Managerial Accounting 10th Edition Crosson Solutions Manual

Managerial Accounting 10th Edition
Crosson Solutions Manual

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0th-edition-crosson-solutions-manual/
CHAPTER 22—Solutions
STANDARD COSTING AND VARIANCE ANALYSIS
Discussion Questions
DQ1. A standard unit cost has six standard elements, two each for direct materials, direct labor,
and overhead costs. A total standard unit cost is computed by adding the following costs:
direct materials costs (direct materials price standard and direct materials quantity stan-
dard), direct labor costs (direct labor rate standard and direct labor time standard), and
overhead costs (variable overhead rate standard and fixed overhead rate standard). The six
elements add detailed cost data for budget and performance comparisons, thus increasing
management understanding.
DQ2. A flexible budget improves the accuracy of variance analysis since it is based on the actual
output for the period instead of the static master budget. Using the standard unit costs for
direct materials, direct labor, variable overhead, and fixed overhead for the good units pro-
duced improves comparability and understanding of production results.
DQ3. Variance analysis is a four-step approach to controlling costs. First, managers compute the
amount of the variance. If the amount is significant, managers then analyze the variance to
identify its cause. They then select performance measures that will enable them to track
those activities, analyze the results, and determine the action needed to correct the prob-
lem. The final step is to take the appropriate corrective action.
DQ4. The evaluation process of a cost center becomes more accurate when its management per-
formance reports include variances from standard costs. A management performance re-
port based on standard costs and related variances should identify the causes of each sig-
nificant variance, along with the personnel involved and the corrective actions taken. It
should be tailored to the cost center manager’s specific areas of responsibility to further
understanding and cost comparisons.
DQ5. Standard costs are useful in the management process as managers plan, perform, evaluate,
and report because they are based on realistic estimates of operating costs. Managers use
them to develop budgets, compare a cost center's planned and actual costs, understand
how performance of the cost center can be improved, and prepare performance reports that
contain comparative analyses.
22-1
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Short Exercises
SE1. Standard Costing Concepts
Standard costing improves the understanding of accounting information since standard costs
are estimated and used to prepare flexible budgets allowing for the comparison of actual costs
with costs budgeted on the same amount of output. These comparisons or variances help man-
agers identify the causes and possible solutions that will result in better cost control and busi-
ness operations.
SE2. Purposes of Standard Costs
Standard costs provide the following advantages to management:

1. They are useful in preparing operating budgets.
2. They pinpoint production costs that must be more closely controlled.
3. They facilitate the evaluation of managers and workers.
4. They help set realistic prices.
5. They simplify accounting procedures during the accounting period.
6. They can help a company become more efficient and reduce waste.
Standard costs provide the following disadvantages to management:

1. Since not based just on past costs, it can be expensive and time-consuming to gather all the
needed information.
SE3. Computing a Standard Unit Cost
Direct materials cost ( $10.00 × 1 lb. ) $10.00

Direct labor cost ( $12.00 × 0.5 hr. ) 6.00
Variable overhead ( $6.00 × 4 machine hrs. ) 24.00
Fixed overhead ( $11.00 × 4 machine hrs. ) 44.00
Total standard unit cost $84.00
22-2
SE4. Analyzing Cost Variances
The tolerance in the exercise is ±5 percent. The following percentages need to be calculated:
Product Variance Standard Cost Percentage

Product 4: $1,200 / $24,000 = 5.0% (U)
Product 6: $3,200 / $42,800 = 7.5% (F)
Product 7: $2,000 / $42,000 = 4.8% (U)
Product 9: $1,600 / $34,000 = 4.7% (F)
Product 12: $2,800 / $50,000 = 5.6% (U)
The variances for Products 6 and 12 should be analyzed for cause. Both are beyond company
limits. Product 4 is at the limit and may be included in the variances analyzed.
Possible causes of variances:
Product 6 Large favorable variance—possible causes include superior employee per-

formance, good results from job training, or new, more efficient machinery.
Product 12 Unfavorable variance—possible causes include machine breakdown, poor

employee performance, inferior materials, poor supervision, or late delivery
of materials.
22-3
SE5. Direct Materials Variances
Computation of direct materials price variance:

Standard direct materials price $1.00
Less actual direct materials price ($19,796 / 20,200) 0.98
Difference in price $0.02 (F)
Direct Materials
= ( Standard Price − Actual Price ) × Actual Quantity
Price Variance
= ( $1.00 – $0.98 ) × 20,200 meters
= $404 (F)
Computation of direct materials quantity variance:

Standard quantity = ( 0.2 meters × 100,000 units ) 20,000 meters
Less actual quantity = 20,200 meters
Difference in quantity = 200 meters (U)
Direct Materials
= Standard Price × ( Standard Quantity − Actual Quantity )
Quantity Variance
= $1.00 × ( 20,000 meters – 20,200 meters )
= $200 (U)
Diagram Form:
Actual Direct Materials Work in Process
Materials Inventory Inventory
Purchased (Standard Price × (Standard Price ×
(Given) Actual Quantity) Standard Quantity)
$19,796 $1.00 × 20,200 $1.00 × (100,000 ×
Direct = $20,200 Direct 0.20) = $20,000
Materials Materials
Price Quantity
Variance Variance
$404 (F) $200 (U)
22-4
SE6. Direct Materials Variances
Direct Materials
Price Variance
= ( $10.00 – $10.10 ) × 21,800 pounds
= $0.10 × 21,800 pounds
= $2,180 (U)
Direct Materials
Quantity Variance
= $10.00 × [ ( 21,000 × 1 pound ) – 21,800 pounds ]
= $10.00 × ( 21,000 pounds – 21,800 pounds )
= $8,000 (U)
Diagram Form:
Actual Direct
Materials Materials Work in Process
Purchased Inventory Inventory
(Actual Price × (Standard Price × (Standard Price ×
Actual Quantity) Actual Quantity) Standard Quantity)
$10.10 × 21,800 Direct $10.00 × 21,800 Direct $10.00 × (21,000 × 1)
= $220,180 Materials = $218,000 Materials = $210,000
Price Quantity
Variance Variance
$2,180 (U) $8,000 (U)
22-5
SE7. Direct Labor Variances
Direct Labor
= ( Standard Rate − Actual Rate ) × Actual Hours
Rate Variance
= [ $12.00 – ( $134,200 / 11,000 hours ) ] × 11,000 hours
= ( $12.00 – $12.20 ) × 11,000 hours
= $0.20 × 11,000 hours = $2,200 (U)
Direct Labor
= Standard Rate × ( Standard Hours Allowed − Actual Hours )
Efficiency Variance
= $12.00 × [ ( 21,000 × 0.5 hour ) – 11,000 hours ]
$12.00 × ( 10,500 hours – 11,000 hours )
= $12.00 × 500 hours = $6,000 (U)
Diagram Form:
Actual Labor Work in Process
Wages Paid Budget Inventory
(Actual Rate × (Standard Rate × (Standard Rate ×
Actual Hours) Actual Hours) Standard Hours)
$12.20 × 11,000 Direct Labor $12.00 × 11,000 Direct Labor $12.00 × (21,000 × 0.5)
= $134,200 Rate = $132,000 Efficiency = $126,000
Variance Variance
$2,200 (U) $6,000 (U)
22-6
SE8. Overhead Variances
Variable overhead spending variance:

Budgeted variable overhead for actual hours
Standard rate × actual hours worked
( $2.50 × 24,200 hours ) $60,500
Less actual variable overhead costs incurred 60,100
Variable overhead spending variance $ 400 (F)
Variable overhead efficiency variance:

Variable overhead applied to good units produced
Standard rate × standard hours allowed
[ $2.50 × ( 8,000 × 2.8 hours per unit ) ] $56,000
Less budgeted variable overhead costs for actual hours
( $2.50 × 24,200 hours ) 60,500
Variable overhead efficiency variance $ 4,500 (U)
Diagram Form:
Actual Budgeted Variable Variable Overhead

Variable Overhead Costs at Costs Applied to
Overhead Actual Hours Products
Costs Incurred (Standard Rate × (Standard Price ×
(Given) Actual Hours) Standard Quantity)
Variable $2.50 × 24,200 Variable $2.50 × (8,000 × 2.8)
$60,100
Overhead = $60,500 Overhead = $56,000
Spending Efficiency
Variance Variance
$400 (F) $4,500 (U)
22-7
SE8. Overhead Variances (Concluded)
Fixed overhead budget variance:

Budgeted fixed overhead $70,000
Less actual fixed overhead costs incurred 68,800
Fixed overhead budget variance $ 1,200 (F)
Fixed overhead volume variance:

Fixed overhead applied to good units produced
[ $3.00 × ( 8,000 × 2.8 hours per unit ) ] $67,200
Less budgeted fixed overhead 70,000
Fixed overhead volume variance $ 2,800 (F)
Diagram Form:
Fixed Overhead Costs

