Professional Documents
Culture Documents
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Note: TF = True-False
C = Completion
BE = Brief Exercise
MC = Multiple Choice
Ex = Exercise
M = Matching
SA = Short Answer
The chapter also contains one set of ten Matching questions and four Short-Answer Essay
questions.
12-3
2.
Describe how companies set standards. The direct materials price standard should be
based on the delivered cost of raw materials plus an allowance for receiving and handling.
The direct materials quantity standard should establish the required quantity plus an
allowance for waste and spoilage. The direct labour price standard should be based on
current wage rates and expected adjustments, such as COLAs. It also generally includes
payroll taxes and fringe benefits. Direct labour quantity standards should be based on
required production time plus an allowance for rest periods, cleanup, machine setup, and
machine downtime. For manufacturing overhead, a standard predetermined overhead rate
is used. It is based on an expected standard activity index, such as standard direct labour
hours or standard direct labour cost.
3.
State the formulas for determining direct materials. The formulas for the direct
materials variances are as follows:
(Total actual quantities x Actual price) - (Total standard quantities allowed x Standard
price) = Total materials variance
(Total actual quantities x Actual price) - (Total actual quantities x Standard price) =
Materials price variance
(Total actual quantities x Standard price) - (Total standard quantities allowed x Standard
price) = Materials quantity variance
4.
State the formulas for determining direct labour variances. The formulas for direct
labour are as follows:
(Total actual hours x Actual rate) - (Total standard hours allowed x Standard rate) = Total
labour variance
(Total actual hours x Actual rate) - (Total actual hours x Standard rate) = Labour price
variance
(Total actual hours x Standard rate) - (Total standard hours allowed x Standard rate) =
Labour quantity variance
5.
State the formulas for determining total manufacturing overhead variances. The
formulas for the manufacturing overhead variances are as follows:
Actual overhead - Overhead applied = Total overhead variance
Actual overhead - (Variable overhead applied + Fixed Overhead budgeted) = Overhead
budget variance
Fixed overhead rate x (Normal capacity hours - Standard hours allowed) = Overhead
volume variance
12-4
6.
7.
Prepare an income statement for management under a standard cost system. Under
a standard cost system, an income statement prepared for management will report the
cost of goods sold at standard cost and then disclose each variance separately.
8.
9.
.TRUE-FALSE
12-5
STATEMENTS
1.
2.
3.
4.
Standard costs may be incorporated into the accounts in the general ledger.
5.
An advantage of standard costs is that they simplify costing of inventories and reduce
clerical costs.
6.
7.
8.
Actual costs that vary from standard costs always indicate inefficiencies.
9.
Ideal standards will generally result in favourable variances for the company.
10.
11.
Once set, normal standards should not be changed during the year.
12.
In developing a standard cost for direct materials, a price factor and a quantity factor must
be considered.
13.
A direct labour price standard is frequently called the direct labour efficiency standard.
14.
The standard predetermined overhead rate must be based on direct labour hours as the
standard activity index.
15.
Standard cost cards are the subsidiary ledger for the Work in Process account in a
standard cost system.
12-6
16.
17.
If actual costs are less than standard costs, the variance is favourable.
18.
A materials quantity variance is calculated as the difference between the standard direct
materials price and the actual direct materials price multiplied by the actual quantity of
direct materials used.
19.
An unfavourable labour quantity variance indicates that the actual number of direct labour
hours worked was greater than the number of direct labour hours that should have been
worked for the output attained.
20.
21.
The total overhead budget variance relates primarily to fixed overhead costs.
22.
The fixed overhead volume variance relates only to fixed overhead costs.
23.
If production exceeds normal capacity, the overhead volume variance will be favourable.
24.
There could be instances where the production department is responsible for a direct
materials price variance.
25.
The starting point for determining the causes of an unfavourable materials price variance
is the purchasing department.
26.
27.
*28.
A credit to a Materials Quantity Variance account indicates that the actual quantity of
direct materials used was greater than the standard quantity of direct materials allowed.
*29.
A standard cost system may be used with a job order cost system but not a process cost
system.
*30.
A debit to the Overhead Volume Variance account indicates that the standard hours
12-7
allowed for the output produced was greater than the standard hours at normal capacity.
12-8
1.
2.
3.
4.
5.
Ans
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12-9
A standard cost is
a. a cost which is paid for a group of similar products.
b. the average cost in an industry.
c. a predetermined cost.
d. the historical cost of producing a product last year.
32.
33.
34.
35.
Budget data are not journalized in cost accounting systems with the exception of
a. the application of manufacturing overhead.
b. direct labour budgets.
c. direct materials budgets.
d. cash budget data.
36.
37.
12-10
c.
d.
the accounting system will produce information which is less relevant than the
historical cost accounting system.
approval of the stockholders is required.
38.
Standard costs
a. may show past cost experience.
b. help establish expected future costs.
c. are the budgeted costs per unit in the present.
d. all of these.
39.
40.
41.
42.
43.
Ideal standards
a. are rigorous but attainable.
b. are the standards generally used in a master budget.
c. reflect optimal performance under perfect operating conditions.
d. will always motivate employees to achieve the maximum output.
44.
c.
d.
45.
46.
47.
48.
49.
A managerial accountant
1. does not participate in the standard setting process.
2. provides knowledge of cost behaviours in the standard setting process.
3. provides input of historical costs to the standard setting process.
a. 1
b. 2
c. 3
d. 2 and 3
50.
51.
12-11
12-12
c.
d.
dollars.
board metres.
52.
53.
The direct labour quantity standard is sometimes called the direct labour
a. volume standard.
b. effectiveness standard.
c. efficiency standard.
d. quality standard.
54.
55.
56.
57.
58.
If actual direct material costs are greater than standard direct materials costs, it means that
a. actual costs were calculated incorrectly.
b. the actual unit price of direct materials was greater than the standard unit price of
direct materials.
c. the actual unit price of raw materials or the actual quantities of raw materials
d.
