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Revised Summer 2010

CHAPTER 9 STANDARD COSTS
Key Terms and Concepts to Know
Standards:  Standards are benchmarks or “norms” for measuring performance. Standards relate to the quantity and costs of inputs used in manufacturing goods or providing services.  Price Standards specify how much should be paid for each unit of the input.  Quantity Standards specify how much of an input such as raw material should be used to make a product or provide service. Standard Costing:  Standard costing allows companies to compare the actual results to expected or standard results and to analyze the differences or variances between them.  If there is a significant variance between the standard and actual results, managers may investigate the discrepancy to find the underlying cause of the variance.  Standard costs are used to value raw materials inventory, work-in-process inventory, finished goods inventory and cost of goods sold. All Variances:  Variances are computed for each manufacturing cost: direct material, direct labor, variable overhead and fixed overhead.  The total variance for each manufacturing cost is the difference between the actual costs incurred and the flexible budget costs (the standard costs that should be incurred for the actual level of production). o Actual cost incurred is the actual price x the actual quantity for the good unit produced. o The flexible budget amount is the standard price x standard quantity allowed. o Standard quantity allowed is the good units produced x standard quantity per unit.  The total variance is divided into price and quantity variances for each manufacturing cost.  All variances are favorable or unfavorable. o Favorable if actual price or quantity is less than the standard price or quantity.
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Page 2 of 18 .Revised Summer 2010 o Unfavorable if actual price or quantity is greater than the standard price or quantity. o Identified at time of purchase. formula is AQ (AP . o May result from many factors such as receiving more cash or quantity discounts than expected.SP) o Journal entry to record the material price variance is: Raw materials inventory MPV OR MPV Accounts payable or cash Debit AQ purchased x SP Debit if unfavorable Credit Credit if favorable AQ purchased x AP  Material Quantity Variance (MQV) o The difference between the actual quantity of materials used in production and the standard quantity allowed for the actual output multiplied by the standard price per unit of materials. price reductions or increases from the supplier or purchasing a different quality of materials.SP) DM Price DL Rate VOH Spending FOH Budget Standard Quantity X Standard Price Quantity Variances SP (AQ – SQ) DM Quantity DL Efficiency VOH Efficiency FOH Volume Key Topics to Know Direct Material Variances  Material Price Variance (MPV) o The difference between the actual unit price paid and the standard price per unit of direct materials multiplied by the quantity purchased.  The general variance model is: Actual Quantity X Actual Price Actual Quantity X Standard Price Price Variances AQ (AP .

80) SQ 4.800 $1.000 X SP $1.5 board feet of hardwood.000 x 2.80(11.80 = $18. During the recent month.000 X AP $1.700 AQ 11.SP) 11. untrained workers.80 = $19. manufactures a number of consumer items for general household use.800 U Quantity Variance SP (AQ – SQ) $1.Revised Summer 2010 o May result from many factors such as shortchanging the actual amount of material used.700 when purchased. Solution #1: AQ 11.000 $1. different benefits costs per hour.5 X SP $1. the company manufactured 4.70-$1. o May result from many factors such as using workers with different wage rates than expected.000($1. inferior materials quality.70 = $18.80 per board feet. annual wage rate Page 3 of 18 . and poor supervision. o Identified at time of usage.000-10. According to the standard cost card.SQ) o Journal entry to record the material quantity variance is: Work-in-process inventory MQV OR MQV Raw materials inventory Debit SQ allowed x SP Debit if unfavorable Credit Credit if favorable AQ used x SP Example #1: Harmon Household. formula is SP (AQ .100 F Price Variance AQ (AP . The hardwood cost the company $18.000) Direct Labor Variances  Labor Rate Variance (LRV) o The difference between the actual hourly labor rate and the standard rate per hour multiplied by the actual number of hours worked during the period. Required: Compute the material price variance and material quantity variance. Inc. each chopping block requires 2. faulty machines. fewer rejects or spoilage than expected.000 feet of hardwood.000 chopping blocks using 11. at a cost of $1.