Actual Fixed Budgeted Fixed Applied to Products
Overhead Costs Overhead Costs (Standard Price ×
(Given) (Given) Standard Quantity)
Fixed Fixed $3.00 × (8,000 × 2.8)
$68,800 $70,000
Overhead Overhead = $67,200
Budget Volume
Variance Variance
$1,200 (F) $2,800 (F)
22-8
SE9. Fixed Overhead Rate and Variances
Budgeted Fixed Overhead Cost

Standard Fixed Overhead Rate =
Normal Capacity
$10,000
=
20,000 direct labor hours
= $0.50 per direct labor hour

Fixed overhead budget variance $ 200 (U)

[ $0.50 × ( 4,000 × 5.1 hours per unit ) ] $10,200
Fixed overhead volume variance $ 200 (F)
Diagram Form:
Fixed Overhead
Costs Applied to
Actual Fixed Budgeted Fixed Products
Overhead Costs Overhead Costs (Standard Rate ×
(Given) (Given) Standard Hours)
Fixed Fixed $0.50 × (4,000 × 5.1)
$10,200 $10,000
Budget Volume
Variance Variance
$200 (U) $200 (U)
SE10. Evaluating Managerial Performance
The manager is responsible for the direct materials price and quantity variances, the direct
labor rate and efficiency variances, and the variable overhead spending and efficiency vari-
ances. Before he answers the controller's query, the total variances given to him need to be
broken down into their individual variance amounts. Then, and only then, will the manager
find out how well or poorly he performed.
22-9
Exercises: Set A
E1A. Uses of Standard Costs
To: Tyson Getz

From: Asa Wentz
Date: Today's Date
Subject: Need for a Standard Costing System at Market Research Company
Since assuming the duties of controller, I have noticed that the existing accounting system is
not as accurate as it could be for cost planning and control. I would like to propose that we de-
velop and install a standard costing system to correct this deficiency. Standard costs are realis-
tic estimates of costs that are developed from analyses of past and projected future costs and
operating conditions. Once developed, standard costs, quantities, and labor and machine times
form a set of projected operating results that can be used to measure how well our employees
performed and how well our resources were utilized during a period of time. Standard, or pro-
jected, results are compared with the actual results, and any differences, called variances, are
computed and analyzed to identify causes for operating variations.
The cost of installing such a system will be approximately $80,000, which includes development
and installation time, consultants' fees, and a program to train managers in the use of the sys-
tem. I propose that we embark on this project as soon as possible. If you have any questions,
I will be happy to meet with you to discuss this proposal.
E2A. Computing Standard Costs
Computation of new direct materials standards:

Direct materials quantity standard
32,000 sq. yds. / 20,000 units = 1.6 sq. yds. per unit
Direct materials price standard

$128,000 / 32,000 sq. yds. = $4.00 per sq. yd.
Computation of new direct labor standards:

Direct labor time standards
Machine H: 34,000 hours / 20,000 units
= 1.7 direct labor hours per unit
Machine K: 24,000 hours / 20,000 units

= 1.2 direct labor hours per unit
Direct labor rate standards

Machine H: $10.00 per hour × 110% = $11.00 per hour
Machine K: $9.00 per hour × 110% = $9.90 per hour
22-10
E3A. Computing a Total Standard Unit Cost
Standard unit cost:

Direct materials costs
Electronic components
$600 per set × 1 set $ 600
Heavy-duty canvas
$13.00 per sq. meter × 100 sq. meters 1,300 $1,900
Direct labor costs
Electronics Department
$20.00 per hour × 26 hours $ 520
Assembly Department
$15.00 per hour × 21 hours 315 835
Variable overhead
$18.00 per direct labor hour × 47 hours* $ 846
Fixed overhead
$10.00 per direct labor hour × 47 hours* 470 1,316
Total standard unit cost $4,051
* 26 + 21 = 47 total direct labor hours
22-11
E4A. Direct Materials Price and Quantity Variances

Less actual direct materials price ($128,700 / 495,000 lbs.) 0.26
Difference in price $0.01 (U)
Direct Materials
Price Variance
= ( $0.25 – $0.26 ) × 495,000 pounds
= $4,950 (U)

Standard quantity = ( 1.0 pound × 500,000 pounds ) 500,000 pounds
Less actual quantity = 495,000 pounds
Difference in quantity = 5,000 pounds (F)
Direct Materials
Quantity Variance
= $0.10 × ( 500,000 pounds – 495,000 pounds )
= $500 (F)
Diagram Form:
Materials Inventory Inventory
Purchased (Standard Price × (Standard Price ×
(Given) Actual Quantity) Standard Quantity)
Direct $0.25 × 495,000 Direct $0.25 × (500,000 × 1)
$128,700
Materials = $123,750 Materials = $125,000
Price Quantity
Variance Variance
$4,950 (U) $1,250 (F)
22-12
E5A. Direct Materials Price and Quantity Variances

Standard direct materials price $22
Less actual direct materials price 20
Difference in price $ 2 (F)
Direct Materials
Price Variance
= ( $22 – $20 ) × 6.5 sq. yds. × 50 units
= $650 (F)

Standard quantity = ( 6.0 sq. yds. × 50 units ) 300 sq. yds.
Less actual quantity = ( 6.5 sq. yds. × 50 units ) 325 sq. yds.
Difference in quantity = 25 sq. yds. (U)
Direct Materials
Quantity Variance
= $22 × ( 300 sq. yds. – 325 sq. yds. )
= $550 (U)
Diagram Form:

Materials Purchased Inventory Inventory
$20 × (50 × 6.5) Direct $22 × (50 × 6.5) Direct $22 × (50 × 6.0)
Price Quantity
Variance Variance
$650 (F) $550 (U)
22-13
E6A. Direct Materials Variances

Less actual direct materials price 12.02
Difference in price $ 0.02 (U)
Direct Materials
Price Variance
= ( $12.00 – $12.02 ) × 7,900
= $158 (U)

Standard quantity = ( 10 lbs. × 800 units ) 8,000 lbs.
Less actual quantity = 7,900 lbs.
Difference in quantity = 100 lbs. (F)
Direct Materials
Quantity Variance
= $12.00 × 100 lbs.
= $1,200 (F)
Diagram Form:
Actual Direct
$12.02 × 7,900 Direct $12.00 × 7,900 Direct $12.00 × (800 × 10)
Price Quantity
Variance Variance
$158 (U) $1,200 (F)
22-14
E7A. Direct Labor Variances
Computation of direct labor rate variance:

Standard direct labor rate $25
Less actual direct labor rate 26
Difference in rate $ 1 (U)
Direct Labor Rate

Variance
= ( $25 – $26 ) × 1,700
= $1,700 (U)
Computation of direct labor efficiency variance:

Standard direct labor hours allowed
( 800 products × 2 hours ) 1,600 hours
Less actual direct labor hours worked 1,700 hours
Difference in direct labor hours 100 hours (U)
Direct Labor
Efficiency Variance
= $25 × ( 1,600 hours – 1,700 hours )
= $2,500 (U)
Diagram Form:
Actual Wages Labor Budget

Paid to Based on Actual Work in Process
Employees Direct Labor Hours Inventory
$26.00 × 1,700 Direct Labor $25.00 × 1,700 Direct Labor $25.00 × (800 × 2)
= $44,200 Rate = $42,500 Efficiency = $40,000
Variance Variance
$1,700 (U) $2,500 (U)
22-15
E8A. Direct Labor Rate and Efficiency Variances
1. Standard direct labor rate $24

Less actual direct labor rate
( $775,000 / 31,000 hrs.) 25
Difference in rate $ 1 (U)
Direct Labor
Rate Variance
= ( $24 – $25 ) × 31,000 hrs.
= $31,000 (U)
2. Standard direct labor hours allowed

( 16,000 engine blocks × 2 hrs./block ) 32,000 hours
Less actual direct labor hours worked 31,000 hours
Difference in direct labor hours 1,000 hours (F)
Direct Labor
= Standard Rate × (Standard Hours Allowed − Actual Hours)
Efficiency Variance
= $24 × ( 32,000 hrs. – 31,000 hrs. )
= $24,000 (F)
Total variance = $31,000 (U) + $24,000 (F) = $7,000 (U)
Diagram Form:
Actual Wages Labor Budget Based

Paid to on Actual Direct Work in Process
Employees Labor Hours Inventory
$25 × 31,000 Direct Labor $24 × 31,000 Direct Labor $24 × (16,000 × 2)
= $775,000 Rate = $744,000 Efficiency = $768,000
Variance Variance
$31,000 (U) $24,000 (F)
Total
Direct Labor
Cost Variance
$7,000 (U)
22-16
E9A. Variable Overhead Variances

( $15.00 × 4,800 hours ) $72,000
Less actual variable overhead costs incurred
( $15.10 × 4,800 hours ) 72,480
Variable overhead spending variance $ 480 (U)

[ $15.00 × ( 800 × 5 hours per unit ) ] $60,000
( $15.00 × 4,800 hours ) 72,000
Variable overhead efficiency variance $12,000 (U)
Diagram Form:
Actual Budgeted Variable Overhead