12-13
used was greater than the standard unit price or standard quantities of raw
materials expected.
the purchasing agent or the production foreman is inefficient.
59.
60.
What was the direct materials price variance for last month?
a. $12,100 favourable
b. $100 favourable
c. $12,100 unfavourable
d. $100 unfavourable
62.
What was the direct materials quantity variance for last month?
a. $75 unfavourable
b. $75 favourable
c. $900 unfavourable
d. $900 favourable
63.
The per-unit standards for direct labour are 3 direct labour hours at $15 per hour. If in
producing 700 units, the actual direct labour cost was $31,175 for 2,150 direct labour
hours worked, the total direct labour variance is
a. $50 unfavourable.
b. $325 favourable.
c. $50 favourable.
d. $325 unfavourable.
64.
The standard rate of pay is $15 per direct labour hour. If the actual direct labour payroll
was $58,800 for 4,000 direct labour hours worked, the direct labour price (rate) variance is
a. $1,200 unfavourable.
12-14
b.
c.
d.
$1,200 favourable.
$1,500 unfavourable.
$1,500 favourable.
65.
The standard number of hours that should have been worked for the output attained is
8,000 direct labour hours and the actual number of direct labour hours worked was 8,400.
If the direct labour price variance was $8,400 unfavourable, and the standard rate of pay
was $18 per direct labour hour, what was the actual rate of pay for direct labour?
a. $17.00 per direct labour hour
b. $15.00 per direct labour hour
c. $19.00 per direct labour hour
d. $18.00 per direct labour hour
66.
67.
A favourable variance
a. is an indication that the company is not operating in an optimal manner.
b. implies a positive result if quality control standards are met.
c. implies a positive result if standards are flexible.
d. means that standards are too loosely specified.
68.
69.
70.
The total variance is $10,000. The total materials variance is $4,000. The total labour
variance is twice the total overhead variance. What is the total overhead variance?
a. $1,000
b. $2,000
c. $3,000
d. $4,000
12-15
71.
72.
73.
A company uses 3,150 kilograms of materials and exceeds the standard by 150
kilograms. The quantity variance is $900 unfavourable. What is the standard price?
a. $2.00
b. $3.50
c. $4.00
d. $6.00
74.
75.
A company uses 40,000 kilograms of materials for which they paid $9.00 a kilogram. The
materials price variance was $80,000 favourable. What is the standard price per
kilogram?
a. $2.00
b. $7.00
c. $10.00
d. $11.00
76.
If the materials price variance is $600 F and the materials quantity and labour variances
are each $450 U, what is the total materials variance?
a. $600 F
b. $450 U
c. $150 F
d. $1,050 U
12-16
was 3,500 kilograms, although the standard quantity allowed for the output was 3,400 kilograms.
77.
78.
79.
80.
81.
82.
83.
12-17
84.
85.
If the labour quantity variance is unfavourable and the cause is inefficient use of direct
labour, the responsibility rests with the
a. sales department.
b. production department.
c. budget office.
d. controller's department.
86.
87.
88.
89.
If the standard hours allowed are less than the standard hours at normal capacity,
a. the overhead volume variance will be unfavourable.
b. variable overhead costs will be under-applied.
c. the overhead controllable variance will be favourable.
d. variable overhead costs will be over-applied.
90.
12-18
91.
92.
The fixed overhead spending variance is calculated as the difference between actual
overhead costs incurred and the budgeted
a. overhead costs for the standard hours allowed.
b. overhead costs applied to the product.
c. overhead costs at the normal level of activity.
d. fixed overhead costs.
93.
If the standard hours allowed are less than the standard hours at normal capacity, the
volume variance
a. cannot be calculated.
b. will be favourable.
c. will be unfavourable.
d. will be greater than the spending variance.
94.
The budgeted overhead costs for standard hours allowed and the overhead costs applied
to the product are the same amount
a. for both variable and fixed overhead costs.
b. only when standard hours allowed is less than normal capacity.
c. for variable overhead costs.
d. for fixed overhead costs.
95.
96.
The difference between fixed overhead budgeted and overhead applied is the
a. budget variance.
b. spending variance.
c. total overhead variance.
d. volume variance.
97.
The fixed overhead variance that indicates whether plant facilities were efficiently used is
the
a. budget variance.
b. efficiency variance.
c. spending variance.
d.
12-19
volume variance.
98.
Each of the following may cause an unfavourable variable budget variance except
a. higher than expected use of indirect materials.
b. greater than expected use of indirect labour.
c. increases in indirect manufacturing costs.
d. inefficient use of direct labour.
99.
The difference between actual overhead costs and overhead costs applied is the
a. budget variance.
b. spending variance.
c. total overhead variance.
d. volume variance.
100.
101.
102.
All of the following variances are reported to the production department except the
a. labour price variance.
b. materials price variance.
c. overhead controllable variance.
d. labour price and materials price variances.
103.
The costing of inventories at standard cost for external financial statement reporting
purposes is
a. not permitted.
b. preferable to reporting at actual costs.
c. in accordance with generally accepted accounting principles if significant
differences exist between actual costs and standard costs.
d. in accordance with generally accepted accounting principles if significant
differences do not exist between actual and standard costs.
104.
Which of the following could cause a debit balance in the direct material price variance
accounts?
a. Paying more than the standard price per unit for direct material
b. Paying less than the standard price per unit for direct material
12-20
c.
d.
105.
Income statements prepared internally for management often show cost of goods sold at
standard cost and variances are
a. separately disclosed.
b. deducted as other expenses and revenues.
c. added to cost of goods sold.
d. closed directly to retained earnings.
106.
*107. If 20,000 kilograms of direct materials are purchased for $14,400 on account and the
standard cost is $.70 per kilogram, the journal entry to record the purchase is
a. Raw Materials Inventory ..............................................
14,400
Accounts Payable ................................................
