Solutions Chapter 9

Chapter 09 - Standard Costing and Variances
Chapter 9
Standard Costing and Variances
ANSWERS TO QUESTIONS
1. Budgetary planning is the process of predicting a companys goals for the future and
the steps to be taken in achieving those goals. Control is a measure of whether the
goals have been (or are being) met.
2. Standard costs are the expected costs for a particular item, often referred to as what
should be used (or paid). They are set at the beginning of a period.
3. A standard cost system records all manufacturing costs at their standards instead of
actual amounts. An adjustment is made at the end of the period to reconcile
standard and actual numbers.
4. An ideal standard assumes perfect or near perfect conditions. It is almost
impossible to meet. Easily attainable standards, on the other hand, are often set
unrealistically low so that its not difficult to meet them.
5. A tight but attainable standard is best for motivating employees.
6. A quantity standard is the amount of input that goes into a single unit of product. A
price standard is the price that should be paid for a specific quantity of input.
7. A standard cost card is the summary of standards that shows what a company
should spend to make a single unit of product. It is important because its the basis
for recording all transactions that occur in the upcoming period.
8. Standards are the expected costs for a single unit of product while budgets
summarize expectations for the companys anticipated level of production.
Standards are multiplied by the number of units to arrive at budgeted amounts.
9. Favorable simply indicates that a company used or spent less than expected.
Unfavorable variances mean that the company used or spent more than expected.
It is important to note that these terms do not mean good and bad.
10. A static budget is based on a single estimate of sales volume and the master budget
is one example of a static budget. The master budget is developed for the
companys sales forecast which is a specific level of sales. Flexible budgets show
costs at several possible levels of sales.
11. A volume variance results from comparing the master and flexible budgets.
12. Spending variances are calculated by comparing actual costs to the flexible budget.
9-1
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13. A spending variance can be broken down into a price variance and a quantity
variance. The price variance relates to the amount paid for an input such as direct
materials or direct labor, while the quantity variance relates to the amount of input
that is used in production.
14. The two direct materials variances are the materials price variance and the materials
quantity variance. The purchasing department would be responsible for the price
variance while the production department would be responsible for the quantity
variance.
15. Purchasing lesser quality materials would result in a favorable price variance.
However, the lesser quality materials might also lead to more waste or an inferior
product which could cause an unfavorable quantity variance.
16. The two direct labor variances are the direct labor rate variance and the direct labor
efficiency variance. The personnel department would be responsible for the rate
variance while the production department would be responsible for the efficiency
variance.
17. Hiring more skilled workers would likely result in an unfavorable labor rate variance,
but it should also lead to a favorable efficiency variance as the more highly trained
workers should be more efficient.
18. In a normal cost system, we established a budgeted (standard) manufacturing
overhead rate based on budgeted costs and budgeted levels of the activity drivers.
Then we applied overhead cost to products by multiplying the budgeted rate by the
actual number of units produced. In a standard cost system, we multiply the
budgeted (standard) overhead rate by the standard value of the cost driver.
19. The two variable overhead variances are the variable overhead rate variance and
the variable overhead efficiency variance. Production would generally be
responsible for each of these variances.
20. The primary fixed overhead variance is the fixed overhead spending variance.
Production would generally be responsible for each of these variances.
21. A $1,000 favorable FOH volume variance indicates that the actual volume of
production was more than budgeted. In other words, the master budget volume
used to compute the fixed overhead rate was too low.
22. Practical capacity is the number of units that could be produced under normal (not
ideal) operating conditions. This allows for some "downtime" to allow for things such
as employee training, breaks and preventive maintenance. Practical capacity should
be a very stable amount from period to period. Budgeted production, on the other
hand, is subject to seasonal fluctuations in demand.
9-2
23. At the end of the accounting period, all variances should be closed to the Cost of
Goods Sold account to adjust the standard cost up or down to the actual cost.
Authors' Recommended Solution Time
(Time in minutes)
Mini-exercises
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Exercises
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Problems
No.
Time
PA1
15
PA2
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PA3
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PA4
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PA5
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PA6
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PA7
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PA8
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Cases and
Projects*
No.
Time
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30
2
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3
30
* Due to the nature of cases, it is very difficult to estimate the amount of time students
will need to complete them. As with any open-ended project, it is possible for students
to devote a large amount of time to these assignments. While students often benefit
from the extra effort, we find that some become frustrated by the perceived difficulty of
the task. You can reduce student frustration and anxiety by making your expectations
clear, and by offering suggestions (about how to research topics or what companies to
select).
9-3
ANSWERS TO MINI-EXERCISES
M9-1
1. Static
2. Volume
3. Production manager
4. Favorable
5. Debit; Credit
6. Variable overhead efficiency
7. Favorable
8. Production manager
9. Fixed overhead volume
10. Credit; Debit
M9-2
Answers will vary, but students should have three distinctly different grading scales. An
example of an ideal standard would be one where a student must receive 100% of the
course points to receive an A in the course, 95% to receive a B, 90% to receive a C,
etc. An easily achievable standard might be one where only 70% of the course points
are needed for an A, 60% for a B, etc. A tight but attainable standard might be the
typical grading scale where 90% of the total course points is an A, 80% is a B, etc.
Obviously the difficulty of these scales will depend on the nature of the course and the
ability level of the students.
M9-3
Variable manufacturing costs, which will change in total as volume changes, include
direct materials, direct labor, and variable manufacturing overhead. Costs that do not
change with fluctuations in volume include fixed manufacturing overhead.
M9-4
Historical data, industry averages, and/or process studies may all serve as a basis for
setting standards within a company.
9-4
M9-5
The direct labor spending variance is the sum of the direct labor rate and efficiency
variances. Whether you add or subtract them depends on the sign of the variance.
Answers in bold are the missing amounts that must be computed based on the other
two variances.
Case
Direct Labor
Rate Variance
Direct Labor
Efficiency Variance
$750 U
$2,000 F
$1,000 F
$2,500 U - $500 U =
$2,000 U
$1,950 U + $1,100 F =
$3,050U
$1,200 F
$3,500 U $2,000 F =
$5,500 U
$1,800 F - $1,000 F =
$800 F
$650 U
Direct Labor
Spending Variance
$750 U - $1,200 F =
$450 F
$3,500 U
$1,800 F
$500 U
$2,500 U
$1,100 F
$1,950 U
$650 U + $1,150 U =
$1,800 U
$1,150 U
M9-6
Theres no way to know whether or not the manager is correct without further
investigation. Variances alone dont give information about causes. In this case,
investigation may reveal that the production manager is correct. However, there are
other viable explanations as well and he must be certain of the cause before taking any
action.
M9-7
AQ x AP
4,200 x $3.75
$15,750
Direct Materials
Price Variance
$1,050 F
AQ x SP
4,200 x $4.00
$16,800
Direct Materials
Quantity Variance
$800 U
SQ x SP
(2 x 2,000) x $4.00
4,000 x $4.00
$16,000
Total Direct Materials Spending Variance

