CHAPTER 13 THE FLEXIBLE BUDGET AND STANDARD COSTING: DIRECT MATERIALS AND DIRECT LABOR

QUESTIONS 13-1 The firm earned $5 million while the master budget planned for the firm to earn $7.5 million operating income last year. The member of the operating review committee was correct in concluding that the firm was not effective; it failed to attain the operating income goal set for the period. The committee member, however, erred in saying that the operation was inefficient. The firm earned $5 million operating income from 25,000 units. The operating income for the flexible budget at 25,000 units is $4.5 million, which is lower than the amount the firm earned. The firm was efficient overall in carrying out its operations.

13.2Yes. A standard cost system can be used with an actual cost system; it compliments the cost system that a firm uses in tracking costs, including job order costing and process costing. 13-3 Yes. An effective operation attains the goal set for the operation while an efficient operation carries out the operation without wasting any of the resources. An operation can achieve its goals even though it wasted resources in attaining the goal. An operation can be efficient in using resources in operations without achieving the goal it sets out to attain. A standard is the cost a firm expects to incur for an operation. The operation can be an activity or a period. A budget includes planned actions for a period or a project and their expected results. Standard costs are stated on per unit bases and often are the building blocks for budgets. A master budget differs from a flexible budget in that a master budget is for a specific level of operations, while a flexible budget can be prepared for any level of operations within the relevant operation range. A flexible budget can consist of several budgets, one for each specific level of the operations such as sales or other measures of activity. They also can differ in the times of preparations and the levels of details of the budget. A master budget is prepared before the beginning of a budget period while a flexible budget may be prepared before, during, or after the budget period. The scopes of budgets often also differ. A flexible budget often focuses on selected aspects of the operation and is at a detailed level while a master budget covers all aspects of operation and is less detailed than those of a flexible budget.

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Flexible budgets can reflect changes in factors that have effects on operations including changes in inflation rates and activity levels. Prime costs are direct materials and direct labor. These costs are variable costs. As the operation level decreases, the amounts of direct materials and direct labor also decrease more or less in proportion to the decrease in output. At the 80 percent level of the budgeted output, the total prime cost should have been $64,000 ($80,000 x .8). Barring changes in other operating factors, the plant manager was not efficient when the manager spent $72,000 to operate at 80% level of the budgeted production. Of the three, standards based on the average of recent historical performance are the least desirable. Many firms prefer to use standards based on attainable performance in their standard cost systems in order to have standards that are achievable and not frustrating to workers. However, world-class firms or firms stressing continuous improvements often choose to use standards based on ideal performance. Underlying causes of direct labor rate and efficiency variances may differ, have different implications, and require different corrective actions. Knowing the causes of cost variances facilitates proper assessments of the operation and effective responses.

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13-10 Although the total materials cost variance is small and insignificant, the total variance can be a result of substantial price and efficiency variances in opposite directions. Management needs to know more specifically efficiencies in purchases and in uses of the materials in its operations in order to evaluate the efficiency of the two separate functions relating to materials. 13-11 The variance that is most likely to reflect effects of a learning curve phenomenon is the direct labor efficiency variance. A learning curve phenomenon may also have effects on the uses of direct materials, as the amount of waste or spoilage may decrease with experience. 13-12 Overtime premium are factory overheads, not direct labor costs. The higher wages paid due to overtime premium should not have any effect on direct labor variances. For firms that include overtime premium in the total wages, rate variances are likely to be unfavorable.

