Chapter 8 - Forsiden€¦ · Web view3. Standard cost card: Standard Quantity or Time Standard Price or Rate Standard Cost Mayol 15.6 liters $1.50 per liter $ 23.40 Oxotate 24.0 kilograms
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Chapter 8Standard Costs
Solutions to Questions
8-1 A quantity standard indicates how much of an input should be used to make a unit of output. A price standard indicates what the cost of the input should be.
8-2 Ideal standards do not allow for any imperfections or inefficiencies. Thus, ideal standards are rarely, if ever, attained. Practical standards allow for normal inefficiency, machine breakdown time, etc., and can be attained by employees working at a reasonable, though efficient pace.
8-3 A variance is the difference between what was planned or expected and what was actually accomplished. In a standard cost system, there are at least two types of variances. The price variance focuses on the difference between standard and actual prices. The quantity variance is concerned with the difference between the standard quantity of input allowed for the actual output and the actual amount of the input used.
8-4 Under the management by exception approach, managers focus their attention on operating results that deviate from expectations. It is assumed that the results that meet expectations do not require investigation.
8-5 The materials price variance is usually the responsibility of the purchasing manager. The materials quantity variance is usually the responsibility of the production managers and supervisors. The labor efficiency variance generally is also the responsibility of the production managers and supervisors.
8-6 The materials price variance can be computed either when materials are purchased or when they are placed into production. It is better to compute the variance when materials are purchased. This permits earlier recognition of the variance, since materials can lay in the warehouse for many periods before being used in production. In addition, computing the variances at the time of purchase allows the company to carry its raw materials in the inventory accounts at standard cost, which greatly simplifies bookkeeping.
8-7 If used as punitive tools, standards can undermine goal setting and can breed resentment toward the organization. Standards should not be used as an excuse to conduct witch-hunts, or as a means of finding someone to blame for problems.
8-8 Poor quality materials can unfavorably affect the labor efficiency variance. If the materials are unsuitable for production, the result could be an excessive use of labor time and therefore an unfavorable labor efficiency variance. Poor quality materials would not ordinarily affect the labor rate variance.
8-9 The variable overhead efficiency variance and the direct labor efficiency variance will always be favorable or unfavorable together. Both depend on the number of direct labor-hours actually worked as compared to the standard hours allowed. That is, in each case the formula is:
Only the “SR” part of the formula differs for the two variances.
8-10 If labor is a fixed cost and standards are tight, then the only way to generate favorable labor efficiency variances is for every workstation to produce at capacity. However, the output of the entire system is limited by the capacity of the bottleneck. If workstations before the bottleneck in the production process produce at capacity, the bottleneck will be unable to process all of
the work-in-process. In general, if every workstation is attempting to produce at capacity, then if a workstation with higher capacity precedes a workstation with lower capacity, work-in-process inventories will build up in front of the workstation with lower capacity.
8-11 Formal journal entries tend to give variances more emphasis than off-the-record computations. And, the use of standard costs in the journals simplifies the bookkeeping process.
