Chapter 11

Standard Costs and Variance Analysis

LEARNING OBJECTIVES
Chapter 11 addresses the following questions:
Q1
Q2
Q3
Q4
Q5
Q6
Q7
Q8

How are standard costs established?

What is variance analysis, and how is it performed?
How are direct cost variances calculated?
How is direct cost variance information analyzed and used?
How are variable and fixed overhead variances calculated?
How is overhead variance information analyzed and used?
How are manufacturing cost variances closed?
Which profit-related variances are commonly analyzed? (Appendix 11A)

These learning questions (Q1 through Q8) are cross-referenced in the textbook to individual
exercises and problems.

COMPLEXITY SYMBOLS
The textbook uses a coding system to identify the complexity of individual requirements in the
exercises and problems.
Questions Having a Single Correct Answer:
No Symbol
This question requires students to recall or apply knowledge as shown in the
textbook.
This question requires students to extend knowledge beyond the applications
e
shown in the textbook.
Open-ended questions are coded according to the skills described in Steps for Better Thinking
(Exhibit 1.10):

Step 1 skills (Identifying)

Step 2 skills (Exploring)

Step 3 skills (Prioritizing)

Step 4 skills (Envisioning)

11-2 Cost Management

QUESTIONS
11.1

Managers need information about the costs of direct materials and direct labor as well as
whether direct materials and labor have been used efficiently. If the price and efficiency
variances are combined, it is impossible to separate the causes of the variance into
potential changes in prices of direct materials (or the labor hourly wage) and changes in
the amount of materials (or labor hours) used to manufacture the product. Managers need
specific information to better monitor operations and investigate changes.

11.2

Utilities are considered fixed costs. These include phone service, natural gas, and
electricity. The use of natural gas and electricity is affected by weather patterns. Because
weather patterns change, these costs cannot be perfectly predicted. There may be
unanticipated price changes in the cost of utilities. In addition, employees could be
careless in their use of electricity or telephones. Therefore, variances occur regularly.

11.3

GAAP requires that revenues and expenses be matched. Revenues from the sales of units
must be matched to the costs of producing those same units. When a standard cost
system is used, production costs are recorded at standard rather than at actual costs. At
the end of the accounting period adjusting entries are made to close the variance accounts
and to distribute the amounts to inventory and cost of goods sold. These entries
simultaneously close the variance accounts and adjust inventory and cost of goods sold to
reflect actual costs for the period.

11.4

For a simple but meaningful variance report for costs, the following variances should be
calculated.

Price and efficiency variances for direct materials and direct labor provide
information about price changes, purchasing efficiencies and the use of materials.
Managers can correct some of these problems to insure cost-effective production.

The variable overhead spending variance and the fixed overhead budget
variance provide information about whether costs are being kept under control.

The efficiency variance for variable overhead and production volume

variances do not provide any incremental information about whether inputs were
purchased or used efficiently.

11.5

At the end of the accounting period, the following variances need to be recorded: direct
materials and direct labor price and efficiency variances, variable overhead spending
variance, fixed overhead budget variance, variable overhead efficiency variance, and
production volume variance. If the sum of these is immaterial, it is closed to cost of
goods sold. If the sum is material, it is prorated across inventory and COGS.

11.6

Managers monitor variances that are large and unexpected. Sometimes a minimum dollar
amount is set as a criteria so that only variances greater than that amount are investigated.
Managers make trade-offs between the costs of investigating and the benefit from
improving the process or standard. Trends in variances also may affect whether a

Chapter 11: Standard Costs and Variance Analysis 11-3

variance is investigated. If accountants know a variance is increasing over time, they
may decide to investigate to identify ways to reverse a negative trend or to modify future
standards for a positive trend.
11.7

The cost categories that are measured and monitored in a given organization depend on
several factors, including the following:

Nature of goods or services: Manufacturers monitor input prices and

efficiency of labor and materials, whereas service organizations monitor cost per
service provided, which may not include materials. All organizations monitor
fixed costs, although the type of fixed costs varies widely with the type of
business.

Cost accounting system used: The cost categories will be more precise with
more complex cost accounting systems. An organization with an ABC system
that separates costs into flexible and committed categories could develop
standards and measure variances for every activity performed. Alternatively, only
broad categories may be tracked, such as the traditional direct materials and direct
labor categories.

Costs that managers consider important: Overhead costs are often aggregated
together and include indirect costs such as oil for machine maintenance. While
these costs may not be individually important, they are often monitored as part of
the larger category of overhead costs.

Cost/benefit trade-off for monitoring individual costs: For those costs already
reported by the accounting system, such as direct labor in a job costing system,
the cost to develop standards and monitor variances is probably low, and the
benefit could be relatively high if such monitoring encourages labor to be more
efficient. However, other costs, indirect materials used during set-ups, may be
expensive to track. The benefit from tracking these costs may be low if only very
small amounts of materials are used per set-up. These costs are likely to be
aggregated into overhead.

11.8

Standard costs are often set using the most recent years data. Historical trends may be
analyzed and used. Sometimes industrial engineers develop standards by analyzing the
manufacturing or service delivery process.

11.9

Recurring favorable variances may indicate that some process has improved. These
should be investigated so that standard production practices reflect the process
improvements. Variances may also reflect opportunities to examine the manufacturing
process and quality of materials to determine improvements. Sometimes the standard is
wrong, and the monitoring process is improved by changing the standard to reflect
current operations.

11.10 The contribution margin variance calculates the effects of changes in contribution
margins, given the actual level of sales. The contribution margin sales volume variance

11-4 Cost Management

calculates the effects of changes in units sold, given the standard contribution margins.
This information helps managers focus on the reason that the contribution margin is
changing. Managers may want to focus on the underlying variable costs, or pricing, or
consider product emphasis. These variances help determine whether its a change in the
volume of sales, or change in the price or variable cost that causes the variance. When
sales are slow, prices could be lowered, which would be reflected in the contribution
margin variance. These types of changes should be investigated.
11.11 The sales price variance reflects the difference between standard and actual selling prices
for the volume of units actually sold. This variance is favorable if the actual selling price
exceeds the standard price, and it is unfavorable if the reverse is true. The revenue sales
quantity variance reflects the difference between the standard and actual quantity of units
sold at the standard selling price. This variance will be favorable when actual quantities
exceed standard quantities, and it will be unfavorable otherwise. These variances help
managers determine whether changes in revenues are driven by changes in selling price
or changes in quantities sold. To remedy any problems, this information is quite useful.
11.12 When the direct materials price variance is large and favorable while direct materials
efficiency variance is large and unfavorable, it is possible that lower quality materials are
being purchased. This could have a negative effect on the efficiency variance if defective
materials are being discarded. Both purchasing and production personnel should be
asked whether there has been a change in the quality of materials purchased. Production
personnel should also be asked to explain the unfavorable efficiency variances.
11.13 If the direct material price variance is recorded at the time of purchase, direct materials
are recorded in inventory at standard cost and do not need to be tracked by purchase date
and purchase price. This reduces bookkeeping time and effort and simplifies inventory
control. It also clarifies that the price variance occurs at the time of purchase rather than
at the time direct materials are used.