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13-13 The performance of a division should not be considered as less than satisfactory simply because all variances are unfavorable. A firm expects unfavorable variances if it uses an ideal performance standard. As long as the firm is making satisfactory progresses toward the standard, unfavorable variances are measures of progresses needed to attain the goal; they are not measures of unsatisfactory performances. On the other hand, an unfavorable variance may signal that the performance of the division is below the expectation if the firm uses a currently attainable standard. Firms with currently attainable standards expect the division to meet the goals in each and every operation. 13-14 Of the four scenarios, 4 is the best answer. The manufacturing cost of all units manufactured since the strike should be based on the new labor rates. 13-15 The best answer among the choices is 3. A favorable materials purchase variance suggests that the firm paid a lower actual cost of materials than the prices specified in the standard cost sheet for the materials. The firm also used more than the quantity of materials specified in the standard cost sheet for the units manufactured. 13-16 JIT firms emphasize the total cost of operations, not just materials purchase costs. The importance of such factors as quality, reliability, and availability often outweighs the purchase cost. Also, firms using JIT systems are likely to have long-term purchase contracts with selected pre-certified suppliers. The negotiated prices are not subject to short-term fluctuations. 13-17 One result of the new technologies is the decreased importance of direct labor variances. The utmost concerns of firms using the new manufacturing technology are satisfying customers and providing better products than the competitor. A well-managed firm is not the one with the lowest unfavorable variances or the highest favorable variances. Rather, it is the one with happy customers and consistently better products. 13-18 Establishing a standard cost system and identifying variances from the standard are steps in gaining a better understanding of the operations and to improve the operations. The focus of a standard cost system should be on influencing behavior with positive reinforcements and motivations. Standard costing systems should never be used as the whipping boy. Seldom is long-term success a result of penalties and punishments. A positive perception about the standards and variance identifications by all affected workers are a must for the success of the system. Secrecy in setting standards, authoritarian control procedures, poor communication, excessive pressure, inflexibility, uneven reward systems, or excessive emphasis on profits can make a good standard cost system a failure. 13-19 The normal year-end treatment of immaterial variances is to close the entire variance to cost of goods sold of the period.
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13-20 1. The major advantages of using a standard cost accounting system include the following: Budgeting. Standard costs can be the building blocks for budget preparations and allow the development of flexible budgets. Performance evaluation. By comparing actual costs to standard costs, the performance of the company, a department, or an individual can be evaluated. Controlling. An analysis of the variances between actual costs and standard costs can identify problem areas and allow for remedial action. Pricing. Standard costs based on carefully determined materials and labor usage plus overhead rates based on normal activity levels form an acceptable basis for pricing strategies that provide for full recovery of all costs. Record keeping cost and effort. Standard costs reduce the effort required to perform cost accounting and, thus, reduce the cost of bookkeeping. 2. The setting of physical standards such as materials quantities, labor hours, machine time, and set-up time generally requires information about materials, laborers, equipment specifications, production procedures, and work flow; this information is generated from studies conducted by technical personnel and/or from the production expertise of line personnel. There must also be adequate cost and price information to convert the physical standards into monetary terms. In addition, a firms cost must be separable into cost per unit of production or hour of service, and the production process must be fairly stable and predictable.

3 a. Because cash maximization is important for a product classified as a cash cow, efficiency of operations is essential. Standard cost will provide targets for monitoring costs and identification of inefficiencies so that they can be corrected. Because a cash cow is a slow-growing established product, costs should be fairly predictable and easy to track. b. Because a product classified as a question mark is facing strong competition, the ability to control product costs may be the difference between success and failure. The efficiency gained from the application and monitoring of a standard cost system could give the question mark a longer period of time to gain market acceptance. The cost control afforded by standard cost allows a firm to be more flexible in its pricing including the ability to price its question marks below similar competitive products. 13-21 One of the functions of making journal entries is to provide management timely information for monitoring operations and controlling activities and costs. These functions can be most effectively attained if entries, including those of variances, are posted to the ledgers as soon as they are known and made available immediately to the operating managers.