Variable Variable Costs Applied
(Actual Rate × (Standard Rate × Standard Hours
Actual Hours) Actual Hours) Allowed)
$15.10 × 4,800 Variable $15.00 × 4,800 Variable $15.00 × (800 × 5)
= $72,480 Overhead = $72,000 Overhead = $60,000
Spending Efficiency
Variance Variance
$480 (U) $12,000 (U)
22-17
E10A. Fixed Overhead Variances

Fixed overhead budget variance $ 4,000 (U)

[ ( $46,000 / 1,000 ) × 800 units ] $36,800
Fixed overhead volume variance $ 9,200 (U)
Diagram Form:
Actual Budgeted
Fixed Fixed Fixed Overhead Costs
Overhead Overhead Applied to Products
Costs Costs (Standard Rate ×
(Given) (Given) Standard Hours Allowed)
Fixed Fixed ($46,000 / 1,000) × 800
$50,000 $46,000
Budget Volume
Variance Variance
$4,000 (U) $9,200 (U)
22-18
E11A. Variable Overhead Variances for a Service Business

( $150 × 6,050 hours ) $907,500
Variable overhead spending variance $ 2,500 (U)

Variable overhead applied to billed hours
( $150 × 6,000 hours ) $900,000
( $150 × 6,050 hours ) 907,500
Diagram Form:
Budgeted Variable Overhead

Actual Variable Costs Applied
Variable Overhead Costs (Standard Rate ×
Overhead Costs (Standard Rate × Standard Hours
(Given) Actual Hours) Allowed)
Variable $150 × 6,050 Variable $150 × 6,000
$910,000
Spending Efficiency
Variance Variance
$2,500 (U) $7,500 (U)
22-19
E12A. Fixed Overhead Variances for a Service Business

Budgeted fixed overhead
( $140 × 10,000 hours ) $1,400,000
Less actual fixed overhead costs incurred 1,450,000

Fixed overhead applied to billed hours
( $140 × 10,500 hours ) $1,470,000
Less budgeted fixed overhead
( $140 × 10,000 hours ) 1,400,000
Diagram Form:
Actual Budgeted Fixed Overhead

Fixed Fixed Costs Applied
Overhead Overhead Costs (Standard Rate ×
Costs (Standard Rate × Standard Hours
Fixed $140 × 10,000 Fixed $140 × 10,500
$1,450,000
Overhead = $1,400,000 Overhead = $1,470,000
Budget Volume
Variance Variance
$50,000 (U) $70,000 (F)
22-20
E13A. Overhead Variances
a.

( $1 × 9,000 hours ) $9,000

[ $1 × ( 8,100 × 0.9 hours per unit ) ] $7,290
( $1 × 9,000 hours ) 9,000
Variable overhead efficiency variance $1,710 (U)
Diagram Form:

Variable $1 × 9,000 Variable $1 × (8,100 × 0.9)
$9,500
Spending Efficiency
Variance Variance
$500 (U) $1,710 (U)
22-21
E13A. Overhead Variances (Concluded)
b.

Fixed overhead budget variance $ 200 (F)

[ $0.12* × ( 8,100 × 0.9 hour per unit ) ] $ 875 **
Fixed overhead volume variance $ 325 (U)
*$1,200 / 10,000 labor hours = $0.12

**Rounded
Diagram Form:
Actual Budgeted Fixed Overhead

Fixed Fixed Costs Applied
Overhead Overhead (Standard Rate ×
Costs Costs Standard Hours
(Given) (Given) Allowed)
Fixed Fixed $0.12 × (8,100 × 0.9)
$1,000 $1,200
Overhead Overhead = $875
Budget Volume
Variance Variance
$200 (F) $325 (U)
22-22
E14A. Overhead Variances
a.
Budgeted Fixed Overhead Cost

Fixed Overhead Rate =
Normal Capacity in Machine Hours
$100,000
= = $1 per machine hour
100,000 machine hours
Total Overhead Applied = Variable Overhead Rate + Fixed Overhead Rate

× Standard Hours Allowed
= ( $5 + $1 ) × 102,500 hours = $615,000
Overapplied overhead:
Overhead applied $615,000
Actual overhead incurred 605,500 *
Overapplied overhead $ 9,500 (F)
*$511,000 variable + $94,500 fixed = $605,500
b.

( $5 × 104,000 hours ) $520,000
Variable overhead spending variance $ 9,000 (F)

( $5 × 102,500 hours ) $512,500
( $5 × 104,000 hours ) 520,000
Diagram Form:
(Given) Variable Actual Hours) Variable Allowed)
Overhead $5 × 104,000 Overhead $5 × 102,500
$511,000
Spending = $520,000 Efficiency = $512,500
Variance Variance
$9,000 (F) $7,500 (U)
22-23
E14A. Overhead Variances (Concluded)

Fixed overhead budget variance $ 5,500 (F)

( $1 * × 102,500 hours ) $102,500
*$100,000 / 100,000 machine hours = $1
Diagram Form:
Fixed Overhead
Actual Budgeted Costs Applied
Fixed Fixed (Standard Rate ×
Overhead Costs Overhead Costs Standard Hours
Fixed Fixed $1 × 102,500
$94,500 $100,000
Budget Volume
Variance Variance
$5,500 (F) $2,500 (F)
E15A. Evaluating Managerial Performance
Layton Davis must identify the causes of the unfavorable direct labor efficiency variance for
the roof structure work on the Highlands Bank. He should ask the manager of the roof structure
work for the following information:
● List of workers on the project and each worker's years of service with the company
● Hourly time report for all workers on the roof structure
● List of new hires working on the roof structure
● Roof manager's report on the cause of the labor efficiency variance, including a list of rea-
sons that the work took more time than anticipated
Davis may also want to review the information used to compute the direct labor time standard
that was used in calculating the variance.
Note to Instructor: Solutions for Exercises: Set B are provided separately on the Instructor's
Resource CD and website.
22-24
Problems
P1. Computing and Using Standard Costs
1. and 2.
Direct materials costs:

Wood framing materials $2,140
Deluxe front door 480
Door hardware 260
Exterior siding 710
Electrical materials 580
Interior finishing materials 1,520
Total standard cost of direct materials per entrance $5,690
Direct labor costs:
Carpenter ( $36 per hour × 30 hours ) $1,080
Door specialist ( $24 per hour × 4 hours ) 96
Electrician ( $50 per hour × 8 hours ) 400
Total cost of direct labor 1,576
Overhead:
40% of cost of direct materials ( $5,690 × 40% ) 2,276
Total standard unit cost of front entrance $9,542
3.
Direct materials costs:

Wood framing materials ( $2,140 × 120% ) $2,568
Deluxe front door 496
Door hardware ( $260 × 110% ) 286
Exterior siding ( $710 − $15 ) 695
Electrical materials ( $580 × 120% ) 696
Interior finishing materials 1,520
Total cost of direct materials $6,261
Direct labor costs:
Carpenter ( $37 per hour × 30 hours ) $1,110
Door specialist ( $24 per hour × 4 hours ) 96
Electrician ( $50.50 per hour × 8 hours ) 404
Total cost of direct labor 1,610
Overhead:
30% of cost of direct materials ( $6,261 × 30% ) 1,878 *
Total standard unit cost of front entrance $9,749
*Rounded
22-25
P2. Direct Materials and Direct Labor Variances
1. Direct materials price variance
Direct Materials
Mylar
(ounces)
Price difference:
Standard price $0.030
Less actual price 0.028
Direct Materials
Price Variance
= $0.002 × 602,000 ounces
= $1,204 (F)
Direct materials quantity variance:

Direct Materials
Mylar
(ounces)
Quantity difference:
Standard quantity 601,800 *
Less actual quantity used 602,000
Difference in quantity 200 (U)
Direct Materials
Quantity Variance
= $0.030 × 200 ounces
= $6 (U)
* 200,600 units × 3 ounces
Diagram Form:
Actual Direct
$0.028 × 602,000 $0.030 × 602,000 $0.030 × (200,600 × 3)
Direct Direct
= $16,856 = $18,060 = $18,054
Materials Materials
Price Quantity
Variance Variance
$1,204 (F) $6 (U)
22-26
P2. Direct Materials and Direct Labor Variances (Concluded)
2. Direct labor rate variance
Rate difference:
Standard rate $18.00
Less actual rate 18.50
Difference in rate $ 0.50 (U)
Direct Labor
Rate Variance
= $0.50 × 2,000 hours
= $1,000 (U)
Direct labor efficiency variance:

Efficiency difference:
Standard hours allowed 2,006 *
Less actual hours 2,000
Difference in hours 6 (F)
Direct Labor
Efficiency Variance
= $18.00 × 6 hours
= $108 (F)
* 200,600 × 0.01 = 2,006 hours
Diagram Form:
Actual Labor Budget Based Work in Process