14,400
b. Work In Process Inventory ..........................................
14,400
Accounts Payable ................................................
14,000
Materials Quantity Variance ..................................
400
c. Raw Materials Inventory ..............................................
14,400
Accounts Payable ................................................
14,000
Materials Price Variance .......................................
400
d. Raw Materials Inventory ..............................................
14,000
Materials Price Variance .............................................
400
Accounts Payable ................................................
14,400
*108. A standard cost system may be used with
a. job order costing only.
b. process costing only.
c. activity-based costing.
d. either job order or process costing.
*109. The materials price variance is recorded
a. at the end of the accounting period.
b. when materials are purchased.
c. when materials are issued to production.
d. at the beginning of the accounting period.
*110.
12-21
c. Wages Payable.
d. Work in Process Inventory.
Use the following information to answer questions 111 to 115:
EKPN Co. Produces wooden boxes. The companys standards per box require 6 boards, each
costing $10 per board, and half of an hour of direct labour. The standard labour rate is $15 per
hour. In August, EKPN Co. Purchased 12,000 boards for a total cost of $123,000. It used 11,500
boards to manufacture 1,900 boxes. Total labour hours were 1,000 hours, and total labour costs
were $16,250.
111.
112.
113.
114.
115.
116.
Blue Fin Co. produces a product requiring 10 kilograms of material at $1.50 per kilogram.
Blue Fin produced 10,000 products during 2009 resulting in a $30,000 unfavourable
materials quantity variance. How much direct material did Blue Fin use during 2009?
a. 120,000 kilograms
12-22
b. 100,000 kilograms
c. 200,000 kilograms
d. 145,000 kilograms
117.
Wild West Inc. produces a product requiring 3 direct labour hours at $20.00 per hour.
During January, 2,000 products are produced using 6,300 direct labour hours. Wild
Wests actual payroll during January was $122,850. What is the labour quantity variance?
a. $2,850 U
b. $6,000 F
c. $3,150 F
d. $6,000 U
118.
Which of the following statements describes the customer perspective in the balanced
scorecard?
a. It establishes which people should be targeted as potential customers.
b. It evaluates the profitability of specific customers rather than the profitability of
specific products or services.
c. It evaluates how well the company is performing from the viewpoint of those
people who buy and use its products or services.
d. It evaluates which customers are not profitable and should be dropped.
119.
Which of the following would be an objective for the internal process perspective?
a. Profit per employee
b. Customer retention
c. Training hours
d. Planning accuracy
120.
The perspectives included in the balanced scorecard approach include all of the following
except the
a. internal process perspective.
b. capacity utilization perspective.
c. learning and growth perspective.
d. customer perspective.
121.
When analyzing period end variance reports, if a variance amount is small the manager
should:
a. Consider the variance within normal terms and ignore it for that period.
b. Combine all such small variances and if they show a larger variance, investigate
them then.
c. Consider investigating the variance as there may be undetected swings in the
intervening period that require investigation.
d. Focus his or her attention on more material variances.
122.
c.
d.
12-23
123.
124.
125.
126.
127.
128.
12-24
129.
130.
Which of the following would generally not be a cause to adjust standard cost rates in a
service industry?
a. Wage rate increase for the cleaners
b. Electricity charges from the municipality
c. Salary increases for management
d. Cleaning supplies increases from suppliers
12-25
Ans
.
Item
Ans
.
Item
Ans
.
Item
Ans
.
Item
Ans
.
Item
Ans
.
Item
Ans.
106.
107.
*108
.
*109
.
*110.
111.
112.
113.
114.
115.
116.
117.
118.
119.
120.
d
d
d
121.
122.
123.
c
d
a
124.
c
b
c
b
a
d
a
d
c
d
b
125.
126.
127.
128.
129.
130.
d
c
c
b
c
c
31.
32.
33.
c
c
d
46.
47.
48.
b
c
a
61.
62.
63.
b
a
b
76.
77.
78.
c
b
a
91.
92.
93.
b
a
c
34.
49.
64.
79.
94.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
a
b
a
d
c
c
b
d
c
d
c
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
a
c
c
c
d
b
c
d
c
b
b
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
c
a
b
d
c
b
b
c
d
b
d
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
d
c
c
b
a
b
c
b
b
a
c
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
c
d
d
d
c
c
b
b
d
a
a
12-26
BRIEF EXERCISES
Brief Exercise 131
Go Mix Company uses both standards and budgets. The company estimates that production for
the year will be 125,000 units of Product Fast. To produce these units of Product Fast, the
company expects to spend $406,250 for materials and $1,875,000 for labour.
Instructions
Calculate the estimates for (a) a standard cost and (b) a budgeted cost.
Solution 131 (5 min.)
(a)
Standards are stated as a per unit amount. Thus, the standards are
materials $3.25, ($406,250 125,000), and labour $15, ($1,875,000 125,000).
(b)
Budgets are stated as a total amount. Thus, the budgeted costs for the year are materials
$406,250 and labour $1,875,000.
12-27
Instructions
Calculate the total manufacturing overhead variance for Halo Inc. for October.
Solution 134 (5 min.)
The formula is:
Actual
Overhead
$168,750
Overhead
Applied
*$169,200*
Total Overhead
Variance
$450 F
15,000
250
14,750
14,400
300
14,100
72,500
500
72,000
73,346
846
72,500
12-28
Unfavourable
12-29
EXERCISES
Exercise 139
Peters Pick-Me_Ups Inc. manufactures and sells a nutrition drink for children. The company
wants to develop a standard cost per kilogram. The following are required for production of a 10litre batch:
70 grams of lime Kool-Drink at $0.07 per gram
5 grams of granulated sugar $0.24 per gram
12 kiwi fruit at $0.70 each
30 protein tablets at $0.80 each
9 litres of mineral water at $0.05 per litre
Peters Pick-Me-Ups estimates that 3% of the lime Kool-Drink is wasted, 10% of the sugar is lost,
and 5% of the kiwis cannot be used.