Chapter 11: Standard Costs and Variance Analysis 11-5

EXERCISES
11.14 Kitchen Tile Company
A. This question requires a missing piece of information: the actual number of hours
worked. However, because the labor efficiency variance is given, the variance formula
can be used to solve for actual labor hours as follows:
Labor efficiency variance = (Standard hours Actual hours)* Standard price
The variance amount is given as $6,720 Favorable, and the standard labor price is given
as $24.00 per hour. The number of standard labor hours is calculated as follows:
Actual production = 18,000 tiles
Standard efficiency is 6 tiles per labor hour
Standard number of labor hours for 18,000 tiles:
= 18,000 tiles/6 tiles per hour
= 3,000 hours
Now solve for actual labor hours using the variance formula:
$6,720 = $24.00 * (3,000 hours Actual hours)
$6,720/$24 = 3,000 Actual hours
280 = 3,000 Actual hours
Actual hours = 3,000 280 = 2,720
Quicker approach: The efficiency variance represents the amount by which actual hours
exceed standard hours, times the standard price. This means that the efficiency variance
represents 280 hours ($6,720/$24). Because the variance was favorable, 280 fewer hours
were used than the standard required. For 18,000 tiles, standard labor hours are 3,000
(18,000/6). Therefore, actual hours are 3,000 280 = 2,720 hours.
B. The direct labor price variance is calculated using the following formula:
Actual labor hours * (Standard price Actual price)
= 2,720 hours * ($24.00 - $24.50)
= $(1,360) Unfavorable
C. The fixed overhead budget (i.e., spending) variance is calculated by simply taking the
difference between standard and actual fixed costs:
Standard fixed costs Actual fixed costs
= $60,000 - $58,720
= $1,280 Favorable

11-6 Cost Management

11.15 Nakatani Enterprises
A. Standard costs for actual output of 15,342 units:
Direct materials (15,342 units x 0.8 lbs. x $2.00/lb.)
Direct labor (15,342 units x 0.2 hrs x $17.00/hour)
Total

$24,547.20
52,162.80
$76,710.00

B. Direct materials price variance

Standard cost for actual purchases ($2.00/lb x 11,000 lbs.)
Actual cost of purchases
Price variance

$22,000
21,730
$ 270 F

C. Direct materials efficiency variance

Standard quantity of materials for actual output (15,342 x 0.8 lbs.) 12,273.6 lbs.
Actual quantity of materials used
13,252.0 lbs.
Variance in pounds
(978.4) lbs.
Times standard cost per pound
$2
Efficiency variance
$(1,956.80) U
D. Direct labor price variance
Standard cost for actual labor hours ($17 x 2,730 hours)
Actual labor cost
Price variance
E. Direct labor efficiency variance
Standard labor hours for actual output (15,342 x 0.2 hours)
Actual labor hours
Variance in hours
Times standard cost per hour
Efficiency variance

$46,410
47,000
$ (590) U
3,068.4
2,730.0
338.4 hours
$17
$5,752.80 F

F. If managers use 10% of total direct costs as the criteria for investigation, none of these
variances would be investigated. However, the direct labor efficiency variance is
relatively large compared to total direct labor cost at 11% ($5,752.80/$52,162.80). Some
managers may want to investigate this variance, especially if this company is concerned
about quality as a strategy. If quality has decreased as a result of this favorable variance,
defective or low quality units could affect Nakatanis reputation and future revenues if
customers are disgruntled. If production processes have improved, and there is no
adverse change in quality, so managers might want to change the labor quantity standard.

Chapter 11: Standard Costs and Variance Analysis 11-7

11.16 Nell Company
A.
Direct material price variance [($0.20 - $0.17) x 100,000]
Direct material efficiency variance [(5 * 10,000 - 60,000) x $0.20]
Direct labor price variance [($7.00 - $7.20) x 3,900]
Direct labor efficiency variance [(0.4 * 10,000 - 3,900) x $7.00]
B. Journal entries:
Raw materials inventory (100,000 lbs at $0.20/lb.)
Direct materials price variance
Accounts payable

$3,000 F
2,000 U
780 U
700 F

$20,000
$3,000
$17,000

Work in process inventory (5*10,000*$0.20)

Direct materials efficiency variance
Raw materials inventory (60,000 * $0.20)

$10,000
$2,000

Work in process inventory (0.4*10,000*$7.00)

Direct labor price variance
Direct labor efficiency variance
Wages payable (3,900 * $7.20)

$28,000
$780

$12,000

$700
$28,080

11.17 Derf Company

Standard fixed overhead is $135,000 x 0.20 = $27,000
Standard variable overhead is $135,000 x 0.80 = $108,000
The standard fixed overhead allocation rate is $27,000/(9,000 x 2) = $1.50 per hour
The standard variable overhead allocation rate is $108,000/(9,000 x 2) = $6.00 per hour
A. The variable overhead spending variance is:
[$6.00 ($108,500/17,200)] x 17,200 = $5,300 U
B. The variable overhead efficiency variance is:
[8,500 * 2 - 17,200] x $6 = $1,200 U
C. The fixed overhead spending (budget) variance is:
$27,000 - $28,000 = $1,000 U
D. The fixed production volume variance is:
$1.50 x [(8,500 x 2) (9,000 x 2)] = $1,500 U

11-8 Cost Management

E. Journal entries
Variable overhead cost control (actual cost)
Accounts payable and other accounts
Work in Process inventory (8,500 x 2 hrs x $6/hr)
Variable overhead cost control
Variable overhead spending variance
Variable overhead efficiency variance
Variable overhead cost control

$108,500
$108,500
102,000
102,000
$5,300
$1,200
$6,500

Fixed overhead cost control

Accounts payable and other accounts

$28,000

WIP inventory (8,500 x 2 x $1.50)

Fixed overhead cost control

$25,500

$28,000
$25,500

Fixed overhead spending (budget) variance

Production volume variance
Fixed overhead cost control

$1,000
$1,500

Ending WIP, finished goods, and/or COGSa

Variable overhead spending variance
Variable overhead efficiency variance
Fixed overhead spending (budget) variance
Production volume variance

$9,000

$2,500
$5,300
$1,200
$1,000
$1,500

The total variance of $9,000 would be prorated based on the ending balances in
work-in-process inventory, finished goods inventory, and cost of goods sold.

11.18 Mitchellville Products Company

A. Revenue budget variance = $60,000 $53,200 = $6,800 Unfavorable
B. Sales price variance:
Standard unit price = $60,000/4,000 = $15
Actual unit price = $14
Sales price variance = ($15 - $14) x 3,800 = $3,800. Unfavorable
C. Revenue sales quantity variance = (4,000 3,800) x $15 = $3,000 Unfavorable

Chapter 11: Standard Costs and Variance Analysis 11-9

D. The standard contribution margin is
Sales
Less:
Variable manufacturing
Variable selling and administration
Contribution margin

$60,000
16,000
8,000
$36,000

Because contribution margin represents 4,000 units, the contribution margin per unit must
be $36,000/4,000 = $9. Then, the contribution margin sales volume variance is
$9 x (4,000 - 3,800) = $1,800 U
11.19 Metropolitan Motors
A. The contribution margin budget variance is the difference between the standard
contribution margin and the actual contribution margin.
First, calculate the contribution margin at budget:
Economy
Family
Luxury

(10*$400)
(20*$800)
(5*$1,300)

$ 4,000
16,000
6,500
$26,500

The average contribution margin per sale is $26,500/35 = $757.14

The actual contribution margin is
Economy
Family
Luxury
Total

25
10
3
38

$ 5,625
7,500
4,200
$17,325

The average contribution margin per sale is $17,325/38 = $455.92

Contribution margin budget variance = $9,175 U because the contribution margin is less
than standard.

11-10 Cost Management

B. The contribution margin variance reflects the effects of the change in contribution
margin, given the actual level of sales.
First calculate what the contribution margin would have been at actual sales and standard
contribution margin:
Economy
Family
Luxury

25 x $400
10 x $800
3 x $1,300
38

$10,000
8,000
3,900
$21,900

The average contribution margin at actual sales mix, standard contribution margin
is $21,900/38 = $576.32
Then take the difference between this and the actual contribution margin.
Contribution margin variance = $21,900 - $17,325 = $4,575 U
The contribution margin sales volume variance is the difference between the standard
volume, mix, and contribution margin and the actual mix and volume at standard
contribution margin or
$21,900 - $26,500 = $4,600 U
Check: The two variances should equal the contribution margin budget variance.
$9,175U = $4,575 U + $4,600 U
C. The contribution margin sales quantity variance is the difference in actual quantity sold
and the standard quantity, given the standard sales mix and standard contribution margin.
The average contribution margin at standard sales mix and standard contribution margin
was calculated above in part A.
(35 - 38) * $757.14 = $2,271.42 F
The contribution margin sales mix variance is the difference between the standard sales
mix and the actual sales mix given actual sales at standard contribution margin. This can
be calculated two different ways. The actual units and actual sales mix at standard
contribution margin total is $21,900. The actual units at standard sales mix and standard
contribution margin is $757.14 * 38 = $28,771.32. So the total variance = $21,900 $28,771 = $6,871.32 U. Alternatively, the averages from above can be used as follows
Contribution margin sales mix variance = ($757.14 - $576.32)*38 = $6,871.16 U
These two variances should sum to the contribution margin sales volume variance of
$4,600, and they do ($6,871 - $2,271 = $4,600).