Wages Paid on Actual Hours Inventory
$18.50 × 2,000 $18.00 × 2,000 $18.00 × (200,600 × 0.01)
= $37,000 = $36,000 = $36,108
Direct Labor Direct Labor
Rate Efficiency
Variance Variance
$1,000 (U) $108 (F)
22-27
1.
Direct materials price variance:

Direct Materials
Metal Wood
(pounds) (ounces)
Price difference:
Standard price $3.00 $0.45
Less actual price 2.95 0.48
Difference in price $0.05 (F) $0.03 (U)
Direct Materials Price Variance = (Standard Price − Actual Price) × Actual Quantity
Metal:
$0.05 × 16,640 pounds = $832 (F)
Wood:
$0.03 × 164,400 ounces = $4,932 (U)

Direct Materials
Metal Wood
(pounds) (ounces)
Quantity difference:
Standard quantity 16,400 * 164,000 **
Less actual quantity used 16,640 164,400
Difference in quantity 240 (U) 400 (U)
Direct Materials Quantity Variance = Standard Price × (Standard Quantity − Actual Quantity)
Metal:
$3.00 × 240 = $720 (U)
Wood:
$0.45 × 400 = $180 (U)
* 16,400 units × 1 pound = 16,400

** 16,400 units × 10 ounces = 164,000
22-28
P3. Direct Materials and Direct Labor Variances (Continued)
Diagram Form for Metal:
Actual Direct
$2.95 × 16,640 $3.00 × 16,640 $3.00 × (16,400 × 1)
= $49,088 Direct = $49,920 Direct = $49,200
Materials Materials
Price Quantity
Variance Variance
$832 (F) $720 (U)
Diagram Form for Wood:
Actual Direct
$0.48 × 164,400 $0.45 × 164,400 $0.45 × (16,400 × 10)
= $78,912 Direct = $73,980 Direct = $73,800
Materials Materials
Price Quantity
Variance Variance
$4,932 (U) $180 (U)
22-29
2.
Direct labor rate variance:

Direct Labor
Trimming/
Molding Finishing
Rate difference:
Standard rate $20.00 $18.00
Less actual rate 19.80 18.10
Difference in rate $ 0.20 (F) $ 0.10 (U)
Direct Labor Rate Variance = (Standard Rate − Actual Rate) × Actual Hours
Molding Department:
$0.20 × 3,400 hours = $680 (F)
Trimming/Finishing Department:
$0.10 × 6,540 hours = $654 (U)

Direct Labor
Trimming/
Molding Finishing
Efficiency difference:
Standard hours allowed 3,280 * 6,560 **
Less actual hours 3,400 6,540
Difference in hours 120 (U) 20 (F)
Direct Labor Efficiency Variance = Standard Price × (Standard Hours − Actual Hours)
Molding Department:
$20.00 × 120 = $2,400 (U)
Trimming/Finishing Department:
$18.00 × 20 = $360 (F)
* 16,400 × 0.2 = 3,280 hours

** 16,400 × 0.4 = 6,560 hours
22-30
Diagram Form for Molding:
Labor Budget
Actual Based on Actual Work in Process
Wages Paid Hours Inventory
$19.80 × 3,400 $20.00 × 3,400 $20.00 × (16,400 × 0.2)
= $67,320 = $68,000 = $65,600
Rate Efficiency
Variance Variance
$680 (F) $2,400 (U)
Diagram Form for Trimming/Finishing:
Labor Budget
$18.10 × 6,540 $18.00 × 6,540 $18.00 × (16,400 × 0.4)
= $118,374 = $117,720 = $118,080
Rate Efficiency
Variance Variance
$654 (U) $360 (F)
22-31
P4. Overhead Variances
a. Actual Variable Overhead = ( Standard Rate × Actual Hours ) − Favorable Variable

Overhead Spending Variance
( $2.50 × 17,100 ) − $750
= $42,000
b. Variable Overhead = ( Standard Rate × Standard Hours Allowed) −

Efficiency Variance ( Standard Rate × Actual Hours )
( $2.50 × 17,500 ) − ( $2.50 × 17,100 )
= $1,000 (F)
c. Actual Fixed Overhead = Budgeted Fixed Overhead + Unfavorable Fixed Overhead

Budget Variance
= $153,000 + $1,300
= $154,300
d. Normal Capacity in = Budgeted Fixed Overhead / Standard Fixed Overhead Rate

Machine Hours
= $153,000 / $9.00
= 17,000
Standard Fixed Fixed Overhead Applied

e. =
Overhead Rate Standard Machine Hours Allowed
= $157,500 / 17,500 hours
= $9.00
f. Fixed Overhead Applied = Budgeted Fixed Overhead + Favorable Fixed Overhead

Volume Variance
= $153,000 + $4,500
= $157,500
Note to Instructor: (f) must be solved first, then (e), and then (d).
22-32
P4. Overhead Variances (Concluded)
Diagram Form:
Variable Overhead
Budgeted Variable Costs Applied
Actual Variable Overhead Costs (Standard Rate ×
(a) Actual Hours) Allowed)
Variable
Variable $2.50 × 17,100 Overhead $2.50 × 17,500
$42,000
Overhead = $42,750 Efficiency = $43,750
Spending Variance
Variance (b)
$750 (F) $1,000 (F)
Fixed Overhead
Costs Applied
(f)
Actual Fixed Budgeted Fixed (Standard Rate ×
Overhead Costs Overhead Costs Standard Hours
(c) (Given) Allowed)
$9.00 × 17,500
$154,300 Fixed $153,000 Fixed = $157,500
Overhead Overhead
Budget Volume
Variance Variance
$1,300 (U) $4,500 (F)
22-33
P5. Computing Variances and Evaluating Performance
1.
a. Direct materials price variance:

Less actual direct materials price 2.90 ( $73,080 / 25,200 meters )
Direct Materials
Price Variance
= $0.10 × 25,200 meters
= $2,520 (F)
b. Direct materials quantity variance:

Standard direct materials quantity
( 50,000 × 0.5 meter per mat ) 25,000 meters
Less actual direct materials quantity 25,200 meters
Difference in quantity 200 meters (U)
Direct Materials
Quantity Variance
= $3.00 per meter × 200
= $600 (U)
Diagram Form:
Actual Direct
Actual Quantity) Direct Actual Quantity) Direct Standard Quantity)
$2.90 × 25,200 Materials $3.00 × 25,200 Materials $3.00 × (50,000 × 0.5)
= $73,080 Price = $75,600 Quantity = $75,000
Variance Variance
$2,520 (F) $600 (U)
22-34
P5. Computing Variances and Evaluating Performance (Continued)
c. Direct labor rate variance:

Standard direct labor rate $20.00
Less actual direct labor rate 19.90 ( $214,920 / 10,800 meters )
Difference in rate $ 0.10 (F)
Direct Labor
Rate Variance
= $0.10 × 10,800 hours
= $1,080 (F)
d. Direct labor efficiency variance:

Standard direct labor hours allowed
( 50,000 × 0.3 hour ) 15,000 hours
Less actual direct labor hours 10,800 hours
Difference in hours 4,200 hours (F)
Direct Labor
= Standard Rate × ( Standard Hours − Actual Hours )
Efficiency Variance
= $20.00 per hour × 4,200
= $84,000 (F)
Diagram Form:
Actual Labor Budget Based Work in Process
Wages Paid on Actual Hours Inventory
Actual Hours) Direct Labor Actual Hours) Direct Labor Standard Hours)
$19.90 × 10,800 Rate $20.00 × 10,800 Efficiency $20.00 × (50,000 × 0.3)
= $214,920 Variance = $216,000 Variance = $300,000
$1,080 (F) $84,000 (F)
22-35
e. Variable overhead spending variance:

( $1.50 × 10,800 hours ) $16,200
Variable overhead spending variance $ 2,000 (U)
f. Variable overhead efficiency variance:

[ $1.50 × ( 50,000 × 0.3 hour per unit ) ] $22,500
( $1.50 × 10,800 hours ) 16,200
Variable overhead efficiency variance $ 6,300 (F)
Diagram Form:
Variable Overhead
Budgeted Variable Costs Applied
Actual Variable Overhead Costs (Standard Rate ×
Variable $1.50 × 10,800 Variable $1.50 × (50,000 × 0.3)
$18,200
Spending Efficiency
Variance Variance
$2,000 (U) $6,300 (F)
22-36
g. Fixed overhead budget variance:

Budgeted fixed overhead $ 9,280
Less actual fixed overhead costs incurred
( $28,200 – $18,200 ) 10,000
h. Fixed overhead volume variance:

[ $0.80 × ( 50,000 × 0.3 hour per unit ) ] $12,000
Diagram Form:
Budgeted Fixed Overhead

Fixed Overhead (Standard Rate ×
Overhead Costs Standard Hours
Costs (Given) Allowed)
$28,200 – $18,200 Fixed Fixed $0.80 × (50,000 × 0.3)
$9,280
= $10,000 Overhead Overhead = $12,000
Budget Volume
Variance Variance
$720 (U) $2,720 (F)
22-37
2.
Clean Sweep Company

