Bus 227 Management Accounting

May Trimester 2016

Workshop Solutions Session 9
Chapter 10
RQ:

10-1; 10-2; 10-12; 10-15

E:

10-25; 10-26

P:

10-40

Chapter 11
RQ:

11-3; 11-17; 11-20

E:

11-22; 11-30

Review Questions (RQ):

10-1

Any control system has three basic parts: a predetermined or standard

performance level, a measure of actual performance, and a comparison between
standard and actual performance. The system works by making the comparison
between actual and standard performance and then taking action to bring about a
desired consequence.

10-2

Management by exception is a managerial technique in which only significant

deviations from expected performance are investigated.

10-12 An unfavorable direct-labor rate variance means that a higher labor rate was paid
than was anticipated when the standard was set. One possible cause is that labor
rate raises granted were above those anticipated in setting the standards.
Another possible cause is that more highly skilled workers were used to perform
tasks than were required or were anticipated at the time the standards were set.
A favorable variance has the opposite interpretation.
10-15 The manager in the best position to influence the direct-labor efficiency variance
usually is the production manager.
EXERCISE 10-25 (15 MINUTES)
1.

Calculation of variances:
Direct-material price variance =

AQ(AP SP)

210,000($.62 $.60)

$4,200 Unfavorable

Direct-material quantity variance =

SP(AQ SQ)

$.60(210,000 200,000*)

$6,000 Unfavorable

Direct-material purchase price variance =

PQ(AP SP)

Bus 227 Management Accounting

May Trimester 2016
Workshop Solutions Session 9
=

240,000($.62 $.60)

$4,800 Unfavorable

*SQ = 200,000 kilograms = 50,000 units 4 kilograms per unit

Direct-labor rate variance = AH(AR SR)

= 13,000($12.20* $12.00)
= $2,600 Unfavorable
*AR = $158,600 13,000 hours

Direct-labor efficiency variance = SR(AH SH)

= $12.00(13,000 12,500*)
= $6,000 Unfavorable
*SH = 12,500 hours = 50,000 units .25 hours per unit

2. In the electronic version of the solutions manual, press the CTRL key and click on
the following link: 10E - Build a Spreadsheet 10-25.xls
PROBLEM 10-40 (30 MINUTES)
1.

Variances (U denotes unfavorable; F denotes favorable):

a.

Direct-labor rate variance for each labor class:

Labor

Actual

Difference

Actual

Rate

Standard
Rate

Class

in Rates

Hours

III

$25.80

$24.00

$1.80

1,100

$1,980 U

II

22.50

21.00

1.50

1,300

1,950 U

16.20

15.00

1.20

750

900 U

Total
b.

Rate
Variance

$4,830 U
Direct-labor efficiency variance for each labor class:

Bus 227 Management Accounting

May Trimester 2016
Workshop Solutions Session 9

Labor

Actual
Hours

Standard
Hours*

III

1,100

II
I

Class

Difference
in Hours

Standard
Rate

1,000

100

$24.00

$2,400 U

1,300

1,000

300

21.00

6,300 U

750

1,000

(250)

15.00

(3,750) F

Total

Efficiency
Variance

$4,950 U

*Given April's output of production.

PROBLEM 10-40 (CONTINUED)
2.

The advantages of not changing the labor rate would include (1) comparison of actual
operating results to a fixed base which was previously approved by management, and
(2) the clerical or computer cost savings of not implementing the change. If labor
standards are not changed during the year to incorporate significant changes in labor
costs, a noncontrollable variance is created. This variance may mask actual operating
variances. In addition, when reporting operating variances that contain a significant
noncontrollable variance, a credibility gap may be created.

REVIEW QUESTIONS:
11-3

Flexible overhead budgets are based on an input activity measure, such as

process time, in order to provide a meaningful measure of production activity. An
output measure, such as the number of units produced, could be used effectively
only in a single-product enterprise. If multiple, heterogeneous products are
produced, it would not be meaningful to base the flexible budget on an output
measure aggregated across highly different types of products.

11-17 The control purpose of a standard-costing system is to provide benchmarks

against which to compare actual costs. Then management by exception is used
to follow up on significant variances and take corrective action. The productcosting purpose of the standard-costing system is to determine the cost of
producing goods and services. Product costs are needed for a variety of
purposes in both managerial and financial accounting.
11-20 Plausible activity bases for a variety of organizations to use in flexible budgeting
are as follows:
(a) Insurance company: Insurance policies processed or insurance claims
processed.