Instructions
Calculate the standard cost of the ingredients for one litre of the nutrition drink.
Solution 139 (1520 min.)
Ingredient
Amount Per litre
Lime Kool-Drink
7 g.
Sugar
0.5 g.
Kiwis
1.2
Protein Tablets
3
Water
0.9 litres
Lime Kool-Drink
Sugar
Kiwis
Protein Tablets
Water
(a)
(b)
(c)
.97X = 7 grams
.90X = .0.5 grams
.95X = 1.2 kiwis
Standard Waste
3%
10%
5%
0%
0%
Standard Usage
Standard Price
(a)7.22 gramsn
$ .07
(b) .556 grams
.24
(c)
1.26
.70
3
.80
0.9 litres
.05
Standard Cost per litre
X = 7.22
X = .556
X = .1.26
Standard Cost
$.505
.133
.882
2.400
.045
$3.965
Exercise 140
The following direct labour data pertain to the operations of Bell Chime Manufacturing Company
for the month of January:
Actual labour rate
$15.50 per hr.
Actual hours used
17,000
Standard labour rate
$15.00 per hr.
Standard hours allowed
16,700
Instructions
Prepare a matrix and calculate the labour variances.
12-30
Price Variance
Quantity Variance
Total
Labour Variance
Actual Hours
Standard Hours
Actual Rate
Standard Rate
Standard Rate
17,000 $15.50 =
$263,500
17,000 $15.00 =
$255,000
16,700 $15.00 =
$250,500
Price Variance
Quantity Variance
$8,500 U
$4,500 U
Total
Labour Variance
$13,000 U
Exercise 141
The following direct materials data pertain to the operations of Stone Wealth Manufacturing
Company for the month of March:
Standard materials price
$9.00 per kilogram
Actual quantity of material purchased and used
65,000 kilograms
The standard cost card shows that a finished product contains 4.75 kilograms of material. The
65,000 kilograms were purchased in March at a discount of 10% from the standard price. In
March, 13,000 units of finished product were manufactured.
Instructions
Prepare a matrix for materials and calculate the materials variances.
Price Variance
12-31
Quantity Variance
Total
Materials Variance
Actual Quantity
Standard Rate
65,000 $9.00 =
$585,000
Price Variance
$58,500 F
Standard Quantity
Standard Price
61,750 $9.00 =
$555,750
Quantity Variance
$29,250 U
Total
Materials Variance
$29,250 F
Exercise 142
Camping Out Co. manufactures down sleeping bags. Each sleeping bag requires 4 kilograms of
down and takes .3 hours of direct labour. The standard cost of the down used by Camping Out is
$8 per kilogram and the standard labour cost is $10 per hour. In November, Camping Out
purchased and used 15,000 kilograms of down for $120,750. During the year, the company
manufactured 4,000 sleeping bags. Payroll reported a total of 1,480 direct labour hours at a cost
of $14,060.
Instructions
a. Calculate the materials price and quantity variances and indicate whether the variances are
favourable or unfavourable.
b. Calculate the labour price and quantity variances and indicate whether the variances are
favourable or unfavourable.
Solution 142 (15 min.)
12-32
a.
Actual Quantity
Actual Price
15,000 $8.05 =
$120,750
Actual Quantity
Standard Price
15,000 $8 =
$120,000
Price Variance
$750 U
12-33
Standard Quantity
Standard Price
16,000 $8 =
$128,000
Quantity Variance
$8,000 F
Total
Materials Variance
$7,250 F
b.
Actual Hours
Actual Hours
Standard Hours
Actual Rate
Standard Rate
Standard Rate
1,480 $9.50 =
$14,060
1,480 $10 =
$14,800
1,200 $10 =
$12,000
Price Variance
$740 F
Quantity Variance
$2,800 U
Total
Labour Variance
$2,060 U
Exercise 143
You have just been hired at SB Polo Supply as a managerial accountant. You are responsible for
variance analysis for direct materials required in the manufacturing of polo mallets. An old college
friend called and asked you to lunch. You raced out the door before finishing the cost analysis for
April. While you were gone, a janitor accidentally threw away your cost analysis sheet. You do
remember, however, that each mallet requires 4 metres of wood with a standard cost of $5 per
metre and that there were 3,000 mallets completed during April. In addition, you remember that
the materials price variance was $700 favourable, and the total materials variance was $30
favourable.
Instructions
a. Calculate the materials quantity variance.
12-34
b.
Actual Quantity
Standard Price
(1)
12,134 $5 =
$60,670
Price Variance
$700 F
Standard Quantity
Standard Price
3,000 mallets x 4 m/mallet $5 =
$60,000
Quantity Variance
$670 U(a)
Total
Materials Variance
$30 F
a. Materials quantity variance = $670 U ($700 F $30 F)
b. Actual price paid per metre of wood = $4.94.
Exercise 144
Salt-of-the-Earth Brick Company makes fired clay bricks for construction. The company uses a
standard costing system that calls for 2.75 kilograms of clay at $.20 per kilogram for each brick.
The standard cost for labour is .075 hour at $32 per hour for each brick. In August, Salt-of-theEarth anticipates production to be at a level of 200,000 bricks. During August, Salt-of-the-Earth
manufactured 201,000 bricks. The company purchased 553,000 kilograms of clay at a cost of
$132,720. The cost of direct labour was $485,060 for 15,350 hours.
Instructions
a. Calculate the materials price and quantity variances and indicate whether the variances are
favourable or unfavourable.
b. Calculate the labour price and quantity variances and indicate whether the variances are
favourable or unfavourable.
Solution 144 (15 min.)
a.
Actual Quantity
Actual Price
553,000 $.24 =
$132,720
Actual Quantity
Standard Price
553,000 $.20 =
$110,600
Price Variance
$22,120 U
12-35
Standard Quantity
Standard Price
552,750 $.20 =
$110,550
Quantity Variance
$50 U
Total
Materials Variance
$22,170 U
b.