$250 F
Direct Materials Price Variance = AQ x (SP AP)
Direct Materials Price Variance = 4,200 x ($4 - $3.75)
Direct Materials Price Variance = $1,050 F
Direct Materials Quantity Variance = SP x (SQ AQ)
Direct Materials Quantity Variance = $4 x (4,000 4,200)
Direct Materials Quantity Variance = $800 U
9-5
M9-8
AH x AR
1,900 x $11.50
$21,850
Direct Labor
Rate Variance
Direct Labor
Efficiency Variance
AH x SR
1,900 x $12.00
$950 F
$600 F
$22,800
Total Direct Labor Spending Variance
$1,550 F
SH x SR
(1 x 1,950) x $12.00
$23,400
Direct Labor Rate Variance = AH x (SR AR)

Direct Labor Rate Variance = 1,900 x ($12 $11.50)
Direct Labor Rate Variance = $950 F
Direct Labor Efficiency Variance = SR x (SH AH)
Direct Labor Efficiency Variance = $12 x (1,950 1,900)
Direct Labor Efficiency Variance = $600 F
Total Direct Labor Spending Variance = $950 F + $600 F = $1,550 F
M9-9
AH x AR
1,900 x $1.20
$2,280
Variable Overhead
Rate Variance
Variable Overhead
Efficiency Variance
AH x SR
1,900 x $1.25
$95 F
$125 F
$2,375
Total Variance
Over/Underapplied Variable Overhead
$220 F (Overapplied)
Applied Variable
Overhead Cost
(1 x 2,000) x $1.25
$2,500
Variable Overhead Rate Variance = AH x (SR AR)

Variable Overhead Rate Variance = 1,900 x ($1.25 - $1.20)
Variable Overhead Rate Variance = $95 F
Variable Overhead Efficiency Variance = SR x (SH AH)
Variable Overhead Efficiency Variance = $1.25 x (2,000 1,900)
Variable Overhead Efficiency Variance = $125 F
Total Variable Overhead Spending Variance = $95 F + $125 F = $220 F (Overapplied)
M9-10
Fixed Overhead Spending Variance = Budgeted Fixed Overhead Actual Fixed Overhead
Fixed Overhead Spending Variance = $10,200 $9,900
Fixed Overhead Spending Variance = $300 F
9-6
M 9-11
FOH Rate = $10,200 / 30,000 = $0.34
Budgeted Fixed
Overhead Cost
Fixed Overhead
Volume Variance
$10,200
$680 U
Applied Fixed Overhead Cost

$0.34 x 28,000
$9,520
Fixed Overhead Volume Variance = FOH Rate x (Actual Volume Budgeted Volume)
Fixed Overhead Volume Variance = $0.34 x (28,000 30,000)
Fixed Overhead Volume Variance = $680 U
M9-12
Raw Materials Inventory (4,400 x $14)...............................
61,600
Direct Materials Price Variance (4,400 x ($14.00 - $14.50))
2,200
Cash (4,400 x $14.50)..
63,800
M9-13
Cost of Goods Sold........................
38,000
Direct Labor Efficiency Variance.
800
Direct Labor Rate Variance..
Cash or Wages Payable....
1,500
37,300
ANSWERS TO EXERCISES
E9-1
AQ x AP
(2.4 x 2,500) x
$4.10
$24,600
Direct Materials
Price Variance
$600 F
AQ x SP
$4.20 x
(2.4 x 2,500)
$25,200
Direct Materials
Quantity Variance
$1,050 F
SQ x SP
$4.20
x (2.5 x 2,500)
$26,250

$1,650 F
Direct Materials Price Variance = (2.4 x 2,500) x ($4.20 - $4.10)
Direct Materials Price Variance = $600 F
Direct Materials Quantity Variance = $4.20 x ((2.5 x 2,500) (2.4 x 2,500))
Direct Materials Quantity Variance = $1,050 F
Total Direct Materials Spending Variance = $600 F + $1,050 F = $1,650 F
9-7
AH x AR
(1.2 x 2,500)
x $15.50
$46,500
Direct Labor
Rate Variance
Direct Labor
Efficiency Variance
AH x SR
(1.2 x 2,500)
$1,500 F
$4,000 U
x $16
$48,000
$2,500 U
SH x SR
(1.10 x 2,500)
x $16
$44,000

