Chapter 8: Exercises

Short-Answer Questions

➢ Is a standard cost an estimated cost? What is the primary objective of employing standard costs in a cost system?

➢ What is a budget?

➢ What is the difference between ideal and practical standards? Which standard generally is used in planning?

➢ What is meant by the term management by exception?

➢ What are some advantages of using standard costs? What are some disadvantages?

➢ Describe how the materials price and usage variances would be computed from the following data:

➢ Standard—1 unit of material at $20 per unit. Purchased—1,200 units of material at $20.30; used—990 units. Production—1,000 units of finished goods.

➢ When might a given company have a substantial favorable materials price variance and a substantial unfavorable materials usage variance?

➢ What is the usual cause of a favorable or unfavorable labor rate variance? What other labor variance is isolated in a standard cost system? Of the two variances, which is more likely to be under the control of management? Explain.

➢ Identify the type of variance indicated by each of the following situations and indicate whether it is favorable or unfavorable:

  • The cutting department of a company during the week ending July 15 cut 12 size-S cogged wheels out of three sheets of 12-inch high-tempered steel. Usually three wheels of such size are cut out of each sheet.
  • A company purchased and installed an expensive new cutting machine to handle expanding orders. This purchase and the related depreciation had not been anticipated when the overhead was budgeted.
  • Edwards, the band saw operator, was on vacation last week. Lands took her place for the normal 40-hour week. Edwards' wage rate is $12 per hour, while Lands' is $10 per hour. Production was at capacity last week and the week before.


➢ Theoretically, how would an accountant dispose of variances from standard? How does an accountant typically dispose of variances?

➢ Why are variances typically isolated as soon as possible?

➢ Is it correct to consider favorable variances as always being desirable? Explain.

➢ How does the use of standard costs permit the application of the principle of management by exception?

➢ How do standards help in controlling production costs?

Real world question Imagine you are making and selling pizzas for Domino's Pizza. How would you set standards for one pizza to be made and delivered?

Exercises

Exercise A During July, the cutting department completed 8,000 units of a product that had a standard materials cost of 2 square feet per unit at $2.40 per square foot. The actual materials purchased consisted of 16,400 square feet at $2.20 per square foot, for a total cost of $36,080. The actual material used this period was 16,160 square feet. Compute the materials price and usage variances. Indicate whether each is favorable or unfavorable.

Direct materials – 4 pounds at $5 per pound $20
Direct labor – 3 hours at $6 per hour 18
Manufacturing overhead – 150% of direct labor 27
$65
Exercise B Whitewater's purchasing agent took advantage of a special offer from one of its suppliers to purchase 44,000 pounds of material at $4.10 per pound. Assume 5,500 units were produced and 34,100 pounds of material were used. Compute the variances for materials. Comment on the purchasing agent's decision to take the special offer.

Exercise C Compute the labor variances in the following situation:

Actual direct labor payroll (51,600 hours at $18) $928,800
Standard direct labor allowed per unit, 4.20 hours at $19.20 80.64
Production for month (in units) 10,000
Exercise D Blackman Company manufactures a product that has a standard direct labor cost of four hours per unit at $24 per hour. In producing 6,000 units, the foreman used a different crew than usual, which resulted in a total labor cost of $26 per hour for 22,000 hours. Compute the labor variances and comment on the foreman's decision to use a different crew.

Exercise E The following data relates to the manufacturing activities of Strauss Company for the first quarter of the current year:

Standard activity (in units) 30,000
Actual production (units) 24,000
Budgeted fixed manufacturing overhead $36,000
Variable overhead rate (per unit) $ 4.00
Actual fixed manufacturing overhead $37,200
Actual variable manufacturing overhead $88,800
Compute the variable overhead spending variance, variable overhead efficiency variance and the fixed overhead variance. (Assume overhead is applied based on units produced.)

Exercise F Assume that the actual production in the previous exercise was 26,000 units rather than 24,000. What was the variable overhead efficiency variance?

Problems

Problem A A product has a standard materials usage and cost of 4 pounds per unit at $7.00 per pound. During the month, 2,400 pounds of materials were purchased at $7.30 per pound. Production for the month totaled 550 units requiring 2,100 pounds of materials.