Production Performance and Cost Variance Report
Product: All-Vinyl Doormats
For the Month Ended August 31
Productivity Summary:
Normal capacity 58,000 units
Good units produced 50,000 units
Cost and Variance Analysis:

Actual
Standard Cost Total Variance Breakdown
Cost Incurred Variance Amount Type
Direct materials $ 75,000 $ 73,080 $ 1,920 (F) $ 2,520 (F) Direct materials price variance
600 (U) Direct materials quantity variance
Direct labor 300,000 214,920 85,080 (F) 1,080 (F) Direct labor rate variance
84,000 (F) Direct labor efficiency variance
Variable overhead 22,500 18,200 4,300 (F) 2,000 (U) Variable overhead spending variance
6,300 (F) Variable overhead efficiency variance
Fixed overhead 12,000 10,000 2,000 (F) 720 (U) Fixed overhead budget variance
2,720 (F) Fixed overhead volume variance
Totals $409,500 $316,200 $93,300 (F) $93,300 (F)
22-38
P5. Computing Variances and Evaluating Performance (Concluded)
Possible Causes of Variances:

Direct materials price variance (favorable):
● Increased quantities of vinyl purchased, which may have triggered quantity discounts.
● Lower-quality vinyl may have been purchased at lower prices.
Direct materials quantity variance (unfavorable):

● Quantity variance for vinyl may be related to quality of vinyl purchased.
● There may have been more waste than anticipated.
Direct labor rate variance (favorable):

● Less-skilled (and thus lower-paid) workers than planned may have been used.
● Anticipated pay raises may not have been implemented.
Direct labor efficiency variance (favorable):

● New equipment may have improved performance.
● Experienced employees may have performed well.
Variable overhead spending variance (unfavorable):

● The manager needs to investigate this unfavorable variance because all of the costs
involved are controlled by the manager. Each cost category within the Variable Over-
head account must be analyzed to determine the reasons for any differences.
Variable overhead efficiency variance (favorable):

● Like the direct labor efficiency variance, new equipment and experienced employees
may have improved performance.
Fixed overhead budget variance (unfavorable):

involved are controlled by him.
Fixed overhead volume variance (favorable):

● Not controllable—a function of production level and normal capacity.
Note to Instructor: Because of the large variances for direct labor, an investigation should be
made to determine whether the standards should be revised.
22-39
Alternate Problems
P6. Computing Standard Costs for Direct Materials
1. Clock facing:
Company A ( 60% × $18.50 ) $11.10
Company B ( 40% × $18.80 ) 7.52
Total $ 18.62
Clock hands:
Hardware, Inc. ( $15.50 per set ) 15.50
Time movement:
Company Q ( 30% × $68.50 ) $20.55
Company R ( 20% × $69.50 ) 13.90
Company S ( 50% × $71.90 ) 35.95
Total 70.40
Spring assembly:
( $52.50 × 120% ) 63.00
Total standard direct materials cost per unit $167.52
2. Total standard unit cost of direct materials before change $167.52

Less original cost of clock hands (15.50)
Plus new purchase price of clock hands
( $15.50 × 80% ) 12.40
Total standard unit cost of direct materials $164.42
3. Total standard unit cost of direct materials before change $167.52

Less original cost of assemblies (63.00)
Plus new cost of substandard assemblies
( $50.00 / 80% ) 62.50
Total standard unit cost of direct materials $167.02
22-40
1. Direct materials price variance
Plastic
(ounces)
Price difference
Less actual price 0.012
Difference in price $0.001 (U)
Direct Materials
Price Variance
= $0.001 × 500,100 ounces
= $500.10 (U)
Direct materials quantity variance

Plastic
(ounces)
Quantity difference
Standard quantity 500,000 *
Less actual quantity used 500,100
Difference in quantity 100 (U)
Direct Materials
Quantity Variance
= $0.011 × 100
= $1.10 (U)
* 100,000 units × 5 ounces = 500,000
Diagram Form:
Actual Direct
$0.012 × 500,100 $0.011 × 500,100 $0.011 × (100,000 × 5)
Direct Direct
= $6,001.20 = $5,501.10 = $5,500.00
Materials Materials
Price Quantity
Variance Variance
$500.10 (U) $1.10 (U)
22-41
2. Direct labor rate variance
Rate difference
Less actual rate 20.50
Direct Labor
Rate Variance
= $0.50 × 3,990 hours
= $1,995 (U)

Efficiency difference
Standard hours allowed 4,000 *
Difference in hours 10 (F)
Direct Labor
Efficiency Variance
= $20.00 × 10 hours
= $200 (F)
* 100,000 × 0.04 = 4,000 hours
Diagram Form:
Labor Budget
Actual Hours) Actual Hours) Standard Quantity)
$20.50 × 3,990 $20.00 × 3,990 $20.00 × (100,000 × 0.04)
= $81,795 = $79,800 = $80,000
Rate Efficiency
Variance Variance
$1,995 (U) $200 (F)
22-42
1.
Material G
Plastic Additive
Standard cost:
Standard price × standard quantity
[ $0.15 per gram × ( 48,000 baskets ×
0.8 gram per basket ) ] $5,760
[ $0.09 per gram × ( 48,000 baskets ×
0.6 gram per basket ) ] $2,592
Less actual cost:
Actual price × actual quantity
$0.14 per gram × 38,600 grams 5,404
$0.10 per gram × 28,950 grams 2,895
Total direct materials cost variance $ 356 (F) $ 303 (U)
Direct materials price variance:

Standard price $0.15 $0.09
Less actual price
( $5,404 / 38,600 grams) 0.14
( $2,895 / 28,950 grams) 0.10
Difference in price $0.01 (F) $0.01 (U)
Difference in price × actual quantity:

( $0.01 × 38,600 grams) $386 (F)
( $0.01 × 28,950 grams) $289.50 (U)
22-43
Material G
Plastic Additive
Standard total quantity 38,400 * 28,800 **
Less actual quantity used 38,600 28,950
Difference in quantity 200 (U) 150 (U)
Standard price × difference in quantity:

( $0.15 per gram × 200 grams ) $30 (U)
( $0.09 per gram × 150 grams ) $13.50 (U)
* 48,000 × 0.8 gram per basket = 38,400

** 48,000 × 0.6 gram per basket = 28,800
Diagram Form for Material G:
Actual Direct
Direct Direct
$0.14 × 38,600 Materials $0.15 × 38,600 Materials $0.15 × (48,000 × 0.8)
= $5,404 Price = $5,790 Quantity = $5,760
Variance Variance
$386 (F) $30 (U)
Diagram Form for Additive:
Actual Direct
$0.10 × 28,950 $0.09 × 28,950 $0.09 × (48,000 × 0.6)
Direct Direct
= $2,895.00 = $2,605.50 = $2,592.00
Materials Materials
Price Quantity
Variance Variance
$289.50 (U) $13.50 (U)
22-44
2.
Trimming/
Molding Packing
Standard cost:
$12.00 per hour × ( 48,000 / 100 ) × 1.0 hour $5,760
$10.00 per hour × ( 48,000 / 100 ) × 1.2 hours $5,760
Less actual cost:
Actual cost × actual hours
$11.80 per hour × 480 hours 5,664
$10.10 per hour × 560 hours 5,656
Total direct labor cost variance $ 96 (F) $ 104 (F)
Direct labor rate variance:

Standard rate $12.00 $10.00
Less actual rate
( $5,664 / 480 hours ) 11.80
( $5,656 / 560 hours ) 10.10
Difference in rate $ 0.20 (F) $ 0.10 (U)
Difference in rate × actual quantity:

( $0.20 × 480 hours ) $96 (F)
( $0.10 × 560 hours ) $56 (U)
22-45
Trimming/
Molding Packing
Standard hours allowed 480 * 576 **
Less actual hours 480 560
Difference in hours 0 16 (F)
Standard rate × difference in hours:

( $12.00 per hour × 0 hours ) $0
( $10.00 per hour × 16 hours ) $160 (F)
* 480 × 1.0 hour per basket = 480 hours

** 480 × 1.2 hours per basket = 576 hours
Diagram Form for Molding:
Actual Work in Process

Wages Paid Labor Budget Inventory
$11.80 × 480 Direct Labor $12.00 × 480 Direct Labor $12.00 × (480 × 1.0)
= $5,664 Rate = $5,760 Efficiency = $5,760
Variance Variance
$96 (F) $0
Diagram Form for Trimming/Packing:

$10.10 × 560 $10.00 × 560 $10.00 × (480 × 1.2)
= $5,656 = $5,600 = $5,760
Rate Efficiency
Variance Variance
$56 (U) $160 (F)
22-46
P9. Overhead Variances
a. Actual Variable Overhead = ( Standard Rate × Actual Hours ) − Favorable Variable

Overhead Spending Variance
( $2.00 × 20,100 ) − $250
= $39,950
b. Variable Overhead = ( Standard Rate × Standard Hours Allowed) −

