process........................................................ 16,200

Factory Overhead—Volume Variance (Unfavorable) 600
Factory Overhead—Controllable Variance
(Favorable)............................................................ 300
Factory Overhead................................................. 16,500

Calculation of the variances for June:

Budgeted overhead for
90% (18,000/20,000) of
Actual overhead normal capacity Applied overhead

Fixed: $ 6,000
Variable:
(90% of $12,000) 10,800 18,000 units ´ $0.90* =
$ 16,500 $ 16,800 $ 16,200

Controllable Variance Volume Variance

$300 (favorable) $600 (unfavorable)

*Calculation of standard overhead cost per unit:

Fixed overhead.............................................................. $ 6,000
Variable overhead......................................................... 12,000
Total............................................................................... $ 18,000
Per unit ($18,000 ¸ 20,000 units)........................................ $ 0.90

July 31 Work in Process............................................................. 18,900

Factory Overhead—Controllable Variance
(Unfavorable).............................................................. 400
Factory Overhead—Volume Variance (Favorable) 300
Factory Overhead................................................. 19,000

Calculation of the variances for July:

Budgeted overhead for
105% (21,000/20,000)
Actual overhead of normal capacity Applied overhead

Fixed: $ 6,000
Variable:
(105% of $12,000) 12,600 21,000 units ´ $0.90 =
$ 19,000 $ 18,600 $ 18,900
248 Chapter 8

Controllable Variance Volume Variance

$400 (unfavorable) $300 (favorable)
Chapter 8 249

E8-17

The usual formula for calculating variances is shown below. Each step in developing
the figures is numbered in order.

(1) Actual cost (2) Budget for actual level

$27,000 $26,800

Controllable Variance
$200 (unfavorable)

1. Data given.
2. The unfavorable controllable variance of $200 indicates that actual cost was
$200 more than the budget for this level of production; therefore, budgeted
cost was $26,800 ($27,000 – $200). (Note that you cannot use the budget
formula to compute the budgeted overhead because the actual level of
production is not given.)
250 Chapter 8

E8-18 (Appendix)

Computation of Budgeted Fixed Overhead:

Total budgeted overhead.................................................. $20,000
Variable overhead (8,000 ´ $2)......................................... 16,000
Budgeted fixed overhead.................................................. $ 4,000

Variable Overhead Variances:

Actual hours ´ Actual hours ´
Actual variable overhead standard rate Standard hours ´ standard rate

7,640 hrs ´ $2 = 2,500 units ´ 3 hrs ´ $2 =

$16,100 $15,280 $15,000

Spending Variance Efficiency Variance

$820 (unfavorable) $280 (unfavorable)

Fixed Overhead Variances:

Actual units ´
Actual fixed overhead Budgeted overhead standard hours ´ standard rate
2,500 units ´ 3 hrs ´ $0.50* =
$3,920 $4,000 $3,750

Budget Variance Volume Variance

$80 (favorable) $250 (unfavorable)
*[ $20,000 – (8,000 x $2) = $4,000/ 8,000 hrs. = $.50 per direct labor hour

Net Factory Overhead Variance:

Spending........................................................................... $ 820 (unfavorable)
Efficiency........................................................................... 280 (unfavorable)
Budget............................................................................... 80 (favorable)
Volume.............................................................................. 250 (unfavorable)
Net overhead variance............................................................. $1,270 (unfavorable)
Chapter 8 251

E8-19 (Appendix)
a-c.
Actual Budget based on Actual hours ´ Standard hours ´
overhead actual hours standard rate standard rate

Fixed: $52,000 Fixed: $52,000 18,500 ´ $4* 9,000 units ´ 2 hrs ´ $4

Var: 28,500 Variable:
18,500 ´ $1.50 =27,750
$ 80,500 $79,750 $ 74,000 $ 72,000

Budget Variance Capacity Variance Efficiency Variance

(a) $750 (unfav) (b) $5,750 (unfav) (c) $2,000 (unfav)
Net Factory Overhead Variance $8,500 (unfav)
*($5 + $3)  2 hours per unit = $4 per direct labor hour.

d. Actual factory overhead.................................................... $ 80,500

Applied factory overhead (18,000 ´ $4)............................ 72,000
Underapplied factory overhead........................................ $ 8,500
Net variance:
Efficiency variance (unfavorable).................................. $ 2,000
Capacity variance (unfavorable)................................... 5,750
Budget variance (unfavorable)...................................... 750
Net variance (underapplied)............................................. $ 8,500
252 Chapter 8

PROBLEMS
P8-1
(Actual price – Standard price) Actual quantity = Materials price variance
($27.50 - $25.00) 5.5 = $13.75 (unfav)
(Actual quantity – Standard quantity) Standard price = Materials qty. var
(5.5 -5.0) $25 = $12.50 (unfav)
(Actual rate – Standard rate) Actual hours = Labor rate variance
($17.50 - $18.00) 80 = $40.00 (fav)
(Actual hours – Standard hours) Standard rate = Labor efficiency variance
(80 – 60) $18 = $360 (unfav)
Chapter 8 253

P8-2

1-3. Materials:

Actual quantity ´ Standard quantity ´

Actual cost standard price standard price
51,680$0.045 = 51,680$0.05 = *6,400 units8$0.05 =
$2,325.60 $2,584.00 $2,560.00

Materials Price Materials Quantity

Variance Variance
1. $258.40 (fav) 2. $24 (unfav)

3. Net Materials Variance

$234.40 (fav)
*Equivalent Production:
Completed units................... 5,600
In process—All materials...... 800
Total equivalent units........... 6,400

4-6. Labor:
Actual hours ´ Standard hours ´
Actual cost standard rate standard rate
38,000* hours$5.68 = 38,000 hours$5.60 = 6,240** units6$5.60 =
$215,840.00 $212,800.00 $209,664.00

Labor Rate Variance Labor Efficiency Variance

4. $3,040.00 (unfav) 5. $3,136.00 (unfav)

Net Labor Variance

6. $6,176.00 (unfav)

*Actual hours = $215,840/$5.68 = 38,000 hours

**Equivalent Production—Labor:
Units completed.................... 5,600
In process (80080%)........ 640
Total equivalent units........... 6,240
 Chapter 8 253