Brief Exercise 8-1 (20 minutes)1. The standard price of a kilogram of white chocolate is
determined as follows:Purchase price, finest grade white chocolate.................£9.00Less purchase discount, 5% of the purchase price of
£9.00............................................................................ (0.45)Shipping cost from the supplier in Belgium.................... 0.20Receiving and handling cost........................................... 0.05 Standard price per kilogram of white chocolate.............£8.80
2. The standard quantity, in kilograms, of white chocolate in a dozen truffles is computed as follows:Material requirements 0.80Allowance for waste 0.02Allowance for rejects 0.03Standard quantity of white chocolate 0.85
3. The standard cost of the white chocolate in a dozen truffles is determined as follows:Standard quantity of white chocolate
(a) 0.85kilogram
Standard price of white chocolate (b) £8.80 per kilogramStandard cost of white chocolate (a) ×
1. Number of chopping blocks.....................................4,000Number of board feet per chopping block...............× 2.5 Standard board feet allowed....................................10,000Standard cost per board foot...................................× $1.80 Total standard cost...................................................$18,000Actual cost incurred.................................................$18,700Standard cost above................................................ 18,000 Total variance—unfavorable.....................................$ 700
Brief Exercise 8-3 (30 minutes)1. Number of meals prepared......................................6,000
Standard direct labor-hours per meal...................................................................... × 0.20
Total direct labor-hours allowed.............................. 1,200Standard direct labor cost per hour.........................× $9.50Total standard direct labor cost...............................$11,400Actual cost incurred.................................................$11,500 Total standard direct labor cost
Brief Exercise 8-4 (30 minutes)1. Number of items shipped.........................................140,000
Standard direct labor-hours per item....................... × 0.04 Total direct labor-hours allowed..............................5,600Standard variable overhead cost per
hour.......................................................................× $2.80Total standard variable overhead cost....................$15,680Actual variable overhead cost incurred...................$15,950Total standard variable overhead cost
Exercise 8-6 (30 minutes)1. Cost per 2 kilogram container.................................6,000.00 Kr
Less: 2% cash discount............................................ 120.00 Net cost...................................................................5,880.00Add freight cost per 2 kilogram container
(1,000 Kr ÷ 10 containers).................................... 100.00 Total cost per 2 kilogram container (a)....................5,980.00 KrNumber of grams per container
(2 kilograms × 1000 grams per kilogram) (b).......................................................................... 2,000
Standard cost per gram purchased (a) ÷ (b)........... 2.99 Kr
2. Alpha SR40 required per capsule as per bill of materials............................................................... 6.00 grams
Add allowance for material rejected as unsuitable (6 grams ÷ 0.96 = 6.25 grams; 6.25 grams – 6.00 grams = 0.25 grams).............. 0.25 grams
Total......................................................................... 6.25 gramsAdd allowance for rejected capsules
(6.25 grams ÷ 25 capsules).................................. 0.25 gramsStandard quantity of Alpha SR40 per salable
Exercise 8-8 (20 minutes)Notice in the solution below that the materials price variance is computed on the entire amount of materials purchased, whereas the materials quantity variance is computed only on the amount of materials used in production.Actual Quantity of
Inputs, at Actual Price
Actual Quantity of Inputs, at
Standard Price
Standard Quantity Allowed for Output, at
Standard Price(AQ × AP) (AQ × SP) (SQ × SP)
20,000 ounces × $2.40 per ounce
20,000 ounces × $2.50 per ounce
14,400 ounces* × $2.50 per ounce
= $48,000 = $50,000 = $36,000
Price Variance,
$2,000 F16,000 ounces × $2.50 per ounce
= $40,000
Quantity Variance, $4,000 U
*2,000 bottles × 7.2 ounces per bottle = 14,400 ounces
Alternatively:Materials Price Variance = AQ (AP – SP)20,000 ounces ($2.40 per ounce – $2.50 per ounce) =
Exercise 8-9 (30 minutes)1. Number of units manufactured................................20,000
Standard labor time per unit....................................× 0.4 *Total standard hours of labor time allowed..............8,000 Standard direct labor rate per hour.........................× $6 Total standard direct labor cost................................$48,000
*24 minutes ÷ 60 minutes per hour = 0.4 hour
Actual direct labor cost............................................$49,300 Standard direct labor cost........................................ 48,000 Total variance—unfavorable.....................................$ 1,300
Exercise 8-10 (45 minutes)1. a. Notice in the solution below that the materials price variance
is computed on the entire amount of materials purchased, whereas the materials quantity variance is computed only on the amount of materials used in production.