Efficiency Variance ( Standard Rate × Actual Hours )
( $2.00 × 20,500 ) − ( $2.00 × 20,100 )
= $800 (F)
c. Actual Fixed Overhead = Budgeted Fixed Overhead + Unfavorable Fixed Overhead

Budget Variance
= $153,000 + $500
= $153,500
d. Normal Capacity in = Budgeted Fixed Overhead / Standard Fixed Overhead Rate

Machine Hours
= $153,000 / $7.50
= 20,400
Standard Fixed Fixed Overhead Applied

e. =
Overhead Rate Standard Machine Hours Allowed
= $153,750 / 20,500 hours
= $7.50
f. Fixed Overhead Applied = Budgeted Fixed Overhead + Favorable Fixed Overhead

Volume Variance
= $153,000 + $750
= $153,750
Note to Instructor: (f) must be solved first, then (e), and then (d).
22-47
P9. Overhead Variances (Concluded)
Diagram Form:

(a) Actual Hours) Allowed)
Variable
Variable $2 × 20,100 Overhead $2.00 × 20,500
$39,950
Overhead = $40,200 Efficiency = $41,000
Spending Variance
Variance (b)
$250 (F) $800 (F)
Fixed Overhead
Actual Budgeted Costs Applied
Fixed Fixed (f)
Overhead Overhead (Standard Rate ×
Costs Costs Standard Hours
(c) (Given) Allowed)
$7.50 × 20,500
$153,500 Fixed $153,000 Fixed = $153,750
Overhead Overhead
Budget Volume
Variance Variance
$500 (U) $750 (F)
22-48
P10. Computing Variances and Evaluating Performance
1.
a. Direct materials price variances:

Chemicals
Less actual price ( $292,800 / 305,000 ounces ) 0.96
Difference $0.04 (F)
Direct Materials
Price Variance
= $0.04 × 305,000 ounces
= $12,200 (F)
Packages
Less actual price ( $60,240 / 50,200 packages ) 1.20
Difference $0.00
Direct Materials
Price Variance
= $0.00 × 50,200 packages
= $0.00
b. Direct materials quantity variances:

Chemicals
Standard quantity ( 50,000 packages × 6 ounces ) 300,000
Less actual quantity 305,000
Difference 5,000 (U)
Direct Materials
Quantity Variance
= $1.00 per ounce × 5,000 ounces
= $5,000 (U)
Packages
Standard quantity 50,000
Less actual quantity 50,200
Difference 200 (U)
Direct Materials
Quantity Variance
= $1.20 per package × 200 packages
= $240 (U)
22-49
Diagram Form for Chemicals:

Actual Direct
Direct Direct
$0.96 × 305,000 Materials $1 × 305,000 Materials $1.00 × (50,000 × 6)
= $292,800 Price = $305,000 Quantity = $300,000
Variance Variance
$12,200 (F) $5,000 (U)
Diagram Form for Packages:

Actual Direct
Direct Direct
$1.20 × 50,200 Materials $1.20 × 50,200 Materials $1.20 × 50,000
= $60,240 Price = $60,240 Quantity = $60,000
Variance Variance
$0 $240 (U)
22-50
c. Direct labor rate variance:

Less actual rate ( $579,600 / 40,250 hours ) 14.40
Direct Labor
Rate Variance
= $0.40 × 40,250 hours
= $16,100 (U)
d. Direct labor efficiency variance:

Standard hours allowed
( 50,000 packages × 0.8 hour per package ) 40,000
Difference in hours 250 (U)
Direct Labor
Efficiency Variance
= $14.00 × 250 hours
= $3,500 (U)
Diagram Form:
Labor Budget
Actual Based on Work in Process
Wages Paid Actual Hours Inventory
$14.40 × 40,250 $14.00 × 40,250 $14.00 × (50,000 × 0.8)
= $579,600 = $563,500 = $560,000
Rate Efficiency
Variance Variance
$16,100 (U) $3,500 (U)
22-51
e. Variable overhead spending variance:

( $4.00 × 40,250 hours ) $161,000
f. Variable overhead efficiency variance:

[ $4.00 × ( 50,000 × 0.8 hour per unit ) ] $160,000
( $4.00 × 40,250 hours ) 161,000
Diagram Form:

Variable $4 × 40,250 Variable $4.00 × (50,000 × 0.8)
$161,100
Spending Efficiency
Variance Variance
$100 (U) $1,000 (U)
22-52
g. Fixed overhead budget variance:

h. Fixed overhead volume variance:

[ $6.40 × ( 50,000 × 0.8 hour per unit ) ] $256,000
Diagram Form:
Actual Fixed Overhead

Fixed Budgeted Costs Applied
Overhead Variable (Standard Rate ×
Costs Overhead Costs Standard Hours
Fixed Fixed $6.40 × (50,000 × 0.8)
$242,000 $240,000
Budget Volume
Variance Variance
$2,000 (U) $16,000 (F)
22-53
2.
Panacea Laboratories, Inc.

Production Performance and Cost Variance Report
Product: Cold-Gone
For the First Week of April
Productivity Summary:
Normal capacity 46,875 units
Good units produced 50,000 units
Cost and Variance Analysis:

Standard Actual Cost Total Variance Breakdown
Cost Incurred Variance Amount Type
Direct materials:
Chemicals $ 300,000 $ 292,800 $ 7,200 (F) $12,200 (F) Direct materials price variance
5,000 (U) Direct materials quantity variance
Packages 60,000 60,240 240 (U) — Direct materials price variance
240 (U) Direct materials quantity variance
Direct labor 560,000 579,600 19,600 (U) 16,100 (U) Direct labor rate variance
3,500 (U) Direct labor efficiency variance
Variable overhead 160,000 161,100 1,100 (U) 100 (U) Variable overhead spending variance
1,000 (U) Variable overhead efficiency variance
Fixed overhead 256,000 242,000 14,000 (F) 2,000 (U) Fixed overhead budget variance
16,000 (F) Fixed overhead volume variance
Totals $1,336,000 $1,335,740 $ 260 (F) $ 260 (F)
22-54
P10. Computing Variances and Evaluating Performance (Concluded)
Possible Causes of Variances:

Direct materials price variance (favorable):
● Increased quantities of chemicals were purchased, which may have triggered quantity
discounts.
● Lower-quality chemicals may have been purchased.
● Package prices are on target.
Direct materials quantity variance (unfavorable):

● High quantity variance for chemicals may be related to quality of chemicals purchased.
● The package quantity variance was very small.
Direct labor rate variance (unfavorable):

● Direct labor rate variance very high—either workers may be too skilled for the job or
new direct labor rates have been established and direct labor rate standards need to
be revised.
Direct labor efficiency variance (unfavorable):

● May be caused by the need to hire additional workers.
● May be caused by the need for additional training of workers.
Variable overhead spending and efficiency variance (unfavorable):

● The manager needs to investigate these unfavorable variances because all of the costs
involved are controlled by the manager. Each cost category within the Variable Over-
head account must be analyzed to determine the reasons for any differences.
Fixed overhead budget variance (unfavorable):

involved are controlled by him.
Fixed overhead volume variance (favorable):

