Chapter 10Standard Costing: A Managerial Control Tool

PROBLEM

6. McDaniel Company manufactures 100-pound bags of fertilizer that have the following unit standard
costs for direct materials and direct labor:

Direct materials (100 lbs. @ $1.00 per lb.) $100.00

Direct labor (0.5 hours at $24 per hour) 12.00
Total standard prime cost per 100 lb. bag $112.00

The following activities were recorded for October:

1,000 bags were manufactured.

95,000 lbs. of materials costing $76,000 were purchased.
102,500 lbs. of materials were used.
$12,000 was paid for 475 hours of direct labor.

There were no beginning or ending work-in-process inventories.

Required:
A. Compute the direct materials variances.
B. Compute the direct labor variances.
C. Give possible reasons for the occurrence of each of the preceding variances.

ANS:

A. Material price variance:

[$76,000 (95,000 $1.00)] = $19,000 F

Material usage variance

[102,500 1,000(100)] $1.00 = $2,500 U

B. Labor rate variance

[$12,000 (475 hrs. $24)] = $600 U

Labor efficiency variance

[(475 500)]$24 = $600 F

C. All of the material price variances could be caused by out-of-date or inappropriate

standards. Other potential reasons could be that the firm could be purchasing in larger
quantities (larger quantity discounts), purchasing lower grade materials, or that the
supplier could be forced to offer a lower price due to the economics of their product.

Material usage variance:

Low-quality materials; lower skilled workers; less efficient machines; low employee
morale.

Labor rate variance:

Higher skilled workers; longer tenured workers with higher wages.

Labor efficiency variance:

 The firm could be using a more experienced work force than desired.

PTS: 1 DIF: Difficulty: Challenging

OBJ: LO: 10-3 | LO: 10-4 | LO: 10-5 NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Strategic Planning | ACBSP: APC-33-Incremental analysis
KEY: Bloom's: Application NOT: 10 min.

14. Rhodes Corporation manufactures a product with the following standard costs:

Direct materials (20 yards @ $1.85 per yard) $37.00

Direct labor (4 hours @ $12.00 per hour) 48.00

Standards are based on normal monthly production involving 2,000 direct labor hours (500 units of
output).

The following information pertains to July:

Direct materials purchased (16,000 yards @ $1.80 per yard) $28,800

Direct materials used (9,400 yards)
Direct labor (1,880 hours @ $12.20 per hour) 22,936
Actual production in July: 460 units

Required:
A. Compute the following variances for the month of July, indicating whether each
variance is favorable or unfavorable:

1. Materials purchase price variance

2. Materials usage variance
3. Labor rate variance
4. Labor efficiency variance

B. Give potential reasons for each of the variances. Be sure to consider inter-relationships
among variances.

ANS:

A. Materials purchase price variance = (Actual unit price standard unit price) actual
quantity of materials purchased
Materials purchase price variance = ($1.80 $1.85) 16,000 = $800 favorable
(actual price less than standard price)

Materials quantity variance = (Actual quantity of materials used standard quantity of

materials allowed) standard unit price
Materials quantity variance = (9,400 9,200*) $1.85 = $370 unfavorable
(actual quantity exceeds standard quantity)
* 460 units 20 yards per unit = 9,200

Labor rate variance = (Actual rate per hour standard rate per hour) Actual hours
worked
Labor rate variance = ($12.20 $12.00) 1,880 = $376 unfavorable
(actual rate exceeds standard rate)
 Labor efficiency variance = (Actual hours worked standard hours allowed) standard
rate
Labor efficiency variance = (1,880 1,840**) $12.00 = $480 unfavorable
(actual hours exceed standard hours allowed)
** 460 units 4 hours per unit = 1,840

B. The favorable purchase price variance may have occurred because the purchasing
manager purchased materials at a lower price that were of lesser quality. The workers
encountered production problems as a result of the lesser quality materials which
resulted in using more materials and taking more time than anticipated. The supervisor
also had to assign more experienced workers to this production, which resulted in a
higher average wage rate.

PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 10-4 | LO: 10-5

NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-33-Incremental
analysis KEY: Bloom's: Application NOT: 10 min.

25. Overland Automotive Company is considering on manufacturing a new brand of car. Given the current
product and process designs, the cost data are:

Direct materials costs (per car) $10,000

Direct labor costs (per car) $ 3,000
Overhead costs (per car) $ 4,000

The company expects the selling price to be $20,000 and has set a target profit of $5,000.

A supplier told Overland that it could purchase a couple of similar components under a different brand
name at a lower price. This would result in cost savings of $2,000 per car. Furthermore, the company
found that it could redesign its manufacturing process to cut down on both inspection labor and worker
labor, which would result in cost savings of $1,000 per car.

A. Calculate Overland's target cost.

B. Calculate the total costs per car after Overland redesigns its processes and schedules to
buy cost-saving components.
C. Should Overland manufacture the car? Calculate the expected profit after the cost
savings are taken into account.

ANS:

A. $20,000 $5,000 = $15,000

B. Direct materials costs $10,000

Direct labor costs 3,000
Overhead costs 4,000
Total $17,000
Less:
Value analysis $2,000
Process redesign 1,000
Total Costs $14,000

C. Yes, Overland should manufacture the car because the total costs of $14,000 is less than
its target cost. Its expected profit is now $6,000 ($20,000 $14,000).