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13-22 This question was posted in Cost Management Update, Institute of Management Accounts (August 2003), p. 4. Two readers responded: Although our manufacturing side would like to change standard costs frequently, we update them every six months. The closest update to year-end is the month prior to year-end. It spreads the workload. Six months later, we do it again. We have found that our processes and costs do not change drastically enough to warrant more frequent changes. At my company we update standards once a year. Our MRP system lets us track at an item level a standard cost (updated once a year) and a current cost. A change in bill of material, routing, or work center overhead rate will be reflected in current cost fields. This allows us to have a base line (the standard) as a measurement of improvement. In the financial statements, the changes are reflected in Methods Change Account (bill of material change or routing change), price variance (raw material price change), or overhead absorption variance (actual direct center spending differs from the annual operating plan overhead rate multiplied by earned hours), along with labor efficiency. If standard cost were to change midyear, my first step would be to estimate the change in revaluating the inventory at the new standard cost, as it will be a lump sum amount and most likely should be forecasted prior to the change.

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EXERCISES 13-23 Review Problem: Flexible Budget And Variances (10 min) 1. Flexible budget for June at 90 percent of the budget level Units sold Sales Variable expense Contribution margin Fixed expenses Operating income 2. 900 $720,000 405,000 $315,000 150,000 $165,000 $165,000 - $200,000 = $35,000 U b. Contribution margin sales volume variance: $315,000 - $350,000 = $35,000 U 3. Contribution Margin Income Statement For the Month of June $756,000 414,000 $342,000 180,000 $162,000

a. Operating income sales volume variance:

Sales (900 x $840) Total variable expenses Contribution margin Fixed expenses Operating income a. b. Operating income flexible budget variance:

$162,000 - $165,000 = $3,000 U Contribution margin flexible budget variance: $342,000 - $315,000 = $27,000 F c. Selling price variance: Or ($840 - $800) x 900 = $36,000 F $756,000 - $720,000 = $36,000 F

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13-24 Flexible budget and Variances (10 minutes) 1. Budget data: Selling price Variable cost $48,000 ) 12,000 = $4.00 per unit $18,000 ) 12,000 = $1.50 per unit $60,000 22,500 $37,500 16,000 $21,500 $40,000 37,500 $ 2,500 F $3,500 F $7,500 F $7,500 F

a.

Flexible budget for 15,000 units Sales 15,000 x $4.00 = Variable costs 15,000 x $1.50 = Contribution margin Fixed costs Operating income

b. Contribution margin earned for the period: $64,000 - $24,000 = Flexible budget contribution margin Contribution margin flexible budget variance c. Operating income flexible budget variance: $25,000 - $21,500 = d. Contribution margin sales volume variance: $37,500 ($48,000 - $18,000) = e. Operating income sales volume variance: $21,500 ($48,000 - $18,000 - $16,000) =

2. As long as both the budgeted and the actual operations are within the same relevant range, the flexible budget for the actual operating level and the master budget will have the same total fixed costs. Since both flexible budget and master budget subtracted the same total fixed costs from the contribution margin to arrive at the operating income, the contribution margin and the operating income sales volume variance will be identical. 3. The actual fixed costs for a period is likely to differ from the budgeted amount. As a result, the difference between the actual contribution margin and the flexible budget contribution margin of the period is likely to differ from the difference between the operating income earned and the flexible budget operating income for the same period.
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Units

Sales Volume Variance (10 min) Flexible Sales Budget Flexible Volume Actual Variance Budget Variance 3,800 -03,800 $53,200 $19,000 7,700 $26,700 $26,500 $16,000 10,000 $26,000 $ 500 $3,800 U $57,000 $3,800 100 $3,900 $7,700 $1,000 1,000 $2,000 $9,700 U $15,200 U 7,600 U $22,800 U $34,200 U $15,000 U 9,000 U $24,000 U $10,200
1

Master Budget 200 U

4,000

Sales Variable costs: Manufacturing Selling & Admin. Total variable costs Contribution margin Fixed costs: Manufacturing Selling & Admin. Total fixed costs Operating income
1