● The variance is due to operating in excess of normal capacity.
Note to Instructor: Several unfavorable variances that are controllable are obscured by the favor-
able fixed overhead volume variance (uncontrollable) and by the direct materials price variance.
22-55
Cases
C1. Ethical Dilemma: An Ethical Question Involving Standard Costs
Accountants are often placed in delicate situations because they have knowledge of the inner
workings of the financial areas of a business. The issue of whistle-blowing is very complex and
must be considered with care. It is important to determine how serious the specific situation is.
In this case, the updating of standard costs may be a higher priority to Elgar than it is to senior
management. Assuming that the update is very important, Elgar cannot ethically refrain from re-
vising the standards that she knows will be wrong at the end of the year and that will significantly
affect the year-end financial statements. Failing to adjust the standard costs will result in a higher
reported net income.
The Institute of Management Accountants (IMA) states that the first course of action in disputes is
to follow the chain of command according to the policies of the company. Elgar's first step, which
was to request clarification from the CFO, was the correct one. She should ask the CFO the rea-
sons for not revising the standards and should document those conversations. Ideally, Elgar's
recommendations should be put in writing. When a dispute cannot be resolved by appeal to an em-
ployee's immediate superior, which is the case here, the next step is to take the issue to the next
higher person, which in this case is the president of the company.
If the recommended procedures fail to bring resolution, the IMA suggests that an attorney be con-
sulted. According to the IMA, if the ethical conflict still exists after Elgar has exhausted all levels
of internal review, she may have no recourse other than to resign from the company and to submit
an informative memorandum to an appropriate representative of the organization. After Elgar re-
signs, depending on the nature of the ethical conflict, it may also be appropriate for her to notify
other parties.
C2. Group Activity: Standard Costs and Variance Analysis
Students' responses will vary, but a standard costing system for a pizza outlet would contain the
following components (possible sources of information are presented in parentheses):
Direct materials:
● Quantity of ingredients (recipes, packaging)
● Price of ingredients (invoices for purchases)
Direct labor costs:
● Direct labor hours, which could include hours worked by cooks and delivery workers (a
study of a known efficient operation)
● Hourly labor rate (pay scales)
Overhead:
● Variable overhead (Items in this category are the most difficult to determine because studies
would need to be made over time. Variable overhead could include certain types of packaging
such as boxes and paper bags, and indirect labor for order taking, maintenance, and activities
not directly involved in the making or delivery of the pizzas. There may also be variable costs
associated with delivery, such as fuel costs.)
● Fixed overhead (The main items here are the occupancy costs, such as rent, utilities, and in-
surance. This information comes from past accounting records.)
These standard costs would enable the manager to set prices and control costs. For example, a
unit cost could be determined and compared with the selling price of a typical unit. Also, a high
unfavorable direct labor efficiency variance could indicate overstaffing. A high unfavorable direct
labor rate variance could indicate that employees are working too much overtime. Use of standard
costs may also be helpful in identifying employee theft. For example, direct materials quantity var-
iances may indicate that pizzas were sold but not recorded.
22-56
C3. Business Communication: Preparing Performance Reports
1. a. The performance report is being prepared to help Correy monitor the operating costs of
the spa. He wants to make sure that the actual profits are close to the budgeted profits.
b. Terry Correy, the president of Pine Valley Spa, needs the performance report.
c. To develop the performance report, you need the standard and actual costs of labor and
overhead. You also need the normal and actual labor hours. The costs can be found in
the general ledger, and the labor hours can be accumulated from time cards. The normal
operating hours come from the information that Correy used to prepare his budget for
March.
d. The performance report and analysis must be prepared immediately. Constant, frequent
feedback is necessary to identify and solve problems quickly.
2. Note to Instructor: In this case, no items are produced or processed. Standard hours allowed
differ from normal hours only when more or fewer items than normal are produced or proc-
essed. Therefore, in this case, the standard hours for the month will equal normal hours, re-
sulting in a zero value for the fixed overhead volume variance.
Standard operating labor cost $10,880

Actual operating labor cost 12,150
Total operating labor variance $ 1,270 (U)
Total Standard Hours Allowed = Normal Hours × Standard Number of Operators

= 160 × 8
= 1,280 hours
Total Actual Hours = Actual Hours × Actual Number of Operators Used

= 150 × 9
= 1,350 hours
22-57
C3. Business Communication: Preparing Performance Reports (Continued)
Operating Labor
= ( Standard Rate* − Actual Rate** ) × Actual Hours
Rate Variance
= ( $8.50 – $9.00 ) × 1,350 hours
= $675 (U)
Operating Labor
Efficiency Variance
= $8.50 × ( 1,280 – 1,350 )
= $595 (U)
* Standard Operating Standard Operating Labor Cost

=
Labor Rate Total Standard Hours Allowed
$10,880
=
1,280
= $8.50 per hour

** Actual Operating Actual Operating Labor Cost
=
Labor Rate Total Actual Hours
$12,150
=
1,350
= $9.00 per hour
Diagram Form:
$9.00 × (150 × 9) Direct Labor $8.50 × (150 × 9) Direct Labor $8.50 × (160 × 8)
= $12,150 Rate = $11,475 Efficiency = $10,880
Variance Variance
$675 (U) $595 (U)
22-58
C3. Business Communication: Preparing Performance Reports (Concluded)
Controllable overhead variance:
Flexible Actual Variance

Variable overhead costs:
Utilities $ 2,880 $ 3,360
Repairs and maintenance 5,760 7,140
Total variable overhead costs $ 8,640 $10,500 $1,860 (U)
Fixed overhead costs:
Depreciation, equipment $ 2,600 $ 2,680
Rent 3,280 3,280
Other 1,704 1,860
Total fixed overhead costs $ 7,584 $ 7,820 $236 (U)
Total overhead costs $16,224 $18,320
3.
Pine Valley Spa

Performance Report
For the Month Ended March 31
Cost Variance
Flexible Actual Amount Type
Operating labor costs $10,880 $12,150 $ 675 (U) Labor rate variance
595 (U) Labor efficiency variance
Variable overhead 8,640 10,500 1,860 (U) Variable overhead variance
Fixed overhead 7,584 7,820 236 (U) Fixed overhead budget
variance
Total costs $27,104 $30,470 $3,366 (U)
The spa had problems with both labor costs and overhead costs during the month. Actual labor
rates paid to employees exceeded standard rates, and the actual number of labor hours worked
exceeded standard hours allowed. Both variable and fixed overhead expenditures exceeded
standard rates for the period. Either the standards are too low and need to be raised, or cost con-
trol measures need to be developed and implemented.
22-59
C4. Decision Analysis: Developing a Flexible Budget and Analyzing Overhead Variances
1.
FT Industries
Flexible Budget—Overhead
For an Average One-Month Period
Machine Hours (MH) Variable
Cost Category 2,000 2,200 2,500 Cost per MH
Budgeted variable overhead:
Indirect materials and supplies $ 2,200 $ 2,420 $ 2,750 $1.10
Indirect machine setup labor 5,000 5,500 6,250 2.50
Materials handling 2,800 3,080 3,500 1.40
Maintenance and repairs 3,000 3,300 3,750 1.50
Utilities 1,600 1,760 2,000 0.80
Miscellaneous 200 220 250 0.10
Total budgeted variable overhead costs $14,800 $16,280 $18,500 $7.40
Budgeted fixed overhead:

Supervisory salaries $ 3,630 $ 3,630 $ 3,630
Machine depreciation 8,360 8,360 8,360
Other 1,210 1,210 1,210
Total budgeted fixed overhead costs $13,200 $13,200 $13,200
Total budgeted overhead costs $28,000 $29,480 $31,700
2. Flexible budget formula:
Total Budgeted Overhead Costs = ( Variable Cost per Machine Hour × Number of MH )
+ Budgeted Fixed Overhead Costs
= ( $7.40 × Number of MH ) + $13,200
3.
Fixed Costs per Machine Hour = Budgeted Fixed Costs / Normal Capacity in MH
= $13,200 / 2,200 MH
= $6 per MH
Detail of fixed overhead rate:

Supervisory salaries = $3,630 / 2,200 MH = $1.65
Machine depreciation = $8,360 / 2,200 MH = 3.80
Other = $1,210 / 2,200 MH = 0.55
= $6.00
22-60
(Continued)
4.
FT Industries
Comparative Cost Analysis
Based on 2,100 Standard Machine Hours Allowed
For the Month Ended October 31
Actual
Cost Costs Costs
Cost Category per MH Applied Incurred Variance
Variable overhead:
Indirect materials and supplies $1.10 $ 2,310 $ 2,380 $ 70 (U)
Indirect machine setup labor 2.50 5,250 5,090 160 (F)
Materials handling 1.40 2,940 3,950 1,010 (U)
Maintenance and repairs 1.50 3,150 2,980 170 (F)
Utilities 0.80 1,680 1,490 190 (F)
Miscellaneous 0.10 210 200 10 (F)
Total variable overhead costs $7.40 $15,540 $16,090 $ 550 (U)
Fixed overhead:
Supervisory salaries $1.65 $ 3,465 $ 3,630 $ 165 (U)
Machine depreciation 3.80 7,980 8,580 600 (U)
Other 0.55 1,155 1,220 65 (U)
Total fixed overhead costs $6.00 $12,600 $13,430 $ 830 (U)
Total overhead costs $28,140 $29,520 $1,380 (U)
22-61
(Continued)
5.

( $7.40 × 2,100 hours ) $15,540

( $7.40 × 2,100 hours ) $15,540
( $7.40 × 2,100 hours ) 15,540
Variable overhead efficiency variance $ 0
Diagram Form:

Variable $7.40 × 2,100 Variable $7.40 × 2,100
$16,090
Spending Efficiency
Variance Variance
$550 (U) $0
22-62
(Concluded)


( $6.00 × 2,100 hours ) $12,600
Fixed overhead volume variance $ 600 (U)
Diagram Form:
Budgeted Fixed Overhead
Variable Costs Applied
Actual Fixed Overhead Costs (Standard Rate ×
Overhead Costs (Given) Standard Hours)
Fixed Fixed $6.00 × 2,100
$13,430 $13,200
Budget Volume
Variance Variance
$230 (U) $600 (U)
6. First, the total variance for the fixed overhead costs in October was $830 (U), of which the
overhead volume variance was $600 (U). The detail in the competitive analysis prepared in
Part 4 reveals that the entire overhead volume variance stemmed from the failure to apply
enough fixed overhead to production. The company operated under capacity. The remain-
ing fixed costs are controllable by the manager. Second, there appears to be one cost cate-
gory that needs immediate attention. Materials handling caused a $1,010 unfavorable vari-
ance. The manager needs to find out the cause of this variance and take corrective action.
The variance in utilities costs may also be of some concern because it is over 10 percent of
the actual costs. The rate may need to be lowered. The other cost categories also generated
cost variances, but those variances are small and tend to balance each other out.
22-63
C5. Conceptual Understanding: Standard Costing in a Service Company
1.
Standard Hours Allowed = Good Units Produced × Standard Hours per Unit
Policy support staff:
Standard Hours Allowed = 265 units × 3 hours
= 795 hours
Policy salespersons:
Standard Hours Allowed = 265 units × 8.5 hours
= 2,252.5 hours
2.
Standard costs for 265 units:

Direct labor:
Policy support staff ( $12.00 × 795 hours ) $ 9,540.00
Policy salespersons ( $14.20 × 2,252.5 hours ) 31,985.50
Total direct labor cost $ 41,525.50
Operating overhead:
Variable operating overhead ( $299.00 × 265 units ) $ 79,235.00
Fixed operating overhead ( $207.00 × 265 units ) 54,855.00
Total operating overhead $134,090.00
Total standard costs $175,615.50
Actual costs for 265 units:

Direct labor:
Policy support staff $ 10,600.00
Policy salespersons 31,535.00
Total direct labor cost $ 42,135.00
Operating overhead:
Variable operating overhead $ 78,440.00
Fixed operating overhead 53,400.00
Total operating overhead $131,840.00
Total actual costs $173,975.00
Total cost variance:

( $175,615.50 − $173,975.00 ) $ 1,640.50 (F)
22-64
C5. Conceptual Understanding: Standard Costing in a Service Company (Continued)
3.
Direct Labor
Rate Variance
Direct Labor
= ( $12.00 – $12.50 ) × 848 hours
Rate Variance
= $424.00 (U)
Direct Labor
= ( $14.20 – $14.00 ) × 2,252.5 hours
Rate Variance
= $450.50 (F)
Direct Labor
= Standard Rate × ( Standard Hours − Actual Hours )
Efficiency Variance
Direct Labor
= $12.00 × ( 795 – 848 hours )
Efficiency Variance
= $636.00 (U)
Direct Labor
= $14.20 × ( 2,252.5 – 2,252.5 hours )
Efficiency Variance
= $0.00
Diagram Form for Policy Support Staff:

$12.50 × 848 $12.00 × 848 $12.00 × (265 × 3)
= $10,600 = $10,176 = $9,540
Rate Efficiency
Variance Variance
$424 (U) $636 (U)
Diagram Form for Policy Salespersons:

$14.00 × 2,252.5 $14.20 × 2,252.5 $14.20 × (265 × 8.5)
= $31,535 = $31,985.50 = $31,985.50
Rate Efficiency
Variance Variance
$450.50 (F) $0
22-65
C5. Conceptual Understanding: Standard Costing in a Service Company (Continued)
4. Variable overhead spending variance:

[ $26.00 × ( 848 + 2,252.5 hours ) ] $80,613
Variable overhead spending variance $ 2,173 (F)

[ $26.00 × ( 265 × 11.5 hours ) ] $79,235
[ $26.00 × ( 848 + 2,252.5 hours ) ] 80,613
Diagram Form:

Variable $26 × (848 + 2,252.5) Variable $26.00 × (265 × 11.5)
$78,440
Spending Efficiency
Variance Variance
$2,173 (F) $1,378 (U)
22-66
C5. Conceptual Understanding: Standard Costing in a Service Company (Concluded)

Fixed overhead budget variance $ 420 (F)

[ $18.00 × ( 265 × 11.5 hours ) ] $54,855
Diagram Form:
Fixed Overhead
Actual Fixed Budgeted Fixed Costs Applied
(Given) (Given) Standard Hours)
Fixed Overhead Fixed Overhead $18 × (265 × 11.5)
$53,400 $53,820
Budget Variance Volume Variance = $54,855
$420 (F) $1,035 (F)
5. A closer look at the direct labor rate variance shows that it is made up of a $424 unfavorable
variance for policy support staff and a $450.50 favorable variance for policy salespersons.
There are several possible reasons for the unfavorable variance of $424. For instance, the
industry's pay rate may have increased, forcing ALIC to increase the rate paid to policy sup-
port staff. Or perhaps, needing more support staff, ALIC hired people with greater skill and,
thus, paid them a higher rate. The favorable direct labor rate variance for salespersons might
have been caused by high employee turnover, with new people being hired at a lower pay
rate. The variance should be analyzed further to determine if the actual pay rates were the
result of a one-time situation, making them temporary, or of permanent changes in the labor
market. If the change is permanent, the direct labor rate standard should be changed.
The unfavorable labor efficiency variance was caused entirely by policy support staff, who
took more time to complete 265 units than the standard allowed. This situation may have
been caused by a high number of inexperienced employees. Also, the support staff com-
pleted 5 more units than normal capacity. This may have required longer-than-normal work-
days and led to a decrease in efficiency because of fatigue.
The variable operating overhead spending variance and the fixed overhead budget vari-
ance were favorable. This means that either someone did a good job of controlling oper-
ating overhead costs and should be commended or the standards were set too low and
should be adjusted. The operating overhead costs may have been lower than expected
because of an unexpected price change; a decrease in the amount of indirect labor used,
such as fewer clerical workers; or a decrease in the utilities consumed.
The variable efficiency variance was unfavorable due to the policy support staff taking
more time to complete the 265 units than the standard allowed.
The fixed overhead volume variance was actually favorable because 5 more units were
sold than expected. This should again result in a reward for the person responsible or
possibly an adjustment of normal capacity if it was set too low.
22-67
C6. Continuing Case: Cookie Company
The variances that could be affected:

1. Direct labor rate variance (unfavorable)
Direct labor efficiency variance (favorable)
Direct materials quantity variance (favorable)
2. Direct materials quantity variance (unfavorable)

Direct labor efficiency variance (unfavorable)
3. Direct labor efficiency variance (unfavorable)

4. Direct materials quantity variance (unfavorable)

Direct materials price variance (favorable)
Direct labor efficiency variance (unfavorable)
5. Direct materials price variance (unfavorable)

Direct labor efficiency variance (favorable)
6. Direct materials price variance (favorable)
7. Direct labor efficiency variance (unfavorable)
22-68

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Managerial Accounting 10th Edition

Crosson Solutions Manual

SE1. Standard Costing Concepts

SE2. Purposes of Standard Costs

Standard costs provide the following advantages to management:

Standard costs provide the following disadvantages to management:

SE3. Computing a Standard Unit Cost

Direct materials cost ( $10.00 × 1 lb. ) $10.00

Product Variance Standard Cost Percentage

Possible causes of variances:

Product 6 Large favorable variance—possible causes include superior employee per-

Product 12 Unfavorable variance—possible causes include machine breakdown, poor

Computation of direct materials price variance:

= ( $1.00 – $0.98 ) × 20,200 meters

Computation of direct materials quantity variance:

= $1.00 × ( 20,000 meters – 20,200 meters )

= ( $10.00 – $10.10 ) × 21,800 pounds

= $0.10 × 21,800 pounds

= $10.00 × [ ( 21,000 × 1 pound ) – 21,800 pounds ]

= $10.00 × ( 21,000 pounds – 21,800 pounds )

= [ $12.00 – ( $134,200 / 11,000 hours ) ] × 11,000 hours

= ( $12.00 – $12.20 ) × 11,000 hours

= $0.20 × 11,000 hours = $2,200 (U)

= $12.00 × [ ( 21,000 × 0.5 hour ) – 11,000 hours ]

$12.00 × ( 10,500 hours – 11,000 hours )

= $12.00 × 500 hours = $6,000 (U)

Variable overhead spending variance:

Variable overhead efficiency variance:

Actual Budgeted Variable Variable Overhead

Fixed overhead budget variance:

Fixed overhead volume variance:

Fixed Overhead Costs

Budgeted Fixed Overhead Cost

= $0.50 per direct labor hour

Fixed overhead budget variance:

Fixed overhead volume variance:

$200 (U) $200 (U)

SE10. Evaluating Managerial Performance

E1A. Uses of Standard Costs

To: Tyson Getz

E2A. Computing Standard Costs

Computation of new direct materials standards:

Direct materials price standard

Computation of new direct labor standards:

Machine K: 24,000 hours / 20,000 units

Direct labor rate standards

Machine K: $9.00 per hour × 110% = $9.90 per hour

Standard unit cost:

* 26 + 21 = 47 total direct labor hours

Computation of direct materials price variance:

= ( $0.25 – $0.26 ) × 495,000 pounds

Computation of direct materials quantity variance:

= $0.10 × ( 500,000 pounds – 495,000 pounds )

$4,950 (U) $1,250 (F)

Computation of direct materials price variance:

= ( $22 – $20 ) × 6.5 sq. yds. × 50 units

Computation of direct materials quantity variance:

= $22 × ( 300 sq. yds. – 325 sq. yds. )

Actual Direct Materials Work in Process

$650 (F) $550 (U)

Computation of direct materials price variance:

= ( $12.00 – $12.02 ) × 7,900

Computation of direct materials quantity variance:

= $12.00 × 100 lbs.