Actual Quantity of Inputs, at
Actual Price
Actual Quantity of Inputs, at
Standard Price
Standard Quantity Allowed for Output, at Standard Price
Exercise 8-10 (continued)2. A variance usually has many possible explanations. In
particular, we should always keep in mind that the standards themselves may be incorrect. Some of the other possible explanations for the variances observed at Topper Toys appear below:Materials Price Variance Since this variance is favorable, the actual price paid per unit for the material was less than the standard price. This could occur for a variety of reasons including the purchase of a lower grade material at a discount, buying in an unusually large quantity to take advantage of quantity discounts, a change in the market price of the material, and particularly sharp bargaining by the purchasing department.Materials Quantity Variance Since this variance is unfavorable, more materials were used to produce the actual output than were called for by the standard. This could also occur for a variety of reasons. Some of the possibilities include poorly trained or supervised workers, improperly adjusted machines, and defective materials.Labor Rate Variance Since this variance is unfavorable, the actual average wage rate was higher than the standard wage rate. Some of the possible explanations include an increase in wages that has not been reflected in the standards, unanticipated overtime, and a shift toward more highly paid workers.Labor Efficiency Variance Since this variance is unfavorable, the actual number of labor hours was greater than the standard labor hours allowed for the actual output. As with the other variances, this variance could have been caused by any of a number of factors. Some of the possible explanations include poor supervision, poorly trained workers, low quality materials requiring more labor time to process, and machine breakdowns. In addition, if the direct labor force is essentially fixed, an unfavorable labor efficiency variance could be caused by a reduction in output due to decreased demand for the company’s products.
Exercise 8-11 (continued)b. The journal entries would be:
Raw Materials (7,000 feet × $6 per foot).................42,000Materials Price Variance
(7,000 feet × $0.25 F per foot)......................... 1,750Accounts Payable
(7,000 feet × $5.75 per foot)........................... 40,250Work in Process (5,250 feet × $6 per foot)..............31,500Materials Quantity Variance
(750 feet U × $6 per foot).....................................4,500Raw Materials (6,000 feet × $6 per foot)............ 36,000
2. a.Actual Hours of Input, at the Actual Rate
Actual Hours of Input, at the
Standard Rate
Standard Hours Allowed for
Output, at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)$8,120 725 hours ×
$10 per hour600 hours* × $10 per hour
= $7,250 = $6,000
Rate Variance,
$870 UEfficiency Variance,
$1,250 U
Total Variance, $2,120 U
*1,500 units × 0.4 hour per unit = 600 hours
Alternatively:Labor Rate Variance = AH (AR – SR)725 hours ($11.20 per hour* – $10.00 per hour) = $870 U*$8,120 ÷ 725 hours = $11.20 per hourLabor Efficiency Variance = SR (AH – SH)$10 per hour (725 hours – 600 hours) = $1,250 U
Problem 8-12 (continued)Note that all of the price variance is due to the hospital’s $0.10 per plate quantity discount. Also note that the $7,150 quantity variance for the month is equal to 48% of the standard cost allowed for plates. This variance may be a result of using too many assistants in the lab.
2. a. The standard hours allowed for tests performed during the month would be:Blood tests: 0.40 hour per test × 1,500
tests............................................................ 600 hoursSmears: 0.10 hour per test × 1,900 tests...... 190 hoursTotal standard hours allowed......................... 790 hours
The variance analysis would be:Actual Hours of
Input, at the Actual Rate
Actual Hours of Input, at the
Standard Rate
Standard Hours Allowed for Output,
at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)$11,400 1,200 hours
× $12.00 per hour790 hours
× $12.00 per hour= $14,400 = $9,480
Rate Variance,
$3,000 FEfficiency Variance,
$4,920 U
Total Variance, $1,920 U
Alternate Solution:Labor rate variance = AH (AR – SR) 1,200 hours ($9.50 per hour* – $12.00 per hour) = $3,000 F*$11,400 ÷ 1,200 hours = $9.50 per hourLabor efficiency variance = SR (AH – SH) $12.00 per hour (1,200 hours – 790 hours) = $4,920 U
Problem 8-12 (continued)b. The policy probably should not be continued. Although the
hospital is saving $2.50 per hour by employing more assistants than senior technicians, this savings is more than offset by other factors. Too much time is being taken in performing lab tests, as indicated by the large unfavorable labor efficiency variance. And, it seems likely that most (or all) of the hospital’s unfavorable quantity variance for plates is traceable to inadequate supervision of assistants in the lab.