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May Trimester 2016
Workshop Solutions Session 9
(b) Express delivery service: Number of items of express mail or weight of
express mail processed.
(c) Restaurant: Number of customers served.
(d) State tax-collection agency: Number of tax returns processed.

Bus 227 Management Accounting

May Trimester 2016
Workshop Solutions Session 9
EXERCISE 10-26 (30 MINUTES)
DIRECT-MATERIAL PRICE AND QUANTITY VARIANCES
ACTUAL MATERIAL COST
Actual
Quantity
210,000
kilograms
used

Actual
Price

Actual
Quantity

$.62
per
kilogram

210,000
kilograms
used

PROJ. MATERIAL COST

$130,200

Standard
Price

Standard
Quantity

$.60
per

kilogram

200,000
kilograms
allowed

$126,000

$4,200 Unfavorable

$6,000 Unfavorable

Direct-material
price variance

Direct-material
quantity variance

Direct-material variance

DIRECT-MATERIAL PURCHASE PRICE VARIANCE

ACTUAL MATERIAL COST

240,000
kilograms
purchased

Actual
Price

$.62
per
kilogram

$148,800

PROJ. MATERIAL COST

Actual
Quantity

Standard
Price

240,000
$.60
kilograms
per

purchased
kilogram
$144,000

Standard
Price

$.60
per

kilogram

$120,000

$10,200 Unfavorable

Actual
Quantity

STANDARD MATERIAL COST

Bus 227 Management Accounting

May Trimester 2016
Workshop Solutions Session 9

$4,800 Unfavorable
Direct-material
purchase price variance

Bus 227 Management Accounting

May Trimester 2016
Workshop Solutions Session 9
EXERCISE 10-26 (CONTINUED)

DIRECT-LABOR RATE AND EFFICIENCY VARIANCES

ACTUAL LABOR COST
Actual
Hours
13,000
hours
used

STANDARD LABOR COST

Actual
Rate

Actual
Hours

$12.20
per
hour

13,000
hours
used

$158,600

Standard
Rate

Standard
Hours

$12.00
per
hour

12,500
hours
allowed

$156,000

Standard
Rate
$12.00
per
hour

$150,000

$2,600 Unfavorable

$6,000 Unfavorable

Direct-labor
rate variance

Direct-labor
efficiency variance
$8,600 Unfavorable

Direct-labor variance
EXERCISE 11-22 (20 MINUTES)
1.

Calculation of overhead variances:

a.

Variable-overhead spending variance

= actual variable overhead (AQ SVR)

= $607,500 (60,750 machine hrs $9.00)
= $60,750 U

b.

Variable-overhead efficiency variance

= SVR(AQ SQ)
= $9.00(60,750 54,000*)
= $60,750 U

Bus 227 Management Accounting

May Trimester 2016
Workshop Solutions Session 9

*SQ = 54,000 hrs. = 13,500 cases 4 machine hours per case

c.

Fixed-overhead budget variance

= actual fixed overhead budgeted fixed overhead

= $183,000 $180,000
= $3,000 U

d.

Fixed-overhead volume variance

= budgeted fixed overhead applied fixed overhead

= $180,000 $162,000
= $18,000 U**

Applied fixed overhead

predetermined fixed standard allowed

overhead rate machine hours (MH)

$180,000

(13,500 cases 4 MH/case)

15,000 cases 4 MH/case

= $162,000
** Some accountants would designate a positive volume variance as "unfavorable."
EXERCISE 11-30 (10 MINUTES)
1.

Flexible budgeted amounts, using activity-based flexible budget:

a.

Indirect material: $33,000 ($18,000 + $3,000 + $3,000 + $9,000)

b.

Utilities: $6,000 ($4,500 + $1,500)

c.

Inspection: $3,300

d.

Test kitchen: $2,400

e.

Material handling: $3,000

Bus 227 Management Accounting

May Trimester 2016
Workshop Solutions Session 9
f.
2.

Total overhead cost: $64,800 ($45,000 + $7,800 + $2,400 + $3,000 + $6,600)

Variance for setup cost:

a.

Using the activity-based flexible budget: $1,000 F (actual cost minus flexible
budget = $3,500 $4,500)

b.

Using the conventional flexible budget: $500 U (actual cost minus flexible budget
= $3,500 $3,000)