-
227755
CHAPTER 9 STANDARD COSTING:
A MANAGERIAL CONTROL TOOL
QUESTIONS FOR WRITING AND DISCUSSION
1. Standard costs are essentially budgeted amounts on a per-unit
basis. Unit standards serve as inputs in building budgets.
2. Unit standards are used to build flexible budgets. Unit
standards for variable costs are the variable cost component of a
flexible budgeting formula.
3. The quantity decision is determining how much input should be
used per unit of out-put. The pricing decision determines how much
should be paid for the quantity of input used.
4. Historical experience is often a poor choice for establishing
standards because the his-torical amounts may include more
inefficien-cy than is desired.
5. Engineering studies can serve as an impor-tant input to
standard setting. Many feel that this approach by itself may
produce stan-dards that are too rigorous.
6. Ideal standards are perfection standards, representing the
best possible outcomes. Currently attainable standards are
standards that are challenging but allow some waste. Currently
attainable standards are often chosen because many feel they tend
to mo-tivate rather than frustrate.
7. Standard costing systems improve planning and control and
facilitate product costing.
8. By identifying standards and assessing dev-iations from the
standards, managers can locate areas where change or corrective
be-havior is needed.
9. Actual costing assigns actual manufacturing costs to
products. Normal costing assigns actual prime costs and estimated
overhead costs to products. Standard costing assigns estimated
manufacturing costs to products.
10. A standard cost sheet presents the standard amount of inputs
and the price for each input and uses this information to calculate
the unit standard cost.
11. Managers generally tend to have more con-trol over the
quantity of an input used rather than the price paid per unit of
input.
12. A standard cost variance should be investi-gated if the
variance is material and if the benefit of investigating and
correcting the deviation is greater than the cost.
13. Control limits indicate how large a variance must be before
it is judged to be material and the process is out of control.
Control limits are usually set by judgment although statistical
approaches are occasionally used.
14. The materials price variance is often com-puted at the point
of purchase rather than issuance because it provides control
infor-mation sooner. When this is done, the va-riance may be called
the materials purchase price variance, and it is the responsibility
of the purchasing manager rather than the production manager.
15. Disagree. A materials usage variance can be caused by
factors beyond the control of the production manager, e.g.,
purchase of a lower-quality material than normal.
16. Disagree. Using higher-priced workers to perform
lower-skilled tasks is an example of an event that will create a
rate variance that is controllable.
17. Some possible causes of an unfavorable labor efficiency
variance are inefficient labor, machine downtime, and poor quality
mate-rials.
18. Part of a variable overhead spending va-riance can be caused
by inefficient use of overhead resources.
19. Agree. This variance, assuming that variable overhead costs
increase as labor usage in-creases, is caused by the efficiency or
ineffi-ciency of labor usage. Also labor may not be a good driver
for variable overhead.
-
227766
20. Fixed overhead costs are either committed or discretionary.
The committed costs will not differ by their very nature.
Discretionary costs can vary, but the level the company wants to
spend on these items is decided at the beginning and usually will
be met unless there is a conscious decision to change the
predetermined levels.
21. The volume variance is caused by the actual volume differing
from the expected volume used to compute the predetermined
stan-dard fixed overhead rate. If the actual vo-
lume is different from the expected, then the company has either
lost or earned a contri-bution margin. The volume variance signals
this outcome, and if the variance is large, then the loss or gain
is large since the vo-lume variance understates the effect.
22. The spending variance is more important. This variance is
computed by comparing ac-tual expenditures with budgeted
expendi-tures. The volume variance simply tells whether the actual
volume is different from the expected volume.
-
227777
EXERCISES
91
1. d 2. e 3. d
4. c 5. e 6. a
92
1. a. The operating personnel of each cost center should be
involved in setting standards. They are the primary source for
quantity information. The mate-rials manager and purchasing manager
are a source of information for ma-terial prices, and personnel are
knowledgeable on wage information. The Accounting Department should
be involved in overhead standards and should provide information
about past prices and usage. Finally, if infor-mation about
absolute efficiency is desired, industrial engineers can pro-vide
important input.
b. Standards should be attainable; they should include an
allowance for waste, breakdowns, etc. Market prices for materials
as well as labor (un-ions) should be a consideration for setting
standards. Labor prices should include fringe benefits, and
material prices should include freight, taxes, etc.
2. In principle, before formal responsibility is assigned, the
causes of the va-
riances must be known. To be responsible, a manager must have
the ability to control or influence the variance. The following
assignments of responsibility are general in nature and have
exceptions:
MPV: Purchasing manager MUV: Production manager LRV: Production
manager LEV: Production manager OH variances: Departmental
managers
-
227788
93
1. SH = 1.5 1,700 = 2,550 hours 2. SQ = 4 1,700 = 6,800
components 94
1. SQ direct materials per unit = 340,000/40,000 = 8.5 oz per
bunny 2. SH direct labor hours per unit = 10,000/40,000 = 0.25 hrs.
per bunny 3. Standard Cost for Dark Chocolate Bunny: Standard
Standard Standard Price Usage Cost Direct materials $0.30 8.50 oz.
$2.55 Direct labor 9.00 0.25 hr. 2.25 Total standard unit prime
cost $4.80 95
1. SQ = 8.5 47,000 = 399,500 oz. 2. SH = 0.25 47,000 = 11,750
hours 3. Total standard prime cost = ($0.30 399,500) + ($9 11,750)
= $225,600 96
1. Cases needing investigation:
Week 1: Exceeds the 2,100 rule and the 5% rule.
Week 4: Exceeds the $2,100 rule and the 5% rule. 2. The
installation and repair manager. If the new workers are now
properly
trained, no corrective action is required. If they are not,
further training will be required to return to the direct labor
hours normally used.
-
227799
97
1. Cases needing investigation:
Week 2: Exceeds the 10% rule.
Week 4: Exceeds the $8,000 rule and the 10% rule.
Week 5: Exceeds the 10% rule. 2. The purchasing agent.
Corrective action would require a return to the pur-
chase of the higher-quality material normally used. 3.
Production engineering is responsible. If the relationship is
expected to pers-
ist, then the new labor method should be adopted, and standards
for mate-rials and labor need to be revised.
