Chapter 8

Flexible Budgets and Standard Cost Systems

S-M:8-6

Direct Materials Cost Variance = (AC ̶ SC) × AQ

= ($0.30 per pound – $0.50 per pound) × 7,800 pounds(a)
= $1,560 F

Direct Materials Efficiency Variance = (AQ ̶ SQ) × SC

= (7,800 pounds(a) – 6,500 pounds(b)) × $0.50 per pound
= $650U

(a)
1.2 pounds per glass × 6,500 glasses = 7,800 actual pounds
(b)
1.0 pound per glass × 6,500 glasses = 6,500 standard pounds

S-M:8-7

Direct Labor Cost Variance = (AC ̶ SC) × AQ

= ($11 per DLHr – $18 per DLHr) × 1,300DLHr(a)
= $9,100 F

Direct Labor Efficiency Variance = (AQ ̶ SQ) × SC

= (1,300DLHr(a) – 3,250DLHr(b)) × $18 per DLHr
= $35,100 F

(a)
0.2 DLHr per glass × 6,500 glasses = 1,300 actual DLHr
(b)
0.5DLHr per glass × 6,500 glasses = 3,250 standard DLHr

Copyright © 2022 Pearson Education Ltd. 8-1

S-M:8-8
Requirement 1

Variance Manager Responsible

Direct materials cost variance Purchasing
Direct materials efficiency variance Production
Direct labor cost variance Human Resources
Direct labor efficiency variance Production

Requirement 2
The $1,560 favorable direct materials cost variance calculated in S-M:8-6 indicates that the actual direct
materials cost per pound was kept within standard. The $0.30 actual cost per pound was less than the
$0.50 standard cost per pound.

The $650 unfavorable direct materials efficiency variance calculated in S-M:8-6 indicates that actual
usage of direct materials was not kept within standard. The 7,800 total pounds actually used was greater
than the 6,500 total pounds allowed to manufacture 6,500 glasses.

The $9,100 favorable direct labor cost variance calculated in S-M:8-7 indicates that the actual direct
labor cost per hour was kept within standard. The $11.00 actual cost per direct labor hour was less than
the $18.00 standard cost per direct labor hour.

The $35,100 favorable direct labor efficiency variance calculated in S-M:8-7 indicates that actual usage
of direct labor hours was kept within standard. The 1,300 total direct labor hours actually used were less
than the 3,250 total direct labor hours allowed to manufacture 6,500 glasses.

E-M:8-19

Direct Materials Cost Variance = (AC ̶ SC) × AQ

= ($1.30 per sq. foot – $1.35 per sq. foot) × 143,000 sq. feet
= $7,150 F

Direct Materials Efficiency Variance = (AQ ̶ SQ) × SC

= (143,000sq. feet – 140,000 sq. feet(a)) × $1.35/sq. foot
= $4,050 U

Direct Labor Cost Variance = (AC ̶ SC) × AQ

= ($16 per DLHr – $15per DLHr) × 400DLHr
= $400 U

Direct Labor Efficiency Variance = (AQ ̶ SQ) × SC

= (400DLHr – 560DLHr(b)) × $15 per DLHr
= $2,400 F

Copyright © 2022 Pearson Education Ltd. 8-2

(a)
7 sq. feet per fender × 20,000 fenders = 140,000 standard sq. feet
(b)
0.028DLHr per fender × 20,000 fenders = 560 standard DLHr

Copyright © 2022 Pearson Education Ltd. 8-3

E-M:8-19 (continued)

There may be trade-offs between the direct materials cost variance and the direct materials efficiency
variance. Decisions made by the purchasing manager may affect the direct materials efficiency variance
for the production manager. Matthews Fender’s purchasing manager may have purchased lower quality
(less expensive) direct materials, leading to the $7,150 favorable direct materials cost variance (the
$1.30 actual direct materials cost per square foot was less than the $1.35 direct materials standard cost
per square foot for the 143,000 square feet actually purchased). Lower quality direct materials would
likely have contributed to the $4,050 unfavorable direct materials efficiency variance (the 143,000
square feet actually used was greater than the 140,000 square feet allowed for actual production of
20,000 fenders at the $1.35 direct materials standard cost per square foot). However, the total direct
materials variance was $3,100 favorable (the $7,150 favorable direct materials cost variance minus the
$4,050 unfavorable direct materials efficiency variance), indicating that the savings from lower quality
(less expensive) direct materials outweighed the less efficient usage of direct materials in production.