$3,000 U $60,000 $800 400 1,200 $1,800 F $16,000 F 8,000 F $24,000 U $36,000

2 3

$15,000 9,000 - 0 - $24,000 $1,800 U $12,000

Budget selling price per unit x number of units = ($60,000/4,000) x 3,800 = $15 per unit x 3,800 = $57,000 Standard variable manufacturing cost per unit x number of units = ($16,000/4,000) x 3,800 = $4 Variable manufacturing cost per unit x 3,800 = $15,200 Standard variable selling and administrative expense per unit x number of units = ($8,000/4,000) x 3,800 = $2 per unit x 3,800 = $7,600 $34,200 - $36,000 = $10,200 - $12,000 = $26,500 - $34,200 = $500 - $10,200 =
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Sales volume variances Contribution margin: Operating income: Flexible budget variances Contribution margin: Operating income:
Blocher, Chen, Cokins, Lin: Cost Managemen, 3e

$1,800 U $1,800 U $7,700 U $9,700 U

The McGraw-Hill Companies, Inc., 2005

13-25 (continued) 2. The firm reduced its selling price (from $15 per unit to $14 per unit) to compete in the market, suggesting that the firm has cost leadership, not differentiation, as its competitive strategy for the product. However, it failed to exercise proper control of its operating costs, as indicated by unfavorable variances for manufacturing and selling and administrative costs. The excess costs reduced the flexible budget operating income of the period by 95 percent. Unless the firm can have its costs under control, it will not be successful to compete as a cost leader or low cost producer. The firm has unfavorable selling price and sales volume variances. Even though the firm reduced its selling prices, it failed to attain the budgeted sales volume. The strategy of competing through reduced selling prices to gain sales failed. 3. Spreadsheets should have the following results for 3,800 and 4,100 units: A B C D Master 1 Flexible Budget Budget Equation 2 Units 3 Sales C2 4 Variable costs: 5 C2 6 C2 7 Total variable costs $22,800 $24,600 $24,000 =B5+B6; C5+C6 8 Contribution margin $34,200 $36,900 $36,000 =B3-B7; C3-C7 9 Fixed costs: 10 11 Manufacturing Selling & Admin. $15,000 $15,000 $15,000 = D10 9,000 9,000 9,000 = D11 C8$24,000 $24,000 $24,000 =B10+B11; $10,200 $12,900 $12,000 =B8-B12;
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3,800

4,100

4,000 or

$57,000 $61,500 $60,000 =D3 D2xB2

Manufacturing Selling & Admin.

$15,200 $16,400 $16,000 7,600 8,200

=D5 D2xB2

or or

8,000 =D6 D2xB2

12 Total fixed costs 13 Operating income

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13-26 Review Problem: Direct Materials And Direct Labor Variances (10 min) 1. Price variance Aluminum: Total Aluminum purchased: 3,375 + 25 50 = 3,350 pounds Price variance : ($30 - $25) x 3,350 = $16,750 U Usage variance Aluminum: Total standard aluminum for the units manufactured: 900 units x 4 pounds per unit = 3,600 pounds Usage variance: (3,375 3,600) x $25 = $5,625 F 2. Direct labor rate variance: ($42 - $40) x 4,200 = $8,400 U Direct labor efficiency variance: Total standard direct labor hours for the units manufactured: 900 x 5 hours = 4,500 hours Direct labor efficiency variance: (4,200 4,500) x $40 = $12,000 F

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13-27 Review Problem: Journal Entry (5 min) Oct. 7 Materials Inventory (720 X $40) Materials Purchase Price Variance-PVC (720 X $1) Accounts Payable (720 X $41) Purchased 720 pounds PVC from TVC Chemical Inc. at $41 per pound. Standard price: $40 per pound. Oct. 9 Work-in-Process Inventory Materials Usage Variance-PVC Materials Inventory (720 X $40) Issued 720 pounds of PVC to production for the production of 780 units of XV-1. Standard usage is 1 pound per unit of XV-1 at $40 per pound. 31,200 2,400 28,800 28,800 720 29,520