98
1. MPV = (AP SP)AQ = ($0.047 $0.046)6,420,000 = $6,420 U
MUV = (AQ SQ)SP = (6,420,000 6,656,000*)$0.046 = $10,856 F * SQ
= 52,000 128 = 6,656,000 2. LRV = (AR SR)AH = ($12.50 $12.00)2,000
= $1,000 U
LEV = (AH SH)SR = (2,000 1,976*)$12.00 = $288 U * SH = 52,000
0.038 = 1,976
-
228800
99
1. Variable overhead analysis:
Actual VOH Budgeted VOH Applied VOH $160,000 $3.00 52,000 $3.00
54,750* $4,000 U $8,250 F
Spending Efficiency * SH for direct labor = 73,000 0.75 = 54,750
2. Fixed overhead analysis:
Actual FOH Budgeted FOH Applied FOH $710,000 $14 50,000 $14
54,750 $10,000 U $66,500 U
Spending Volume
-
228811
910
1. Materials: $35 34,000 = $1,190,000 Labor: $21 34,000 =
$714,000 2. Actual Cost* Budgeted Cost Variance Materials
$1,183,270 $1,190,000 $ 6,730 F Labor 687,150 714,000 26,850 F
*$173,500 $6.82; 50,900 $13.50 3. MPV = (AP SP)AQ = ($6.82
$7.00)173,500 = $31,230 F
MUV = (AQ SQ)SP = (173,500 170,000)$7 = $24,500 U
AP AQ SP AQ SP SQ $6.82 173,500 $7 173,500 $7 170,000
$31,230 F $24,500 U Price Usage
4. LRV = (AR SR)AH = ($13.50 $14.00)50,900 = $25,450 F
LEV = (AH SH)SR = (50,900 51,000)$14 = $1,400 F
AR AH SR AH SR SH $13.50 50,900 $14 50,900 $14 51,000
$25,450 F $1,400 F Rate Efficiency
-
228822
911
1. MPV = (AP SP)AQ = ($8.05 $7.95)222,500 = $22,250 U
MUV = (AQ SQ)SP = [220,400 (20,100 11)]$7.95 = $5,565 F
(A three-pronged variance diagram is not shown because MPV is
for materials purchased and not materials used.)
2. LRV = (AR SR)AH = ($9.50 $9.40)79,900 = $7,990 U
Note: AR = $759,050/79,900 = $9.50
LEV = (AH SH)SR = [79,900 (20,100 4)]$9.40 = $4,700 F
AR AH SR AH SR SH $9.50 79,900 $9.40 79,900 $9.40 80,400 $7,990
U $4,700 F
Rate Efficiency 3. Materials Inventorya
.................................. 1,768,875 MPV
............................................................ 22,250
Accounts Payableb .............................. 1,791,125
Work in Processc .......................................
1,757,745 MUV
....................................................... 5,565
Materials Inventoryd ............................ 1,752,180
Work in Processe ....................................... 755,760
LRV .............................................................
7,990 LEV ........................................................
4,700 Accrued Payrollf .................................. 759,050
a$7.95 222,500 =1,768,875 b$8.05 222,500 =1,791,125 c$7.95 221,100
=1,757,745 d$7.95 222,500 = 1,768,875 e$9.40 80,400 = 755,760
f$9.50 79,900 = 759,050
-
228833
912
1. Fixed overhead rate = $0.55/(1/2 hr. per unit) = $1.10 per
DLH
SH = 786,000 0.5 = 393,000 Applied FOH = $1.10 393,000 =
$432,300 2. Fixed overhead analysis:
Actual FOH Budgeted FOH Applied FOH $430,300 $1.10 400,000*
$1.10 393,000 $9,700 F $7,700 U
Spending Volume *400,000 expected hours = 0.5 hour 800,000
units) 3. Variable OH rate = ($1,120,000 $440,000)/400,000 = $1.70
per DLH 4. Variable overhead analysis:
Actual VOH Budgeted VOH Applied VOH $695,000 $1.70 390,000 $1.70
393,000 $32,000 U $5,100 F
Spending Efficiency
-
228844
913
1. Standard fixed overhead rate = $864,000/(120,000 3) = $2.40
per DLH
Standard variable overhead rate = $1,440,000/360,000 = $4.00 per
DLH 2. Fixed: 120,600 3 $2.40 = $868,320 Variable: 120,600 3 $4.00
= $1,447,200
Total FOH variance = $940,320 $868,320 = $72,000 U
Total VOH variance = $1,447,200 $1,443,500 = $3,700 F
3. Fixed overhead analysis:
Actual FOH Budgeted FOH Applied FOH $940,320 $864,000 $868,320
$76,320 U $4,320 F
Spending Volume The spending variance is the difference between
planned and actual costs.
Each items variance should be analyzed to see if these costs can
be reduced. The volume variance is the incorrect prediction of
volume, or alternatively, it is a signal of the loss or gain that
occurred because of producing at a level different from the
expected level.
4. Variable overhead analysis:
Actual VOH Budgeted VOH Applied VOH $1,443,500 $4 361,800
$1,447,200
$3,700 F $0 Spending Efficiency
The variable overhead spending variance is the difference
between the actual
variable overhead costs and the budgeted costs for the actual
hours used. The variable overhead efficiency variance is the
savings or extra cost attri-butable to the efficiency of labor
usage.
-
228855
914
1. MPV = (AP SP)AQ = ($6.60 $6.40)1,684,700 = $336,940 U
MUV = (AQ SQ)SP = (1,684,000 1,680,000)$6.40 = $25,600 U
Note: There is no three-pronged analysis for materials because
materials pur-chased is different from the materials used. (MPV
uses materials purchased and MUV uses materials used.)
2. LRV = (AR SR)AH = ($18.10 $18.00)515,000 = $51,500 U
LEV = (AH SH)SR = [515,000 (1.8 280,000 units)]$18.00 = $198,000
U
AR AH SR AH SR SH $18.10 515,000 $18 515,000 $18 504,000
$51,500 U $198,000 U Rate Efficiency
3. Fixed overhead analysis:
Actual FOH Budgeted FOH Applied FOH $4,140,200 $8 518,400 $8
504,000
$7,000 F $115,200 U Spending Volume
Note: Practical volume in hours = 1.8 288,000 = 518,400 hours 4.