3.Actual Hours of
Input, at the Actual Rate
Actual Hours of Input, at the
Standard Rate
Standard Hours Allowed for
Output, at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)$6,840 1,200 hours
× $5.50 per hour790 hours
× $5.50 per hour= $6,600 = $4,345
Spending Variance,
$240 UEfficiency Variance,
$2,255 U
Total Variance, $2,495 U
Alternate Solution:Variable overhead spending variance = AH (AR – SR) 1,200 hours ($5.70 per hour* – $5.50 per hour) = $240 U *$6,840 ÷ 1,200 hours = $5.70 per hourVariable overhead efficiency variance = SR (AH – SH)$5.50 per hour (1,200 hours – 790 hours) = $2,255 U
Yes, there is a close relation between the two variances. Both are computed by comparing actual labor time to the standard hours allowed for the output of the period. Thus, if there is an unfavorable labor efficiency variance, there will also be an unfavorable variable overhead efficiency variance.
Problem 8-13 (75 minutes)1. a. In the solution below, the materials price variance is
computed on the entire amount of materials purchased whereas the materials quantity variance is computed only on the amount of materials used in production:Actual Quantity
of Inputs, at Actual Price
Actual Quantity of Inputs, at Standard
Price
Standard Quantity Allowed for Output, at Standard Price
Alternatively:Materials price variance = AQ (AP – SP)11,500 ounces ($20.60 per ounce* – $22.00 per ounce) =
$16,100 F*$236,900 ÷ 11,500 ounces = $20.60 per ounce
Materials quantity variance = SP (AQ – SQ) $22.00 per ounce (8,500 ounces – 8,400 ounces) = $2,200 U
b. Yes, the contract probably should be signed. The new price of $20.60 per ounce is substantially lower than the old price of $22.00 per ounce, resulting in a favorable price variance of $16,100 for the month. Moreover, the material from the new supplier appears to cause little or no problem in production as shown by the small materials quantity variance for the
Total Variance, $3,024 U *36 technicians × 160 hours per technician = 5,760 hours**4,200 units × 1.3 hours per unit = 5,460 hours
Alternatively:Labor rate variance = AH (AR – SR) 5,760 hours ($11.90 per hour – $12.00 per hour) = $576 FLabor efficiency variance = SR (AH – SH) $12.00 per hour (5,760 hours – 5,460 hours) = $3,600 U
b. No, the new labor mix probably should not be continued. Although it decreases the average hourly labor cost from $12.00 to $11.90, thereby causing a $576 favorable labor rate variance, this savings is more than offset by a large unfavorable labor efficiency variance for the month. Thus, the new labor mix increases overall labor costs.
Total Variance, $36 U * Based on direct labor hours:
36 technicians × 160 hours per technician = 5,760 hours
** 4,200 units × 1.3 hours per unit = 5,460 hours
Alternatively:Variable overhead spending variance = AH (AR – SR)5,760 hours ($2.85 per hour* – $3.00 per hour) = $864 F*$16,416 ÷ 5,760 hours = $2.85 per hourVariable overhead efficiency variance = SR (AH – SH) $3.00 per hour (5,760 hours – 5,460 hours) = $900 U
Both the labor efficiency variance and the variable overhead efficiency variance are computed by comparing actual labor-hours to standard labor-hours. Thus, if the labor efficiency variance is unfavorable, then the variable overhead efficiency variance will be unfavorable as well.
variance................................................................ 310 FNet variance............................................................$7,070 U
The net unfavorable variance of $7,070 for the month caused the plant’s variable cost of goods sold to increase from the budgeted level of $220,050 to $227,120:
Budgeted cost of goods sold at $14.67 per pool.......................................................................