Chapter 8
P8-3

Standard Actual
Quantity Quantity Standard
or Hours or Hours Difference Cost Variance

253
1. Materials quantity variance:
Stomp.......................................... 640,000 gal.* 645,000 gal. 5,000 gal. $2.00/gal. $10,000
(unfav) (unfav)
Empty drums............................... 80,000 drums 80,000 drums -0- $1.00/drum -0-
3. Labor efficiency variance............... 80,000 hrs. 81,000 hrs. 1,000 hrs. $8.00/hr. $ 8,000
(unfav) (unfav)
Actual
Standard Actual Quantity
Cost Cost Difference or Hours Variance
2. Materials purchase price variance:
Stomp.......................................... $2.00/gal. $1.90/gal.** $0.10 600,000 gal. $60,000
(fav) (fav)
Empty drums............................... $1.00/drum $1.00/drum -0- 94,000 drums -0-
4. Labor rate variance........................ $8.00/hr. $8.08 hr.*** $0.08 81,000 hours $ 6,480
(unfav) (unfav)

*80,000 drums produced8 gallons per drum = 640,000 gallons

**1,140,000 ¸ 600,000 = $1.90 per gallon
***654,480 ¸ 81,000 hours = $8.08 per hour
254 Chapter 8

Chapter 8
254
P8-4

Standard Actual
Quantity Quantity Standard
or Hours or Hours Difference Cost Variance
1. Materials quantity variance............ 5,000 lbs. 5,300 lbs. 300 lbs. $3.00/lb. $ 900
(unfav) (unfav)
3. Labor efficiency variance............... 8,000 hrs. 8,200 hrs. 200 hrs. $10.00/hr. $2,000
(unfav) (unfav)

Actual
Standard Actual Quantity
Cost Cost Difference or Hours Variance
2. Materials purchase price variance. $ 3.00/lb. $ 2.90/lb. $0.10 5,200 lbs. $ 520
(fav) (fav)
4. Labor rate variance........................ $10.00/hr. $9.80/hr. $0.20 8,200 hrs. $1,640
(fav) (fav)
 Chapter 8 255

Chapter 8
P8-5

Standard Actual
Quantity Quantity Standard
or Hours or Hours Difference Cost Variance

255
1. Materials quantity variance
for Class. .................................... 80,000 ft.* 78,000 ft. 2,000 ft. $0.75/ft. $1,500
(fav) (fav)
2. Materials quantity variance for
Chic............................................. 24,000 ft.** 26,000 ft. 2,000 ft. $ 1.00/ft. $2,000
(unfav) (unfav)
5. Labor efficiency variance............... 32,000 hrs.*** 31,000 hrs. 1,000 hrs. $8.00/hr. $8,000
(fav) (fav)
*10 ft (8,000 units)
**3 ft (8,000 units)
***4 hours (8,000 units)

Actual
Standard Actual Quantity
Cost Cost Difference or Hours Variance
3. Materials purchase price
variance for Class....................... $0.75/ft. $0.72/ft. $0.03 100,000 ft. $3,000
(fav) (fav)
4. Materials purchase price
variance for Chic......................... $1.00/ft. $1.05/ft. $0.05 30,000 ft. $1,500
(unfav) (unfav)
6. Labor rate variance........................ $8.00/hr. $7.80/hr. $0.20 31,000 hrs. $6,200
(fav) (fav)
256 Chapter 8

P8-6

Materials quantity variance:

Standard
Standard Actual Cost
Quantity Quantity Difference per Pound Variance
Aluminum........ 1,700 * 1,900 200 (unfav) $0.40 $ 80 (unfav)
Plastic............. 8,500 9,500 1,000 (unfav) $0.38 $380 (unfav)
*8,500 units.2 lb per unit = 1,700 lbs

Materials purchase price variance:

Standard Actual
Cost Cost Quantity
per Pound per Pound Difference Purchased Variance
Aluminum........ $0.40 $0.48 $0.08 (unfav) 1,800 $144 (unfav)
Plastic—regular
grade............ $0.38 $0.50 $0.12 (unfav) 3,000 $360 (unfav)
Plastic—low
grade............ $0.38 $0.29 $0.09 (fav) 6,000 $540 (fav)

Labor efficiency variance:

Standard
Standard Actual Cost
Hours Hours Difference per Hour Variance
2,550** 2,700 150 (unfav) $8.00 $1,200 (unfav)
**8,500 units.3 hrs per unit = 2,550

Labor rate variance:

Standard Actual
Cost Cost Actual
per Hour per Hour Difference Hours Variance
$8.00 $8.60 $0.60 (unfav) 2,700 $1,620 (unfav)
Chapter 8 257

P8-7

1. Equivalent production Units

Materials:
Completed during the month.......................................................... 9,000
Equivalent units in ending work in process (2,0001/2)............... 1,000
Total........................................................................................... 10,000
Labor and overhead:
Completed during the month.......................................................... 9,000
Equivalent units in ending work in process (2,0001/4)............... 500
Total........................................................................................... 9,500

2. Liquid Lead:

Actual quantity ´ Standard quantity ´

Actual cost standard price standard price
21,000 gal.$1.96 = 21,000 gal.$2.00 = (10,000 units2 gal/unit)$2.00 =
$41,160 $42,000 $40,000

Material Price Material Quantity

Variance Variance
$840 (fav) $2,000 (unfav)

Net Liquid Lead Variance

$1,160 (unfav)
258 Chapter 8

P8-7 Continued

Varnish:

Actual quantity ´ Standard quantity ´

Actual cost standard price standard price
20,000 gal. $3.00 = 20,000 gal.$3.00 = (10,000 units2 gal/unit)$3.00 =
$60,000 $60,000 $60,000

Material Price Material Quantity

Variance Variance
–0– –0–

Labor:
Actual hours ´ Standard hours ´
Actual cost standard rate standard rate
10,000 hours$11.70 = 10,000 hours$12.00 = (9,500 units1 hr/unit)$12.00 =
$117,000 $120,000 $114,000

Labor Rate Variance Labor Efficiency Variance

$3,000 (fav) $6,000 (unfav)