Variable overhead analysis:
Actual VOH Budgeted VOH Applied VOH $872,000 $1.50 515,000 $1.50
504,000 $99,500 U $16,500 U
Spending Efficiency
-
228866
915
1. Materials Inventory ...................................
10,782,080 MPV
............................................................
336,940 Accounts Payable ................................
11,119,020 2. Work in Process
........................................ 10,752,000 MUV
............................................................ 25,600
Materials Inventory .............................. 10,777,600 3.
Work in Process ........................................ 9,072,000
LRV .............................................................
51,500 LEV
.............................................................
198,000 Accrued Payroll ...................................
9,321,500 4. Work in Process
........................................ 4,788,000 Fixed Overhead
Control ...................... 4,032,000 Variable Overhead Control
................. 756,000 5. Materials and labor:
Cost of Goods Sold ................................... 612,040
MPV ....................................................... 336,940
MUV ....................................................... 25,600
LRV ........................................................ 51,500
LEV ........................................................
198,000
Overhead disposition:
Cost of Goods Sold ................................... 108,200
Fixed Overhead Control ...................... 108,200
Cost of Goods Sold ................................... 116,000
Variable Overhead Control ................. 116,000
-
228877
916
1. Tom purchased the large quantity to obtain a lower price so
that the price standard could be met. In all likelihood, given the
reaction of Jackie Iverson, encouraging the use of quantity
discounts was not an objective of setting price standards. Usually,
material price standards are to encourage the pur-chasing agent to
search for sources that will supply the quantity and quality of
material desired at the lowest price.
2. It sounds like the price standard may be out of date.
Revising the price stan-
dard and implementing a policy concerning quantity purchases
would likely prevent this behavior from reoccurring.
3. Tom apparently acted in his own self-interest when making the
purchase. He
surely must have known that the quantity approach was not the
objective. Yet, the reward structure suggests that there is
considerable emphasis placed on meeting standards. His behavior, in
part, was induced by the re-ward system of the company. Probably,
he should be retained with some ad-ditional training concerning the
goals of the company and a change in em-phasis and policy to help
encourage the desired behavior.
917
Materials:
AP AQ SP AQ SP SQ $38,295 $2.00 20,700 $2.00 20,650 $3,105 F
$100 U
Price Usage Labor:
AR AH SR AH SR SH $57,226 $9 6,200 = $55,800 $9 6,195 = $55,755
$1,426 U $45 U
Rate Efficiency
-
228888
918
1. Materials Inventory ...................................
41,400 MPV .......................................................
3,105 Accounts Payable ................................ 38,295 2.
Work in Process ........................................ 41,300 MUV
............................................................ 100
Materials Inventory .............................. 41,400 3. Work
in Process ........................................ 55,755 LRV
........................................................ 1,426 LEV
........................................................ 45 Accrued
Payroll ................................... 57,226 4. Cost of Goods
Sold ................................... 100 MUV
....................................................... 100
MPV ............................................................
3,105 LRV
............................................................. 1,426
LEV .............................................................
45 Cost of Goods Sold ............................. 4,576
-
228899
919
1. VOH efficiency variance = (AH SH)SVOR $8,000 = (1.2SH SH)$2
$8,000 = $0.4SH SH = 20,000 AH = 1.2SH = 24,000 2. LEV = (AH SH)SR
$20,000 = (24,000 20,000)SR $20,000 = 4,000SR SR = $5
LRV= (AR SR)AH $6,000= (AR $5)24,000 $0.25= AR $5 AR= $5.25 3.
SH = 4 Units produced 20,000 = 4 Units produced Units produced =
5,000
-
229900
PROBLEMS
920
1. Materials:
AP AQ SP AQ SP SQ $1.72 38,500 $1.70 38,500 $1.70 40,000 $770 U
$2,550 F
Price Usage The new process saves 0.25 4,000 $1.70 = $1,700.
Thus, the net savings
attributable to the higher-quality material are (2,550 $1,700)
$770 = $80. Keep the higher-quality material.
2. Labor for new process:
AR AH SR AH SR SH $26,500 $10 2,500 $10 2,400 $1,500 U $1,000
U
Rate Efficiency The new process gains $80 in materials (see
Requirement 1) but loses $2,500
from the labor effect, giving a net loss of $2,420. If this
pattern is expected to persist, then the new process should be
abandoned.
3. Labor for new process, one week later:
AR AH SR AH SR SH $22,400 $10 2,200 $10 2,400 $400 U $2,000
F
Rate Efficiency If this is the pattern, then the new process
should be continued. It will save
$87,360 per year ($1,680 52 weeks). The weekly savings of $1,680
is the ma-terials savings of $80 plus labor savings of $1,600.
-
229911
921
1. e 2. h 3. k 4. n 5. d 6. g 7. o 8. b
9. m 10. l 11. j 12. c 13. a 14. i 15. f
922
1. Material quantity standards: 1.25 feet per cutting board 6
7.50 feet for five good cutting boards Unit standard for lumber =
7.50/5 = 1.50 feet Unit standard for foot pads = 4.0 Material price
standards: Lumber: $3.00 per foot Pads: $0.05 per pad Labor
quantity standards: Cutting: 0.2 hrs. 6/5 = 0.24 hours per good
unit Attachment: 0.25 hours per good unit Unit labor standard 0.49
hours per good unit Labor rate standard: $8.00 per hour Standard
prime cost per unit: Lumber (1.50 ft. @ $3.00) $4.50 Pads (4 @
$0.05) 0.20 Labor (0.49 hr. @ $8.00) 3.92 Unit cost $8.62
-
229922
922 Concluded
2. Standards allow managers to compare planned and actual
performance. The difference can be broken down into price and
efficiency variances to identify the cause of a variance. With this
feedback, managers are able to improve productivity as they attempt
to produce without cost overruns.
3. a. The purchasing manager identifies suppliers and their
respective prices
and quality of materials.
b. The industrial engineer often conducts time and motion
studies to deter-mine the standard direct labor time for a unit of
product. They also can de-termine how much material is needed for
the product.
c. The cost accountant has historical information as well as
current informa-tion from the purchasing agent, industrial
engineers, and operating per-sonnel. He or she can compile this
information to obtain an achievable standard.