$220,050
Add the net unfavorable variance, as above........... 7,070
Actual cost of goods sold.........................................$227,12
0This $7,070 net unfavorable variance also accounts for the difference between the budgeted net income and the actual net income for the month.
Budgeted net income..............................................$37,950Deduct the net unfavorable variance added
to cost of goods sold for the month....................... 7,070 Net income..............................................................$ 30,880
3. The two most significant variances are the materials quantity variance and the labor rate variance. Possible causes of the variances include:
Alternative Solution:Variable overhead spending variance = AH (AR – SR)8,400 hours ($2.80 per hour – $2.60 per hour) = $1,680 UVariable overhead efficiency variance = SR (AH – SH)$2.60 per hour (8,400 hours – 9,240 hours) = $2,184 F
4. No. He is not correct in his statement. The company has several large variances (both favorable and unfavorable) that should be investigated.It appears that the company’s strategy to increase output by giving raises was effective. Although the raises resulted in an unfavorable labor rate variance, this variance was more than offset by a large, favorable labor efficiency variance.
Problem 8-15 (continued)5. The variances have many possible causes. Some of the more
likely causes include the following:
Materials variances:Favorable price variance: Fortunate buy, outdated standards, inferior quality materials, unusual discount due to quantity purchased, drop in market price, less costly method of freight.Unfavorable quantity variance: Carelessness, poorly adjusted machines, unskilled workers, inferior quality materials, outdated standards.
Labor variances:Unfavorable rate variance: Use of highly skilled workers, change in pay scale, outdated standards, overtime.Favorable efficiency variance: Use of highly skilled workers, high quality materials, new equipment, outdated or inaccurate standards.
Variable overhead variances:Unfavorable spending variance: Increase in costs, outdated standards, waste, theft, spillage, purchases in uneconomical lots.Favorable efficiency variance: Same as for labor efficiency variance.
Problem 8-16 (45 minutes)1. Mayol quantity standard:
Required per 12-liter batch (9.1 liters ÷ 0.7).....................................................................13.0 liters
Loss from rejected batches (0.2 batch* × 13.0 liters per batch).......................................... 2.6 liters
Total quantity required per good batch.................15.6 liters* Due to the loss from rejected batches,
1.2 batches are required to get one good batch. The loss from rejections is 1/6 of this or 0.2 batch. The same reasoning applies below for other inputs.
Oxotate quantity standard:Required per 12-liter batch (14.0 kilograms
Problem 8-17 (30 minutes)1. If the total variance is $100 unfavorable, and the rate variance
is $90 favorable, then the efficiency variance must be $190 unfavorable, since the rate and efficiency variances taken together always equal the total variance. Knowing that the efficiency variance is $190 unfavorable, one approach to the solution would be:
Efficiency variance = SR (AH – SH) $9.50 per hour (AH – 180 hours*) = $190 U $9.50 per hour × AH – $1,710 = $190**$9.50 per hour × AH = $1,900 AH = $1,900 ÷ $9.50 per hour AH = 200 hours
*60 tune-ups × 3.0 hours per tune-up = 180 hours**When used with the formula, unfavorable variances are
positive and favorable variances are negative.
2. Rate variance = AH (AR – SR) 200 hours (AR – $9.50 per hour) = $90 F200 hours × AR – $1,900 = -$90*200 hours × AR = $1,810 AR = $1,810 ÷ 200 hours AR = $9.05 per hour
*When used with the formula, unfavorable variances are positive and favorable variances are negative.