Direct Labor Rate Variance = (1.2 x 2,500) x ($16 - $15.50)
Direct Labor Rate Variance = $1,500 F
Direct Labor Efficiency Variance = $16 x ((1.10 x 2,500) (1.2 x 2,500))
Direct Labor Efficiency Variance = $4,000 U
Total Direct Labor Spending Variance = $1,500 F + $4,000 U = $2,500 U
E9-2
Master Budget
5,000 Units
Per Unit
Direct
materials
Direct
Labor
Variable
manufacturing
overhead
Fixed
manufacturing
overhead
Total
Manufacturing
Costs
$15,000 / 5,000 =
$3.00
30,000 / 5,000 =
$6.00
8,000 / 5,000 =
$1.60
18,000
n/a
$71,000
Flexible
Budget
4,000 units
4,000 x $3.00
$ 12,000
4,000 x $6.00
$ 24,000
4,000 x $1.60
$ 6,400
Flexible
Budget
6,000 units
6,000 x $3.00
$ 18,000
6,000 x $6.00
$ 36,000
6,000 x $1.60
$ 9,600
Flexible
Budget
7,000 units
7,000 x $3.00
$ 21,000
7,000 x $6.00
$ 42,000
7,000 x $1.60
$ 11,200
$ 18,000
$ 18,000
$ 18,000
$60,400
$81,600
$92,200
9-8
E9-3
Req. 1
1.5 feet x $2.50 / foot = $3.75 per collar
Req. 2
The direct materials price variance will be favorable because Perfect Pet paid $2.00 per
foot when the standard price is $2.50 per foot.
Req. 3
The direct materials quantity variance will be unfavorable because Perfect Pet used
1.75 ft in each collar, while the standard only allows 1.5 ft. per collar.
Req. 4
One possible explanation is that Perfect Pet bought lower quality leather that was
cheaper, but more difficult to use, leading to more waste.
Req. 5
Investigation of the variances would begin by talking to the managers in charge of
purchasing and production to determine what may have caused the variances.
Req. 6
AQ x AP
(60 x 1.75) x $2.00
$210
Direct Materials
Price Variance
Direct Materials
Quantity Variance
AQ x SP
(60 x 1.75) x $2.50
$52.50 F
$37.50 U
$262.50
$15 F
SQ x SP
(60 x 1.5) x $2.50
$225

Direct Materials Price Variance = (60 x 1.75) x ($2.50 - $2.00)
Direct Materials Price Variance = $52.50 F
Direct Materials Quantity Variance = $2.50 x ((60 x 1.5) (60 x 1.75))
Direct Materials Quantity Variance = $37.50 U
Total Direct Materials Spending Variance = $52.50 F + $37.50 U = $15 F
9-9
E9-4
Req. 1
Shampoo Variances:
AQ x AP
725 x $0.16
$116.00
Direct Materials
Price Variance
Direct Materials
Quantity Variance
AQ x SP
725 x $0.10
$43.50 U
$.50 U
$72.50
Total Shampoo Spending Variance
$44.00 U
SQ x SP
(360 x 2) x $0.10
$72.00

Direct Materials Price Variance = 725 x ($0.10 - $0.16)
Direct Materials Price Variance = $43.50 U
Direct Materials Quantity Variance = $0.10 x ((360 x 2) 725)
Total Direct Materials Spending Variance = $43.50 U + $0.50 U = $44.00 U
Water Variances:
AQ x AP
6,500 x $0.07
$455
Direct Materials
Price Variance
Direct Materials
Quantity Variance
AQ x SP
6,500 x $0.05
$130 U
$35 F
$325
Total Water Spending Variance
$95 U
SQ x SP
(360 x 20) x $0.05
$360

Direct Materials Price Variance = 6,500 x ($0.05 - $0.07)
Direct Materials Price Variance = $130 U
Direct Materials Quantity Variance = $0.05 x ((360 x 20) 6,500)
Direct Materials Quantity Variance = $35 F
Total Direct Materials Spending Variance = $130 U + $35 F = $95 U
9-10
E9-4 (Continued)
Req. 2
Direct Labor Variances:
AH x AR
230 x $10
$2,300
Direct Labor
Rate Variance
Direct Labor
Efficiency Variance
AH x SR
230 x $9
$230 U
$360 F
$2,070
$130 F
SH x SR
(360 x .75) x $9
$2,430

Direct Labor Rate Variance = 230 x ($9.00 $10)
Direct Labor Rate Variance = $230 U
Direct Labor Efficiency Variance = $9.00 x ((360 x .75) 230))
Total Direct Labor Spending Variance = $230 U + $360 F = $130 F
Req. 3
Potential causes of the variances could include buying higher quality material, outdated
standards, increases in the direct labor rate, hiring more skilled workers, etc. Further
investigation would be required to determine the specific causes.
E9-5
Req. 1
Silver Variances:
AQ x AP
420 x $22
$9,240
Direct Materials
Price Variance
$840 U
Direct Materials
Quantity Variance
AQ x SP
420 x $20
$600 F
$8,400
Total Spending Variance
$240 U
SQ x SP
(1,800 x .25) x $20
$9,000

Direct Materials Price Variance = 420 x ($20 - $22)
Direct Materials Price Variance = $840 U
Direct Materials Quantity Variance = $20 x ((1,800 x .25) 420)
Direct Materials Quantity Variance = $600 F
Total Direct Materials Spending Variance = $840 U + $600 F = $240 U
9-11
Crystal Variances:
AQ x AP
3,650 x $0.22
$803
Direct Materials
Price Variance
$109.50 F
Direct Materials
Quantity Variance
AQ x SP
3,650 x $0.25
$12.50 U
$912.50
$97 F
SQ x SP
(1,800 x 2) x $0.25
$900

Direct Materials Price Variance = 3,650 x ($0.25 - $0.22)
Direct Materials Price Variance = $109.50 F
Direct Materials Quantity Variance = $0.25 x ((1,800 x 2) 3,650)
Total Direct Materials Spending Variance = $109.50 F + $12.50 U = $97 F
E9-5 (Continued)
Req. 2
Direct Labor Variances:
AH x AR
2,880 x $14.75
$42,480
Direct Labor
Rate Variance
$720 F
Direct Labor
Efficiency Variance
AH x SR
2,880 x $15
$2,700 U
$43,200
$1,980 U
SH x SR
(1,800 x 1.5) x $15
$40,500

Direct Labor Rate Variance = 2,880 x ($15.00 $14.75)
Direct Labor Rate Variance = $720 F
Direct Labor Efficiency Variance = $15 x ((1,800 x 1.5) 2,880)
Total Direct Labor Spending Variance = $720 F + $2,700 U = $1,980 U
9-12
Req. 3
Potential causes of the variances could include buying higher quality silver, but lower
quality crystals, outdated standards, hiring unskilled labor (who are less expensive, but
take more time to make the jewelry), etc. Further investigation would be required to
determine the specific causes.
E9-6
AQ X AP
Direct Materials
Price Variance
AQ X SP
11,800,000 x $0.70
$8,260,000
$236,000 F
11,800,000 x $0.72
$8,496,000
Direct Materials
Quantity
Variance
SQ X SP
$144,000 F
(1,000,000 x 12) x
$0.72
$8,640,000