4. Lumber:
MPV = (AP SP)AQ = ($3.10 $3.00)16,000 = $1,600 U
MUV = (AQ SQ)SP = (16,000 15,000)$3 = $3,000 U Rubber pads:
MPV = (AP SP)AQ = ($0.048 $0.05)51,000 = $102 F
MUV = (AQ SQ)SP = (51,000 40,000)$0.05 = $550 U Labor:
LRV = (AR SR)AH = ($8.05 $8.00)5,550 = $277.50 U
LEV = (AH SH)SR = (5,550 4,900)$8 = $5,200 U
-
229933
923
1. The cumulative average time per unit is an average. It
includes the 2.5 hours per unit when 40 units are produced as well
as the 1.024 hours per unit when 640 units are produced. As more
units are produced, the cumulative average time per unit will
decrease.
2. The standard should be 0.768 hour per unit as this is the
average time taken
per unit once efficiency is achieved:
[(1.024 640) (1.28 320)]/(640 320) 3. Std. Price Std. Usage Std.
Cost Direct materials $ 4 25.000 $100.00 Direct labor 15 0.768
11.52 Variable overhead 8 0.768 6.14 Fixed overhead 12 0.768 9.22*
Standard cost per unit $126.88*
*Rounded 4. There would be unfavorable efficiency variances for
the first 320 units be-
cause the standard hours are much lower than the actual hours at
this level. Actual hours would be approximately 409.60 (320 1.28),
and standard hours would be 245.76 (320 0.768).
924
1. MPV = (AP SP)AQ = ($5.80 $6.00)465,000 = $93,000 F
MUV = (AQ SQ)SP = (491,400* 490,000)$6 = $8,400 U * AQ = 26,400
+ 465,000 0 = 491,400
The materials usage variance is viewed as the most controllable
because prices for materials are often market-driven and thus not
controllable. Re-sponsibility for the variance in this case likely
would be assigned to purchas-ing. The lower-quality materials are
probably the cause of the extra usage.
-
229944
924 Continued
2. LRV = (AR SR)AH = ($13 $12)150,000 = $150,000 U
LEV = (AH SH)SR = (150,000 140,000)$12 = $120,000 U
AR AH SR AH SR SH $13 150,000 $12 150,000 $12 140,000 $150,000 U
$120,000 U
Rate Efficiency Production is usually responsible for labor
efficiency. In this case, efficiency
may have been affected by the lower-quality materials, thus
purchasing may have significant responsibility for the outcome.
Other possible causes are less demand than expected, poor
supervision, lack of proper training, and lack of experience.
3. Variable overhead variances:
Actual VOH Budgeted VOH Applied VOH $1,470,000 $10 150,000 $10
140,000
$30,000 F $100,000 U Spending Efficiency
Formula approach:
VOH spending variance = Actual VOH (SVOR AH) = $1,470,000 ($10
150,000) = $30,000 F
VOH efficiency variance = (AH SH)SVOR = (150,000 140,000)$10 =
$100,000 U 10,000 $10 = $100,000
-
229955
924 Continued
4. Fixed overhead variances:
Actual FOH Budgeted FOH Applied FOH $913,000 $6 2 75,000 $6 2
70,000 $13,000 U $60,000 U
Spending Volume The volume variance is a measure of unused
capacity. This cost is reduced
as production increases. Thus, selling more goods is the key to
reducing this variance (at least in the short run).
5. Four variances are potentially affected by material quality:
MPV $ 93,000 F MUV 8,400 U LEV 150,000 U VOH efficiency 100,000 U $
165,400 U
If the variance outcomes are largely attributable to the
lower-quality materials, then the company should discontinue using
this material.
6. (Appendix required)
Materials Inventorya ..................................
2,790,000 MPV
....................................................... 93,000
Accounts Payableb .............................. 2,697,000
Work in Processc .......................................
2,940,000 MUV
............................................................ 8,400
Materials Inventoryd ............................ 2,948,400
a465,000 $6 = $2,790,000 b465,000 $5.80 = $2,697,000 c490,000 $6 =
$2,940,000 d(465,000 + 26,400) $6 = $2,948,400
-
229966
924 Concluded
Work in Processe .......................................
1,680,000 LRV
.............................................................
150,000 LEV
.............................................................
120,000 Accrued Payroll ...................................
1,950,000
Cost of Goods Sold ................................... 278,400
MUV ....................................................... 8,400
LRV ........................................................
150,000 LEV
........................................................
120,000
MPV ............................................................
93,000 Cost of Goods Sold ............................. 93,000
VOH Control ...............................................
1,470,000 Various Credits ....................................
1,470,000
FOH Control ...............................................
913,000 Various Credits ....................................
913,000
Work in Processf .......................................
1,400,000 VOH Control .........................................
1,400,000
Work in Processg ....................................... 840,000
FOH Control ......................................... 840,000
Cost of Goods Sold ................................... 20,000
VOH Control ......................................... 20,000
Cost of Goods Sold ................................... 73,000
FOH Control ......................................... 73,000 e2 $12
70,000 = $1,680,000 f2 $10 70,000 = $1,400,000 g2 $6 70,000 =
$840,000
-
229977
925
1. Fixed overhead rate = $2,400,000/600,000 hours* = $4 per
hour
*Standard hours allowed = 2 300,000 units 2. Little Rock
plant:
Actual FOH Budgeted FOH Applied FOH $2,500,000 $2,400,000 $4
480,000
$100,000 U $480,000 U Spending Volume
Athens plant:
Actual FOH Budgeted FOH Applied FOH $2,500,000 $2,400,000 $4
600,000
$100,000 U $0 Spending Volume
The spending variance is almost certainly caused by supervisors
salaries
(for example, an unexpected midyear increase due to union
pressures). It is unlikely that the lease payments or depreciation
would be greater than bud-geted. Changing the terms on a 10-year
lease in the first year would be un-usual (unless there is some
sort of special clause permitting increased pay-ments for something
like unexpected inflation). Also, the depreciation should be on
target (unless more equipment was purchased or the depreciation
budget was set before the price of the equipment was known with
certainty).
The volume variance is easy to explain. The Little Rock plant
produced less than expected, and so there was an unused capacity
cost: $4 120,000 hours = $480,000. The Athens plant had no unused
capacity.