Problem 8-17 (continued)An alternative approach to each solution would be to work from known to unknown data in the columnar model for variance analysis:
Actual Hours of Input, at the Actual
Rate
Actual Hours of Input, at the
Standard Rate
Standard Hours Allowed for Output,
at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)200 hours
× $9.05 per hour200 hours
× $9.50 per hour*180 hours1
× $9.50 per hour*= $1,810 = $1,900 = $1,710
Rate Variance,
$90 F*Efficiency Variance,
$190 U
Total Variance, $100 U*160 tune-ups* × 3.0 hours per tune-up* = 180 hours*Given
Total standard cost (a)..............................................$33,750 Number of backpacks produced (b).......................... 1,000Standard cost of a single backpack (a) ÷ (b)............ $33.75
2. Standard cost of a single backpack (above).............. $33.75Deduct favorable variance between standard and
actual cost............................................................. (2.15) Actual cost per backpack.......................................... $31.60
3. Total standard cost of materials used during September (a).......................................................$17,550
Number of backpacks produced during September (b)....................................................... 1,000
Standard materials cost per backpack (a) ÷ (b)...... $17.55
4. Standard cost of material used$17,55
0Actual cost of material used 14,700
Total variance$
2,850 FSince there were no beginning or ending raw materials inventories, the materials purchased were all used in production during the month. Therefore, the price and quantity variances together equal the total variance. If the quantity variance is $650 U, then the price variance must be $3,500 F:
Price variance $3,500 FQuantity variance 650 UTotal variance $2,850 F
Total Variance, $2,850 F *Given.**1,000 units × 2.70 yards per unit = 2,700 yards
5. The first step in computing the standard direct labor rate is to determine the standard direct labor-hours allowed for the month’s production. The standard direct labor-hours can be computed by working with the variable overhead cost figures, since they are based on direct labor- hours worked:
Standard variable manufacturing overhead cost for September (a)..........................................$4,200
Standard variable manufacturing overhead rate per direct labor-hour (b).................................$2.80
Standard direct labor-hours for September (a) ÷ (b).................................................................1,500
Problem 8-18 (continued)6. Before the labor variances can be computed, it is necessary
first to compute the actual direct labor cost for the month:Actual cost per backpack produced (part
2)........................................................................... $31.60Number of backpacks produced.............................. × 1,000 Total actual cost of production................................. $31,600Less: Actual cost of materials..................................$14,700
Actual cost of variable overhead..................... 3,500 18,200 Actual cost of direct labor........................................ $13,400
With this information, the variances can be computed:Actual Hours of
Problem 8-19 (60 minutes)1. a. Materials quantity variance = SP (AQ – SQ)
$8.00 per foot (AQ – 6,000 feet*) = $2,400 U$8.00 per foot × AQ – $48,000 = $2,400**$8.00 per foot × AQ = $50,400AQ = 6,300 feet *3,000 units × 2.00 feet per unit**When used with the formula, unfavorable
variances are positive and favorable variances are negative.
Therefore, $49,770 ÷ 6,300 feet = $7.90 per foot.
b. Materials price variance = AQ (AP – SP)6,300 feet ($7.90 per foot – $8.00 per foot) = $630 FThe total variance for materials would be:
variance in hours 50 U 40 F 108 U 118 ULabor efficiency
variance in dollars @ $9.00 per hour $450 U $360 F $972 U $1,062 U
5. It is often better to express quantity variances in units (hours, yards, etc.) rather than in dollars when those variances are to be used by managers whose day-to-day work deals with activity expressed in units. That is, some middle-level managers rarely deal with anything on a dollar basis; all of their work may be in terms of unit (hours, yards, etc.) activity. For such persons, variances expressed in dollars may not be nearly as useful as variances expressed in terms of what they work with from day to day.On the other hand, price variances expressed in units (hours, yards) would make little sense. Such variances should always be expressed in dollars to be most useful to the manager. In addition, quantity variances expressed in both dollar and unit terms should be prepared for top management.