Net Labor Variance

$3,000 (unfav)
Chapter 8 259

P8-7 Concluded

3. Ending Work in Process

2,000 units, one-half complete as to materials (2,0001/2$10)............... $ 10,000
2,000 units, one-fourth complete as to labor (2,0001/4$12)................... 6,000
Materials and labor costs in work in process at end of month....................... $ 16,000
4. Cost of production for month (materials and labor):
Liquid Lead.......................................................................................... $ 41,160
Varnish................................................................................................ 60,000
Labor................................................................................................... 117,000
Total costs to be accounted for..................................................... $ 218,160
Costs accounted for (materials and labor):
Transferred to finished goods (9,000$22)............... $198,000
Ending work in process*.............................................. 16,000 $ 214,000
Net variance—Liquid Lead (unfavorable).................... $ 1,160
Net variance—Labor (unfavorable)............................. 3,000 4,160
Total costs accounted for...................................... $ 218,160
*$10.001,000 equivalent units..................... $10,000
$12.00 500 equivalent units...................... 6,000
$ 16,000

P8-8

1. Raw Materials Inventory (55,000$2.20)........................ 121,000

Materials Purchase Price Variance ($0.05*55,000)..... 2,750
Accounts Payable........................................................ 123,750

*$123,750/55,000 = $2.25; $2.25 – $2.20 = $0.05

Work in Process (8,8005.5 lbs.$2.20)....................... 106,480

Materials Quantity Variance [(54,305 – 48,400)$2.20]. 12,991
Raw Materials Inventory (54,305  $2.20)................... 119,471
2. Work in Process (8,8001.8 hours$6.25)................... 99,000
Labor Efficiency Variance (2,360 hours*$6.25)............ 14,750
Labor Rate Variance (18,200$.75)**............................. 13,650
Payroll.......................................................................... 127,400

*18,200 – (8,8001.8 hrs.) = 2,360 hrs.

**($127,400  18,200) – $6.25 = $.75 hr.
260 Chapter 8

P8-9

1. Direct materials cost in finished goods inventory................. $ 87,000 20%

Direct materials cost in cost of goods sold........................... 348,000 80
Total...................................................................................... $435,000 100%
Materials price variance........................................................ $ 10,000
Ratio of direct materials cost in finished goods inventory.... 20%
Amount to be prorated to finished goods inventory.............. $ 2,000

2. Materials price variance........................................................ $ (10,000) (unfav)

Materials quantity variance................................................... 15,000 (fav)
Net materials cost variance................................................... $ 5,000 (fav)
Ratio of direct materials cost in finished goods inventory.... 20%
Net variance prorated to finished goods inventory............... $ 1,000 (Cr.)
Direct materials cost in finished goods inventory before
variances are prorated........................................................ 87,000 (Dr.)
Total amount of direct materials cost in finished goods
inventory............................................................................. $ 86,000

3. Direct labor cost in finished goods inventory........................ $ 130,500 15%

Direct labor cost in cost of goods sold.................................. 739,500 85
Total...................................................................................... $ 870,000 100%
Labor rate variance............................................................... $ (20,000) (unfav)
Labor efficiency variance...................................................... 5,000 (fav)
Net labor cost variance......................................................... $ (15,000) (unfav)
Ratio of direct labor cost in finished goods inventory........... 15%
Net variance prorated to finished goods inventory............... $ 2,250 (Dr.)
Direct labor cost in finished goods inventory before
variances are prorated........................................................ 130,500 (Dr.)
Total amount of direct labor cost in finished goods
inventory............................................................................. $ 132,750
Chapter 8 261

P8-9 Concluded

4. Beginning balance of cost of goods sold:

Direct materials.................................... $348,000
Direct labor.......................................... 739,500
Applied manufacturing overhead........ 591,600 $1,679,100 (Dr.)
Net materials cost variance...................... $ 5,000 (Cr.)
Ratio of direct materials cost in cost
of goods sold.......................................... 80%
Materials cost variances prorated to
cost of goods sold.................................. 4,000 (Cr.)
Net labor cost variance............................. $ 15,000 (Dr.)
Ratio of direct labor cost in cost
of goods sold.......................................... 85%
Labor cost variance prorated to cost of
goods sold.............................................. 12,750 (Dr.)
Total cost of goods sold........................... $ 1,687,850 (Dr.)
Note: There is no overhead variance.

P8-10

1. Standard quantity of materials allowed:

Actual production......................................................... 4,000 units
Standard materials per unit......................................... ´ 5 pounds
Standard quantity of materials allowed........................ 20,000 pounds

2. Actual quantity of materials used:

Standard quantity................................................................ 20,000 pounds
Add unfavorable (debit) materials quantity
variance ¸ standard price per lb. ($1,000 ¸ $1 per lb.).. 1,000
Actual quantity of materials used....................................... 21,000 pounds

3. Standard direct labor hours allowed:

Actual production................................................................ 4,000 units
Standard hours per unit...................................................... ´1
Standard hours allowed...................................................... 4,000
262 Chapter 8

P8-10 Concluded

4. Actual direct labor hours worked:

Standard hours allowed...................................................... 4,000
Less favorable (credit) direct labor efficiency
variance ¸ standard rate ($1,200 ¸ $8/hr)..................... (150)
Actual hours worked........................................................... 3,850

5. Actual direct labor rate:

Standard direct labor rate................................................... $ 8.00
Add unfavorable (debit) direct labor rate
variance ¸ actual hours worked ($770 ¸ 3,850 hrs)...... .20
Actual direct labor rate........................................................ $ 8.20

6. Actual total overhead:

Standard overhead (4,000 units produced ´ $4
standard overhead rate per unit).................................... $ 16,000
Unfavorable (debit) overhead variance.............................. 500
Actual total overhead.......................................................... $ 16,500