Chapter 11: Standard Costs and Variance Analysis 11-11

D. No, management would not be pleased. It appears that the bonus induced the salespeople
to put more effort into selling the low margin economy cars at the expense of the higher
markup lines. Further, the price variance implies that the salespeople also accepted lower
prices on the already narrow markups for the economy cars.
11.20 Plush Pet Toys
[Note: This problem requires knowledge of decision making from Chapter 4.]
A. Direct materials variances
Direct material price variance
= ($2.00 per yard*30,000 yards) - $62,000
= $60,000 - $62,000
= $2,000 unfavorable because the company paid more than standard
Direct material efficiency standard
= 15 yards per lot * 2,400 lots 34,000 yards)*$2.00 per yard
= (36,000 yards 34,000 yards)*$2.00 per yard
= $4,000 favorable because the company used fewer yards than at standard
Direct labor variances:
Direct labor price variance
= $10 per hours x 4,200 hours - $39,000)
= $42,000 - $39,000
= $3,000 favorable
Direct labor efficiency variance
= (2 hrs per lot * 2,400 lots 4,200 hours)*$10 per hour
= (4,800 hours 4,200 hours)*$10
= $6,000 favorable because the company used fewer hours than at
standard
Variable overhead spending variance
= ($5 per lot*2,400 lots - $12,000)
= $12,000 - $12,000 = $0
There is no spending variance for variable overhead.
Fixed overhead budget variance
= $24,000 - $24,920
= $920 unfavorable because the company spent more than standard

11-12 Cost Management

The preceding are the commonly used variances for cost control. Some organizations
also compute and monitor the following variances:
Variable overhead efficiency variance
= [(1,000 lots 2,400 lots)*$2]
= $2,800 unfavorable because the company allocated more overhead than
at standard
Production volume variance
Given that fixed overhead is allocated using the following rate:
$24,000/1,000 = $24/lot
= [(1,000 lots 2,400 lots)*$24/lot]
= $33,600 favorable because lots were produced than expected
B.
1.
Reduction in labor hours (2.0 hours 1.5 hours)
Times cost per hour
Cost savings per lot

0.5 hours per lot

$10 per hour
$5.00 per lot

2.
Cost savings per month = (1,000 lots * $5.00 per lot) = $5,000
Cost savings over 5 years = ($5,000 per month * 60 months) = $300,000
The maximum price the company would be willing to pay for the new equipment is
$300,000. This is equal to the expected labor cost savings over 5 years (ignoring the
time value of money).
11.21 Fine Products Manufacturing Company
A. Total variances = $7,900 unfavorable. Because anything greater than $5,000 is
considered material, the total variance amount is material.
B. Total WIP, FG, and COGS = $32,000.
Each inventory and COGS account gets a portion of the variance:
Work in Process ($2,000/$32,000 x $7,900)
Finished goods ($6,000/$32,000 x $7,900)
Cost of goods sold ($24,000/$32,000 x $7,900)
Total

$ 494
1,481
5,925
$7,900

Chapter 11: Standard Costs and Variance Analysis 11-13

Journal Entry:
Work in process inventory
Finished goods inventory
Cost of goods sold
Direct materials efficiency variance
Variable overhead spending variance
Direct materials price variance
Labor price variance
Labor efficiency variance
Fixed overhead budget variance
Variable overhead efficiency variance

494
1,481
5,925
1,500
1,000
2,000
5,000
2,000
200
1,200

11.22 Pet Toys, Inc.

A.
Frisbee
Plush toys
Total

Actual Unit Sales

at Standard Prices
95,000 x $3
$285,000
40,000 x $3
120,000
135,000
$405,000

Standard
Contribution Margin
95,000 x $1.25
$118,750
40,000 x $2.00
80,000
$198,750

Revenue budget variance ($450,000 - $409,500) =$40,500 U

Revenue sales quantity variance ($450,000 - $405,000) = $45,000 U
Sales price variance ($409,500 - $405,000) = $ 4,500 F
B.
Standard units sold
At standard sales mix
And standard CM
(100,00x$1.25+50,000 x $2)
$225,000

Actual units sold at actual

sales mix and standard CM
(95,000x$1.25 + 40,000x$2)
$198,750

CM sales volume variance

($225,000 $198,750)
= $26,250 U

Actual units sold at actual

sales mix and actual CM
(95,000x$1.55+40,000x$1.40)
$203,250

Contribution margin variance

($198,750 - $203,250)
= $4,500 F

Contribution margin budget variance

($225,000 - $203,250)
= $21,750 U

11-14 Cost Management

C.

Standard units sold at standard

sales mix and standard CM
$225,000

Actual units sold at standard

sales mix and standard CM
[(130,000 x .67 x
$1.25)+(130,000 x .33 x $2)]
$194,675

CM sales quantity variance

($225,000 - $194,675)
= $30,325 U

Actual units at actual sales

mix and standard CM
(95,000x$1.25 + 40,000 x $2)
$198,750

Contribution margin sales mix variance

($194,675 - $198,750)
= $4,075 F

Contribution margin sales volume variance

($30,325 U + $4,075 F)
= $26,250 U

Chapter 11: Standard Costs and Variance Analysis 11-15

PROBLEMS
11.23 Raging Sage Coffee
A. For a coffee cart business, workers are scheduled with more help available when the shop
is busy, such as in the morning. Although each workers hours vary, the schedule remains
fairly fixed, so the cost structure includes a high proportion of fixed cost.
B. In this business, workers need to be at the cart regardless of the number of customers.
Therefore, the direct labor efficiency variance is meaningless and should not be
calculated because it would be measuring whether the clerks sold as many cups of coffee
per labor hour as was expected. Labor costs are fixed, so the computation would reflect a
revenue variance, rather than a labor efficiency variance.
C. Price variance for coffee beans:
Standard cost of actual coffee beans purchased (240 lbs. x $6.00 per lb)
$1,440
Actual cost of coffee beans purchased
1,800
Price variance
$ (360) U
Efficiency variance for coffee beans:
Coffee beans at standard lbs. (0.04 lbs per cup x 8,260 cups)
Actual beans
Variance in pounds
Standard cost per pound
Efficiency variance

330.4 lbs
224.0 lbs.
106.4 lbs.
$6.00
$638.40 F

D. The quantity standard for direct labor implies that 20 cups should be sold per hour of
clerk/brewer time:
0.05 hours per cup x 60 minutes per hour = 3 minutes per cup
In 60 minutes, 20 cups are expected to be made and sold
Expected sales volume (600 clerk/brewer hours x 20 cups per hour)
Actual sales volume
Difference between expected volume and actual volume

12,000 cups
8,260 cups
(3,740) cups

E. There is an unfavorable coffee bean price variance, a favorable coffee bean efficiency
variance, and sales were off by about 32% (3,740 cups/12,000 cups). These variances
might be related. One possibility is that the higher cost of coffee beans caused the
clerks/brewers to reduce the quantity of coffee beans used per cup. This would have
resulted in weaker coffee, which might have caused customers to go elsewhere.
The following are other possible explanations for the unfavorable sales volume variance:
* A competing coffee business opened nearby.
* A nearby employer went out of business or launched a major lay-off of
employees.

11-16 Cost Management

*
*
*

There was employee turnover. A clerk/brewer who was well-liked by customers

left and was replaced by a clerk/brewer who was often impolite to customers.
There was road construction nearby, disrupting traffic to the shopping center.
Nearby competitors decreased their selling prices.