poor supervision of workers or using workers with different level of skills than expected. Direct labor accounting does not use an account equivalent to raw materials inventory. their cost goes directly into work-in-process inventory. Credit Debit Work-in-process inventory SQ allowed x SP Debit if unfavorable LRV OR Credit if favorable LRV Debit if unfavorable LEV OR Credit if favorable LEV AQ used x SP Wages payable Example #2: China Inc.20 direct-hours at a cost of $9.SP)  Labor Efficiency Variance (LEV) o The difference between the actual hours worked and the standard hours allowed for the actual output multiplied by the standard hourly labor rate. According to the standard cost card. each plate should require .000 plates using 1. o Identified when direct labor hours are worked. produces custom-painted cake plates for a number of major department stores. Page 4 of 18 .Revised Summer 2010 increases more or less than expected or a different number of overtime hours than expected. Required: Compute the labor rate variance and a labor efficiency variance. materials of a different quality than standard. faulty equipment causing breakdowns and work interruptions. formula is AQ (AP .150 direct labor-hours. formula is SP (AQ . fewer equipment breakdowns than expected.50 per hour. During the most recent week. o May result from many factors such as poorly trained or motivated workers. The company paid its direct labor workers at an average pay rate of $10.SQ).00 per hour. the company prepared 6.  A single journal entry is used to record the labor variances because when direct labor hours are worked. o Identified when direct labor hours are worked.

50 = $10.150-1. allowed denominator activity (variable overhead) or the difference between the budgeted and allowed denominator activity (fixed overhead) valued at the variable or fixed standard (pre-determined) overhead rate. Page 5 of 18 .  The price variances (rate or spending or budget) may result from many factors such as a difference in price for the overhead items purchased and a difference in the quantity of overhead items purchased.400 $475 F Efficiency Variance SP (AQ – SQ) $9.500 AQ 1.  The quantity variances (efficiency and volume) measure the variance in the actual vs.20 X SP $9.00-$9.00 = $11.150 X SP $9. how much fixed overhead should have been incurred.150($10.50) SQ 6.925 $575 U Rate Variance AQ (AP .50 = $11.150 X AP $10. they contain the same information as the price and quantity variances for direct materials and direct labor.  The quantity variances (efficiency and volume) do not measure how efficiently variable overhead was used or incurred or the difference between how much fixed overhead was incurred vs.Revised Summer 2010 Solution #2: AQ 1.000 x .200) Overhead Variances  Overhead variances have somewhat different meanings than direct material and direct labor variances for two reasons: o overhead is an indirect cost whereas materials and labor are direct costs o overhead includes both variable and fixed costs  For overhead variance analysis the standard or pre-determined overhead rate based on total overhead costs is divided into variable and fixed rates which are calculated by dividing budgeted variable or budgeted fixed overhead by the budgeted allocation base (now referred to as the denominator activity).SP) 1. In other words. Variable Overhead Variances  Variable Overhead Rate Variance (VORV) o The difference between the actual variable overhead cost incurred during a period and the standard cost that should have been incurred based on the actual activity of the period multiplied by the standard variable overhead rate.50(1.

800-5.80 = $16. Inc.04 X SP $2.000 direct labor hours and $168. provides order fulfillment services for e-commerce merchants.SP) $15.800x$9. For the year.000 of variable overhead costs. 0. o Identified when variable overhead costs are incurred. In the most recent month.Revised Summer 2010 o Identified when variable overhead costs are incurred. Order Up expects to incur 60. Solution #3: AQ X AP = $15.000 x . formula is (AQ x AP) – (Denominator Q x SP) o Fixed overhead costs incurred are frequently reported as total costs rather than AQ x AP. Denominator Q x SP is the fixed overhead flexible budget. The company incurred a total of $15. Page 6 of 18 . Required: Compute variable overhead spending variance and variable overhead efficiency variance.800 X SP $2.  Variable Overhead Efficiency Variance (VOEV) o The difference between the actual activity and the standard activity allowed for the actual output multiplied by the standard variable overhead rate.SQ) Example #3: Order Up. formula is AQ (AP .50) Fixed Overhead Variances  Fixed Overhead Rate Variance (FORV) o The difference between the actual fixed overhead cost incurred during a period and the flexible budget for fixed overhead. formula is SP (AQ .80 = $15.680 $560 U Efficiency Variance SP (AQ – SQ) $2.240 SQ 140.600) $290 F Rate Variance AQ (AP .04 direct labor-hours are required to fulfill an order for one item.950 in variable overhead costs.SP) o Variable overhead costs incurred are frequently reported as total costs rather than AQ x AP.000 items were shipped to customers using 5.950-(5.. o Identified when fixed overhead costs are incurred.800 direct labor-hours.950 AQ 5.80(5. The company maintains warehouses that stock items carried by its clients. According to the company’s standards. 140.