There may be trade-offs between the direct labor cost variance and the direct labor efficiency variance.
Decisions made by the human resources manager may affect the direct labor efficiency variance for the
production manager. Matthews Fender’s human resources managers may have hired more skilled
(higher paid) direct labor workers, leading to the $400 unfavorable direct labor cost variance (the $16
actual direct labor cost per direct labor hour was greater than the $15direct labor standard cost per direct
labor hour). Hiring more skilled direct labor workers would likely have contributed to the $2,400
favorable direct labor efficiency variance (400 direct labor hours actually used was less than the 560
direct labor hours allowed for actual production of 20,000 fenders). However, the total direct labor
variance was $2,000 favorable (the $2,400 favorable direct labor efficiency variance minus the $400
unfavorable direct labor cost variance), indicating that the more efficient use of direct labor in
production outweighed the higher cost of hiring more skilled direct labor workers.

Copyright © 2022 Pearson Education Ltd. 8-4

P-M:8-31B
Requirement 1

MCKNIGHT RECLINERS
Flexible Budget

Budget
Amounts
per Unit
Actual Units (Recliners) 1,005
Sales $ 500.00 $ 502,500(d)
Variable Manufacturing Costs:
Direct Materials 51.00(a) 51,255(e)
Direct Labor 102.00(b) 102,510(f)
Variable Overhead 30.60(c) 30,753(g)
Fixed Manufacturing Costs:
Fixed Overhead 62,730
Total Cost of Goods Sold 247,248
Gross Profit $255,252

(a)
$ 52,275 / 1,025 recliners = $51.00 per recliner
(b)
$ 104,550 / 1,025 recliners = $102.00 per recliner
(c)
$ 31,365 / 1,025 recliners = $30.60 per recliner
(d)
$ 500.00 per recliner × 1,005 recliners = $ 502,500
(e)
$ 51.00 per recliner × 1,005 recliners = $ 51,255
(f)
$ 102.00 per recliner × 1,005 recliners = $ 102,510
(g)
$ 30.60 per recliner × 1,005 recliners = $ 30,753

Requirement 2

Direct Materials Cost Variance = (AC ̶ SC) × AQ

= ($8.30 per yard – $8.50 per yard) × 6,300 yards
= $1,260F

Direct Materials Efficiency Variance = (AQ ̶ SQ) × SC

= (6,300 yards – 6,030 yards(a)) × $8.50 per yard
= $2,295 U

Direct Labor Cost Variance = (AC ̶ SC) × AQ

($10.40 per DLHr – $10.20 per
= × 9,850DLHr
DLHr)
= $1,970 U

Copyright © 2022 Pearson Education Ltd. 8-5

P-M:8-31B, cont.
Requirement 2, cont.

Direct Labor Efficiency Variance = (AQ ̶ SQ) × SC

$10.20 per
= (9,850DLHr – 10,050DLHr(b)) ×
DLHr
= $2,040 F

VOH Cost Variance = (AC ̶ SC) × AQ

= ($6.50 per yard – $5.10 per yard) × 6,300 yards
= $8,820U

VOH Efficiency Variance = (AQ ̶ SQ) × SC

= (6,300 yards – 6,030 yards(a)) × $5.10 per yard
= $1,377U

FOH Cost Variance = Actual FOH ̶ Budgeted FOH

= $64,730 ̶ $62,730
= $2,000U

FOH Volume Variance = Budgeted FOH ̶ Allocated FOH

= $62,730 ̶ $61,506(c)
= $1,224 U

(a)
6,150 yards / 1,025 recliners = 6 yards per recliner
Thus:
6 yards per recliner × 1,005 recliners = 6,030 yards
(b)
10,250DLHr / 1,025 recliners = 10 DLHr per recliner
Thus:
10 DLHr per recliner × 1,005 recliners = 10,050DLHr
(c)
$62,730 / 6,150 yards = $10.20 per yard
Thus:
$10.20 per yard × 6,030 yards = $61,506

Copyright © 2022 Pearson Education Ltd. 8-6

P-M:8-31B, cont.
Requirement 3

The $1,260 favorable direct materials cost variance indicates that McKnight’s managers did a good job
keeping actual direct materials cost per yard within standard. The $8.30 actual cost per yard was less
than the $8.50 standard cost per yard.