F. Instead of basing a bonus based on cost variance measures, give employees a bonus
based on profitability. This provides them motivation to encourage customers to return,
increasing revenue, and also to contain costs.
11.24 Sunglass Guys
A. Standard overhead rate per direct labor hour:
Calculate total estimated overhead at normal production volume:
Estimated overhead = (4,300 x $8.15) + (1,400 x $12.32) + $235,707 = $288,000
Calculate estimated labor hours at normal production volume:
Estimated hours = 0.2 x 4,300 + 0.3 x 1,400 = 1,280 hours
Calculate standard rate by dividing estimated cost by estimated hours:
Rate = $288,000/1,280 = $225 per direct labor hour
B. This method would be useless for monitoring and control because the fixed and variable
overhead costs are not separated. When the production volume variance is commingled
with the fixed overhead budget variance and variable overhead spending variances,
spending variances cannot be calculated, so no information is available about cost
control.
C. The recommendation is to separate fixed and variable overhead costs into separate
standards. Only the spending variances will be useful for monitoring and controlling
overhead costs.
Using normal monthly volume, the fixed overhead budget variance is:
Estimated fixed overhead cost (i.e., static budget)Actual fixed overhead cost
= $235,707 - $237,859 = $2,152 U
The variable overhead spending variance (using units of production as the allocation
base):
Standard variable overhead for actual productionActual variable overhead cost
= ($8.15 * 4,500 Regular units) + ($12.32 * 1,300 Deluxe units) - $54,238
= $36,675 + $16,016 - $54,238
= $1,547 U

Chapter 11: Standard Costs and Variance Analysis 11-17

D. To calculate the production volume variance, first determine what the fixed overhead
standard rate would have been if it had been calculated separately from the variable
overhead standard rate: (See computation of normal labor hours in the solution to Part
A.)
Standard fixed overhead costs/Normal number of direct labor hours
= $235,707 / 1,280
= $184.15 per labor hour
Production volume variance:
Standard labor hours for actual production
(0.2 * 4,500 Regular + 0.3 * 1,300 Deluxe)
Normal labor hours
Volume variance in labor hours
Times the standard overhead rate
Production volume variance

1,290 hours
1,280 hours
10 hours
$184.14
$1,841 F

Double-check the fixed overhead variance calculations in Parts C and D as follows:

Standard fixed overhead cost allocated to actual production:
Regular sunglasses: [($184.15*0.2) * 4,500]
Deluxe sunglasses: [($184.15*0.3) * 1,300]
Total fixed overhead allocated
Less actual fixed overhead costs
Total fixed overhead variance

$ 165,735
71,819
237,554
237,859
$
(305) U

Sum of individual variances: [$(2,152) U + $1,841 F]

$
(311) U
Difference due to rounding
To calculate the variable overhead efficiency variance, the standard volume of allocation
base for actual output is compared to the actual volume of allocation base. Because
variable overhead is allocated using actual units, an efficiency variance never arises
(actual volume of units always equals actual volume of units). Therefore, the efficiency
variance will be $0.
E. If labor hours and costs are fixed, they do not vary with production. Therefore, labor
hours provide a poor allocation base for variable overhead cost. A better option would be
to allocate variable overhead using units produced because the variable overhead costs
are more related to units than to labor.
11.25 The Mighty Morphs
A. Documentation price variance for MMMs:
Actual quantity x (standard price per unit actual price per unit)
= [1,005 books x ($3 - $2.95)] +[(825 books x ($5 - $4.75)]
= $50.25 F + $206.25 F = $256.50 F

11-18 Cost Management

B. Efficiency variance for DVDs

(Standard quantity actual quantity) x standard price
= [(1.03 books per unit x 1,000 units) 1,005 books] x $3
+ [(1.03 books per unit x 800 units) 825 books] x $5
= (1,030 1,005) x $3 + (824 825) x $5
= $75 F + $5 U = $70 F
C. Labor price variance for both games:
(Standard price actual price) x actual labor hours
= ($15 - $795/55) * 55
Labor efficiency variance for both games:
(Standard hours for actual output actual hours) x standard price
= [(0.01 x 1,000) + (0.03 x 800) 55] x $15
= [(10 + 24) 55] x $15
Total labor variance

$ 30 F

315 U
$285 U

D. If there were no waste, the company would incur costs for only one DVD and one
documentation book per game produced. Thus, the cost of waste is equal to the number
of DVDs and documentation books used in excess of one per unit, valued at standard
cost:
Waste for DVDs:
[Actual DVDs used (1,000 + 800)] x $0.35
= (2,025 1,800) x $0.35
$ 78.75
Waste for documentation books:
(Actual Power Puffs books used 1,000) x $3
+ (Actual MMM books used 800) x $5
= [(1,005 1,000) x $3] + [(825 800) x $5]
140.00
Total waste
$218.75
E. Pros:

Cons:

It may be less costly to allow waste in the standard than to inspect incoming
materials or to pay for higher quality materials.
The company has done it this way a long time, and change might be difficult
for employees.
Several waste-related opportunity costs arise from defective units. As waste
increases, it is likely that the number of defective units sold increases. Greater
defect rates reduce customer satisfaction and reduce sales. By eliminating waste
altogether, this cost is avoided.
The company would have saved $218.75, although no information is given
about the amount of investment required to save this amount.

Chapter 11: Standard Costs and Variance Analysis 11-19

11.26 Baker Street Animal Clinic
A. The technicians have argued that the cost variance was caused by the price increase.
Thus, the total variance can be separated into a price variance and an efficiency variance.
Normally, the price variance is calculated using the purchase quantity. However, no
information is given about the quantity purchased. Also, the problem presents total cost
for serum used of $2,270, which results in a $(270) total variance. However, the serum
for 2,000 injections costs $105 per 1,000cc. Following are calculations for the price
variance.
Price variance for serum:
Standard quantity of serum for actual injections
Times amount of price increase per cc:
[($100/1,000 cc) ($105/1,000 cc)]
= ($.10 - $.105) per cc
Serum Price Variance (20,000 cc * $.005)

20,000 cc
(.005) per cc
$(100) U

Efficiency variance for serum:

The efficiency variance cannot be calculated using the usual method because the
quantity of serum used is unknown. However, the efficiency variance can be
calculated by subtracting the price variance from the total serum cost variance.
Total variance (given in the problem)
Price variance
Serum Efficiency Variance

$(270) U
(100) U
$(170) U

B. The unfavorable efficiency variance represents the cost of wasted serum. To see this,
consider the formula for the efficiency variance:
Efficiency Variance = Standard cost * (Standard quantity Actual quantity)
The difference between the standard quantity and the actual quantity is the amount of
serum wasted. At a standard cost of $.10 per cc, the volume of wasted serum is estimated
to be 1,700 cc ($170 unfavorable efficiency variance/$.10 per cc).
Is this a significant amount of waste? This is a matter of judgment. Below are several
ways to quantity the significance.
Waste, relative to standard quantity of serum:
Standard quantity of serum = 2,000 injections * 10 cc
Percent serum waste (1,700 cc/20,000 cc)

20,000
8.5%

Note: The waste could also have been calculated using percent of standard cost:
$170 efficiency variance/$2,000 standard cost = 8.5%
Number of additional injections that could have been given:
Waste of 1,700 cc / 10 cc per injection

170 injections

11-20 Cost Management

Following are possible issues to discuss when answering this question:

The percent waste (8.5%) might or might not be considered a significant cost.
Given the nature of operations at the Baker Street Animal Clinic, it would be
reasonable for waste to be very close to zero.
Had there been zero waste, 8.5% or 170 more injections could have been given.
Perhaps the waste is a sign that the technicians are wasteful in other areas, too.
There could be a significant larger problem.