600) Page 7 of 18 . According to the company’s standards. The company incurred a total of $48.04 X SP $10.800($8.00) SQ 140.00-(5.SQ) Example #4: Order Up. Solution #4: AQ X AP = $48. o Identified when variable overhead costs are incurred.950 in variable overhead costs.000 items were shipped to customers using 5.800-5. Required: Compute variable overhead spending variance and variable overhead efficiency variance. 140.SP) 5.800 direct labor-hours.Revised Summer 2010  Fixed Overhead Volume Variance (FOVV) o The difference between the flexible budget for fixed overhead and the standard activity allowed for the actual output multiplied by the standard fixed overhead rate. Inc.00 = $56.950 AQ X SP = $58. The company maintains warehouses that stock items carried by its clients. provides order fulfillment services for e-commerce merchants.000 x . 0.04 direct labor-hours are required to fulfill an order for one item.000 direct labor hours and $600.44-$10.000 of variable overhead costs.050 F Rate Variance AQ (AP . In the most recent month.000 $2.000 $9. For the year.000 U Efficiency Variance SP (AQ – SQ) $10. formula is SP (DQ . Order Up expects to incur 60.

12.280 for their work or $11. According to the standard cost card for Bango Mints. each box should require 0.000 in variable overhead costs. at a cost of $1.3 direct labor hours at a cost of $12. 40. Practice Problem #2: Czar Nicholas Chocolatier.00 per hour. Ltd. Required: Compute the material price variance and material quantity variance.500 direct labor hours. One of the company’s products is the Bango Mint. The 14.90 per hour. According to the standard cost card. Required: Compute variable overhead spending variance and a variable overhead efficiency variance.000 units using 12.00 per hour.000 orders were shipped to customers using $50. Page 8 of 18 .Revised Summer 2010 Practice Problems Practice Problem #1: ConWay manufactures a number of consumer items for general household use. In the most recent month. the company manufactured 5. During the recent month. 0.000 boxes were produced.2 direct labor-hours are required to fulfill an order at a rate of $20. Bango Mints are packed 24 per box.40 per pound. The company incurred a total of $20. Required: Compute the labor rate variance and a labor efficiency variance.000 of direct labor and 2. According to the company’s standards.2 pounds. The company paid its direct labor workers a total of $14. Practice Problem #3: Universal Parcel provides parcel delivery services to many merchants.000 pounds of material. each unit requires 2.000 pounds purchased cost the company $21. makes premium chocolate in Chicago. The variable overhead rate is 45% of direct labor dollars.000. The company maintains warehouses that store and distribute items carried by all the different merchants. During June.

000 orders were shipped to customers using $50. The company incurred a total of $30. 12.2 direct labor-hours are required to fulfill an order at a rate of $20. The fixed overhead rate is 75% of direct labor dollars. The company maintains warehouses that store and distribute items carried by all the different merchants.Revised Summer 2010 Practice Problem #4: Universal Parcel provides parcel delivery services to many merchants. Required: Compute variable overhead spending variance and a variable overhead efficiency variance.500 direct labor hours. Page 9 of 18 .00 per hour. In the most recent month.000 of direct labor and 2.000 in variable overhead costs. According to the company’s standards. 0.