Actual Hours
Actual Hours
Standard Hours
Actual Rate
Standard Rate
Standard Rate
15,350 $31.60 =
$485,060
15,350 $32 =
$491,200
15,075 $32 =
$482,400
Price Variance
$6,140 F
Quantity Variance
$8,800 U
Total
Labour Variance
$2,660 U
Exercise 145
Ducker Company has developed the following standard costs for its product for 2012:
DUCKER COMPANY
Standard Cost Card
Product A
Cost Element
Standard Quantity
Direct materials
1.5 kilograms
Direct labour
2 hours
Manufacturing overhead
2 hours
Standard Price
$4
11
7
Standard Cost
$6
22
14
$42
The company expected to produce 15,000 units of Product A in 2012 and work 75,000 direct
labour hours.
12-36
Actual direct labour costs were $340,000 for 34,000 direct labour hours worked.
Actual direct materials purchased and used during the year cost $89,000 for 23,000
kilograms.
Actual variable overhead incurred was $179,000 and actual fixed overhead incurred was
$87,000.
Instructions
Calculate the following variances showing all computations to support your answers. Indicate
whether the variances are favourable or unfavourable.
(a) Materials quantity variance.
(b) Total direct labour variance.
(c) Direct labour quantity variance.
(d) Direct materials price variance.
(e) Total overhead variance.
Solution 145 (2025 min.)
(a) Materials quantity variance = $3,800 unfavourable.
(AQ SP) (SQ SP) = Materials quantity variance
(23,000 $4) (22,050 $4) = $92,000 $88,200= $3,800 unfavourable
SQ = 14,700 units 1.5 kg/unit = 22,050 kilograms
(b) Total direct labour variance = $16,600 unfavourable.
(AH AR) (SH SR) = Total direct labour variance
(34,000 $10) (29,400 $11) = $340,000 $323,400 = $16,600 unfavourable
SH = 14,700 2 = 29,400 direct labour hours
(c) Direct labour quantity variance = $50,600 unfavourable.
(AH SR) (SH SR) = Direct labour quantity variance
(34,000 $11) (29,400 $11) = $374,000 $323,400 = $50,600 unfavourable
(d) Direct materials price variance = $3,000 favourable.
(AQ AP) (AQ SP) = Direct materials price variance
(23,000 $3.87) (23,000 $4) = $89,000 $92,000 = $3,000 favourable
(e) Total overhead variance = $60,200 unfavourable.
(Actual overhead) (Overhead applied) = Total overhead variance
($179,000 + $87,000) (29,400 $7) = $266,000 $205,800 = $60,200 unfavourable
Standard hours = 14,700 2 = 29,400 direct labour hours
Exercise 146
Chefs Company developed the following standard costs for its product for 2012:
CHEFS COMPANY
Standard Cost Card
Cost Elements
Direct materials
Direct labour
Standard Quantity
4 kilograms
2 hours
Standard Price
$ 10
20
Standard Cost
$40
40
Variable overhead
Fixed overhead
2 hours
2 hours
12-37
8
4
16
8
$104
The company expected to work at the 30,000 direct labour hours level of activity and produce
15,000 units of product.
Actual results for 2012 were as follows:
14,200 units of product were actually produced.
Direct labour costs were $552,420 for 27,900 direct labour hours actually worked.
Actual direct materials purchased and used during the year cost $543,320 for 57,800
kilograms.
Total actual manufacturing overhead costs were $340,000.
Instructions
Calculate the following variances for Chefs Company for 2012 and indicate whether the variance
is favourable or unfavourable.
1.
2.
3.
4.
5.
6.
$7,200 favourable
12-38
$347,200
6. Overhead volume variance = $6,400 unfavourable.
Budgeted overhead for 28,400 direct labour hours allowed
Variable overhead (28,400 $8) = $227,200
Fixed overhead
= 120,000
347,200
Overhead applied (28,400 $12) = 340,800
Overhead volume variance
$ 6,400 unfavourable
*Exercise 147
Universal Bats, Inc. manufactures aluminum baseball bats that it sells to university athletic
departments. It has developed the following per unit standard costs for 2012 for each baseball
bat:
Manufacturing
Direct Materials
Direct Labour
Overhead
Standard Quantity
2 Kilograms (Aluminum)
1/2 hour
1/2 hour
Standard Price
$4.00
$10.00
$6.00
Unit Standard Cost
$8.00
$5.00
$3.00
In 2012, the company planned to produce 40,000 baseball bats at a level of 20,000 hours of
direct labour.
Actual results for 2012 are presented below:
1. Direct materials purchased were 82,000 kilograms of aluminum which cost $344,400.
2. Direct materials used were 73,000 kilograms of aluminum.
3. Direct labour costs were $187,200 for 19,500 direct labour hours actually worked.
4. Total manufacturing overhead was $117,000.
5. Actual production was 38,000 baseball bats.
Instructions
(a) Calculate the following variances:
Direct materials price.
Direct materials quantity.
Direct labour price.
Direct labour quantity.
Total overhead variance.
(b) Prepare the journal entries to record the transactions and events in 2012.
*Solution 147 (4045 min.)
(a) 1. Direct materials price variance = $16,400 Unfavourable.
(AQ AP) (AQ SP)
(82,000 $4.20) (82,000 $4.00) = $344,400 $328,000 = $16,400
2.
3.
4.
5.
(b) 1.
2.
3.
4.
5.
6.
7.
328,000
16,400
304,000
195,000
190,000
5,000
117,000
114,000
608,000
12-39
344,400
12,000
292,000
7,800
187,200
195,000
117,000
114,000
608,000
*Exercise 148
The standard cost of a litre of paint manufactured by By-the-Numbers, Inc. includes 2 litres of
direct materials at $4.75 per litre. During February, 75,000 litres of direct materials are purchased
at a cost of $4.70 per litre, and 72,000 litres of direct materials are used to produce 36,500 litres
of paint.