-
229988
925 Concluded
3. It appears that the 120,000 hours of unused capacity (60,000
subassemblies) is permanent for the Little Rock plant. This plant
has 10 supervisors, each making $50,000. Supervision is a step-cost
driven by the number of produc-tion lines. Unused capacity of
120,000 hours means that two lines can be shut down, saving the
salaries of two supervisors ($100,000 at the original salary
level). The equipment for the two lines is owned. If it could be
sold, then the money could be reinvested, and the depreciation
charge would be reduced by 20 percent (two lines shut down out of
10). There is no way to directly reduce the lease payments for the
building. Perhaps the company could use the space to establish
production lines for a different product. Or perhaps the space
could be subleased. Another possibility is to keep the supervisors
and equipment and try to fill the unused capacity with special
ordersorders for the subassembly below the regular selling price
from a market not normally served. If the selling price is
sufficient to cover the variable costs and cover at least the
salaries and depreciation for the two lines, then the special order
option may be a possibility. This option, however, is fraught with
risks, e.g., the risk of finding enough orders to justify keeping
the supervisors and equipment, the risk of alienating regular
customers who pay full price, and the risk of violating price
discrimination laws. Note: You may wish to point out the value of
the resource usage model in answering this question (see Chapter
3).
4. For each plant, the standard fixed overhead rate is $4 per
direct labor hour.
Since each subassembly should use two hours, the fixed overhead
cost per unit is $8, regardless of where they are produced. Should
they differ? Some may argue that the rate for the Little Rock plant
needs to be recalculated. For example, one possibility is to use
expected actual capacity, instead of prac-tical capacity. In this
case, the Little Rock plant would have a fixed overhead rate of
$2,400,000/480,000 hours = $5 per hour and a cost per subassembly
of $10. The question is: Should the subassemblies be charged for
the cost of the unused capacity? ABC suggests a negative response.
Products should be charged for the resources they use, and the cost
of unused capacity should be reported as a separate itemto draw
managements attention to the need to manage this unused
capacity.
-
229999
926
1. Normal Patient Day: Standard Standard Standard Price Usage
Cost Direct materials $10.00 8.00 lb. $ 80.00 Direct labor 16.00 2
hr. 32.00 Variable overhead 30.00 2 hr. 60.00 Fixed overhead 40.00
2 hr. 80.00 Unit cost $252.00 Cesarean Patient Day: Standard
Standard Standard Price Usage Cost Direct materials $10.00 20.00
lb. $200.00 Direct labor 16.00 4 hr. 64.00 Variable overhead 30.00
4 hr. 120.00 Fixed overhead 40.00 4 hr. 160.00 Unit cost $544.00 2.
MPV = (AP SP)AQ = ($9.50 $10.00)172,000 = $86,000 F
MUV = (AQ SQ)SP MUV (Normal) = [30,000 (8 3,500)]$10 = $20,000 U
MUV (Cesarean) = [142,000 (20 7,000)]$10 = $20,000 U Materials
..................................................... 1,720,000 MPV
....................................................... 86,000
Accounts Payable ................................ 1,634,000
Work in Process ........................................
1,680,000 MUV
............................................................ 40,000
Materials ...............................................
1,720,000
MPV ............................................................
86,000 MUV
............................................................ 40,000
Cost of Services Sold .......................... 46,000
-
330000
926 Continued
3. LRV = (AR SR)AH = ($15.90 $16.00)36,500 = $3,650 F
LEV = (AH SH)SR LEV (Normal) = [7,200 (2 3,500)]$16 = $3,200 U
LEV (Cesarean) = [29,300 (4 7,000)]$16 = $20,800 U Work in Process
........................................ 560,000* LEV
.............................................................
24,000 LRV ........................................................
3,650 Accrued Payroll ...................................
580,350
*[(2 3,500) + (4 7,000)] $16 = $560,000 Cost of Services Sold
............................... 20,350 LRV
............................................................. 3,650
LEV ........................................................ 24,000
4. Variable overhead variances:
Actual VOH Budgeted VOH Applied VOH $1,215,000 $40 36,500 $40
35,000
$245,000 F $60,000 U Spending Efficiency
Fixed overhead variances:
Actual FOH Budgeted FOH Applied FOH $700,000 $720,000 $30 35,000
$20,000 F $330,000 F
Spending Volume
Note: SH = (2 3,500) + (4 7,000) = 35,000
-
330011
926 Concluded
Work in Process ........................................
1,400,000 Variable Overhead Control ................. 1,400,000
Work in Process ........................................
1,050,000 Fixed Overhead Control ......................
1,050,000
Variable Overhead Control ....................... 1,215,000
Various Credits .................................... 1,215,000
Fixed Overhead Control ........................... 700,000
Various Credits .................................... 700,000
Variable Overhead Control ....................... 185,000 Cost
of Services Sold .......................... 185,000
Fixed Overhead Control ........................... 350,000 Cost
of Goods Sold ............................. 350,000 5. Yes.
Computations are shown below:
MUV = (172,000 28,000 140,000)$10 = $40,000 F LEV = (36,500
35,000)$16 = $24,000 U
927
1. The budgeted overhead costs are broken down into fixed and
variable costs by the high-low method:
Standard VOH rate = Change in cost/Change in activity =
$288,000/24,000 = $12/hour
FOH rate = Total rate VOH rate = $18 $12 = $6
-
330022
927 Concluded
2. Budgeted fixed overhead = Y2 VX2 = $1,080,000 $12(60,000) =
$360,000
FOH spending variance = Actual FOH Budgeted FOH = $380,000
$360,000 = $20,000 U 3. To find the VOH spending variance, we need
to find the actual hours. To find
AH, we first need to find the standard hours, SH:
Fixed OH volume variance = Budgeted fixed overhead (Fixed
overhead rate SH) $36,000 = $360,000 ($6.00 SH) $324,000 = $6.00 SH
SH = 54,000
Next, the actual hours need to be found:
VOH efficiency variance = (AH SH)SVOR $24,000 = (AH 54,000)$12
2,000 = AH 54,000 AH = 52,000
VOH spending variance = Actual VOH (VOH rate AH) = $620,000 ($12
52,000) = $620,000 $624,000 = $4,000 F 4. 54,000 hours/100,000
units = 0.54 hour per unit 5. LEV = (AH SH)SR = (52,000 54,000)$13
= $26,000 F
-
330033
928
1. Liquid standard: 4.2 250,000 $0.25 = $262,500
Upper control limit (UCL): $288,750 or $282,500; lesser =
$282,500 Lower control limit (LCL): $236,250 or $242,500; greater =
$242,500
Bottle standard = 250,000 $0.05 = $12,500
UCL: $13,750 LCL: $11,250
Direct labor standard = 0.2 250,000 $12.50 = $625,000
UCL: $687,500 or $645,000; lesser = $645,000 LCL: $562,500 or
$605,000; greater = $605,000
Variable overhead budgeted = 0.2 250,000 $4.70 = $235,000
UCL: $258,500 or $255,000; lesser = $255,000 LCL: $211,500 or
$215,000; greater = $215,000
Fixed overhead budgeted = 0.2 250,000 $1 = $50,000
UCL: $55,000 or $70,000; lesser = $55,000 LCL: $45,000 or
$30,000; greater = $45,000 2. Total liquid variance = $310,500
$262,500 = $48,000 U
MPV = ($0.27 $0.25)1,150,000 = $23,000 U MUV = (1,150,000
1,050,000)$0.25 = $25,000 U
The liquid variances would be investigated as the total variance
exceeds $20,000, as does each individual variance.