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13-28Materials Purchase Price (5 min) 2,000 x AP 2,000 x $5.00

$200 F Price Variance

1,800 x $5.00

1,600 x $5.00

Usage Variance ? 1. Direct materials price variance = (AP - SP) x AQ - $200 - $200/2,000 AP AP 2. = (AP - $5.00) x 2,000 = AP - $5.00 = $5.00 - $0.10 = $4.90

Direct materials usage variance = (AQ - SQ) x SP = (1,800 - 1,600) x $5.00 = $1,000 U

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13-29 Materials Price Variance (5 min) 30,000 x AP = $90,000 30,000 x $3.25 = $97,500

Price Variance? 28,000 x $3.25 SQ x $3.25

$6,500 U Usage Variance 1. Price per pound paid to purchase direct materials: $90,000 30,000 units = $3.00 per unit 2. Total actual cost of direct materials purchased Total direct materials purchased (pounds) Standard cost per pound of direct materials Direct materials price variance 3. Total direct materials used at standard cost per pound 28,000 x $3.25 = Less: unfavorable direct materials usage variance Total standard direct materials cost for the units manufactured Standard cost per unit of direct materials Total standard quantity of direct materials for the units Manufactured $91,000 6,500 $84,500 $3.25 26,000 x Total standard cost of direct materials purchased 30,000 3.25 97,500 $ 7,500 F $90,000

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13-30Materials Price Variance (5 min) AQ X AP AQ x SP

Price Variance = $220,000

60,000 x SP

54,000 x SP

$24,000 U Usage Variance Sales volume variances Contribution margin: Operating income: 1. $34,200 - $36,000 = $10,200 - $12,000 = $1,800 U $1,800 U

Standard unit price of direct materials: (60,000 - 54,000) x SP = $24,000 SP = $24,000/6,000 SP = $4.00 per pound 2. Actual quantity of direct materials purchased: Direct materials used during the period Add: Increase in direct materials inventories Total units of direct materials purchased + 60,000 2,000 62,000

3.

Direct materials price variance: $220,000 - $4.00 x 62,000 = $28,000 Favorable

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13-31Materials Price Variance (5 min) 1,400 x $1.10 1,400 x $1.00 AQ x $1.00 1,300 x $1.00

Price Variance Direct materials price variance:

Usage Variance

($1.10 - $1.00) x 1,400 = $140 Unfavorable Direct materials usage variance: Actual direct materials used: 700 + 1,400 - 600 = 1,500 gallons (1,500 - 1,300) x $1.00 = $200 Unfavorable

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13-32Materials Usage Variance (5 min) AQ x $7.50 AQ x $7.25

Price Variance 2,300 x $7.25 2,100 x $7.25

Usage Variance Units of direct materials purchased: 2,300 - 100 = 2,200 Direct materials purchase price variance: ($7.50 - $7.25) x 2,200 = $550 Unfavorable Direct materials usage variance: (2,300 - 2,100) x $7.25 = $1,450 Unfavorable.

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13-33Materials Usage Variance (5 min) 8,300 x AP 8,300 x $5.10

Price Variance AQ x $5.10 8,000 x $5.10

Usage Variance 1. Quantity of materials used: 8,300 - 500 = 7,800 pounds Total standard quantity of direct materials for the units of finished units produced: 2,000 units produced x 4 pounds per unit = 8,000 pounds Direct materials usage variance: (7,800 pounds - 8,000 pounds) x $5.10 = $1,020 Favorable Direct materials price variance: $640 U + $1,020 F = $1,660 Unfavorable 2. Actual cost of direct materials per pound: (AP - $5.10) x 8,300 = $1,660 AP = $5.10 + $0.2 AP = $5.30 per pound

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13-34Standard Direct Materials Cost (5 min) Standard direct material cost per bag of Inset-Be-Gone Total direct materials in the final product Proportion of direct materials input remained in the finished product Purchase price per pound Total purchase price before purchase discount Purchase discount Standard direct material cost per bag ) 75% 80 lbs. $2.50 $200.00 4.00 $196.00 x Total standard quantity of DM per bag of Inset-Be-Gone 60 lbs.