C. The manager would probably be concerned about the unfavorable efficiency variance.
The manager could ask the technicians to review their procedures and to identify how and
where waste is occurring. Once the reasons for waste are identified, the manager could
help the technicians establish new procedures to minimize or eliminate the waste.
If the technicians are unable to provide reasonable explanations for the waste, the
manager might become concerned that someone is stealing serum and then selling or
using it elsewhere. If the manager considered the cost to be sufficiently large, he/she
might institute new procedures for monitoring the physical use of serum. However, this
type of approach might cost more than the benefit.
Perhaps the easiest and most cost-effective solution would be to provide the technicians
with incentives based on the efficiency variance. The efficiency variance could be used
as part of the technicians performance evaluation. This would encourage them to seek
efficiency improvements on their own.
11.27 Damson Products
[Note: This problem requires students to know about normal versus abnormal waste (see
Chapters 5 and 6).]
A. Most of the variances are immaterial and can be closed to cost of goods sold. However,
three of them need attention. The $13,000 for materials lost should be accounted for as a
flood loss; similarly, the $9,000 in labor should be accounted for as flood loss. This
leaves $12,600 - $13,000 = $400 F and $9,700 - $9,000 = $700 U, respectively, in the
material efficiency and labor efficiency variances to be closed to cost of goods sold.
Note, that variable overhead must not have been allocated on the basis of labor;
otherwise, there would be a large unfavorable variable overhead quantity variance.
The production volume variance should also be split into two amounts. The $10,200 due
to down time during the flood should be part of the flood loss. The remaining $200
should be debited to cost of good sold.
B.

Using the recommendations made in Part A, the journal entries would be

Cost of Goods Sold
$ 658
Material Price Variance

$ 658

Chapter 11: Standard Costs and Variance Analysis 11-21

Flood Loss
Cost of Goods Sold
Material Efficiency Variance

$13,000
$ 400
12,600

Labor Price Variance

Cost of Goods Sold

$ 376

Flood Loss
Cost of Goods Sold
Labor Efficiency Variance

$ 9,000
700

$ 376

$ 9,700

Variable Overhead Spending Variance

Cost of Goods Sold

$ 507
$ 507

Cost of Goods Sold

Variable Overhead Quantity Variance

$ 412

Fixed Overhead Budget Variance

Cost of Goods Sold

$ 782

$ 412
$ 782

Cost of Goods Sold

Flood Loss
Production Volume Variance

200
10,200
$10,400

C. The finished goods inventory is unaffected; its balance remains at $34,000.

The net effect of all of the adjustments is a decrease of $95 in cost of goods sold, so the
adjusted balance in cost of goods sold is $304,905 ($305,000 95).
11.28 Data Processors
[Note: This problem assumes knowledge of ABC (Chapter 7).]
A.
Activity
Processing transactions
Issuing statements
Issuing credit cards
Resolving disputes

Estimated Cost
$2,000,000
1,000,000
500,000
90,000

Estimated Activity
5,000,000
250,000
100,000
3,000

ABC Rate
$0.40
$4.00
$5.00
$30.00

11-22 Cost Management

B. The flexible budget in the following statement is calculated by multiplying the actual
activity level times the ABC allocation rate (Part A).
Activity
Processing transactions
Issuing statements
Issuing credit cards
Resolving disputes

Static
Budget
$2,000,000
1,000,000
500,000
90,000
$3,590,000

Actual
Activity
5,800,000
270,000
110,000
3,500

Flexible
Budget
$2,320,000
1,080,000
550,000
105,000
$4,055,000

Actual
Cost
$2,200,000
1,300,000
400,000
100,000
$4,000,000

Variance
$120,000 F
-220,000 U
150,000 F
5,000 F
$ 55,000 F

C. The spending variance for processing transactions is calculated in Part B as $120,000 F.

D. Budget (i.e., spending) variance for fixed processing costs:
At standard (estimated cost)
$1,000,000
Actual cost
1,300,000
Fixed budget variance
Spending variance for variable processing costs:
Actual activity x standard activity rate
(5,800,000 x $1,000,000/5,000,000)
Actual cost
Variable spending variance
Total spending/budget variance for processing costs

$300,000 U

$1,160,000
900,000
260,000 F
$ 40,000 U

E. Fixed costs might have increased if new equipment or software was purchased that has
not been reflected in the standard. Costs could be out of control. Variable costs might
have been reduced if new equipment resulted in more efficient operations. The processes
might have been improved somehow. The variance could also reflect normal fluctuations
of processing activities.
F. There is no one answer to this part. Sample solutions and a discussion of typical student
responses will be included in assessment guidance on the Instructors web site for the
textbook (available at www.wiley.com/college/eldenburg).

Chapter 11: Standard Costs and Variance Analysis 11-23

11.29 Software Development Company
[Note: This problem assumes knowledge of budgeting from Chapter 10.]
A. Standard pretax income
Standard sales
Games
40,000 @ $16
Business
2,000 @ $55
Educational
10,000 @ $20
Total sales
Standard variable costs 52,000 @ $2
Standard fixed costs
Standard pretax income

$640,000
110,000
200,000
950,000
(104,000)
(535,000)
$311,000

Average contribution margin per unit per master budget:

40,000 x $14 + 2,000 x $53 + 10,000 x $18
52,000

= $16.269231

Average standard contribution margin per unit for actual sales:

35,000 x $14 + 4,000 x $53 + 11,000 x $18
50,000

= $18.00

Master budget pretax income

Sales quantity variance
(52,000 - 50,000)*$16.269231
Contrib. margin sales mix variance ($16.269231 - $18)*50,000
Flexible budget pretax income
Sales price variance:
Games
($16 - $616,000/35,000)*35,000
Business
($55 - $198,000/4,000)*4,000
Material price variance
($2 - $106,575/50,750)*50,750
Material quantity variance
(50,000 - 50,750)*$2
Fixed cost budget variance
($535,000 - $533,500)
Actual pretax income

$311,000.00
(32,538.46)
86,538.46
365,000.00
56,000.00
(22,000.00)
(5,075.00)
(1,500.00)
1,500.00
$393,925.00

B.
1. The sales manager should be held responsible for only those variances related to
activities under his or her control. Therefore, the production-related variances
(material price and material quantity) should be excluded. The fixed cost budget
variance should be considered only to the extent that the fixed costs are under the
sales managers control. The sales manager is mostly likely responsible for some
fixed costs, so a budget variance for those costs should be separated from the budget
variance for other costs. The group of sales-related variances, considered together,
provides information to evaluate whether the sales managers changes to prices and
sales effort are benefiting the company. Although individual variances such as sales
quantity and sales price may be negative, the important question is whether the sales
managers new strategies are increasing the companys profits.

11-24 Cost Management

2. The manager should be praised. The net effect of the manager's changes can be seen
in the sales mix, quantity, and price variances. These variances total to an $88,000
favorable variance ($32,538.46 U + $86,538.46 F + $56,000.00 F + $22,000.00 U).
C. Sales
Games
(55,000*35,000/50,000) @ $17.60
Business
(55,000*4,000/50,000) @ $49.50
Educational
(55,000*11,000/50,000) @ $20.00
Total sales
Variable costs
55,000 @ $1.80
Fixed costs
Pretax income

$ 677,600
217,800
242,000
1,137,400
99,000
535,000
$ 503,400

D. The managers cannot know for certain whether there will be changes in customer
preferences that affect the demand estimates. They also cannot know for certain when
prices of inputs will increase. Although they can build known price changes into the
budget, even vendors may not anticipate their own price increases up to a year in the
future. The managers cannot know their costs for services such as electricity and
transportation because these prices are affected by weather and gas and oil costs. There
are many uncertainties that cannot be perfectly predicted; these are just a few examples.
11.30 Professor Grader
A. It is not possible to develop a perfect system for measuring student performance in a
course. To know for certain the amount of effort put forth, and the understanding that
each student acquires, a professor would have to monitor all of their actions related to the
course, no matter where the student was. This is impossible. Even if it were possible to
perfectly observe all student actions, uncertainty would still exist about how best to
measure individual course performance. Should students be graded based on the
improvement in their knowledge and other competencies during the course? Should they
be graded based on an absolute standard for the course? Should grades be measured
relative to other students in the same section or several sections taught by the professor?
B. There is probably wider variation in exam results than any of the other measures, but
because some students have access to the exam, variation is reduced. There is probably
very little variation in attendance because it is rarely monitored. There is probably little
variation in the term paper because it is graded on quantity, not quality, and the quantity
standards are known by all students. There is probably little variation on the take-home
exam because students have two weeks to work on it, and judging from other aspects of
this professors performance evaluation systems, it is likely that all of the questions have
single correct answers because they are easy to grade.