12-40
Instructions
(a) Calculate the materials price and quantity variances.
(b) Journalize the purchase of the materials and the issuance of the materials, assuming a
standard cost system is used.
*Solution 148 (1520 min.)
(a) Materials Price Variance:
$352,500
$356,250 = $3,750 F
(75,000 $4.70) (75,000 $4.75)
Materials Quantity Variance:
$342,000
$346,750 = $4.750 F
(72,000 $4.75) *(73,000 $4.75)
*36,500 2 litres = 73,000
(b) Raw Materials Inventory ................................................................
Materials Price Variance .........................................................
Accounts Payable ...................................................................
356,250
346,750
3,750
352,500
4,750
342,000
*Exercise 149
Starlight Company's standard labour cost of producing one unit of product is 4 hours at the rate of
$28.00 per hour. During December, 77,000 hours of labour are incurred at a cost of $27.60 per
hour to produce 19,000 units of product.
Instructions
(a) Calculate the labour price and quantity variances.
(b) Journalize the incurrence of the labour costs and the assignment of direct labour to
production, assuming a standard cost system is used.
*Solution 149 (1520 min.)
(a) Labour Price Variance:
$2,125,200
$2,156,000 = $30,800 F
(77,000 $27.60)
(77,000 $28.00)
Labour Quantity Variance:
$2,156,000
$2,128,000 = $28,000 U
(77,000 $28.00) (76,000 $28.00)
(b) Factory Labour .............................................................................. 2,156,000
Labour Price Variance ............................................................
Wages Payable ......................................................................
30,800
2,125,200
2,156,000
12-41
*Exercise 150
The following direct labour data pertain to the operations of Blue Vanity Company for the month of
June:
Standard labour rate
$20.00 per hr.
Actual hours incurred and used
9,000
The standard cost card shows that 5 hours are required to complete one unit of product. The
actual labour rate incurred exceeded the standard rate by 10%. Two thousand units were
manufactured in June.
Instructions
(a) Calculate the price, quantity, and total labour variances.
(b) Journalize the entries to record the labour variances.
*Solution 150 (1520 min.)
(a)
Actual Hours
Actual Hours
Standard Hours
Actual Rate
Standard Rate
Standard Rate
9,000 $22.00 =
$198,000
9,000 $20.00 =
$180,000
10,000 $20.00 =
$200,000
Price Variance
$18,000 U
Quantity Variance
$20,000 F
Total
Labour Variance
$2,000 F
(b)
180,000
18,000
200,000
198,000
20,000
180,000
Exercise 151
Preston Well Company planned to produce 25,000 units of product and work 100,000 direct
labour hours in 2012. Manufacturing overhead at the 100,000 direct labour hours level of activity
was estimated to be:
Variable manufacturing overhead
$ 700,000
Fixed manufacturing overhead
300,000
Total manufacturing overhead
$1,000,000
12-42
At the end of 2012, 26,000 units of product were actually produced and 107,000 actual direct
labour hours were worked. Total actual overhead costs for 2012 was $1,015,000, of which
$295,000 was fixed manufacturing overhead.
Instructions
(a) Calculate the total overhead variance.
(b) Calculate the variable overhead budget variance.
(c) Calculate the fixed overhead volume variance.
Solution 151 (1116 min.)
(a) Actual overhead Overhead applied
$1,015,000
$1,040,000
Overhead applied = 26,000 units 4 hrs
104,000 $10
(b) Actual variable overhead
$728,000
variable
= $8,000 favourable
$312,000
Fixed
= $12,000 favourable
12-43
$660,000
=
=
610,000
50,000 favourable
$330,000
300,000
$ 30,000 favourable
Exercise 153
The following information was taken from the annual manufacturing overhead cost budget of
Ashley Company:
Variable manufacturing overhead costs
Fixed manufacturing overhead costs
Normal production level in direct labour hours
Normal production level in units
$124,000
$93,000
62,000
31,000
During the year, 30,000 units were produced, 64,000 hours were worked, and the actual
manufacturing overhead costs were $225,000, of which $90,000 was fixed. The actual fixed
manufacturing overhead costs did not deviate from the budgeted fixed manufacturing overhead
costs. Overhead is applied on the basis of direct labour hours.
Instructions
(a) Calculate the total, fixed, and variable predetermined manufacturing overhead rates.
(b) Calculate the total, variable overhead budget, and fixed overhead volume variances.
Solution 153 (1318 min.)
(a) Item
Variable Overhead
Fixed Overhead
Total Overhead
(b) Total overhead variance:
Overhead incurred
($225,000)
Amount
$124,000
93,000
$217,000
Hours
62,000
62,000
62,000
Overhead applied
(60,000 hours $3.50)
Rate
$2.00
1.50
$3.50
= $15,000 U
= $15,000 U
12-44
Overhead applied
($93,000)
(60,000 hours $1.50)
= $3,000 U
*Exercise 154
Presented below is a flexible manufacturing budget for Bestwood Company, which manufactures
fine dining chairs:
Activity Index:
Standard direct labour hours
Variable costs
Indirect materials
Indirect labour
Utilities
Total variable
Fixed costs
Supervisory salaries
Rent
Total fixed
Total costs
2,000
3,200
3,600
4,000
$ 4,000
2,300
3,200
9,500
$ 6,400
3,680
5,120
15,200
$ 7,200
4,140
5,760
17,100
$ 8,000
4,600
6,400
19,000
1,000
3,000
4,000
$13,500
1,000
3,000
4,000
$19,200
1,000
3,000
4,000
$21,100
1,000
3,000
4,000
$23,000
The company applies the overhead on the basis of direct labour hours at $6.00 per direct labour
hour and the standard hours per dining chair is 1/2 hour each. The company's actual production
was 5,800 dining chairs with 3,000 actual hours of direct labour. Actual overhead was $18,200, of
which $4,100 was fixed.