$380,000 F
Direct Materials Price Variance = 11,800,000 x ($0.72 $.70)
Direct Materials Quantity Variance = $0.72 x ((1,000,000 x 12) 11,800,000)
Total Direct Materials Spending Variance = $236,000 F + $144,000 F = $380,000 F
E9-7
AH x AR
245,000 x $11.80
$2,891,000
Direct Labor
Rate Variance
$98,000 F
AH x SR
245,000 x $12.20
$2,989,000
Direct Labor
Efficiency Variance
$61,000 F
SH x SR
(1,000,000 x .25) x
$12.20
$3,050,000

$159,000 F
Direct Labor Rate Variance = 245,000 x ($12.20 $11.80)
Direct Labor Efficiency Variance = $12.20 x ((1,000,000 x .25) 245,000)
Direct Labor Efficiency Variance = $61,000 F
Total Direct Labor Spending Variance = $98,000 F + $61,000 F = $159,000 F
9-13
E9-8
Actual Variable
Overhead Cost
Variable Overhead
Rate Variance
$318,500
$24,500 U
AH x SR
245,000 x $1.20
$294,000
Variable Overhead
Efficiency Variance
Applied Variable
Overhead Cost
(1,000,000 x .25)
x $1.20
$300,000
$6,000 F
Total Variance
$18,500 U (Underapplied)
Variable Overhead Rate Variance = 245,000 x ($1.20 ($318,500 / 245,000))
Variable Overhead Rate Variance = $24,500 U
Variable Overhead Efficiency Variance = $1.20 x ((1,000,000 x .25) 245,000)
Variable Overhead Efficiency Variance = $6,000 F
Variable Overhead Spending Variance = $24,500 U + $6,000 F = $18,500 U (Underapplied)
E9-9
Actual Fixed
Overhead Cost
Fixed Overhead
Spending Variance
$355,000
$23,000 F
Budgeted Fixed
Overhead Cost
Fixed Overhead
Volume Variance
$42,000 F
$378,000
Total Variance
Over/Underapplied Fixed Overhead
$65,000 F (Overapplied)
Applied Fixed
Overhead Cost
$0.42 x 1,000,000
$420,000
Fixed Overhead Spending Variance = $378,000 - $355,000
Fixed Overhead Spending Variance = $23,000 F
Fixed Overhead Volume Variance = $0.42 (900,000 - 1,000,000)
Fixed Overhead Volume Variance = $42,000 F
Total Fixed Overhead Variance = $23,000 F + $42,000 F = $65,000 F (Overapplied)
9-14
E9-10
Req. 1
Entry to record direct materials costs:
Cost of Goods Sold ($8.64 x 1,000,000 units)..........................
8,640,000
Direct Materials Price Variance
(($0.72 x 11,800,000) - $8,260,000....
Direct Materials Quantity Variance
($0.72 x ((1,000,000 x 12) 11,800,000).....
Cash or Accounts Payable..
236,000
144,000
8,260,000
Req. 2
Entry to record direct labor costs:
Cost of Goods Sold ($3.05 x 1,000,000 units)...........................
3,050,000
Direct Labor Rate Variance
((245,000 x $12.20) - $2,891,000).....
Direct Labor Efficiency Variance
($12.20 x ((1,000,000 x .25) 245,000)..
Cash or Accounts Payable.
61,000
2,891,000
Req. 3
Entry to record variable overhead costs:
Cost of Goods Sold ($0.30 x 1,000,000 units)...................
300,000
Variable Overhead Rate Variance
((245,000 x $1.20) - $318,500)....
24,500
Variable Overhead Efficiency Variance
($1.20 x ((1,000,000 x .25) 245,000))..
6,000
318,500
Req. 4
Entry to record fixed overhead costs:
Cost of Goods Sold ($0.42 x 1,000,000 units).......................
420,000
Fixed Overhead Spending Variance ($378,000 - $355,000)
Fixed Overhead Volume Variance ($0.42 x (900,000 1,000,000))...
98,000
23,000
42,000
355,000
9-15
E9-11
Actual Variable
Overhead Cost
Variable Overhead
Rate Variance
$9,490
$3,310 F
AH x SR
16,000 x $0.80
$12,800
Variable Overhead
Efficiency Variance
$800 U
Applied Variable
Overhead Cost
(25,000 x .6) x
$0.80
$12,000
Total Variance
2,510 F (Overapplied)
Variable Overhead Rate Variance = 16,000 x (.80 ($9,490 / 16,000))
Variable Overhead Rate Variance = $3,310 F
Variable Overhead Efficiency Variance = $.80 X ((25,000 x .6) 16,000)
Variable Overhead Efficiency Variance = $800 U
Variable Overhead Spending Variance = $3,310 F + $800 U = 2,510 F (Overapplied)
E9-12
Req. 1
FOH rate = $32,400 / 24,000 units = $1.35
Req. 2
Fixed Overhead Spending Variance = $32,400 - $32,000 =
Req. 3
Req. 4
Overapplied overhead = Applied Actual = $33,750 - $32,000 = $1,750 (Overapplied)
or
Total Fixed Overhead Variance = $400 F + $1,350 F = $1,750 F (Overapplied)
9-16
E9-13
Req. 1
Total purchases = AP AQ (purchased) = $2.30 1,115,000 = $2,564,500
Req. 2
Direct materials price variance = AQ x (SP AP)
= 1,115,000 x ($2.10 $ 2.30)
= $223,000 U
Req. 3
Material quantity variance = SP x (SQ AQ)
= $2.10 x (970,000 1,000,000)
= $63,000 U
Req. 4
Since the labor rate variance is favorable, the actual cost of direct labor must be $5,500
less than the standard cost. The standard cost is $80,500.
Direct labor rate variance = AH x (SR AR)
$5,500 = 10,000 x ($X $ 7.50)
$80,500 = 10,000 AH
$80,500 10,000 actual direct labor hours equals a standard rate of $8.05.
Req. 5
Since the actual hours are 1,000 less than the standard, the efficiency variance is 1,000
hours x $8.05 = $8,050 F.
Direct labor efficiency variance = SR x (SH AH)
= $8.05 x (11,000 10,000)
= $8,050 F
9-17
E9-14
Req. 1
$600,000 / 30,000 = $20
Req. 2
Fixed Overhead Spending Variance = $600,000 - $560,000 = $40,000 F
Req. 3
Expected (Planned) Capacity Variance = $20 x (20,000 30,000) = $200,000 U
Req. 4
Unexpected (Unplanned) Capacity Variance = $20 x (22,000 - 20,000) = $40,000 F
Req. 5
Actual Fixed Overhead
Applied = 22,000 units x $20 =
Underapplied Fixed Overhead
F)
$560,000
440,000
$120,000 U ($40,000 F + 200,000 U + 40,000
9-18
E9-15
Actual Variable
Overhead Cost
Variable Overhead
Rate Variance
$30,240
$7,560 F
AH x SR
63,000 x $0.60
$37,800
Variable Overhead
Efficiency Variance
$120 U
Applied Variable
Overhead Cost
(628,000 x .1) x
$0.60
$37,680
Total Variance