Total bottle variance = $12,000 $12,500 = $500 F
MPV = ($0.048 $0.05)250,000 = $500 F MUV = (250,000
250,000)$0.05 = 0
The bottle variances would not be investigated as the total
variance is within the accepted limits.
-
330044
928 Concluded
3. Total labor variance = $622,425 $625,000 = $2,575 F
LRV = ($12.90 $12.50)48,250 = $19,300 U LEV = (48,250
50,000)$12.50 = $21,875 F
The total variance is within the limits. However, the labor
efficiency variance is greater than $20,000 and should be
investigated.
4. Variable overhead variances:
Actual VOH Budgeted VOH Applied VOH $239,000 $4.70 48,250 $4.70
50,000 $12,225 U $8,225 F
Spending Efficiency Fixed overhead variances:
Actual FOH Budgeted FOH Applied FOH $50,500 $50,000 $1 50,000
$500 U $0
Spending Volume None of the overhead variances would be
investigated as the total variances
are within the prescribed limits. Overhead variances are not as
meaningful in total. Individual overhead items should be analyzed
for significant variances.
-
330055
929
1. Performance Report
Actual Budgeted Costs Costs* Variance
Direct materials $ 775,000 $ 750,000 $25,000 U Direct labor
590,000 600,000 10,000 F Variable overhead 310,000 300,000 10,000 U
Fixed overhead 180,000 165,000 15,000 U Total $1,855,000 $1,815,000
$40,000 U
*Uses the variable unit standard costs for materials, labor and
variable over-head (e.g., DM = $15 50,000); fixed overhead = $3.00
55,000 (the FOH rate is based on expected production).
2. a. Total materials variance = MPV + MUV $25,000 U = $5,000 U
+ MUV MUV = $20,000 U b. LRV = (AR SR)AH
SH = 63,000/1.05 = 60,000 SR SH = $600,000 SR = $600,000/60,000
hours SR = $10.00 per hour
LRV = $590,000 ($10 63,000) = $40,000 F c. LEV = (AH SH)SR =
(63,000 60,000)$10 = $30,000 U
-
330066
929 Continued
d. FOH variances:
Spending variance = Actual FOH Budgeted FOH = $180,000 $165,000
= $15,000 U
Volume variance = Budgeted FOH (FOH rate SH) = $165,000 ($2.50
60,000) = $15,000 U
Note: FOH rate is calculated as follows:
Hours allowed = 60,000 hours/50,000 units = 1.20 hours per
unit
Standard FOH rate = $3.00 per unit/1.20 hours per unit = $2.50
per hour e. VOH variances:
Variable OH rate = $300,000/60,000 hours = $5.00 per hour
Spending variance = Actual VOH (SVOR AH) = $310,000 ($5.00
63,000)
= $5,000 F
Efficiency variance = (AH SH)SVOR = (63,000 60,000)$5.00 =
$15,000 U
-
330077
929 Concluded
3. Materials Work in Process
(a) 770,000 770,000 (b) (b) 750,000 1,800,000 (f) (c) 600,000
(d) 300,000 (e) 150,000
Finished Goods (f) 1,800,000 1,800,000 (g)
MPV MUV Accounts Payable
(a) 5,000 5,000 (h) (b) 20,000 20,000 (i) 775,000 (a)
Accrued Payroll LRV LEV
590,000 (c) (j) 40,000 40,000 (c) (c) 30,000 30,000 (k)
Variable Overhead Control Fixed Overhead Control
310,000 300,000 (d) 180,000 150,000 (e) 10,000 (l) 30,000
(m)
Cost of Goods Sold (g) 1,800,000 40,000 (j) (h) 5,000 (i) 20,000
(k) 30,000
(l) 10,000
(m) 30,000
-
330088
930
1. April (UCL = Upper control limit, and LCL = Lower control
limit)
Materials:
Price standard: $0.25 723,000 = $180,750 UCL: 0.08 $180,750 =
$14,460 LCL: ($14,460)
Quantity standard: 8 90,000 $0.25 = $180,000 UCL: 0.08 $180,000
= $14,400 LCL: ($14,400)
Labor:
Price standard: $7.50 36,000 = $270,000 UCL: 0.08 $270,000 =
$21,600 LCL: ($21,600)
Quantity standard: 0.4 90,000 $7.50 = $270,000 UCL: 0.08
$270,000 = $21,600 LCL: ($21,600) May
Materials:
Price standard: $0.25 870,000 = $217,500 UCL: 0.08 $217,500 =
$17,400 LCL: ($17,400)
Quantity standard: 8 100,000 $0.25 = $200,000 UCL: 0.08 $200,000
= $16,000 LCL: ($16,000)
Labor:
Price standard: $7.50 44,000 = $330,000 UCL: 0.08 $330,000 =
$26,400 LCL: ($26,400)
Quantity standard: 0.4 100,000 $7.50 = $300,000 UCL: 0.08
$300,000 = $24,000 LCL: ($24,000)
-
330099
930 Continued
June
Materials:
Price standard: $0.25 885,000 = $221,250 UCL: 0.08 $221,250 =
$17,700 LCL: ($17,700)
Quantity standard: 8 110,000 $0.25 = $220,000 UCL: 0.08 $220,000
= $17,600 LCL: ($17,600)
Labor:
Price standard: $7.50 46,000 = $345,000 UCL: 0.08 $345,000 =
$27,600 LCL: ($27,600)
Quantity standard: 0.4 110,000 $7.50 = $330,000 UCL: 0.08
$330,000 = $26,400 LCL: ($26,400) 2. April Limit Actual* MPV =
($0.2614 $0.25)723,000 = $8,242 U $ 14,460 4.6% MUV = (723,000
720,000)$0.25 = $750 U 14,400 0.4% LRV = ($7.50 $7.50)36,000 = 0
21,600 0.0 LEV = (36,000 36,000)$7.50 = 0 21,600 0.0