Instructions
(a) Calculate the variable overhead budget and fixed overhead variances.
(b) Prepare the entries for manufacturing overhead during the period and the entry to recognize
the overhead variances at the end of the period.
*Solution 154 (1621 min.)
(a) Computation of variances:
Actual variable overhead variable overhead
$14,100
[(5,800 1/2 $4.75)]
=
=
budget variance
$325 Unfavourable
18,200
17,400
325
475
18,200
17,400
12-45
800
Exercise 155
M&H Inc. uses a standard cost accounting system. During January, 2012, the company reported
the following manufacturing variances:
Material price variance
$1,500 F
Material quantity variance
1,300 U
Labour price variance
750 U
Labour quantity variance
1,300 U
Overhead controllable
600 F
Overhead volume
4,000 U
In addition, 12,000 units of product were sold at $20 per unit. Each unit sold had a standard cost
of $14. Selling and administrative expenses for the month were $11,000.
Instructions
Prepare an income statement for management for the month ending January 31, 2012.
Solution 155 (1520 min.)
M&H Inc.
Income Statement
For the Month Ended January 31, 2012
Sales (12,000 $20) ............................................................................
Cost of goods sold (12,000 $14) .......................................................
Gross profit (at standard) .....................................................................
Variances:
Materials price .............................................................................
Materials quantity ........................................................................
Labour price ................................................................................
Labour quantity ............................................................................
Overhead controllable .................................................................
Overhead volume ........................................................................
Total variances (unfavourable) ............................................
Gross profit (actual) ..............................................................................
Selling and administrative expenses ....................................................
Net income ...........................................................................................
$240,000
168,000
72,000
$(1,500)
1,300
750
1,300
(600)
4,000
(5,250)
66,750
11,000
$ 55,750
*Exercise 156
Cactus Company developed the following standards for 2012:
CACTUS COMPANY
Standard Cost Card
Cost Elements
Direct materials
Direct labour
Standard Quantity
5 kilograms
1 hour
Standard Price
$ 5
$18
Standard Cost
$25
18
12-46
Manufacturing overhead
1 hour
$10
10
$53
The company planned to produce 30,000 units of product and work at the 30,000 direct labour
level of activity in 2012. The company uses a standard cost accounting system which records
standard costs in the accounts and recognizes variances in the accounts at the earliest
opportunity. During 2012, 29,000 actual units of product were produced.
Instructions
Prepare the journal entries to record the following transactions for Cactus Company during 2012.
(a) Purchased 147,000 kilograms of raw materials for $4.90 per kilogram on account.
(b) Actual direct labour payroll amounted to $527,000 for 28,500 actual direct labour hours
worked. Factory labour cost is to be recorded and distributed to production.
(c) Direct materials issued for production amounted to 147,000 kilograms which actually cost
$4.90 per kilogram.
(d) Actual manufacturing overhead costs incurred were $288,000 in 2012.
(e) Manufacturing overhead was applied when the 29,000 units were completed.
(f) Transferred the 29,000 completed units to finished goods.
*Solution 156 (2025 min.)
(a) Raw Materials Inventory ................................................................
Materials Price Variance .....................................................
Accounts Payable ...............................................................
(To record purchase of materials)
735,000
14,700
720,300
513,000
14,000
522,000
725,000
10,000
288,000
290,000
(f)
527,000
9,000
513,000
735,000
288,000
290,000
1,537,000
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Exercise 157
(a) How are standards developed?
(b) What is the difference between ideal and currently attainable standards?
Solution 157
(a) Standards are developed by means of historical experience, engineering studies (time and
motion studies) and input from operating personnel most familiar with the task.
(b) Ideal standards are those that demand maximum efficiency with no allowances for break
downs, slack time or poor operational skills. In essence, everything must work perfectly.
In contrast, currently attainable standards are those that can be reasonably achieved under
efficient operating conditions. Allowances are made for normal breakdowns, interruptions, and
imperfect employee skills.
Exercise 158
Hasak Corp makes 100 kg containers of vegetable seeds, and has the following unit standard
costs for direct materials and direct labour:
Direct materials
(100 kg @$1.00 per kg)
Direct labour
(0.5 hours at $24 per hour)
Total standard costs per 100 kg container:
$100.00
$12.00
$112.00
c) Any of the variances above could be caused by out of date or inappropriate standards.
With respect to the materials price variance, the firm could be purchasing in larger quantities and
receiving quantity discounts, purchasing lower quality materials, or perhaps the supplier was
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forced to offer purchase discounts because of economic factors beyond its control.
Regarding the materials usage variance, the following reasons are relevant: lower quality
materials than the standard provided for, lower skilled workers, less efficient machines, employee
dissatisfaction.
For the labour rate variance, it could be that more highly skilled workers were used than the
standard, or employees with more seniority either case would mean a higher pay rate than
expected.
Regarding the labour efficiency variance, the firm could have used a more experienced work
force than originally planned.
Exercise 159
(a) Why does the Balanced Scorecard differ from company to company?
(b) Whose responsibility is its implementation?
Solution 159
(a) A given companys scorecard should be directly derived from its established corporate
strategy. Since strategy differs from company to company, so will their respective Balanced
Scorecards.
(b) No one person is responsible for implementing the Balanced Scorecard. It is a company-wide
initiative and requires the commitment and contribution of the entire organization for successful
implementation and acceptance.
Exercise 160
(a) How can management communicate strategy?
(b) What management failure can keep strategy from being actionable?
Solution 160
(a) Strategy can be communicated to employees and lower level managers through he Balanced
Scorecard, which shows objectives, performance measures, targets and initiatives, on which to
focus attention. To align corporate objectives with employee objectives, employees must be fully
informed of the strategies, and share ownership for their implementation. Further, incentives must
support the strategy for employees to own it.
(b) For strategy to become actionable and fully implemented, it is critical that management
commit sufficient resources to its support.