Problem 8-21 (continued)2. a. Before the variances can be computed, we must first
determine the actual direct labor hours worked for last year. This can be done through the variable overhead efficiency variance, as follows:Variable overhead efficiency variance = SR (AH – SH) $2.50 per hour × (AH – 18,000 hours*) = $6,000 U**$2.50 per hour × AH – $45,000 = $6,000***$2.50 per hour × AH = $51,000 AH = $51,000 ÷ $2.50 per hour AH = 20,400 hours* 12,000 units × 1.5 hours per unit = 18,000 hours** A debit represents an unfavorable variance.*** When used in the formula, an unfavorable variance is
positive.We must also compute the standard rate per direct labor hour. The computation is:Labor rate variance = (AH × AR) – (AH × SR) $236,640 – (20,400 hours × SR) = $8,160 F*$236,640 – 20,400 SR = -$8,160**20,400 SR = $244,800 SR = $244,800 ÷ 20,400 SR = $12.00* A credit represents a favorable variance.** When used in the formula, a favorable variance is
Sorting (15 minutes1 ÷ 60 minutes per hour) × $10.00 per hour.............................................. 2.50
Blending (10 minutes ÷ 60 minutes per hour) × $10.00 per hour.............................................. 1.67 4.17
Packing (40 quarts2 × $0.30 per quart)................... 12.00 Standard cost per 10-gallon batch........................... $37.1713 minutes per quart × 5 quarts.24 quarts per gallon × 10 gallons = 40 quarts.
2. a. In general, the purchasing manager is held responsible for unfavorable material price variances. Causes of these variances include the following:• Incorrect standards.• Failure to correctly forecast price increases.• Purchasing in nonstandard or uneconomical lots.• Failure to take purchase discounts available.• Failure to control transportation costs.• Purchasing from suppliers other than those offering the
most favorable terms.However, failure to meet price standards may be caused by a rush of orders or changes in production schedules. In this case, the responsibility for unfavorable material price variances should rest with the sales manager or the manager of production planning. There may also be times when variances are caused by external events and are therefore uncontrollable, e.g., a strike at a supplier’s plant.
Problem 8-22 (continued)b. In general, the production manager or foreman is held
responsible for unfavorable labor efficiency variances. Causes of these variances include the following:• Incorrect standards.• Poorly trained labor.• Substandard or inefficient equipment.• Inadequate supervision.• Machine breakdowns from poor maintenance.• Poorly motivated employees/absenteeism.• Fixed labor force with demand less than capacity.Failure to meet labor efficiency standards may also be caused by the use of inferior materials or poor production planning. In these cases, responsibility should rest with the purchasing manager or the manager of production planning. There may also be times when variances are caused by external events and are therefore uncontrollable, e.g., lack of skilled workers caused by low unemployment.
Ethics Case (45 minutes)This case, which is based on an actual situation, may be difficult for some students to grasp since it requires looking at standard costs from an entirely different perspective. In this case, standard costs have been inappropriately used as a means to manipulate reported earnings rather than as a way to control costs.
1. Lansing has evidently set very loose standards in which the standard prices and standard quantities are far too high. This will guarantee that favorable variances will ordinarily result from operations. If the standard costs are set artificially high, the standard cost of goods sold will be artificially high and thus the division’s net income will be depressed until the favorable variances are recognized. If Lansing saves the favorable variances, he can release just enough in the second and third quarters to show some improvement and then he can release all of the rest in the last quarter, creating the annual “Christmas present.”
2. Lansing should not be permitted to continue this practice for a number of reasons. First, it distorts the quarterly earnings for both the division and the company. The distortions of the division’s quarterly earnings are troubling because the manipulations may mask real signs of trouble. The distortions of the company’s quarterly earnings are troubling because they may mislead external users of the financial statements. Second, Lansing should not be rewarded for manipulating earnings. This sets a moral tone in the company that is likely to lead to even deeper trouble. Indeed, the permissive attitude of top management toward manipulation of earnings may indicate that the company may have other, even more serious, ethical problems. Third, a clear message should be sent to division managers like Lansing that their job is to manage their operations, not their earnings. If managers keep on top of operations and manage well, the earnings should take care of themselves.
Ethics Case (continued)3. Stacy Cummins does not have any easy alternatives available.