A price standard is the price that should be paid per unit of input. True False 6. The variable overhead rate variance is the difference between the actual variable overhead rate and the standard variable overhead rate multiplied by the actual value of the cost driver. A variance is the difference between actual costs and static budget costs. A quantity standard allowed is the amount of input that should go into a single unit of the product. True False 10. True False 5. True False 2. True False 7. In calculating the material price variance. A direct labor price standard is frequently called the direct labor efficiency standard.Revised Summer 2010 Sample True / False Questions 1. True False Page 10 of 18 . True False 8. True False 4. the actual quantity is equal to the quantity of material that the company used in production. True False 3. The direct material quantity variance is the difference between the actual quantity and the standard quantity of materials multiplied by the actual price. An unfavorable labor quantity variance indicates that the actual number of direct labor hours worked was greater than the number of direct labor hours that should have been worked for the output attained. A standard cost system records costs at their actual amounts. True False 9. A standard cost card shows what the company should spend to produce a single unit of product based on expected production and sales for the coming period.

700 units. Albertville has a material standard of 1 pound per unit of output. What is the direct materials price variance? a) $3.500 unfavorable b) $2. During July. The difference between the actual price and the standard price.950 pounds. multiplied by the standard price is the a) direct materials spending variance b) direct materials volume variance c) direct materials price variance d) direct materials quantity variance 5.000 unfavorable Page 11 of 18 .600 favorable c) $12.Revised Summer 2010 Sample Multiple Choice Questions 1. multiplied by the actual quantity of materials purchased is the a) direct materials spending variance b) direct materials volume variance c) direct materials price variance d) direct materials quantity variance 4. which they used to produce 4. Each pound has a standard price of $25 per pound. A favorable variance occurs when a) actual costs are less than static costs b) standard costs are less than actual costs c) standard costs are less than static costs d) actual costs are less than standard costs 2.600 unfavorable d) $10. An unfavorable variance occurs when a) actual costs are less than static costs b) standard costs are less than actual costs c) standard costs are less than static costs d) actual costs are less than standard costs 3. Albertville paid $127. The difference between the actual quantity and the standard quantity.250 for 4.

The direct material quantity variance was $750 unfavorable and the direct material price variance was $1.50 Use the following information for questions 9–12: Bridgetown Corporation produces a product that requires 2. respectively. What price per gallon was paid for the purchases? a) $5.40 c) $4. During July.50 per gallon. but a 2% discount is usually taken.900 units.520 unfavorable 7. The direct materials quantity variance was $750 unfavorable.5 pounds of materials per unit. but a raise which will average $. Fringe benefits average $2. Calhoun Company has a direct material standard of 3 gallons of input at a cost of $5 per gallon.250 unfavorable d) $1.800 for 4.00 c) $4.500 gallons. What is the direct materials quantity variance? a) $1.17 d) $4.50 will go into effect soon.000 favorable.250 favorable b) $2. and the allowances for rest periods and setup are .00 b) $5. During July.500 units 2) 3.00 per hour. and receiving and handling costs are $.600. During July.2 hours.Revised Summer 2010 6.300 gallons. which they used to produce 4. The standard direct materials price per pound is a) $3.200 units 8. Standard production time is 2 hours per unit. The allowance for waste and spoilage per unit is .107 units 4) 3. paying $46. Albertville paid $118. Freight costs are $. Burnet Company has a direct material standard of 1 gallons of input at a cost of $7.92 b) $4.15 per pound. Courtville has a material standard of 1 pound per unit of output. The hourly wage rate is $9.4 pounds and .10 per pound.600 favorable c) $1.25 Page 12 of 18 .1 hours and .300 units 3) 3.950 pounds. 9.1 pounds.00 per hour. The purchase price is $4 per pound. Calhoun Company purchased and used 2. How many units were produced? 1) 6. Burnet Company purchased and used 3.60 d) $2. Each pound has a standard price of $25 per pound.