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13-35Standard Direct Materials Cost (5 min) Total direct materials per package of SS-2 Standard purchase price per pound of Natura Total purchase price before purchase discount Purchase discount (3/15) Standard direct material cost per package of SS-2 12 lbs. x $5.00 $60.00 1.80 $58.20

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13-36Materials Price and Usage Variance (5 min) 22,000 x AP = $26,400 22,000 x $1.25 = $27,500 Price Variance Direct materials price variance: $26,400 - $27,500 = $1,100 Favorable Or, Actual cost per shingle: $26,400 ) 22,000 = $1.20 per shingle (AP SP) X AQ = Price Variance ($1.20 - $1.25) x 22,000 = $1,100 Favorable Direct materials usage variance: Total Standard quantity allowed for the units completed: SQ = 20 x 1,000 = 20,000 shingles (AQ SQ) X SP = Usage Variance (22,000 - 20,000) x $1.25 = $2,500 U 20 x 1,000 x $1.25 = $25,000 Usage Variance

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13-37Materials Usage Variance (5 min) Actual direct materials used in production Total standard direct materials for the units manufactured: Number of desks manufactured Standard quantity of vinyl per desk Total Excess vinyl used in production Standard cost of vinyl per sq. ft. Direct materials (vinyl) usage variance 1,000 x 12 12,000 sq. ft. 600 sq. ft. x $ 2.25 $1,350 U 12,600 sq. ft.

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13-38Labor Rate Variance (5 min) 40,000 x $25 = $1,000,000 40,000 x SR 42,000 x SR

Rate Variance

$48,000 F Efficiency Variance

1. Standard hourly rate: Efficiency variance = (40,000 - 42,000) x SR = -$48,000 SR = $48,000 ) 2,000 hours SR = $24.00 per hour 2. Direct labor rate variance: Total payroll for direct labor 40,000 x $25 per hour = $1,000,000 Total actual hours at standard direct labor rate: Actual direct labor hours Standard hourly rate Total Direct labor rate variance 40,000 x $24.00 - 960,000 $40,000 U

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13-39Standard Labor Rate and Efficiency Variance (5 min) 11,000 x $30.00 11,000 x SR ? Efficiency Variance 11,000 x + $30.00 $330,000 33,000 $363,000 11,000 $33.00 12,000 x SR

$33,000 F Rate Variance 1. Total actual direct labor hours Actual hourly rate Total actual total direct labor cost Favorable direct labor rate variance

Total actual direct labor hours at standard hourly rate Total actual direct labor hours in January Standard direct labor rate per hour 2. Direct labor efficiency variance: = (AH SH) x SR = (11,000 - 12,000) x $33.00 = $33,000 F

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13-40Standard Labor Rate and Total Hours (5 min) 200 x AR = $1,000 $100 F Rate Variance 1. Total actual direct labor cost Favorable direct labor rate variance Direct labor hours worked at the standard hourly rate Total direct labor hours worked Standard direct labor rate per hour 2. Total standard direct labor hours allowed: Efficiency variance = (200 - SH) x $5.50 = $165 SH = 200 - ($165 $5.50) = 200 - 30 = 170 hours + 200 x SR $165 U Efficiency Variance $1,000 100 $1,100 200 $5.50 SH x SR