Chapter 11: Standard Costs and Variance Analysis 11-25

C. As a performance measurement system, the grading system is faulty for several reasons.

The performance standard appears to be very low. Students will not be

motivated to work hard to learn the subject matter of the course.

The performance measurement for the term paper does not seem to be
consistent with the goals of the course. Measuring length instead of content
would normally not measure whether students understood the subject matter of
the course.

There is no feedback on the midterm exam. Consequently, students are not

apprised of whether they are meeting the standards of the course. They have no
basis for changing their actions to improve future performance.

The performance measure is unfair to the extent that some students have
access to the midterm exam and others do not.

It is questionable whether a students performance on the final exam provides

information about overall performance. The potential for manipulation (having
someone else work the final) is high.

The defects in the performance measure are so severe that one should not attempt to use
grades earned in this course as a measure of students' comprehension of the subject
matter.
D. Professor Grader has a responsibility to students and to others who directly finance
students (such as parents and spouses) to grade in a manner that is consistent with
university and program policies and also with the grading system set forth in the course
syllabus. The professor is also responsible for establishing a grading system that is fair to
students in the course and that measures student learning (although how to do this is
uncertain, as described in Part A). This group of stakeholders often considers grades as
signals about student effort and/or ability. If the grades do not measure student effort or
ability, even with error, these stakeholders do not have adequate information about the
students progress.
Professor Grader has responsibilities toward the recruiters who hire the universitys
graduates. Recruiters want to identify students who work hard and learn new things
quickly. Grades measure these skills and abilities, although with error. Without
appropriate measurement, recruiters cannot identify students that might best suit their
needs, and they may no longer use the university for recruiting.
Professor Grader is responsible to the university, which expects professors to ensure that
graduating students have met outcomes specified by the university, such as the ability to
think critically, communicate effectively, be an effective team member, and are
knowledgeable within their respective majors. Universities rely on professors and their
evaluation systems to maintain standards.

11-26 Cost Management

Professor Grader is responsible to other professors at the university, who rely on their
colleagues to grade fairly so that students develop a better understanding of expectations
and are do not become unhappy about discrepancies in grades across courses or sections
of courses.
Professor Grader is responsible to state and federal governments and their citizens, who
financially support the university, for using resources efficiently. The professor is
responsible to these stakeholders for ensuring that the grading system encourages greater
student learning. The professor also has a responsibility to the general public for
improving the education of its citizens.
E. There are a variety of ways to answer this question. In general, however, Professor
Grader does not appear to have acted ethically in this situation because the professor does
not appear to have adequately addressed the responsibilities described in Part D. The
professor appears to have placed low priority on values such as integrity, fairness, and
professional competence.
F. It is unethical for students to cooperate on the take-home exam if Professor Grader has
specifically asked them not to do that. It is also unethical for students to have access to
an exam that is not public information. Some students in the class will act ethically
because they have high ethical standards. It is unfair to these students when other
students do no behave ethically.
Some students in this situation might rationalize unethical behavior by saying that
Everyone is doing it, or The professor should expect us to get all the help we can.
These types of rationalizations are simply ways of avoiding ethical responsibility.
Although the professors system might contribute to unethical behavior, the system does
not justify unethical behavior.
A variety of values could be used to reach the conclusions drawn above. For example,
the values of fairness, honesty, and integrity would lead students to behave ethically in
this situation.
11.31 Benerux Industries
A. Managers cannot perfectly observe employee effort and abilities. Therefore, it is
impossible to perfectly measure, monitor, and motivate employee performance.
B. The first part of the performance measurement system allows company managers to learn
whether the companys production levels this year are 5% higher than production levels
during the same month of the prior year.
The second part of the performance measurement system allows the managers to learn
whether actual cost per unit is higher or lower than the average cost for manufacturing
this kind of product as determined from industry newsletters.

Chapter 11: Standard Costs and Variance Analysis 11-27

C. In companies that value quality, price and efficiency variances may not be as important as
information about quality. If the companys strategy is to be the highest quality
manufacturer, and the market is willing to pay more for higher quality, the company may
emphasize quality and may not emphasize cost control and efficiency.
D. The proposed performance measurement report suffers from several major weaknesses.

It concentrates on the wrong goals--quantity and cost. The firm has achieved
its success through quality.

The volume measure is susceptible to easy manipulation. Production

employees could presumably start a large number of units with virtually no effort.
This would increase the amount of WIP on hand and increase inventory carrying
costs.

The performance standard on quantity is arbitrary (5% increase). It seems

unrelated to sales and may encourage the accumulation of excess inventory.

The performance standard for cost is incorrect. The firm is producing a higher
quality product than other firms in the industry. Consequently, the firm should
expect higher costs than other firms.

Even if the reports were appropriate, a quarterly report is unlikely to provide

sufficiently timely feedback to allow workers to adjust their performance to
achieve budgeted goals.

Workers are likely to resent the new system and could then leave the
company, requiring increased costs in training and reduced productivity.

E. There is no single answer to this question. However, the answer should contain a
synthesis of the issues discussed in the preceding sections, and it should also address
concerns about responding in a productive way to the new accountant. The following
major areas should be addressed:

A summary of what the proposed system would measure (Part B) and the
weaknesses in the proposal (Part D), followed by a conclusion about whether the
CFO would support the proposal. Most likely, the CFO would not be in favor of
the proposal because it focuses on inappropriate measures.

A discussion of whether a new performance measurement system would be useful

for this company. This discussion would address possible reasons why variances
are not currently used (Part C), followed by a conclusion about whether some type
of new performance measurement system should be considered. One possible
conclusion would be that no apparent reason currently exists to make a change.
The companys current control system seems to be working fine, so there may be
no reason to consider changing it. An alternative conclusion might be that it
would be useful for the company to investigate possible alternative performance

11-28 Cost Management

measures. Even if the companys system is working fine, there may be ways to
improve it or to prevent unforeseen future problems; a performance measurement
system might be useful.

Identify ways to respond to the new accountant. The response should be positive
so that it encourages the accountant to continue to think creatively and to share
new ideas. The response is also a learning opportunity for the new accountant.
The CFO could discuss the proposal with the cost accountant and ensure that the
accountant understands the proposals flaws. They could then discuss ways to
improve upon the ideas in the proposal.

11.32 Auto Parts Co.

A sample spreadsheet showing the calculations for this problem is available on the Instructors
web site for the textbook (available at www.wiley.com/college/eldenburg).
A. Below is an excerpt from a sample spreadsheet for this problem. For variable costs, the
flexible cost budget should reflect the actual volume, or 950 pistons. Because fixed costs
are not expected to vary with production volume, they are presented using the static
budget amount. The problem information indicates that direct labor is a fixed cost. Also,
notice that the allocation base for variable factory overhead is direct labor hours.

The problem does not give the total standard amount of fixed direct labor cost or fixed
factory overhead, but they can be calculated from the standard cost information:
Fixed direct labor (1,000 pistons x $6 per piston)
Fixed factory overhead (1,000 pistons x $20 per piston)

$ 6,000
20,000

B. The direct costs consist of: piston shafts, shaft housings, and direct labor. Because the
information in the problem indicates that actual costs were identical to standard costs for
shaft housings, there are no variances for shaft housings. Therefore, direct cost variances
are calculated only for piston shafts and direct labor. Also note that direct labor in this
problem is treated as a fixed cost. Accordingly, budget and volume variances are
calculated for direct labor using the same method that is used for fixed factory overhead.

Chapter 11: Standard Costs and Variance Analysis 11-29

Below is an excerpt from a sample spreadsheet showing the direct cost variances for this
problem.

Double-check computations for total piston shaft variances:

Standard cost for quantity of pistons produced (950*$35)
$33,250
Actual cost for piston shafts purchased
$(34,950)
Increase in cost of raw material inventory:
Quantity purchased
1,000
Quantity used
954
Increase in inventory quantity
46
Standard cost per piston shaft
$ 35
Book value of raw material inventory increase
1,610
Actual cost of pistons used in production
(33,340)
Total piston shaft variance
$
(90) U
Sum of price and efficiency variances [$50 + $(140)]

(90) U

Double-check computations for direct labor variances:

Standard cost for quantity of pistons produced (950*$6)
Actual direct labor cost
Total direct labor variance

$ 5,700
(6,120)
$ (420) U

Sum of direct labor budget and volume variances [$(120)+$(300)]

$ (420) U

11-30 Cost Management

C.