Compute the materials variances.

Problem B During December, a department completed 2,500 units of a product that has a standard materials usage and cost of 1.2 square feet per unit at $0.48 per square foot. The actual material used consisted of 3,050 square feet at an actual cost of $2,664.48. The actual purchase of this material amounted to 4,500 square feet at a total cost of $3,931.20.

Prepare journal entries (a) for the purchase of the materials and (b) for the issuance of materials to production.

Problem C Martin Company makes plastic garbage bags. One box of bags requires one hour of direct labor at an hourly rate of $6. The company produced 200,000 boxes of bags using 208,000 hours of direct labor at a total cost of $1,144,000.

Compute the labor variances.

Problem D The finishing department of Mozart Company produced 25,000 units during November. The standard number of direct labor-hours per unit is two hours. The standard rate per hour is $37.80. During the month, 51,250 direct labor-hours were worked at a cost of $1,742,500.

Compute labor variances.

Problem E The standard amount of output for the Chicago plant of Worldworth Company is 50,000 units per month. Overhead is applied based on units produced. The flexible budget of the month for manufacturing overhead allows $180,000 for fixed overhead and $4.80 per unit of output for variable overhead. Actual overhead for the month consisted of $181,440 of fixed overhead; the actual variable overhead follows.

Compute the overhead variances variance assuming the following actual production in units and actual variable overhead in dollars:

  1. 37,500 and $182,400.
  2. 55,000 and $270,480.


Problem F Based on a standard volume of output of 96,000 units per month, the standard cost of the product manufactured by Tahoe Company consists of:

Direct materials (0.25 pounds x $8 per pound) $2.00
Direct labor (0.5 hours x $7.60 per hour) 3.80
Variable manufacturing overhead 2.50
Fixed manufacturing overhead ($144,000 in total) 1.50
Total $9.80
A total of 25,200 pounds of materials was purchased at $8.40 per pound. During May, 98,400 units were produced with the following costs:

Direct materials used (24,000 pounds at $8.40) $201,600
Direct labor (50,000 hours at $7.80) 390,000
Variable manufacturing overhead 249,000
Fixed manufacturing overhead 145,000
Compute the materials price and usage variances, the labor rate and efficiency variances, and the overhead budget and volume variances. (Overhead is applied based on units produced.)

Alternate problems

Alternate problem A The following data apply to Roseanne Company for August, when 2,500 units were produced:

Materials used: 16,000 pounds

standard materials per unit: 6 pounds at 5 per pound

Materials purchased: 24,000 pounds at$4.80 per pound

Direct labor: 5,800 hours at a total cost of $69,600

Standard labor per unit: 2 hours at $11 per hour.

  1. Compute the materials and labor variances.
  2. Prepare journal entries to record the transactions involving these variances.


Alternate problem B During April, Shakespeare Company produced 15,000 units of a product called Creative. Creative has a standard materials cost of two pieces per unit at $8 per piece. The actual materials used consisted of 30,000 pieces at a cost of $230,000. Actual purchases of the materials amounted to 40,000 pieces at a cost of $300,000.

Compute the two materials variances.

Alternate problem C Some of the records of Gonzaga Company's repair and maintenance division were accidentally shredded. Salvaged records indicate that actual direct labor-hours for the period were 2,000 hours. The total labor variance was $6,000, favorable. The standard labor rate was $7 per direct labor-hour, and the labor rate variance was $2,000, unfavorable.

Compute the actual direct labor rate per hour and prepare the journal entry to record the labor rate and the labor efficiency variances.

Alternate problem D All Fixed Overhead Company computes its overhead rate based on a standard level of output of 20,000 units. Fixed manufacturing overhead for the current year is budgeted at $30,000. Actual fixed manufacturing overhead for the current year was $31,000. Overhead is applied based on units produced.

Compute the amount of overhead volume variance for the year under each of the following assumptions regarding actual output:

  1. 12,500 units.
  2. 22,500 units.


Beyond the numbers—Critical thinking

Business decision case A Turn to the Sun City Company exercise in this chapter. For each of the variances listed, give a possible reason for its existence.