P8-11

FACTORY OVERHEAD VARIANCES

Actual factory Budget at standard hours Units produced ´ standard

overhead allowed quantity ´ standard rate

2,500 units ´ 4 hrs = 10,000 2,500 units ´ 4 ´ $3.38

10,000 hrs ´ $1.00 = $ 10,000

Fixed cost = 20,000
$30,305 Budget at standard hrs $ 30,000 $33,800

Controllable Variance Volume Variance

$305 (unfavorable) $3,800 (favorable)
Chapter 8 263

P8-12

1. Work in Process— Mixing (1,100 eq. units ´ $4)..................... 4,400

Work in Process— Blending (950 eq. units ´ $2)..................... 1,900
Factory Overhead (indirect materials) ($1,000 + $500)........... 1,500
Materials Quantity Variance— Mixing....................................... 200*
Materials Price Variance— Mixing............................................ 115*
Materials Quantity Variance— Blending............................... 50*
Materials Price Variance— Blending..................................... 37*
Materials ($4,715 + $1,813 + $1,000 + $500)...................... 8,028
Work in Process— Mixing (1,100 eq. units ´ $10).................... 11,000
Work in Process— Blending (950 eq. units ´ $6)..................... 5,700
Factory Overhead (indirect labor) ($1,300 + $1,000)............... 2,300
Labor Rate Variance— Mixing.................................................. 215*
Labor Efficiency Variance— Blending...................................... 300**
Labor Efficiency Variance— Mixing...................................... 250*
Labor Rate Variance— Blending...........................................
100**
Payroll ($10,965 + $5,900 + $1,300 + $1,000)..................... 19,165
Work in Process—Mixing (1,100 eq. units ´ $6)....................... 6,600
Work in Process— Blending (950 eq. units ´ $4)..................... 3,800
Factory Overhead, Controllable Variance— Mixing................. 500**
Factory Overhead, Volume Variance— Blending..................... 50**
Factory Overhead, Volume Variance— Mixing..................... 400**
Factory Overhead, Controllable Variance— Blending.......... 100**
Factory Overhead— Mixing.................................................. 6,700
Factory Overhead— Blending............................................... 3,750
Factory Overhead ($4,400 + $2,250)....................................... 6,650
Various credits....................................................................... 6,650
Factory Overhead— Mixing...................................................... 6,700
Factory Overhead— Blending................................................... 3,750
Factory Overhead.................................................................. 10,450
*See page 262
**See page 263

Work in Process— Blending (1,000 units ´ $20)....................... 20,000

Work in Process— Mixing..................................................... 20,000
Finished Goods (900 units ´ $32)............................................. 28,800
Work in Process—Dept. Blending......................................... 28,800
Accounts Receivable (850 units ´ $50)..................................... 42,500
Sales...................................................................................... 42,500
Cost of Goods Sold (850 units ´ $32)....................................... 27,200
Finished Goods..................................................................... 27,200
264 Chapter 8

P8-12 Continued

Variances are calculated as follows:

Materials
Mixing
Actual cost Actual quantity ´ standard price Standard cost

2,300 lbs. ´ $2.05 = 2,300 lbs. ´ $2.00 = 2,200 lbs. ´ $2.00 =

$4,715 $4,600 $ 4,400

Materials Price Variance Materials Quantity Variance

$115 (unfavorable) $200 (unfavorable)

Net Materials Variance

$315 (unfavorable)
Blending
Actual cost Actual quantity ´ standard price Standard cost

1,850 lbs. ´ $0.98 = 1,850 lbs. ´ $1.00 = 1,900 lbs. ´ $1.00 =

$1,813 $1,850 $1,900

Materials Price Variance Materials Quantity Variance

$37 (favorable) $50 (favorable)

Net Materials Variance

$87 (favorable)

Labor
Mixing
Actual cost Actual hours ´ standard price Standard cost

2,150 hrs ´ $5.10 = 2,150 hrs ´ $5.00 = 2,200 hrs ´ $5.00 =

$10,965 $10,750 $11,000

Labor Rate Variance Labor Efficiency Variance

$215 (unfavorable) $250 (favorable)

Net Labor Variance

$35 (favorable)
Chapter 8 265

P8-12 Continued
Blending

Actual cost Actual hours ´ standard rate Standard cost

1,000 hours ´ $5.90 = 1,000 hours ´ $6.00 = 950 hours ´ $6.00 =

$5,900 $6,000 $5,700

Labor Rate Variance Labor Efficiency Variance

$100 (favorable) $300 (unfavorable)

Net Labor Variance

$200 (unfavorable)
Factory Overhead

Mixing

Actual overhead Budget at standard hours Standard cost

Fixed: 2,000 hrs ´ $2 = $ 4,000

Var: 2,200 hrs ´ $1 = 2,200 2,200 hrs ´ $3.00 =
$6,700 $ 6,200 $ 6,600

Controllable Variance Volume Variance

$500 (unfavorable) $400 (favorable)

Net Factory Overhead Variance

$100 (unfavorable)
Blending
Actual overhead Budget at standard hours Standard cost

Fixed: 1,000 hrs ´ $1 = $ 1,000

Var: 950 hrs ´ $3 = 2,850 950 hrs ´ $4.00 =
$3,750 $ 3,850 $ 3,800

Controllable Variance Volume Variance

$100 (favorable) $50 (unfavorable)

Net Factory Overhead Variance

$50 (favorable)
266 Chapter 8

P8-12 Concluded

2. Mixing 200 units, one-half completed)

Materials (200 ´ 1/2 ´ $4).................................................................... $ 400
Labor (200 ´ 1/2 ´ $10)........................................................................ 1,000
Factory overhead (200 ´ 1/2 ´ $6)....................................................... 600
Work in process—Mixing............................................................... $ 2,000
Blending (100 units, one-half completed)
Cost from Mixing (100 ´ $20)................................................. $ 2,000
Cost in Blending:
Materials (100 ´ 1/2 ´ $2)................................................... $ 100
Labor (100 ´ 1/2 ´ $6)........................................................ 300
Factory overhead (100 ´ 1/2 ´ $4)..................................... 200 600
Work in process—Blending........................................... $ 2,600

3. Costs to be accounted for:

Material I.............................................................................................. $ 4,715
Material II............................................................................................. 1,813
Labor—Mixing..................................................................................... 10,965
Labor—Blending................................................................................. 5,900
Factory overhead—Mixing.................................................................. 6,700
Factory overhead—Blending.............................................................. 3,750
Total................................................................................................ $33,843
Costs accounted for:
Transferred to finished goods (900 units ´ $32)................................. $28,800
Work in process—Mixing.................................................................... 2,000
Work in process—Blending................................................................. 2,600
Net unfavorable variance.................................................................... 443
Total................................................................................................ $33,843
Chapter 8 267