Variable Overhead Rate Variance = 63,000 x (.60 ($30,240 / 63,000))
Variable Overhead Efficiency Variance = $.60 x ((628,000 x .1) 63,000)
Variable Overhead Spending Variance = $7,560 F + $120 U = $7,440 F (Overapplied)
E 9-16
Req. 1
FOH rate = $192,000 / 600,000 = $0.32 per unit
Req. 2
Fixed Overhead Spending Variance = $3,000 U
Req. 3
Total Fixed Overhead Variance = $3,000 U + $8,960 F = $5,960 F (Overapplied)
Req. 4
Applied = 628,000 units x $0.32 =
Overapplied Fixed Overhead
$195,000
200,960
$ 5,960 F ($3,000 U + 8,960 F)
9-19
E9-17
Req. 1
$540,000 / 80,000 = $6.75
Req. 2
Fixed Overhead Spending Variance = $540,000 - $520,000 = $20,000 F
Req. 3
Expected (Planned) Capacity Variance = $6.75 x (70,000 80,000) = $67,500 U
Req. 4
Unexpected (Unplanned) Capacity Variance = $6.75 x (75,000 - 70,000) = $33,750 F
E9-18
Units produced
Standard hours per unit
Standard hours
Standard rate per hour
Actual hours worked
Actual labor cost
DL rate variance
DL efficiency variance
Casey Co.
2,000
3.5
7,000
$14.50
6,800
$96,900
$1,700 F
$2,900 F
Kevin, Inc.
1,000
.9
900
$10.20
975
$8,970
$975 F
$765 U
Jess Company
120
2.5
300
$10.50
280
$3,090
$150 U
$210 F
Valerie, Inc.
1,500
3
4,500
$7
4,900
$31,850
$2,450 F
$2,800 U
9-20
GROUP A PROBLEMS
PA9-1
Req. 1
AQ X AP
178,200 x $1.50
$267,300
Direct Materials
Price Variance
$17,820 F
AQ X SP
178,200 x $1.60
$285,120
Direct Materials
Quantity Variance
$21,120 U
SQ X SP
(110,000 x 1.5) x
$1.60
$264,000

$3,300 U
Direct Materials Price Variance = 178,200 x ($1.60 $1.50)
Direct Materials Quantity Variance = $1.60 x ((110,000 x 1.50) 178,200)
Direct Materials Quantity Variance = $21,120 U
Total Direct Materials Spending Variance = $17,820 F + $21,120 U = $3,300 U
Req. 2
AH x AR
Direct Labor
Rate Variance
AH x SR
150,000 x $13.50
$2,025,000
$225,000 U
150,000 x $12.00
$1,800,000
Direct Labor
Efficiency
Variance
$180,000 F
SH x SR
(110,000 x 1.5) x $12.00
$1,980,000

$45,000 U
Direct Labor Rate Variance = $225,000 U
Direct Labor Efficiency Variance = $12 x ((110,000 x 1.5) 150,000)
Direct Labor Efficiency Variance = $180,000 F
Total Direct Labor Spending Variance = $225,000 U + $180,000 F = $45,000 U
9-21
PA9-1 (Continued)
Req. 3
Actual Variable
Overhead Cost
Variable Overhead
Rate Variance
$200,000
$20,000 U
AH x SR
150,000 x $1.20
$180,000
Variable Overhead
Efficiency Variance
$18,000 F
Applied Variable
Overhead Cost
(110,000 x 1.5) x
$1.20
$198,000
Total Variance
Variable Overhead Rate Variance = 150,000 x (1.20 ($200,000 / 150,000))
Variable Overhead Efficiency Variance = $1.20 x ((110,000 x 1.5) 150,000)
Variable Overhead Efficiency Variance = $18,000 F
Variable Overhead Spending Variance = $20,000 U + $18,000 F = $2,000 U (Underapplied)
PA9-2
Req. 1
Req. 2
Req. 3
Applied = 110,000 units x $2.50 =
Overapplied Fixed Overhead
$270,000
275,000
$ 5,000 F ($20,000 U + 25,000 F)
9-22
PA9-3
Req. 1
Cost of Goods Sold ($2.40 x 110,000 units).............................
264,000
($1.60 x ((110,000 x 1.5) 178,200) ...
21,120
Direct Materials Price Variance ((1.60 x 178,200) - $267,300)
17,820
267,300
Req. 2
Cost of Goods Sold ($18 x 110,000 units).............................
1,980,000
((150,000 x $12) - $2,025,000).
225,000
($12 x ((110,000 x 1.5) 150,000))....
Cash or Accounts Payable...
180,000
2,025,000
Req. 3
Cost of Goods Sold ($1.80 x 110,000 units)..........................
198,000
((150,000 x $1.20) - $200,000)..
20,000
($1.20 x ((110,000 x 1.5) 150,000))...
18,000
200,000
PA9-4
275,000
Fixed Overhead Spending Variance ($250,000 - $270,000).
20,000
Fixed Overhead Volume Variance ($2.50 x (110,000 100,000))..
25,000
270,000
9-23
PA9-5
Req. 1
AQ X AP
360,000 x $2.10
$756,000
Direct Materials
Price Variance
$36,000 U
AQ X SP
360,000 x $2.00
$720,000
Direct Materials
Quantity Variance
$20,000 U
SQ X SP
(140,000 x 2.5) x
$2.00
$700,000