May MPV = ($0.2506 $0.25)870,000 = $522 U 17,400 0.3% MUV =
(870,000 800,000)$0.25 = $17,500 U 16,000** 8.8% LRV = ($7.341
$7.50)44,000 = $6,996 F 26,400 (2.3%) LEV = (44,000 40,000)$7.50 =
$30,000 U 24,000** 10.0%
June MPV = ($0.2599 $0.25)885,000 = $8,762 U 17,700 4.0% MUV =
(885,000 880,000)$0.25 = $1,250 U 17,600 0.6% LRV = ($7.826
$7.50)46,000 = $14,996 U 27,600 4.5% LEV = (46,000 44,000)$7.50 =
$15,000 U 26,400 4.5%
*The actual deviation divided by the total price or quantity
**Investigate Mays MUV and LEV
-
331100
930 Continued
3. Control charts allow us to see when the variances are outside
an acceptable range. They may also show a pattern that may help in
pinpointing when the problem began.
Control charts: To simplify the presentation, the variances are
expressed as a percentage of the total quantity or price standard,
and the Y-axis is used for variances. These percentages were
calculated in Requirement 2.
MPV: %
10.0
8.0 x x
0.0 x
8.0 APRIL MAY JUNE
-
331111
930 Continued
MUV: %
10.0 x
8.0
0.0 x x
8.0 APRIL MAY JUNE
-
331122
x
930 Continued
LRV: %
10.0
8.0 x
0.0 x
8.0 APRIL MAY JUNE
-
331133
x
930 Concluded
LEV: %
10.0 x
8.0 x
0.0
8.0 APRIL MAY JUNE
931
1. Hepler Company must put 60,000 units of lower-quality
material into produc-tion in order to produce 54,000 finished
units:
Good units/(1 Rejection rate) = Units required 54,000/0.9 =
60,000 units 2. In order to produce 60,000 units (54,000 good units
and 6,000 rejects), Hepler
Company must utilize the following labor:
New team = 8 Assembler A, 1 Assembler B, 1 Machinist
New team will work at 80 percent of the efficiency of the old
team.
Assembler A: 8 hours (60,000/80) = 6,000 hours Assembler B: 1
hour (60,000/80) = 750 hours Machinist: 1 hour (60,000/80) = 750
hours
-
331144
931 Concluded
3. Hepler Company should include an additional $18,480 in its
operating budget for the planned labor variance. This variance
consists of $6,780 for the change in materials and $11,700 for the
labor change caused by the reduced efficiency of the new team,
calculated as follows:
Cost for new team to produce 80 units:
Assembler A (8 hrs. $10) $ 80 Assembler B (1 hr. $11) 11
Machinist (1 hr. $15) 15 Labor cost $ 106 Units 80 Labor cost per
unit $ 1.325
Labor change due to reduced efficiency:
New labor cost = January units New labor cost = 60,000 $1.325 =
$79,500
Old labor cost = January units Standard cost = 60,000 ($113/100)
= $67,800
Labor change = $79,500 $67,800 = $11,700
Increased labor due to materials change:
Labor change = (New materials Standard materials) Standard cost
= (60,000 54,000)($113/100) = $6,780
Total planned labor variance = $11,700 + $6,780 = $18,480
-
331155
932
1. Standard cost sheet:
Direct materials (0.6 lb. @ $5)* $3.00 Direct labor (0.20 hr. @
$8)** 1.60 Variable overhead (0.20 hr. @ $10)** 2.00 Fixed overhead
(0.20 hr. @ $5.00)** 1.00 Unit cost $7.60
* (AP AQ) (AQ SP) = $1,000 $51,000 (10,000 SP) = $1,000 10,000
SP = $50,000 SP = $5.00
(AQ SQ)SP = ($10,000) (10,000 SQ)$5.00 = ($10,000) $50,000
$5.00SQ = ($10,000) $5.00SQ = $60,000 SQ = 12,000
SQ/unit = 12,000/20,000 = 0.6 lb. per unit
** Actual VOH (Standard VOH rate AH) = $2,000 $46,000 (Standard
VOH rate 4,400) = $2,000 4,400(Standard VOH rate) = $44,000
Standard VOH rate = $10
(AH SH)Standard VOH rate = $4,000 (4,400 SH)$10 = $4,000 44,000
$10(SH) = $4,000 $10(SH) = $40,000 SH = 4,000
-
331166
932 Concluded
Standard hours per unit = 4,000/20,000 = 0.20 hours
(AH SH)SR = $3,200 (4,400 4,000)SR = $3,200 400(SR) = $3,200 SR
= $8.00
Actual FOH (Standard FOH rate SH) = $3,000 $23,000 (Standard FOH
rate 4,000) = $3,000 4,000 Standard FOH rate = $20,000 Standard FOH
rate = $5.00
2. Budgeted FOH (Standard FOH rate SH) = $4,000 Budgeted FOH
($5.00 4,000) = $4,000 Budgeted FOH $20,000 = $4,000 Budgeted FOH =
$24,000
FOH spending variance = Actual FOH Budgeted FOH = $23,000
$24,000 = $1,000 F 3. LRV = (AR SR)AH = ($7.80 $8.00)4,400 = $880 F
4. Standard FOH rate = Budgeted FOH/Expected activity $5.00 =
$24,000/Expected activity Expected activity = $24,000/$5.00 = 4,800
hours
-
331177
MANAGERIAL DECISION CASES
933
1. The major advantages of using a standard costing system
include:
Budgeting: Standard costs can be the building blocks for budget
prepara-tion and allow the development of flexible budgeting.