00 d) $11.800 F d) $1.50 c) $11. The standard direct labor rate per hour is a) $ 9.000 units.930 F 15.030 F d) $1. 13. The standard direct labor hours per unit is a) 2 hour b) 2. at $12 per hour.00 b) $ 9.030 F d. $1.930 F Page 13 of 18 .9 pounds d) 3.930 F 14. In producing 4.50 12.030 F c) $1. $1.1 hours c) 2. Company’s labor quantity variance is a) $770 U b) $1. $770 U b.0 pounds 11.7 pounds c) 2. Company’s total labor variance is a. $800 U c.3 hours d) 3.2 hours Use the following information for questions 13-15: A Company has a standard of 1 hours of labor per unit.970.6 pounds b) 2.Revised Summer 2010 10.850 hours of labor at a total cost of $46. The standard direct materials quantity per unit is a) 2. Company used 3. Company’s labor price variance is a) $770 F b) $770 U c) $1.

The standard direct labor wage rate is $8. What is the variable overhead total variance? a) $250 F b) $250 U c) $2.500 U 17.750? a) $2.00.000 U c) $2.Revised Summer 2010 Use the following information for questions 16-18: The actual direct labor wage rate is $8.00 and the standard quantity of hours allowed for the actual level of output was 5.500 F d) $2.250 F c) $2.50 and 4.250 U b) $2.000 F b) $5. The standard variable overhead per direct labor-hour is $5. What is the variable overhead spending variance if the variable manufacturing overhead costs was $24.500 F 18.500 U Page 14 of 18 .500 F d) $2.000 direct labor-hours.500 direct labor-hours were actually worked during the month. What is the variable overhead efficiency variance? a) $5.500 U d) $2. 16.

50 = $21.200($11.40 = $16.Revised Summer 2010 Solutions to Practice Problems Practice Problem #1: AQ 14.SP) 14.40) AQ 12.400 U Quantity Variance SP (AQ – SQ) $1.200 X SP $12.30 X SP $12.000 X AP $1.200) $120 F Rate Variance AQ (AP .000 X SP $1.90 = $14.00) Page 15 of 18 .600 SQ 5.800 $1.50-$1.000 AQ 14.00 = $14.000 X SP $1.00(1.400 SQ 40.40 = $19.400 $0 Efficiency Variance SP (AQ – SQ) $12.90-$12.40 = $15.000-11.400 $1.400 U Price Variance AQ (AP .SP) 1.000 x .000($1.000) Practice Problem #2: AQ 1.000 x 2.280 AQ 1.200-1.00 = $14.2 X SP $1.200 X AP $11.40(12.

000 x .500 U Efficiency Variance SP (AQ – SQ) $.45(50.00 X SP $.75) $1.75 = $36.75($50.000) Page 16 of 18 .000 X SP $.000-$48.000x$.500 SQ 12.000 x .SP) $30.2 x $20.500 SQ 12.45 = $21.SP) $20.000 $7.000-($50.000 X SP $.2 x $20.000x$.000 AQ $50.Revised Summer 2010 Practice Problem #3: AQ X AP = $20.000) $2.00 X SP $.000 DQ $50.500 F Rate Variance AQ (AP .45) Practice Problem #4: AQ X AP = $30.45 = $22.75 = $37.000-$48.500 F Rate Variance AQ (AP .600 $900 U Efficiency Variance SP (AQ – SQ) $.000-($50.

as Chapter 8 explained. True False because the standard quantity allowed is the amount that should go into the actual number of good units produced. 3. 4. 10. True True False because the material quantity variance is calculated using the standard price per unit. False because. 8. True 9. Page 17 of 18 .Revised Summer 2010 Solutions to True / False Problems 1. 7. variances are calculated between static budget costs and flexible budget costs as well as between actual costs and flexible budget costs. 2. True False because the direct labor price variance is frequently called the direct labor rate variance. 6. False because the material price variance is base on the quantity of material purchased. 5.

Revised Summer 2010 Solutions to Multiple Choice Questions 1. 18. 2. 15. D B C D A C D C C D D C B C C A D A Page 18 of 18 . 4. 8. 10. 7. 12. 5. 16. 11. 13. 9. 3. 6. 17. 14.