P8-13

1. Standard Cost of Production for October

QuantityStandard Cost Total

Lot (Dozens)per Dozen Standard Cost
30 1,000 $41.25 $ 41,250
31 1,700 41.25 70,125
32 1,200 35.64* 42,768
Standard cost of production.............................................................. $154,143

*Standard materials cost plus 80% complete as to standard cost of labor and overhead: $13.20 + (80% ´
$28.05)

2. Schedule Computing Materials Price Variance

Actual cost of materials purchased.......................................................... $ 53,200

Standard cost of materials purchased (95,000 ´ $0.55).......................... 52,250
Materials price variance (unfavorable)..................................................... $ 950

3. Schedule of Materials and Labor Variances for October

a. Materials quantity variance Lot 30 Lot 31 Lot 32 Total

Standard yards:
Dozens in lot.................................. 1,000 1,700 1,200 3,900
Standard yards per dozen............. 24 24 24 24
Total standard quantity.............. 24,000 40,800 28,800 93,600
Actual yards used.............................. 24,100 40,440 28,825 93,365
Variance in yards............................... (100) 360 (25) 235
268 Chapter 8

P8-13 Concluded

b. Labor efficiency variance

Standard hours:
Dozens in lot.................................. 1,000 1,700 1,200
Standard hours per dozen............. 3 3 3

Total standard quantity.............. 3,000 5,100 3,600

Percentage of completion.............. 100% 100% 80%

Total standard hours.................. 3,000 5,100 2,880 10,980

Actual hours worked.......................... 2,980 5,130 2,890 11,000

Variance in hours............................... 20 (30) (10) (20)

( ) indicates unfavorable variance

c. Labor rate variance Lot 30 Lot 31 Lot 32 Total

Actual hours worked.......................... 2,980 5,130 2,890 11,000
Rate paid in excess of standard
($7.40 – $7.35)............................... $ 0.05 $ 0.05 $ 0.05 $ 0.05
Labor rate variance (unfavorable)..... ($ 149.00) ($ 256.50) ($ 144.50) ($ 550.00)

4. Schedule of Overhead Variances for October

Controllable variance
Actual overhead..................................................................... $ 22,800
Budgeted overhead for level of production attained:
Fixed overhead (.40 ´ $288,000/12)................................ $9,600
Variable overhead ($2 ´ .60 ´ 10,980 standard hours).... 13,176
Total budgeted overhead........................................... 22,776
Controllable variance (unfavorable)...................................... ($ 24)
Volume variance
Budgeted overhead for level of production attained............. $ 22,776
Overhead applied to production
(10,980 standard hours ´ $2)................................................ 21,960
Volume variance (unfavorable)............................................. ($ 816)
Chapter 8 269

P8-14

MATERIALS VARIANCES
Standard
Actual cost Actual gal. ´ standard price gallons ´ standard price

40,743 gal. ´ $0.38* = 40,743 gal. ´ ($32/80 gal.) = 503 batches x $32 =

$15,482.34 $16,297.20 $16,096.00

Materials Price Variance Materials Quantity Variance

$814.86 (favorable) $201.20 (unfavorable)

Net Materials Variance

$613.66 (favorable)

*Actual materials cost $15,482.34 ¸ 40,743 gallons = $0.38 per gallon.

LABOR VARIANCES
Standard
Actual cost Actual hours ´ standard rate hours ´ standard rate

29,677 hrs ´ $3.65 = 29,677 hrs ´ $216/60 = 503 batches ´ $216 =

29,677 ´ $3.60 =
$108,321.05 $106,837.20 $108,648.00

Labor Rate Variance Labor Efficiency Variance

$1,483.85 (unfavorable) $1,810.80 (favorable)

Net Labor Variance

$326.95 (favorable)
270 Chapter 8

P8-14 Concluded

FACTORY OVERHEAD VARIANCES

Actual factory Budgeted overhead Standard

overhead at standard hours hours ´ standard rate

Variable + Fixed Var. = 30,180 hrs* ´ $2.20** = $ 66,396 30,180 ´ $4.20 =

$67,080 + $60,500 = Fixed cost =....................... 60,000
$127,580 Budget at standard hrs $126,396 $126,756

Controllable Variance Volume Variance

$1,184.00 (unfavorable) $360.00 (favorable)

Net factory overhead variance

$824.00 (unfavorable)

*503 batches × 60 hours = 30,180 hours

**Variable overhead rates:

Per hour

Total overhead rate..................... $4.20 ($252 ¸ 60 hours)

Less:
$60,000 fixed overhead
= 2.00 fixed overhead rate
30,000 budgeted hours * * *
Variable overhead rate ........ $2.20

***500 batches ´ 60 hours = 30,000 budgeted hours

Chapter 8 271

P8-15 (Appendix)

1. Factory Overhead—Variable Costs:

Actual variable cost Actual hours ´ standard rate Standard hrs ´ standard rate

18,375 hrs ´ $2 = 3,500 units ´ 5 hrs ´ $2 =

$33,710 $36,750 $35,000

Spending Variance Efficiency Variance

$3,040 (favorable) $1,750 (unfavorable)

Factory Overhead—Fixed Cost:

Actual cost Budgeted fixed cost Standard hours ´ standard rate

3,500 units ´ 5 hrs ´ $4 =

$61,950 $60,000 $70,000

Budget Variance Volume Variance

$1,950 (unfavorable) $10,000 (favorable)

2. Net Factory Overhead Variance:

Spending....................................................................... $ 3,040 (favorable)
Efficiency....................................................................... 1,750 (unfavorable)
Budget........................................................................... 1,950 (unfavorable)
Volume.......................................................................... 10,000 (favorable)
Net factory overhead variance................................. $ 9,340 (favorable)

Since the net variance is favorable, it represents overapplied factory overhead.