$56,000 U
Direct Materials Price Variance = $36,000 U
Direct Materials Quantity Variance = $2.00 x ((140,000 X 2.5) - 360,000)
Total Direct Materials Spending Variance = $36,000 U + $20,000 U = $56,000 U
Req. 2
AH x AR
148,000 x $13.10
$1,938,800
Direct Labor
Rate Variance
$133,200 F
AH x SR
148,000 x $14
$2,072,000
Direct Labor
Efficiency Variance
$112,000 U
SH x SR
(140,000 x 1) x
$14
$1,960,000

$21,200 F
Direct Labor Efficiency Variance = $14 x ((140,000 x 1) 148,000)
Total Direct Labor Spending Variance = $133,200 F + $112,000 U = $21,200 F
9-24
PA9-5 (Continued)
Req. 3
Actual Variable
Overhead Cost
Variable Overhead
Rate Variance
$72,000
$2,000 F
AH x SR
148,000 x $0.50
74,000
Variable Overhead
Efficiency Variance
$4,000 U
Applied Variable
Overhead Cost
(140,000 x 1) x
$0.50
$70,000
Total Variance
Variable Overhead Efficiency Variance = $0.50 x ((140,000 x 1) 148,000)
Variable Overhead Efficiency Variance = $4,000 U
Variable Overhead Spending Variance = $2,000 F + $4,000 U = $2,000 U (Underapplied)
PA9-6
Actual Fixed
Overhead Cost
Fixed Overhead
Spending Variance
$50,000
$10,000 U
Budgeted Fixed
Overhead Cost
Fixed Overhead
Volume Variance
$5,000 U
$40,000
Total Variance
Applied Fixed
Overhead Cost
$0.25 x 140,000
$35,000
Req. 1
Fixed Overhead Spending Variance = $40,000 - $50,000 =
Req. 2
Fixed Overhead Volume Variance = $0.25 x (140,000 - 160,000)
Fixed Overhead Volume Variance = $5,000 U
Req. 3
Total Fixed Overhead Variance = $10,000 U + $5,000 U = $15,000 U (Underapplied)
9-25
PA9-7
Req. 1
700,000
($2.00 x 360,000) - ($756,000)....
36,000
($2.00 x ((140,000 x 2.5) 360,000))..
20,000
756,000
Req. 2
Cost of Goods Sold ($14 x 140,000 units)...........................
1,960,000
($14 x ((140,000 x 1) 148,000))...
112,000
((148,000 x $14) - $1,938,800).......
133,200
1,938,800
Req. 3
70,000
($.50 x ((140,000 x 1) 148,000)..
4,000
((148,000 x $0.50) - $72,000)...
Cash or Accounts Payable
2,000
72,000
PA9-8
35,000
10,000
Fixed Overhead Volume Variance ($0.25 x (140,000
5,000
160,000)..
50,000
9-26
PA9-9
Req. 1
AQ X AP
4,920 x $5.60
$27,552
Direct Materials
Price Variance
$2,952 U
AQ X SP
4,920 x $5.00
$24,600
Direct Materials
Quantity Variance
$1,200 U
SQ X SP
(312 x 15) x
$5.00
$23,400

$4,152 U
Direct Materials Quantity Variance = $5.00 x ((312 x 15) 4,920)
Total Direct Materials Spending Variance = $2,952 U + $1,200 U = $4,152 U
Req. 2
AH x AR
3,060 x $15.60
$47,736
Direct Labor
Rate Variance
$1,836 U
AH x SR
3,060 x $15
$45,900
Direct Labor
Efficiency Variance
$900 F
SH x SR
(312 x 10) x $15
$46,800

$936 U
Direct Labor Rate Variance = $1,836 U
Direct Labor Efficiency Variance = 15 x ((312 x 10) 3,060)
Total Direct Labor Spending Variance = $1,836 U + $900 F = $936 U
9-27
PA9-10
Req. 1
Cost of Goods Sold ($75 x 312 units)....................................
23,400
(($5.00 x 4,920) - $27,552).....
2,952
($5.00 x ( (312 x 15) 4,920)) ...
1,200
Req. 2
Cost of Goods Sold ($150 x 312 units)..................................
46,800
((3,060 x 15) - $47,736)......
1,836
($15 x ((312 x 10) 3,060))..
27,552
900
47,736
GROUP B PROBLEMS
PB9-1
Req. 1
AQ X AP
583,000 x $0.065
$37,895
Direct Materials
Price Variance
$8,745 U
AQ X SP
583,000 x $0.05
$29,150
Direct Materials
Quantity Variance
$275 U
SQ X SP
(38,500 x 15) x
$0.05
$28,875

$9,020 U
Direct Materials Quantity Variance = $0.05 x ((38,500 x 15) 583,000)
Direct Materials Quantity Variance = $275 U
Total Direct Materials Spending Variance = $8,745 U + $275 U = $9,020 U
9-28
Req. 2
AH x AR
9,900 x $13.80
$136,620
Direct Labor
Rate Variance
$1,980 F
AH x SR
9,900 x $14.00
$138,600
Direct Labor
Efficiency Variance
$3,850 U
SH x SR
(38,500 x .25) x
$14.00
$134,750