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13-41Labor Efficiency Variance (5 min) 20,000 x AR = $378,000 $6,000 U Rate Variance 1. Standard direct labor hourly rate: Total payroll Unfavorable direct labor rate variance Direct labor hours worked x Standard hourly rate Actual direct labor hours Standard direct labor hourly rate 2. Direct labor efficiency variance: Budgeted total direct hours Budgeted units to manufacture Standard direct labor hour per unit Total units manufactured Total standard hours for units manufactured Direct labor efficiency variance = (AH SH) x SR = (20,000 - 18,000) x $18.60 = $37,200 U x 24,000 8,000 3 6,000 18,000 $378,000 6,000 $372,000 20,000 $18.60 20,000 x SR ? Efficiency Variance SH x SR

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13-42Labor Rate and Efficiency Variances (5 min) 3,000 x AR = $69,000 3,000 x $20.00 = $60,000 2 x 1,600 x $20.00 = 3,200 x $20.00 = $64,000

Rate Variance 1. Direct labor rate variance:

Efficiency Variance $69,000 - 3,000 x $20 = $9,000 U 3,000 3,200 200 x $20.00 $4,000 F

2. Total hours spent to manufacture 1,600 units Total standard direct labor hours for the units manufactured Saving in direct labor hours Standard direct labor hourly wage rate Direct labor efficiency variance 1,600 x 2 =

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13-43Labor Rate and Efficiency Variances (10 min) AH x $18.00 = $207,000 AH x $16.00 10,000 x 1.5 x $16.00 = $240,000

Rate Variance

Efficiency Variance

1. Direct labor rate variance: Difference in hourly wage rates: Actual direct labor hourly rate Standard direct labor hourly rate Actual direct labor hours spent: Actual direct labor costs $207,000 Actual direct labor hourly rate Total actual direct labor hours spent Direct labor rate variance 2. Direct labor efficiency variance:

$18.00 - 16.00 $18.00

$2.00 U

x 11,500 $23,000 U

Actual direct labor hours 11,500 Total standard direct labor hours for the units manufactured: Number of finished units manufactured 10,000 Standard direct labor hour per unit x 1.5 Total - 15,000 Difference in direct labor hours 3,500 F Standard direct labor hourly wage rate x $16.00 Direct labor efficiency variance $56,000 F 3. If the unfavorable rate variance is a result of the production managers decision to employ workers with higher skill levels the production manager made a right decision in doing so. The amount of favorable efficiency variance more than offsets the higher wages paid to these skilled workers. Direct labor rate variance $23,000 Direct labor efficiency variance Total direct labor variance U 56,000 F $33,000 F

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13-44Labor Rate and Efficiency Variances (5 min) 410 x $21.00 = $8,610 Rate Variance 1. Direct labor rate variance: Total direct labor payroll Actual total direct labor hours at standard hourly rate: 410 hours x $20 = Direct labor rate variance 2. Direct labor efficiency variance: Actual direct labor hours Total standard direct labor hours for the output: Total output (gallons) Standard output per direct labor hour Difference in labor direct hours Standard direct labor cost per hour Direct labor efficiency variance 8,440 20 422 12 F x $ 20 $240 F 8,200 $410 U $8,610 410 x $20.00 SH x $20.00 = $8,440

Efficiency Variance

410 hrs.

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13-45Actual Labor Hours (5 min) 1.Direct labor efficiency variance = (AH - SH) x SR $27,000 = (AH - 10,000) x $25.00 AH AH = 10,000 + $27,000 / $25.00 = 11,080 hours

2. Direct labor rate variance = (AR SR) x AH = ($22 - $25) x 11,080 = $33,240 F

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13-46 Labor Hour Worked (5 minutes) 1. Direct labor efficiency variance $4,000 AH AH = = = = = = (AH - SH) x SR = (AH - 2,000) x $20.00 = 2,000 + $4,000 / $20.00 = 2,200 hours