Exercise 161
The following measures belong to one of the four perspectives within the Balanced Scorecard:
1)
2)
3)
4)
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Instructions
a) Identify the relevant perspective for each measure listed above.
b) Suggest a possible strategic objective that might be associated with each measure.
Solution 161
a)
1) Product cost per unit Financial Perspective
2) Satisfaction of employees Learning and Growth Perspective
3) Satisfaction of the customer Customer Perspective
4) Cycle time Process Perspective.
b)
1) Product cost per unit Reduce product costs
2) Satisfaction of employees Increase motivation and alignment of employee goals and
corporate goals
3) Satisfaction of the customer increase repeat customer business
4) Cycle time decrease total production time
Exercise 162
Dromedille Corporation has developed the following standards for the materials for each unit of
product that it manufactures:
Direct materials
Monthly production
In a recent month, Dromedille produced 300 widgets and incurred the following costs:
Direct materials purchased
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Direct labour
Monthly production
In a recent month, Dromedille produced 300 widgets and incurred the following costs:
Direct labour
Budget
100,000
100,000
50,000 kgs
40,000 DLHs
Actual
99,000
96,000
47,840 kgs
37,720 DLHs
$200,000
$500,000
$80,000
$160,000
$207,404
$471,500
$84,640
$162,000
There were no beginning or ending work-in-process inventories but there were 4,000 units of
finished goods at the end of the year.
Instructions
1) Calculate the standard cost of goods sold for the year just ended
2) Calculate the direct materials flexible budget variance
3) Calculate the direct labour efficiency variance
Solution 164
1) Standard cost per unit:
DM
DL
VOH
FOH
2) Actual DM cost
Budgeted DM 99,000 x $2 =
$2.00
5.00
0.80
1.60
$9.40 x 96,000 units sold = $902,400
$207,404
198,000
$ 9,404 Unfavourable
3) ($500,000 / 40,000 DLHs) x (37,720 39,600) = $23,500 Favourable
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COMPLETION STATEMENTS
165.
166.
Standards which represent optimum performance under perfect operating conditions are
called _______________ standards, but most companies use _________________
standards which are rigorous but attainable.
167.
In developing a standard cost for direct materials used in making a product, consideration
should be given to two factors: (1) __________________ per unit of direct materials and
(2) the __________________ of direct materials to produce one unit of product.
168.
The difference between actual hours times the actual pay rate and actual hours times the
standard pay rate is the labour _________________ variance.
169.
The standard number of hours allowed times the predetermined overhead rate is the
amount of ________________ to the products produced.
170.
The difference between actual quantity of materials times the standard price and standard
quantity times the standard price is the materials ________________ variance.
171.
If the actual direct labour hours worked is greater than the standard hours, the labour
quantity variance will be ___________________, and the labour rate variance will be
____________________ if the standard rate of pay is greater than the actual rate of pay.
172.
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MATCHING
173.
Match the items in the two columns below by entering the appropriate code letter in the
space provided.
A.
B.
C.
D.
E.
Variances
Standard costs
Standard cost accounting system
Normal standards
Ideal standards
F.
G.
H.
I.
J.
____
1. The difference between actual variable overhead incurred and variable overhead
budgeted for the standard hours allowed.
____
2. The hours that should have been worked for the units produced.
____
3. The difference between the actual quantity of material used times the actual price of
materials purchased, and the actual quantity of material used times the standard price
of materials.
____
4. The difference between total actual costs and total standard costs.
____
5. The difference between actual hours times the standard rate and standard hours
times the standard rate.
____
____
7. The difference between fixed overhead budgeted for the standard hours allowed and
the fixed overhead applied.
____
____
____ 10. A double-entry system of accounting in which standard costs are used in making
entries and variances are recognized in the accounts.
ANSWERS TO MATCHING
1.
6.
2.
7.
3.
8.
4.
9.
5.
10. C
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The argument continued. Finally, the standards were prepared. All standards were prepared
according to normal expected performance, except that for materials, an ideal standard was
used. Mary, still maintaining the unfairness of the system, refused to hold her workers
accountable for materials quantity variances.
Instructions
1. Are ideal standards unethical? Explain briefly.
2. Is it unethical for Mary to refuse to support the standards? Explain.
Solution 176
1. Ideal standards are not necessarily unethical. They may be used unethically, such as in the
case in which employees are denied bonuses or other rewards because of not meeting a
standard which was out of their reach. If they are used as a guide to maximum attainable
performance, however, and not tied directly to the reward system, they may be ethical.
2. It is unethical for Mary simply to refuse to accept a particular standard. However, if the
company intends to use the standard unethically, she may refuse to hold her workers
accountable while she pursues a permanent disposition of the matter. If she simply refuses to
accept it, she may be indirectly sabotaging the company by hindering it from accomplishing its
legitimate objectives. This would be unethical.
Short Answer Essay 177 (Communication)
Mike Kiner has come to the accounting department for help in interpreting his variance report. He
says that he understands that last month was not a very good one for output, but he really
thought everyone put forth good effort, so he is confused about the existence of an unfavourable
labour efficiency variance. He cites as an example of the workers' effort their willingness to work
extra hours to get full output, even when a whole week's worth of production had to be scrapped.
He knew that his materials costs would be higher, and that overtime would make his rate variance
unfavourable, but he certainly didn't think his workers had been inefficient.
Instructions
Write a short note to Mike explaining the probable cause of the unfavourable labour efficiency
variance.
Solution 177
To:
Mike,
From: name
Date: todays date
Re:
Last month was a tough one for all of us, wasn't it? Your workers certainly did go
the extra mile, no doubt about it.
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You asked about your efficiency variance. When we calculate it, we count the
number of hours it took to get good output. Since we had such high spoilage, we
got fewer units, but used more hours. That is why your efficiency variance was
negative. It does not imply that you didn't do your best. It just means that we
investigate to see what happened.
Good luck, and I hope this month is a better one for all of us.