$1,870 U
Direct Labor Efficiency Variance = $14 x ((38,500 x .25) 9,900)
Total Direct Labor Spending Variance = $1,980 F + $3,850 U = $1,870 U
PB9-1 (Continued)
Req. 3
Actual Variable
Overhead Cost
Variable Overhead
Rate Variance
$3,630
$330 F
AH x SR
9,900 x $0.40
$3,960
Variable Overhead
Efficiency Variance
$110 U
Applied Variable
Overhead Cost
(38,500 x.25) x
$0.40
$3,850
Total Variance
Variable Overhead Rate Variance = $330 F
Variable Overhead Efficiency Variance = $0.40 x ((38,500 x .25) 9,900)
Variable Overhead Spending Variance = $330 F + $110 U = $220 F (Overapplied)
9-29
PB9-2
Actual Fixed
Overhead Cost
Fixed Overhead
Spending Variance
$9,900
$100 F
Budgeted Fixed
Overhead Cost
Fixed Overhead
Volume Variance
$375 U
$10,000
Total Variance
$275 U (Underapplied)
Applied Fixed
Overhead Cost
$0.25 x 38,500
$9,625
Req. 1
Req. 2
Fixed Overhead Volume Variance = $375 U
Req. 3
Total Fixed Overhead Variance = $100 F + $375 U = $275 U (Underapplied)
PB9-3
Req. 1
Cost of Goods Sold ($0.75 x 38,500 units)...............................
28,875
(($0.05 x 583,000) - $37,895).
8,745
($0.05 x ((38,500 x 15) 583,000) ......
275
37,895
Req. 2
Cost of Goods Sold ($3.50 x 38,500 units)...........................
134,750
($14 x ((38,500 x .25) 9,900)...
3,850
((9,900 x $14) - $136,620)....
1,980
136,620
9-30
Req. 3
3,850
($0.40 x ((38,500 x .25) 9,900).....
110
((9,900 x $0.40) - $3,630).....
330
3,630
PB9-4
Entry to record fixed overhead:
Cost of Goods Sold ($.25 x 38,500 units).................................
9,625
Fixed Overhead Volume Variance ($0.25 x (38,500 40,000))
375
Fixed Overhead Spending Variance ($10,000 - $9,900)..
100
9,900
PB9-5
Req. 1
AQ X AP
1,305,000 x $.76
$991,800
Direct Materials
Price Variance
$52,200 F
AQ X SP
1,305,000 x $.80
$1,044,000
Direct Materials
Quantity Variance
$36,000 F
SQ X SP
(675,000 x 2) x
$.80
$1,080,000

$88,200 F
Direct Materials Price Variance = 1,305,000 x ($.80 - $.76)
Direct Materials Quantity Variance = $0.80 x ((675,000 x 2) 1,305,000)
Total Direct Materials Spending Variance = $52,200 F + $36,000 F = $88,200 F
9-31
Req. 2
AH x AR
337,500 x $11.00
$3,712,500
Direct Labor
Rate Variance
$337,500 F
AH x SR
337,500 x $12
$4,050,000
Direct Labor
Efficiency Variance
$0
SH x SR
(675,000 x .5) x
$12
$4,050,000

$337,500 F
Direct Labor Efficiency Variance = $12 x ((675,000 x .5) 337,500)
Direct Labor Efficiency Variance = $0
Total Direct Labor Spending Variance = $337,500 F + $0 = $337,500 F
PB9-5 (Continued)
Req. 3
Actual Variable
Overhead Cost
Variable Overhead
Rate Variance
$157,500
$22,500 U
AH x SR
337,500 x $0.40
$135,000
AH x (SR AR)
337,500 x ($0.40
($157,500 / 337,500))
$22,500 U
Variable Overhead
Efficiency Variance
0
Applied Variable
Overhead Cost
(675,000 x .5) x
$0.40
$135,000
SR x (SH AH)
$0.40 x ((750,000 x
.5) 375,000)
$0
Total Variance
Variable Overhead Efficiency Variance = $0.40 x ((750,000 x .5) 375,000)
Variable Overhead Efficiency Variance = $0
Variable Overhead Spending Variance = $22,500 U + $0= $22,500 U (Underapplied)
9-32
PB9-6
Actual Fixed
Overhead Cost
Fixed Overhead
Spending Variance
Budgeted Fixed
Overhead Cost
Fixed Overhead
Volume Variance
$505,000
$25,000 U
$480,000
$75,000 U
Applied Fixed
Overhead Cost
$0.60 x 675,000
units
$405,000
Total Variance
Req. 1
Req. 2
Fixed Overhead Volume Variance = $0.60 x (675,000 - 800,000)
Fixed Overhead Volume Variance = $75,000 U
Req. 3
Total Fixed Overhead Variance = $25,000 U + $75,000 U = $100,000 U (Underapplied)
PB9-7
Req. 1
1,080,000
(($0.80 x 1,305,000) - $991,800)...
($0.80 x ((675,000 x 2) 1,305,000)...
Req. 2
Cost of Goods Sold ($6 x 675,000 units)...........................
4,050,000
((337,500 x $12) - $3,712,500).....
52,200
36,000
991,800
337,500
3,712,500
9-33
Req. 3
135,000
((337,500 x $0.40) - $157,500)....
22,500
PB9-8
Entry to record fixed overhead:
405,000
25,000
Fixed Overhead Volume Variance ($0.60 x (675,000 800,000))
75,000
157,500
505,000
PB9-9
Actual Variable
Overhead Cost
Variable Overhead
Rate Variance
$14,790
$3,570 F
AH x SR
3,060 x $6
$18,360
Variable Overhead
Efficiency Variance
$360 F
Applied Variable
Overhead Cost
(312 x10) x $6
$18,720
Total Variance
Req. 1
Req. 2
Variable Overhead Efficiency Variance = $6 x ((312 x 10) 3,060)
Variable Overhead Efficiency Variance = $360 F
Req. 3
Variable Overhead Spending Variance = $3,570 F + $360 F = $3,930 F (Overapplied)
9-34
Actual Fixed
Overhead Cost
Fixed Overhead
Spending Variance
$24,600
$600 U
Budgeted Fixed
Overhead Cost
Fixed Overhead
Volume Variance
$960 F
$24,000
Total Variance
Applied Fixed
Overhead Cost
$80 x 312 units
$24,960
Req. 4
Fixed Overhead Spending Variance = $600 U
Req. 5
Fixed Overhead Volume Variance = $80 x (300 - 312)
Fixed Overhead Volume Variance = $960 F
Req. 6
Total Fixed Overhead Variance = $600 U + $960 F = $360 F (Overapplied))
PB9-10
Req. 1
Cost of Goods Sold ($60 x 312 units)..........................
18,720
((3,060 x $6.00) - $14,790).......
($6 x ((312 x 10) 3,060).
Cash or Accounts Payable
Req. 2
Cost of Goods Sold ($80 x 312 units)...............................
24,960
600
Fixed Overhead Volume Variance ($80 x (312 300).
3,570
360
14,790
960
24,600
9-35
ANSWERS TO SKILLS DEVELOPMENT CASES