The $2,295unfavorable direct materials efficiency variance and $1,377 unfavorable variable overhead
efficiency variance indicate that McKnight’s managers did not do a good job keeping actual usage of
direct materials within standard. The 6,300 total yards actually used was greater than the 6,030 total
yards allowed to manufacture 1,005 recliners.

The $1,970 unfavorable direct labor cost variance indicates that McKnight’s managers did not do a good
job keeping actual direct labor cost per hour within standard. The $9.40 actual cost per direct labor hour
was greater than the $9.20 standard cost per direct labor hour.

The $2,040 favorable direct labor efficiency variance indicates that McKnight’s managers did a good
job keeping actual usage of direct labor hours within standard. The 9,850 total direct labor hours actually
used was less than the 10,050 total direct labor hours allowed to manufacture 1,005 recliners.

The $8,820 unfavorable variable overhead cost variance indicates that McKnight’s managers did not do
a good job keeping actual variable overhead cost per yard within standard. The $6.50 actual cost per
yard was greater than the $5.10 standard cost per yard (the standard variable overhead allocation rate per
yard).

The $2,000 unfavorable fixed overhead cost variance indicates that McKnight’s managers did not do a
good job keeping actual total fixed cost within budget. The $64,730 actual total fixed overhead cost was
greater than the $62,730 budgeted total fixed overhead cost.

The $1,224 unfavorable fixed overhead volume variance is not a cost variance. It is a volume variance
and explains why fixed overhead was underallocated. The variance is unfavorable because the company
manufactured fewer recliners (1,005) than budgeted (1,025). Therefore, total fixed overhead cost
allocated to recliners was $1,224 less than the total budgeted fixed overhead cost ($61,506 total fixed
overhead cost was allocated compared with the $62,730 total budgeted fixed overhead cost).

Cautionary remarks: Variances raise questions that can help pinpoint issues. Variances should be used to
investigate and make changes, not punish employees. Good managers use variances as a guide for
investigation, rather than merely to assign blame, and investigate favorable as well as unfavorable
variances.

Copyright © 2022 Pearson Education Ltd. 8-7

P-M:8-31B, cont.
Requirement 4
McKnight’s managers can benefit from the standard costing system because it helps managers do the
following:
 Prepare the master budget.
 Set target levels of performance for flexible budgets.
 Identify performance standards.
 Set sales price of products.
 Decrease accounting costs.

Copyright © 2022 Pearson Education Ltd. 8-8

P-M:8-32B
Requirement 1

Direct Materials Cost Variance = (AC ̶ SC) × AQ

= ($0.21 per part – $0.16 per part) × 209,000 parts
= $10,450 U

Direct Materials Efficiency Variance = (AQ ̶ SQ) × SC

= (209,000 parts – 212,000 parts(a)) × $0.16 per part
= $480 F

Direct Labor Cost Variance = (AC ̶ SC) × AQ

($11.10 per DLHr – $11.00 per
= × 1,620DLHr
DLHr)
= $162 U

Direct Labor Efficiency Variance = (AQ ̶ SQ) × SC

$11.00 per
= (1,620DLHr – 2,120DLHr(b)) ×
DLHr
= $5,500 F

(a)
2 parts per case × 106,000 cases = 212,000 parts
(b)
0.02 DLHr per case × 106,000 cases = 2,120DLHr

Copyright © 2022 Pearson Education Ltd. 8-9

P-M:8-32B, cont.
Requirement 3

There may be trade-offs between the direct materials cost variance and the direct materials efficiency
variance. Decisions made by the purchasing manager may affect the direct materials efficiency variance
for the production manager. Perhaps Headset used better quality direct materials, indicated by the fact
that the $0.21 actual direct materials cost per part was greater than the $0.16 direct materials standard
cost per part. Therefore, the direct materials cost variance was $10,450 unfavorable for the 209,000 parts
actually purchased. If so, then the better quality direct materials likely contributed to the $480 favorable
direct materials efficiency variance (209,000 parts actually used was less than the 212,000 parts allowed
for actual production of 106,000 cases). However, the total direct materials variance was $9,970
unfavorable (the $10,450 unfavorable direct materials cost variance minus the $480 favorable direct
materials efficiency variance),indicating that the more efficient usage of direct materials did not
outweigh the higher cost of the direct materials purchased. However, the higher quality components may
result in higher quality and durable final products which may lead to fewer returns and warranty claims
due to product failures and higher customer satisfaction.

Copyright © 2022 Pearson Education Ltd. 8-10