She has already taken the problem to the President, who was not interested. If she goes around the President to the Board of Directors, she will be putting herself in a politically difficult position with little likelihood that it will do much good if, in fact, the Board of Directors already knows what is going on.On the other hand, if she simply goes along, she will be violating the “Objectivity” standard of ethical conduct for management accountants. The Home Security Division’s manipulation of quarterly earnings does distort the entire company’s quarterly reports. And the Objectivity standard clearly stipulates that “management accountants have a responsibility to disclose fully all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, comments, and recommendations presented.” Apart from the ethical issue, there is also a very practical consideration. If Merced Home Products becomes embroiled in controversy concerning questionable accounting practices, Stacy Cummins will be viewed as a responsible party by outsiders and her career is likely to suffer dramatically.There is no obvious best course of action for Ms. Cummins to take. We would suggest that she quietly, in a non-confrontational manner, bring the problem to the attention of the audit committee of the Board of Directors, carefully laying out the problems created by Lansing’s practice of manipulating earnings. If the President and the Board of Directors are still not interested in dealing with the problem, she may reasonably conclude that the best alternative is to start looking for another job.
1. Based on the conversation between Terry Travers and Sally Christensen, it seems likely that their motivation would be stifled by the variance reporting system at Aurora Manufacturing Company. Their behavior may include any of the following:• Suboptimization, a condition in which individual managers
disregard major company goals and focus their attention solely on their own division’s activities.
• Frustration from untimely reports and formats that are not useful in their daily activities.
2. Aurora Manufacturing Company could improve its variance reporting system, so as to increase employee motivation, by implementing the following:• Introduce a flexible budgeting system that relates actual
expenditures to actual levels of production on a monthly basis. In addition, the budgeting process should be participative rather than imposed.
• Only those costs that are controllable by managers should be included in the variance analysis.
• Distribute reports on a more timely basis to allow quick resolution of problems.
• Reports should be stated in terms that are most understandable to the users, i.e., units of output, hours, etc.
Analytical Thinking (150 minutes)Note: This is a very rigorous case; it should be assigned only after
students have been fully “checked out” in variance computations and journal entries.
1.Standard cost of Material A used in production
(a).................................................................................$2,400Standard cost of Material A per batch
(5 gallons × $6 per gallon) (b)...................................... $30 Number of batches produced (a) ÷ (b)............................ 80
2. a. The number of gallons of Material A used in production can be computed through analysis of the raw materials inventory account:
Balance, Material A, 6/1...........................................$ 720Add purchases (550 gallons @ $6 per
gallon)................................................................... 3,300 Total Material A available.........................................4,020Less balance, Material A, 6/7................................... 1,500 Total Material A used................................................$2,520$2,520 ÷ $6 per gallon = 420 gallons
b. Quantity Variance = SP (AQ – SQ)$6 per gallon (420 gallons – 400 gallons*) = $120 U
*80 batches × 5 gallons per batch = 400 gallons
c. Standard cost of purchases (550 gallons × $6 per gallon) $3,300
Add unfavorable price variance* 220 Actual cost of purchases $3,520* A debit represents an unfavorable variance.
(550 gallons @ $0.40 per gallon)..........................220Accounts Payable
(550 gallons @ $6.40 per gallon*).................... 3,520*$3,520 ÷ 550 gallons = $6.40 per gallons
Work in Process (400 gallons @ $6 per gallon)...................................................................2,400
Materials Quantity Variance (20 gallons @ $6 per gallon).................................120
Raw Materials (420 gallons @ $6 per gallon)..............................................................2,520
3. a. The standard cost per pound of Material B can be computed by analyzing the raw materials inventory account:
Total Material B used in production..........................$600Add balance, Material B, 6/7.................................... 200 Total Material B available.........................................800Deduct balance, Material B, 6/1............................... 0 Purchases of Material B............................................$800$800 ÷ 200 pounds = $4 per pound
b. Material B drawn from inventory $600 ÷$4 =150 pounds used
Add favorable quantity variance* 40
Standard cost of material used $640 ÷$4 =160 pounds allowed