Business decision case B Diane La Hoya, the president of the Rebokk Company, has a problem that does not involve substantial dollar amounts but does involve the important question of responsibility for variances from standard costs. She has just received the following report:

Standard materials at standard price for the actual production in May $9,000
Unfavorable materials price variance
($3.60 - $3.00) x 3,450 pounds 2,070
Unfavorable materials usage variance
(3,450 – 3,000 pounds) x $3 1,350
Total actual materials cost for the month of May
(3,450 pounds at $3.60 per pound) $12,420
La Hoya has discussed the unfavorable price variance with Jim Montel, the purchasing officer. Montel agrees that under the circumstances he should be held responsible for most of the materials price variance. But he objects to the inclusion of $270 (450 pounds of excess materials used at $0.60 per pound). This, he argues, is the responsibility of the production department. If the production department had not been so inefficient in the use of materials, he would not have had to purchase the extra 450 pounds.

On the other hand, Ken Kechum, the production manager, agrees that he is basically responsible for the excess quantity of materials used. But, he does not agree that the materials usage variance should be revised to include the $270 of unfavorable price variance on the excess materials used. "That is Jim's responsibility," he says.

La Hoya now turns to you for help. Specifically, she wants you to tell her:

  1. Who is responsible for the $270 in dispute?
  2. If responsibility cannot be clearly assigned, how should the accounting department categorize the variance (price or usage)? Why?
  3. Are there likely to be other circumstances where materials variances cannot be considered the responsibility of the manager most closely involved with them? Explain.


Prepare written answers to the three questions La Hoya asked.

A broader perspective C Refer to "A broader perspective: Quality management and Balridge award". The Baldrige Award has been criticized for fostering a winner-versus-loser mentality, instead of encouraging every organization to improve its quality. Further, the award has been criticized for grading on the curve by awarding companies that are the best in US industry but still do not compete well against foreign competition.

Write a response to each of these criticisms of the Baldrige Award.

Group project D Many workers hate standards. Some people claim standards reduce morale and productivity. Others believe standards are necessary to motivate people. Based on your own experience in school or on a job, what do you think?

In groups of three, choose an organization or business to use as an example. List all the possible standards you could set for this organization or business. Then decide whether your group favors setting standards. If the group does, decide who should set each of the standards on your list. If the group does not favor standards, discuss your reasons. Choose one member to report for your group to the class.

Group project E The chief executive officer (CEO) of Tax Preparation Services, Incorporated, remarked to a colleague, "Establishing standard costs and performing variance analysis is only useful for companies with inventories. As a service organization, how could we possibly benefit from implementing such a system?" In groups of two or three students, write a memorandum to your instructor stating whether you agree with this comment or not and explain why. The heading of the memorandum should contain the date, to whom it is written, from whom, and the subject matter.

Group project F The controller of Plastics Manufacturing, Incorporated, states: "Let us figure the materials price variances when the materials are used rather than at the time of purchase. This way we can prepare the price and usage variances at the same time and directly link the price variance to production." In groups of two or three students, write a memorandum to your instructor stating whether you agree with this suggestion or not and explain why. The heading of the memorandum should contain the date, to whom it is written, from whom, and the subject matter.

Using the Internet—A view of the real world

Using any Internet search engine enter "standard costs" (be sure to include the quotation marks). Select an article that directly discusses standard costs and print a copy of the article. You are encouraged (but not required) to find an article that answers some of the following questions: When is the use of standard costing appropriate? How do certain industries use standard costing? How are standard costs established? How do standard costs help management in production?

Write a memorandum to your instructor summarizing the key points of the article. The heading of the memorandum should contain the date, to whom it is written, from whom, and the subject matter. Be sure to include a copy of the article used for this assignment.

Using any Internet search engine select one of the new terms at the end of the chapter and perform a key word search. Be sure to include quotation marks (for example: "Management by exception"). Select an article that directly discusses the new term used and print a copy of the article. Write a memorandum to your instructor summarizing the key points of the article. The heading of the memorandum should contain the date, to whom it is written, from whom, and the subject matter. Be sure to include a copy of the article used for this assignment.

Licenses and Attributions

More Study Resources for You

Show More