Double-check computations for variable overhead variances:

Standard cost for quantity of pistons produced (950*$4)
Actual variable overhead cost
Total variable overhead variance

$ 3,800
(3,677)
$ 123 F

Sum of spending and efficiency variances [$293+$(170)]

123 F

Double-check computations for fixed overhead variances:

Standard cost for quantity of pistons produced (950*$20)
Actual fixed overhead cost
Total fixed overhead variance

$ 19,000
(18,325)
$
675 F

Sum of budget and volume variances [$1,675+$(1,000)]

675 F

D. Below is an excerpt from a sample spreadsheet showing the total selling and
administrative variance for this problem.

Chapter 11: Standard Costs and Variance Analysis 11-31

E. Before preparing a report that would be useful in evaluating control of production costs,
identify costs that are relevant to production: direct costs and factory overhead. The
selling and administrative costs are not relevant. Next, identify the relevant variances for
evaluating production costs: the price and efficiency variances for direct materials, the
spending variance for direct labor (because it is a fixed cost) and variable overhead, and
the budget variance for fixed overhead costs. The variable overhead efficiency variance
is not relevant because its information is already provided by the direct labor efficiency
variance. The direct labor and production volume variances are not relevant because total
volume is assumed to be driven by sales rather than by the production department.
Below is an excerpt from a sample spreadsheet showing a production cost variance report
for this problem.

The actual cost for piston shafts was calculated in Part B.

F. The production cost variances would be closed using the method shown on pages 437438 in the textbook. The first step is to sum all of the production cost variances and
determine whether they are material. Below is an excerpt from a sample spreadsheet
computing the net amount of all production cost variances.

The second step is to compare the total net amount of production cost variances ($288 F)
with total actual production costs ($80,462). In this case, the variances amount to only

11-32 Cost Management

0.4% of actual costs. Therefore, the variances would be considered immaterial, and the
adjustment would be made entirely to cost of goods sold.
The adjusting journal entry would be made as follows:
Piston shafts direct materials price variance
Variable overhead spending variance
Fixed overhead budget variance
Piston shafts direct materials efficiency variance
Direct labor spending variance
Direct labor volume variance
Variable overhead efficiency variance
Production volume variance
Cost of goods sold

50
293
1,675
140
120
300
170
1,000
288

G. As manager of the piston division, I would like to know if the quality of the pistons was
the same as usual. Four more pistons were used than expected, so it is possible that
quality has been compromised with a lower price. This could be a problem if defective
shafts are not removed from production and customers receive more defective pistons
than usual. Sales volumes could drop. I would also like to know why labor costs and
hours were up. If workers had to work overtime because of a quality problem, cost and
hours would be up. It appears that fixed and variable overhead costs were under control,
and were even less than expected during the period. Because the fixed overhead budget
variance is fairly large, I would want to know if something has changed and whether the
use of overhead has improved. If so, the standard could be changed, although the efforts
of workers to reduce fixed costs needs to be recognized and praised.
11.33 Bramlett Company
A. The problem states that management wants to maintain the selling price for several years,
so the assumption is made that long-run standard costs will be used for pricing, rather
than the expected costs during start up.
Standard cost per unit
Direct materials
Direct labor
Variable overhead
Fixed overhead (a)
Total
Markup
Selling price

4 pieces @ $20
10 hours @ $25
50% x $250
42.666% x $250
60% x $562

$ 80
250
125
107
562
337
$899

(a) After start up, the firm will produce 1,500 units per month, or 18,000 per year.
The budgeted labor costs for 18,000 units is 18,000 x $250 = $4,500,000.
Using the same basis to allocate fixed overhead as is used to allocate variable
overhead yields a fixed overhead rate of $1,920,000/$4,500,000 = 42.666% of
labor cost.

Chapter 11: Standard Costs and Variance Analysis 11-33

B. The variances for product costing purposes using the long-term standards would be
Labor price variance
(Standard price actual price) x actual hours
= ($25 - $26) x 12,000 = $12,000 U
Labor efficiency variance
(Standard quantity for actual output actual quantity) x standard price
=[(10 x 950) - 12,000] x $25 = $62,500 U
For product costing purposes, the overhead variances would be as follows (note that
overhead is based on labor cost, not hours):
Variable overhead spending variance
= Actual allocation base (labor cost) at standard rate actual variable
overhead
= [(50% x $312,000) - $160,250 = $ 4,250 U
Fixed overhead budget variance
Static budget for fixed costs (budgeted fixed overhead per month) actual
fixed overhead
= [($1,920,000/12 - $172,220] = $160,000 - $172,220 = $ 12,220 U
Variable overhead efficiency variance
= Standard allocation base at standard rate actual allocation base at
standard rate
= (Standard labor cost actual labor cost) x standard variable rate
= [($25 x 10 hours x 950 units) - $312,000] x 50% = $37,250 U
Production volume variance
= Standard allocation base at standard rate (allocated cost) estimated
allocation base at standard rate (static budget)
= (Standard labor cost for actual output standard labor cost for estimated
output) x standard rate
= [($25 x 10 hours) x (950 units - 1,500)] x 0.42666
= ($237,500 - $375,000) x 0.42666 = $58,666 U
C. Here are some pros and cons for using the long-term standard for the first months
operations.
Pros:
The accounting department performs the calculations they will use for the next
year, and personnel will gain experience with the new system
The variances will reflect the results of the long-term standard and give workers a
more accurate picture of the gaps in their performance

11-34 Cost Management

Using the long-term standard may highlight areas with very large variances that
are likely to have larger variances over the next few months

Cons:
Workers may be discouraged when their performance is compared to such high
standards
The standard will not be viewed as realistic, and so may be ignored causing
poorer performance in the first few months than otherwise
Information about variances from these standards is of poor quality and cannot be
used reliably for planning or monitoring
D. The short term standards do not affect the labor price variance. It remains the same as
above:
Labor price variance
=(Standard price actual price) x actual hours
= ($25 - $26) x 12,000 = $12,000 U
However, a substantial portion of the labor efficiency variance was anticipated. That is,
management expected it to take 10 x 1.2 = 12 hours per unit during the first month of
operations. The following variance better reflects performance.
Labor efficiency variance = [(12 x 950) - 12,000] x $25 = $15,000 U
The overhead spending and budget variances are probably unaffected by the learning
curve experienced by labor. Therefore, they are the same as in part B, as follows.
Variable spending variance
= Actual allocation base (labor cost) at standard rate actual variable
overhead
= [(0.5 x $312,000) - $160,250 = $ 4,250 U
Fixed overhead budget variance
= Static budget fixed costs (budgeted fixed overhead per month) actual
fixed overhead
= [($1,920,000/12 - $172,220] = $160,000 - $172,220 = $ 12,220 U
The following variances are used as adjusting entries in the accounting records. It may
be more appropriate for these variances to reflect the expected short-term performance as
well. Therefore they could be calculated as follows.
Variable overhead efficiency variance
= [($25 x 12 x 950) - $312,000] x 0.5 = $13,500 U
Production volume variance
= [($25 x 12 x 950) - ($25 x 12 x 1,000)] x 0.5333
= ($285,000 - $300,000) x 0.5333 = 8,000 U

Chapter 11: Standard Costs and Variance Analysis 11-35

Where the adjusted fixed overhead rate is calculated as:

Monthly fixed overhead = $1,920,000/12 = $ 160,000
Anticipated labor costs = ($25 x 12 x 1,000) = $300,000
Rate based on anticipated activity = $160,000/$300,000 = 53.33%
E. Following are several possible reasons for the variances. Students may think of others.
1. Direct labor price variance: Because labor used more hours, overtime may have been
paid. In addition, it is possible that workers with higher skill levels were hired. It is
also possible that the standard is too low, that labor rates increased during the month.
2. Direct labor efficiency variance: The standard may be wrong because workers have
so little experience at this new plant, the company may still be experiencing a
learning curve, or labor may be working inefficiently for some reason such as lack of
training, high absenteeism, or just low productivity.
3. Variable overhead spending variance: Because this was the first month, it is possible
that some costs were higher than anticipated. For example, the company may expect
to receive volume discounts on indirect materials, but does not earn them until order
sizes become as large as anticipated. Indirect labor may have had to work extra hours
and received overtime pay. There may have been more maintenance on machines
than anticipated during the start-up period.
4. Fixed overhead budget variance. It is possible that utilities were higher than
anticipated due to season or weather-related factors. The standard may be too low
because accountants did not anticipate all of the fixed costs. Some periodic costs
such as taxes or insurance may have been paid this month.
F. Managers respond to variances according to the results of their investigations. If they
find the standard is wrong, they change the standard. For example, it is likely that some
of the standards at Bramlett will need adjusting as the company obtains more experience
with the new product. If managers find that operations are out of control, they will
monitor operations more closely and ask employees for suggestions to improve
performance. If managers realize that the variances for this month are based on longterm standards, they may do nothing because they believe that over the next few months
the variances will disappear. If managers discover that labor variances are related to
employee turnover or absence, they may use compensation incentives based on
attendance or longevity to improve this aspect of operations. However, increasing
compensation will also increase labor costs, so the costs and benefits of these types of
alternatives need to be analyzed. Students may have thought of a number of different
ways that managers respond to the variance information.
G. Because uncertainties exist about the appropriate amount for standards, it would probably
be more difficult to analyze the variances at the new plant. It will take a number of
months before production at the new plant becomes stable. At that time it will be easier
to set standards because accountants will know more about regular operations, and most

11-36 Cost Management

of the learning will have taken place, so results are less likely to be affected by learning
curves.

Chapter 11: Standard Costs and Variance Analysis 11-37

BUILD YOUR PROFESSIONAL COMPETENCIES

11.34 Focus on Professional Competency: Interaction
A.
1. An accountants role in developing standards, analyzing variances, and
recommending actions varies from organization to organization, depending on the
nature of the business and the organizational structure. In some organizations,
engineers or quality control personnel handle these activities. In other organizations,
accountants gather information, perform calculations, and develop forecasts that are
used in creating standards. They also gather information about large or important
variances, analyze their causes, and then recommend appropriate actions.
2. Accountants must work with others in the organization to perform the tasks described
in Part A.1 above. For example, they gather information from people who work in
the operating areas for which standards are developed as well as from other personnel
in areas such as engineering, human resources, and purchasing. Ideally, they work as
partners with managers in various departments to help them develop reasonable
standards and improve operations over time.
B.
1. Attainable standards are standards that should be achievable by employees, given
existing or planned operating processes. Slack is an allowance built into standards to
permit deviation from perfect performance. Standards are more likely to be
attainable if they contain some slack to allow normal variation in cost and efficiency.
However, standards having too much slack fail to motivate employees to achieve
better results.
Managers cannot know for certain whether standards are reasonable because it is
difficult or impossible to measure the level of achievable performance. Information
about past performance and measures built on that performance could include slack.
Studies of performance are sometimes unreliable because employees may perform
poorly knowing that a standard will be developed based on their performance. Also,
higher levels of performance may be achievable for short time periods, but might not
be sustainable over long time periods.
2. Different students will provide different examples from their own experiences. Team
protocols and expectations are sometimes communicated explicitly, but they may also
be implicit. New members to a team often learn about protocols by asking questions
and by observing team behavior.
3. Production employee incentives are similar to the incentives discussed in Part B.1 for
all employees. Standards can motivate employees to work harder and more
efficiently to achieve explicit goals. However, employees are more likely to work
toward standards they perceive as achievable. When standards are too difficult to
achieve, employees may give up and not attempt to meet them.

11-38 Cost Management

C.
1. Some people believe that cooperation means giving in to others. Instead, true
cooperation involves listening carefully to others perspectives, attending to diverse
interests, and working together to reach the best overall result. Thus, cooperation
should encourage free expression rather than discourage it.
2. Each student will have his or her own experiences to share when answering this
question. The purpose is to help students reflect on what constitutes useful
coaching/mentoring.
11.35 Integrating Across the Curriculum: Auditing
A. There are many possible errors that could cause a variance even when no variance
actually exists. Below are possible answers to this question; students may think of others.
Direct materials price: The company has a policy of using the net method for recording
early payment discounts, but an accountant erroneously recorded the purchase transaction
using the gross method. Then when payment was made, a credit was erroneously
recorded to a miscellaneous income account instead of to the cost of direct material
purchases. This combination of errors would cause the cost of direct materials purchased
to be overstated.
Direct materials efficiency: A mechanical error could have occurred in recording the
quantity of direct materials used in production. For example, a clerk might have
accidentally entered a quantity of 975 instead of 957, overstating the quantity of
direct materials used.
Direct labor price: A payroll department employee made an error when entering the pay
rate for an individual production employee in the payroll system. This error would cause
the employee to be overpaid or underpaid, which in turn would overstate or understate
direct labor cost.
Direct labor efficiency: A production employee accidentally miscoded her time, causing
hours to be charged to direct labor instead of indirect labor. This error would overstate
direct labor hours and understate indirect labor hours (in either variable or fixed overhead
cost).
Variable overhead spending: When making an entry to record the transfer of indirect
materials from the warehouse to production, a clerk accidentally coded the materials as
direct materials instead of indirect materials. This error would overstate direct material
costs and understate variable overhead costs.
Variable overhead efficiency: An error in the accuracy of the variable overhead cost
allocation base would also cause an error in this variance. For example, if the cost
allocation base is either direct labor hours or direct labor costs, then the errors described
above for direct labor efficiency or direct labor spending would cause an error in the
variable overhead efficiency variance.

Chapter 11: Standard Costs and Variance Analysis 11-39

Fixed overhead budget: An accounting clerk might have accidentally coded a fixed
overhead cost as a variable overhead cost. This error would cause fixed overhead costs to
be overstated and variable overhead costs to be understated.
Production volume: An error in the computation of units produced would cause an error
in this variance. Suppose personnel forget to record the number of units spoiled during a
particular production run. This error would cause the number of good units produced to
be too high, overstating the production volume.
B. The theft of inventory is accounted for with any other errors in inventory quantities at the
time physical inventory is counted. Because it is not possible to distinguish between theft
and errors, the adjustment for missing raw materials inventory is usually recorded as
either direct materials or indirect materials (most likely in variable overhead). If the
adjustment is recorded to direct materials, then the theft would be reflected in the direct
materials efficiency variance (the usage of raw materials would appear to be higher). If
the adjustment is recorded to indirect materials, then the theft would overstate variable
overhead costs, which would be reflected in the variable overhead spending variance.
C. There are several reasons for failing to uncover theft through analysis of the affected
variances. Variances include offsetting positive and negative items, and the theft might
be offset by positive variances such as more efficient use of materials. In addition, cost
standards are often set based on past experience. If the company has always experienced
significant theft, then the cost would already be anticipated in the cost standards.
D. Assuming that the fictitious employee time is charged to direct labor, this fraud would be
reflected in the direct labor efficiency variance. If the pay rate for the fictitious employee
is not equal to the standard direct labor pay rate, then the fraud would also be reflected in
the direct labor price variance. If time for the fictitious employee is charged to an
overhead account, then this fraud would be reflected in the variable overhead spending
variance or fixed overhead budget variance.
E. This error will cause variable overhead costs to be overstated this year by the difference
between the total cost and the amount that should have been depreciated this year.
Variable overhead costs will be understated in future years by the amount of depreciation
that should have been recorded. This error would be reflected in the variable overhead
spending variance. During the current year the variance would be less favorable (or more
unfavorable), and in future years it would be more favorable (or less unfavorable).
F. The most obvious way to increase earnings by misapplying accounting principles for
variances is to close material variance accounts incorrectly. For example, favorable
variances could be closed to cost of goods sold instead of prorated to cost of goods sold
and work in process.