272 Chapter 8

P8-16 (Appendix)
1. MATERIAL VARIANCES
Actual parts ´ Units produced ´ standard
Actual cost standard price parts ´ standard price

1,800 ´ 4 = 7,200 parts 7,776 ´ $0.50 = 1,800 ´ 4 = 7,200 parts

7,200 ´ 108% = 7,776 parts 7,200 ´ $0.50 =
$2.00/4 parts = $0.50 each
$0.50 ´ 105% = $0.525 cost
7,776 ´ $0.525 =
$4,082.40 $3,888.00 $3,600.00

Materials Price Materials Quantity

Variance Variance
$194.40 (unfavorable) $288.00 (unfavorable)

Net Materials Variance

$482.40 (unfavorable)

LABOR VARIANCES
Actual hours ´ Units produced ´ standard
Actual cost standard rate hours ´ standard rate

1,800 units ´ 2 hrs = 3,600 1,800 ´ 2 hrs = 3,600

3,600 ´ 106% = 3,816 act. hrs 3,816 ´ $3 = 3,600 ´ $3 =
3,816 ´ $3.30 (110% ´ $3) =
$12,592.80 $11,448 $10,800

Labor Rate Labor Efficiency

Variance Variance
$1,144.80 (unfavorable) $648.00 (unfavorable)

Net Labor Variance

$1,792.80 (unfavorable)
Chapter 8 273

P8-16 Concluded
FACTORY OVERHEAD VARIANCES
2. Factory Overhead
$4,000 fixed cost $4,000
Fixed rate = 2,000 units  2 hours = 4,000 hours
= $1.00 per hour
$3
Variable rate = = $1.50 per hour
2 hours

Factory Overhead—Variable Cost

Actual variable cost Actual hrs ´ standard rate Standard hrs ´ standard rate
3,816 hrs ´ $1.50 = 3,600 hrs ´ $1.50 =
$4,800 $5,724 $5,400

Spending Variance Efficiency Variance

$924 (favorable) $324 (unfavorable)

Budget Variance—Fixed Cost

Actual fixed overhead Budgeted fixed cost Standard hours ´ standard rate
3,600 hrs ´ $1.00 =
$4,100 $4,000 $3,600

Budget Variance Volume Variance

$100 (unfavorable) $400 (unfavorable)

Net Factory Overhead Variance:

Spending variance.......................................................... $924 (favorable)

Efficiency variance......................................................... 324 (unfavorable)
Budget variance............................................................. 100 (unfavorable)
Volume variance............................................................. 400 (unfavorable)
Net factory overhead variance................................... $100 (favorable)
274 Chapter 8

P8-17 (Appendix)

Budgeted hours = 500 units ´ 26 hours = 13,000 hours

$44,200
Variable overhead rate = 13,000 hours = $3.40 per hour
$50,050
Fixed overhead rate = 13,000 hours = $3.85 per hour
Standard hours allowed = 510 units ´ 26 hours = 13,260 standard hours

Factory Overhead—Variable Costs:

Actual variable costs Actual hrs ´ standard rate Standard hrs ´ standard rate
13,015 hrs ´ $3.40 = 13,260 hrs ´ $3.40 =
$45,009 $44,251 $45,084

Spending Variance Efficiency Variance

$758 (unfavorable) $833 (favorable)

Factory Overhead—Fixed Costs:

Actual fixed overhead Budgeted fixed cost Standard hours ´ standard rate
13,260 hrs ´ $3.85 =
$50,125 $50,050 $51,051

Budget Variance Volume Variance

$75 (unfavorable) $1,001 (favorable)

Net Factory Overhead Variance:

Spending........................................................................ $ 758 (unfavorable)
Efficiency........................................................................ 833 (favorable)
Budget............................................................................ 75 (unfavorable)
Volume........................................................................... 1,001 (favorable)
Net overhead variance............................................... $ 1,001 (favorable)

Proof:
Applied overhead (13,260 hrs ´ $7.25)................................. $ 96,135
Actual total overhead ($45,009 + $50,125)........................... 95,134
Overapplied factory overhead........................................ $ 1,001 (favorable)
Chapter 8 275

P8-17 Concluded

Labor Variances:
Actual labor cost Actual hrs ´ standard rate Standard hrs ´ standard rate

13,015 hrs ´ $5.08 = 13,015 hrs ´ $5.00 = 13,260 hrs ´ $5.00 =

$66,116.20 $65,075.00 $66,300.00

Labor Rate Variance Labor Efficiency Variance

$1,041.20 (unfavorable) $1,225.00 (favorable)

Net Labor Variance

$183.80 (favorable)

P8-18 (Appendix)

Mixing:
Actual Actual hours ´ Applied
overhead Budgeted overhead standard rate overhead

Fixed: $ 4,000 2,150 hrs ´ $3 = 2,200 hrs ´ $3 =

Variable:
2,150 hrs ´ $1 = 2,150
$6,700 $ 6,150 $6,450 $6,600

Budget Variance Capacity Var. Efficiency Var.

$550 (unfavorable) $300 (favorable) $150 (favorable)

Net Factory Overhead Variance

$100 (unfavorable)

Blending:
Actual Actual hours ´ Applied
overhead Budgeted overhead standard rate overhead

Fixed: $1,000 1,000 hrs ´ $4 = 950 hrs ´ $4 =

Variable:
1,000 hrs ´ $3 = 3,000
$3,750 $ 4,000 $4,000 $3,800

Budget Variance Capacity Var. Efficiency Var.

$250 (favorable) $–0– $200 (unfavorable)
276 Chapter 8

Net Factory Overhead Variance

$50 (favorable)
Chapter 8 277

P8-19 (Appendix)

Schedule of Variances from Standard Cost for December

Three-Variance Method
Favorable variances:
Materials price [110 ft. ´ ($0.15 – $0.12) ´ 1,200 units].......... $ 3,960
Capacity [(5,100 hrs* ´ $4.50**) – $21,300***]....................... 1,650
Overhead budget ($21,300 – $21,120).................................. 180
Total favorable variances................................................... $ 5,790
Unfavorable variances:
Materials quantity [$0.15 ´ (110 ft. – 100 ft.) ´ 1,200 units].... $ 1,800
Labor rate [4 1/4 hrs ´ ($10.24 – $10.00) ´ 1,200 units]......... 1,224
Labor efficiency [$10.00 ´ (4 1/4 – 4) ´ 1,200 units]............... 3,000
Overhead efficiency [$4.50 ´ (4 1/4 – 4) ´ 1,200 units].......... 1,350
Total unfavorable variances............................................... 7,374
Net variance (unfavorable)............................................. $ 1,584
Proof of computation:
Total standard cost of 1,200 units ´ $73.00................................................... $ 87,600
Total actual cost of 1,200 units ´ $74.32....................................................... 89,184
Total variance......................................................................................... $ 1,584
* Actual labor hours—1,200 units ´ 4 1/4 hrs = 5,100 hrs
** Overhead application rate—$10 ´ 45% = $4.50 per direct labor hour
*** Computation of overhead budget at 5,100 hours:

Actual hours worked—4 1/4 per unit ´ 1,200 units........................................ 5,100

Fixed overhead—15/45 of estimated overhead at normal capacity
(15/45 ´ $18,000).................................................................................... $ 6,000
Variable overhead—30% ´ $10.00, or $3.00 per hour
(5,100 hours ´ $3.00).............................................................................. 15,300
Budget at 5,100 hours.................................................................................... $ 21,300
or
Budget at 5,200 hours.................................................................................... $ 21,600
Budget at 4,800 hours.................................................................................... 20,400
Difference................................................................................................ $ 1,200
Range between hour levels........................................................................... 400 hrs
Dividing the difference of $1,200 by 400 hours determines an additional cost of $3.00 for each
one-hour increase in the budget.
Budget at 4,800 hours.................................................................................... $ 20,400
Add increase in budgeted cost necessary to attain 5,100 hour level
($3.00 ´ 300 hours)................................................................................. 900
Budget at 5,100 hours.................................................................................... $ 21,300
278 Chapter 8

REVIEW PROBLEM
1.
Variable rate: Per DLH
Variable costs.................................................................... $12,500 = $2.00
Direct labor hours.............................................................. 6,250

Fixed rate:

Fixed costs....................................................................... $50,000 = $8.00

Direct labor hours............................................................. 6,250

Total rate:

Variable costs................................................................... $12,500

Fixed costs....................................................................... $50,000

Total................................................................................. $62,000 $10.00
Direct labor hours............................................................. 6,250
2.
Direct material: 3 lbs. @ $5 per lb........................................... $15.00
Direct labor: 2 hours @ $10 per hour...................................... 20.00
Factory overhead:
Variable cost: 2 hrs @ $2 .................................................. $ 4.00
Fixed cost: 2 hrs @ $8 ....................................................... 16.00 20.00
Standard cost per unit.............................................................. $55.00
3. (a)
Actual units produced.......................................................................................... 3,500
Number of hours allowed by standard established for each unit of product...... ´2
Total standard hours allowed.............................................................................. 7,000
Chapter 8 279

RP Continued

(b)
Actual factory overhead incurred:
Variable costs............................................................................................ $14,000
Fixed costs................................................................................................ 52,000
Total actual overhead costs........................................................................... $ 66,000
Factory overhead costs applied:
Standard hours allowed ´ standard rate:
7,000 hours ´ $10.00 .......................................................................... 70,000
Overapplied factory overhead............................................................................. $ 4,000
4. a. Two-variance method:

Actual overhead Budget based on standard hrs Standard hrs x Std.rate

Fixed: = $50,000
Var: 7,000 hrs ´ $2 = 14,000 7,000 hrs ´ $10 =
$66,000* $64,000 $70,000

Controllable Variance Volume Variance

$2,000 (unfav) $6,000 (fav)

Net Factory Overhead Variance

$4,000 (fav)

b. Three-variance method: (Appendix)

Actual Budget based on Actual hours ´ Standard hrs ´

overhead actual hrs standard rate standard rate

Fixed: $50,000 7,000 hrs ´ $10 = 7,000 hrs ´ $10 =

Variable:
7,000 hrs ´ $2 = 14,000
$66,000* $64,000 $70,000 $70,000

Budget Variance Capacity Var. Efficiency Var.

$2,000 (unfav) $6,000 (fav) $-0-

Net Factory Overhead Variance

$4,000 (fav)
280 Chapter 8

RP Concluded

c. Four-variance method:

Variable Costs
Actual Actual hrs ´ standard Standard hrs ´ standard
variable overhead variable rate variable rate

7,000 hrs ´ $2 = 7,000 hrs ´ $2 =

$14,000* $14,000 $14,000

Spending Variance Efficiency Variance

$-0- $-0-

Fixed Costs

Actual fixed overhead Fixed cost: budgeted Standard hrs ´ standard fixedrate

7,000 hrs ´ $8 =
$52,000* $50,000 $56,000

Budget Variance Volume Variance

$2,000 (unfav) $6,000 (fav)

Net factory overhead variance:

Spending............................................................................. $ 0
Efficiency............................................................................. 0
Budget................................................................................. 2,000 (unfavorable)
Volume................................................................................ 6,000 (favorable)

Net overhead variance....................................................... $4,000 (favorable)

*These total costs represent actual hours multiplied by actual rates per hour. When the total cost is given,
it is not necessary to determine the specific components which make up the total cost unless you do it to
understand the formulas being used.
Chapter 8 281

MINI-CASE

1. Calculation of Net Variances:

Mixing Blending Total

Equivalent production of Equivalent production of
7,000 units 5,500 units
Favorable Favorable Favorable
Standard Actual (Unfavorable Standard Actual (Unfavorable) Standard Actual (Unfavorable)
Cost Cost ) Cost Cost Variance Cost Cost Variance
Variance

Materials:
(7,000 units x 4 lbs) @ $0.50 $14,000
30,000 lbs @ $0.52 $15,600 $(1,600)
(5,500 units x 1 gal) @ $1.00 $ 5,500
5,500 gal @ $0.95 $ 5,225 $ 275 $ 19,500 $ 20,825 $(1,325)

Labor:
7,000 hours @ $ 8.00 56,000
6,800 hours @ $ 8.00 54,400 1,600
5,500 hours @ $10.00 55,000
5,600 hours @ $10.20 57,120 (2,120) 111,000 111,520 (520)

Factory overhead:
Standard cost per unit
$1.00 7,000
Actual cost 7,000 None
Standard cost per unit
$2.00 11,000
Actual cost 11,000 None 18,000 18,000 None