S9-1
Answers to this case will depend on the product chosen, but should demonstrate
students understanding of how cost standards are created and the potential causes of
the various cost variances.
S9-2
This case provides an opportunity to show students that managerial accounting, in general,
and performance evaluation, in particular, doesnt follow any established rules or imposed
guidelines. The case often leads students to develop very creative evaluation criteria and,
as a result, is very easily discussed in a large group or classroom setting.
Req. 1
Sales Rep
Terry
Maria
Samantha
Abraham
Sample
Variance
$3,000 F
8,300 U
4,300 F
1,900 F
Travel
Variance
$10,000 U
6,000 F
0
1,800 F
Entertainment Overall Expense

Variance
Variance
$2,900 F
$4,100 U
5,100 U
7,400 U
200 F
4,500 F
300 F
4,000 F
Sales
Variance
$12,000 U
40,000 F
47,000 U
2,000 F
Student rankings and bonus allocations may vary, but when using the variances above
students should rank either Maria or Abraham as best and Terry or Samantha as worst.
Req. 2
This additional information helps explain the travel variances for both Terry (large
geographic area) and Maria (much smaller geographic area). It also helps explain the
sample and entertainment variances since Maria is in a metropolitan area where there
are a larger number of physicians and they are much more densely populated.
At this point, some students may choose to evaluate the sales reps using an alternate
criteria such as sales generated for every dollar spent on travel (or samples or
entertainment), or they may calculate sales per dollar of total expense.
Req. 3
Other information that might be relevant includes the number of physicians or hospitals
in each territory, experience level of each sales rep, cost of gasoline, last years
performance numbers, changes to the territory (such as hospital closings or population
increases/decreases), competition from other companies reps, etc.
Additionally, information such as timing of the sales might be helpful. For example,
finding out that Abrahams numbers have changed very little since April 1 could suggest
9-36
S9-2 (Continued)
that hes managing the numbers and slacking off once he hit the 6-month sales goal
and/or while his expense variances are all favorable.
Req. 4
Students answers will vary.
Req. 5
Given the differences in territory, Acores process isnt appropriate. Acore could
implement a participative budgeting process that allows input from each sales rep
and/or they could rely on previous periods for more accurate information.
S9-3
Req. 1
Yes, there is incentive to build slack into the process study in order to give everyone
more possibility of meeting or exceeding expectations in the future.
Req. 2
If the study results in time and amount standards that are at or near perfection, then
there is less chance of beating the budget in the future. To the extent that bonuses
are tied to variances, this would lessen the possibility of earning a bonus.
Req. 3
The company could find a way of estimating time and amount over a longer period of
time or more employees. Alternatively, a standard based on perfection plus some
allowance (e.g., perfection plus 10%) could be used.
9-37

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Chapter 09 - Standard Costing and Variances

Chapter 09 - Standard Costing and Variances

Chapter 09 - Standard Costing and Variances

Chapter 09 - Standard Costing and Variances

Chapter 09 - Standard Costing and Variances

Total Direct Materials Spending Variance

Chapter 09 - Standard Costing and Variances

Direct Labor Rate Variance = AH x (SR AR)

Variable Overhead Rate Variance = AH x (SR AR)

Chapter 09 - Standard Costing and Variances

Applied Fixed Overhead Cost

Total Direct Materials Spending Variance

Chapter 09 - Standard Costing and Variances

Direct Labor Rate Variance = AH x (SR AR)

Chapter 09 - Standard Costing and Variances

Direct Materials Price Variance = AQ x (SP AP)

Chapter 09 - Standard Costing and Variances

Direct Materials Price Variance = AQ x (SP AP)

Direct Materials Price Variance = AQ x (SP AP)

Chapter 09 - Standard Costing and Variances

Direct Labor Rate Variance = AH x (SR AR)

Direct Materials Price Variance = AQ x (SP AP)

Chapter 09 - Standard Costing and Variances

Direct Materials Price Variance = AQ x (SP AP)

Direct Labor Rate Variance = AH x (SR AR)

Chapter 09 - Standard Costing and Variances

Total Direct Materials Spending Variance

Total Direct Labor Spending Variance

Chapter 09 - Standard Costing and Variances

Chapter 09 - Standard Costing and Variances

Chapter 09 - Standard Costing and Variances

Chapter 09 - Standard Costing and Variances

Chapter 09 - Standard Costing and Variances

Chapter 09 - Standard Costing and Variances

Variable Overhead Rate Variance = AH x (SR AR)

Total Fixed Overhead Variance = $3,000 U + $8,960 F = $5,960 F (Overapplied)

Chapter 09 - Standard Costing and Variances

Chapter 09 - Standard Costing and Variances

Total Direct Materials Spending Variance

Total Direct Labor Spending Variance

Chapter 09 - Standard Costing and Variances

Total Fixed Overhead Variance = $20,000 U + $25,000 F = $5,000 F (Overapplied)

Chapter 09 - Standard Costing and Variances

Chapter 09 - Standard Costing and Variances

Total Direct Materials Spending Variance

Total Direct Labor Spending Variance

Chapter 09 - Standard Costing and Variances

Chapter 09 - Standard Costing and Variances

Chapter 09 - Standard Costing and Variances

Total Direct Materials Spending Variance

Total Direct Labor Spending Variance

Chapter 09 - Standard Costing and Variances

Total Direct Materials Spending Variance

Chapter 09 - Standard Costing and Variances

Total Direct Labor Spending Variance

Chapter 09 - Standard Costing and Variances

Chapter 09 - Standard Costing and Variances

Total Direct Materials Spending Variance

Chapter 09 - Standard Costing and Variances

Total Direct Labor Spending Variance

Chapter 09 - Standard Costing and Variances

Chapter 09 - Standard Costing and Variances

Chapter 09 - Standard Costing and Variances