Performance evaluation: Comparison of actual costs to standard
costs fa-cilitates evaluation of the performance at the company,
department, cost center, or individual level. Standards also allow
employees to more clearly understand what is expected of them.
Decision making: Having predetermined costs facilitates and
simplifies pricing decisions, make-or-buy decisions, etc.
2. The disadvantages that can result from using a standard
costing system in-
clude the following:
Cost standards that are too tight can have negative implications
which may cause demotivation.
Standards may ignore qualitative characteristics which may
jeopardize product quality.
Variance analysis at the operational level may limit the
emphasis on conti-nual improvement found in the new manufacturing
environment.
3. A standard costing system must be supported by top management
to be suc-
cessful. The parties who should participate in the
standard-setting process include all levels of the organization,
e.g., purchasing, engineering, produc-tion, and cost
accounting.
4. Standard setting can be a participative process with those
individuals most
familiar with the variables associated with standard setting
available to pro-vide the most accurate information. Participation
provides benefits such as helping establish the legitimacy of the
standards, giving the participants a greater feeling of being part
of the operation, and encouraging participants to internalize the
standards as their own goals.
-
331188
933 Concluded
Standards that are set for routine activities, which can be
identifiable and measurable, can be associated with specific cost
factors of uniform products in long production runs.
Standards promote cost control through the use of variance
analysis and per-formance reports.
5. There could be negative employee reaction as the employees
did not partici-
pate in the standard-setting process.
There could be dissatisfaction if the standards contain cost
elements that are not controllable by the production groups who are
then held responsible for any unfavorable variances.
The outside firm may not fully understand the manufacturing
process; this could result in poor management decisions based on
faulty information.
934
1. By using a standard cost system, Sabroso Chips can increase
control of its manufacturing inputs. By developing price and
quantity standards for each input, management can compute price and
usage variances for each input. Since a standard cost system
provides more information, control is en-hanced. For example, since
managers have the most control over usage of inputs, knowing the
usage variances provides specific information about where action is
needed. Moreover, by breaking out price variances which are not as
controllable, performance evaluation is improved.
2. The engineering standards are ideal standards. The presidents
concern is
probably reflecting doubt that the labor standards can be
achieved. If pres-sure is applied to workers to achieve perfection
standards, the outcome is likely to be unsatisfactory. Workers may
become frustrated and lower their performance as a consequence.
Many firms elect to use currently attainable standards in lieu of
ideal standards. The standard suggested by the president is a good
starting point. If experience indicates that his standard is too
loose, then the standard can be adjusted later on.
-
331199
934 Concluded
3. Standard cost sheet (for one box of chips):
Direct materials Potatoes (15.9375 lbs. @ $0.238)* $3.7931
Cooking oil (49.5 ounces @ $0.04) 1.9800 Bags (15 @ $0.11) 1.6500
Boxes (1 @ $0.52) 0.5200 $ 7.9431 Direct labor** Potato inspection
(0.006 hr. @ $15.20) $0.0912 Chip inspection (0.0225 hr. @ $10.30)
0.2318 Frying monitor (0.0118 hr. @ $14.00) 0.1652 Boxing (0.0311
hr. @ $11.00) 0.3421 Machine operators (0.0118 hr. @ $13.00) 0.1534
0.9837 Variable overhead ($0.9837 1.16) 1.1410 Fixed overhead
($0.9837 1.967)*** 1.9349 Cost per box $12.0027 Cost per bag
($12.0027/15) $ 0.8002
*Pounds per box = 15 4 4.25/16 = 15.9375 Price per pound =
$0.245 less scrap value; scrap per box = 15 (17.0 ounces 16.3
ounces) = 10.5 ounces. Scrap value/ounce = $0.16/16 = $0.01 per
ounce. Scrap savings per box is $0.01 10.5 = $0.105, and the
savings per pound of potato is $0.105/15.9375 = $0.007. Thus, the
standard price per pound of potato is $0.245 $0.007 = $0.238.
**Number of boxes/year = 8,800,000/15 = 586,667 Hours/box:
Potato inspection: (3,200 1.1)/586,667 Chip inspection: (12,000
1.1)/586,667 Frying monitor: (6,300 1.1)/586,667 Boxing: (16,600
1.1)/586,667 Machine operators: (6,300 1.1)/586,667
***($1,135,216)/($0.9837 586,667) = Fixed OH rate based on labor
dollars
4. MUV = (AQ SQ)SP = (9,500,000 9,350,000)$0.238 = $35,700 U
SQ = 15.9375 8,800,000/15 = 9,350,000
-
332200
935
1. Pats decision was wrong and not in the best interests of the
company. His concern for his bonus and promotion was apparently
more important than his companys reputation for a quality product.
Unfortunately, his assessment of personal risk was probably a
significant input to the decision to buy the infe-rior component.
All too often, individuals decide to take an unethical course of
action based on their assessment of their chances of getting
caught. This obviously should not be a factor. What is right should
be the driving concern for this type of decision.
2. The use of standards to evaluate performance and assess
rewards apparently
was influential in Pats decision. He clearly had a desire to
receive his annual bonus and wanted to present an impressive
performance profile so that he could secure a position at division
headquarters. Perhaps altering the factors used for evaluating and
rewarding performance and increasing the tenure of managers may
decrease this type of behavior. Or perhaps we ought to spend more
time emphasizing ethical behaviormaybe the problem isnt so much the
systems we use for evaluating and rewarding performance but rather
the lack of commitment to ethical decision making.
3. Purchasing agents have ethical responsibilities similar to
accountants. Integr-
ity is a universally desirable characteristic. Pat and other
purchasing agents should refrain from engaging in any activity that
would prejudice their abili-ties to carry out their duties
ethically (III-2); and refrain from a conflict of in-terest, either
actual or apparent (III-1). Organizations would be well advised to
adopt a set of ethical standards. All employees should understand
that cer-tain behaviors are unacceptable.
RESEARCH ASSIGNMENTS
936
Answers will vary.
937
Answers will vary.