Total $77,000 $77,000 None $71,500 $73,345 $(1,845) $148,500 $150,345 $(1,845)
282 Chapter 8

MINI-CASE Continued

2. a. Materials:
Mixing:
Actual quantity ´ Standard quantity ´
Actual cost standard price standard price
30,000 lbs $0.52 = 30,000 lbs$0.50 = 28,000 lbs$0.50 =
$15,600 $15,000 $14,000

Materials Price Materials Quantity

Variance Variance
$600 (unfav) $1,000 (unfav)

Net Materials Var.—Mixing

$1,600 (unfav)

Blending:

Actual quantity ´ Standard quantity ´

Actual cost standard price standard price
5,500 gal. $0.95 = 5,500 gal.$1.00 = 5,500 gal.$1.00 =
$5,225 $5,500 $5,500

Materials Price Materials Quantity

Variance Variance
$275 (fav) –0–
Labor:
Mixing:
Actual hours ´ Standard hours ´
Actual cost standard rate standard rate
6,800 hours$8.00 = 6,800 hours$8.00 = 7,000 hours$8.00 =
$54,400 $54,400 $56,000

Labor Rate Variance Labor Efficiency Variance

–0– $1,600 (fav)
Chapter 8 283

MINI-CASE Continued

Blending:

Actual hours ´ Standard hours ´

Actual cost standard rate standard rate
5,600 hours $10.20 = 5,600 hours$10.00 = 5,500 hours$10.00 =
$57,120 $56,000 $55,000

Labor Rate Variance Labor Efficiency Variance

$1,120 (unfav) $1,000 (unfav)

Net Labor Variance

$2,120 (unfav)

b. In Mixing, both the materials price variance and the materials quantity variance were
unfavorable. If they paid more for a better quality material in expectation of having a lesser
amount of waste and spoilage, the strategy was not successful. It is also possible that
there were price increases for material that were not foreseen when the standards were
determined. The labor variances were more satisfactory in Mixing. There was no labor
rate variance, and the labor efficiency variance was favorable. This means that giving the
caliber of labor they budgeted for, the amount of labor time needed to complete production
was less than budgeted.
In Blending, there was a favorable materials price variance and no materials quantity
variance. This indicates that they were able to use less expensive materials than
budgeted for, while maintaining good control over materials usage. It is also possible that
the price of materials of the quality that they had budgeted has declined. Blending’s
difficulties lie in the area of labor costs. Both the labor rate variance and the labor
efficiency variance were unfavorable. If their strategy was to employ more expensive
labor in hopes of having it complete production in a shorter amount of time, it was not
successful.

3. Work in Process—Mixing.................................................. 14,000

Work in Process—Blending.............................................. 5,500
Materials Quantity Variance—Mixing............................... 1,000
Materials Price Variance—Mixing..................................... 600
Factory Overhead............................................................. 1,500
Materials Price Variance—Blending............................ 275
Materials ($20,825 + $1,500 indirect materials).......... 22,325
284 Chapter 8

Work in Process—Mixing.................................................. 56,000

Work in Process—Blending.............................................. 55,000
Labor Efficiency Variance—Mixing................................... 1,000
Labor Rate Variance—Blending....................................... 1,120
Factory Overhead ($2,000 + $5,000 indirect labor)......... 7,000
Labor Efficiency Variance—Mixing.............................. 1,600
Payroll ($111,520 + $7,000 indirect labor).................. 118,520
Factory Overhead............................................................. 9,500
Various credits (Accounts Payable,
Prepaid Insurance, etc.)............................................... 9,500
Work in Process—Mixing.................................................. 7,000
Work in Process—Blending 11,000
Factory Overhead........................................................ 18,000
Work in Process—Blending.............................................. 66,000
Work in Process—Mixing............................................. 66,000
Finished Goods................................................................. 120,000
Work in Process—Blending......................................... 120,000

4. Mixing Blending
Costs charged to departments:
Materials............................................................................ $ 14,000 $ 5,500
Labor................................................................................. 56,000 55,000
Factory overhead.............................................................. 7,000 11,000
Prior department............................................................... — 66,000
$ 77,000 $ 137,500
Costs credited to departments................................................. 66,000 120,000
Balance of work in process...................................................... $ 11,000 $ 17,500

Mixing
2,000 units, one-half completed (2,0001/2$11)........ $ 11,000

Blending
Mixing cost—1,000 units @ $11.................... $ 11,000
Blending cost—1,000 units, one-half completed
(1,0001/2$13)......................................... 6,500 $ 17,500
Chapter 8 285

5.
Mixing Blending Total
Cost of production:
Materials......................................................... $ 15,600 $ 5,225 $ 20,825
Labor.............................................................. 54,400 57,120 111,520
Factory overhead........................................... 7,000 11,000 18,000
Total costs to be accounted for................ $ 77,000 $ 73,345 $ 150,345
Costs accounted for:
Charged to finished goods....................................................................... $ 120,000
Work in process....................................................................................... 28,500
Net unfavorable variance......................................................................... 1,845
Total costs accounted for.................................................................... $ 150,345
6.
Sales (4,000$40).............................................................................. $ 160,000
Cost of goods sold at standard (4,000$24)..................................... 96,000
a. Gross margin at standard cost............................................................. $ 64,000
Net unfavorable variance..................................................................... 1,845
b. Gross margin at actual cost................................................................. $ 62,155

c. The gross margin at actual cost is less than the gross margin at standard cost because
the net amount of all the variances was $1,845 unfavorable. In a standard cost system,
the production costs flow through the system at standard during the accounting period. At
the end of the period, the standard costs must be adjusted to actual when preparing the
financial statements.

INTERNET EXERCISE

One would expect food and paper costs to have a small favorable variance because food and
paper costs were 34.1% of 2004 sales by company-operated restaurants versus only 33.9% of
2005 sales. The other three cost items probably had small unfavorable variances because
payroll and employee benefits were only 26.2% of sales in 2004 versus 26.3% in 2005;
occupancy and other operating expenses were24.8% of 2004 sales versus 25.2% in 2005;
and selling, general, and administrative expenses were 10.4% of total revenues in 2004
versus 10.9% in 2005.