2. Direct labor rate variance (AR - SR) x AH ($22.50 - $20.00) X 2,200 $5,500 U $5,500 U + $4,000 U $9,500 U

3. Direct labor flexible budget variance

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13-47Total Payroll (5 min) 1. Efficiency variance = (AH SH) x SR = (18,000 16,000) x $50 = $100,000 U 2. Total variance = Rate variance + Efficiency variance Rate variance = Total variance (F) + Efficiency variance (U) = $20,000 + $100,000 = $120,000 F 3. Actual direct labor hours Standard direct labor rate Total actual direct labor hours at the standard rate Direct labor rate variance - Favorable Total direct labor payroll in May x 18,000 $50.00 $900,000 120,000 $780,000

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13-48Total Payroll (5 min) Actual direct labor hours Standard direct labor rate Total direct labor hours worked at the standard rate Direct labor favorable rate variance Total direct labor payroll for May x 10,500 $24.00 $252,000 8,400 $243,600

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13-49Standard Direct Labor Cost Per Unit (5 min) Total hours paid per week per employee Hourly wage Weekly wages per employee Employee benefit (40%) Total weekly payroll cost per employee Weekly productive hours per employee Direct labor cost per productive hour Standard direct labor cost per unit $48 x 3 $144 Number of standard direct labor hours per unit + x 40 $30 $1,200 480 $1,680 35

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13-50 Actual and Standard Labor Rates (5 min) 1. Actual direct labor hourly wage rate: Total payroll for direct labor Actual direct labor hours Actual direct labor rate 2. Standard direct labor hourly rate: Total payroll for direct labor Direct labor rate variance - Favorable Total actual hours at standard hourly rate Actual direct labor hours Standard direct labor hourly rate 3. Direct labor efficiency variance: Actual direct labor hours Total standard direct labor for the units manufactured Favorable direct labor efficiency variance in hours Standard hourly wage rate Direct labor efficiency variance x $76,800 27,000 30,000 3,000 $25.60 F + $675,000 16,200 $691,200 27,000 $25.60 per hour $675,000 27,000 hrs. $25.00per hour

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13-51Total Direct Materials Cost in Flexible Budget (5 min) 1. Flexible budget direct materials cost Master budget data: Total direct materials Number of units Direct materials cost per unit Number of units manufactured during March Direct materials cost in the flexible budget for March 2. Direct materials flexible budget variance: Actual direct materials cost Flexible budget direct materials cost Direct materials flexible budget variance $22,000 - 21,660 $ 340 U x $273,600 144,000 $1.90 11,400 $21,660

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13-52 Flexible budget and direct labor variances (5 minutes) 1. Master budget Total variable cost Total number of papers to be processed Total standard variable cost to process one paper Total number of papers processed during the year Total budgeted variable cost for 1,200,000 papers Fixed costs per year Expected total cost to process 1,200,000 papers 2. Total actual labor cost Actual total labor hours Standard labor rate per hour ($600 ) 15) Direct labor rate variance 3. Actual total labor hours Total standard labor hours for 1,200,000 paper: (1,200,000 ) 1,000) x 15 = Excess labor hour Standard labor rate per hour Direct labor efficiency variance x 18,000 1,000 40.00 $40,000 U x 19,000 40.00 - 760,000 $95,000 U 19,000 x ) $2,700,000 1,500,000 $1.80 1,200,000 $2,160,000 150,000 $2,310,000 $855,000

Total labor hours worked at the standard hourly rate

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Problem 13-53 Standard costing system (10 minutes) 1. a. The major advantages of using a standard cost system include budgeting. Standard costs can be the building blocks for budget preparation and allow the development of flexible budgets. performance evaluation. Comparisons of actual costs to standard costs facilitate 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. b. The disadvantages that can result from using a standard cost system include the following. Cost standards that are too tight can cause the employees to ignore the standards or, worse, have negative behavioral implications leading to undesirable actions. Standards may ignore qualitative characteristics and jeopardize product quality. 2. A standard cost system must be supported by top management to be successful. The parties who should participate in the standard setting processes include all levels of the organization, i.e., purchasing, engineering, production, and cost accounting. The value of their participation is that they are more likely to accept the standards as an evaluation criterion.

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13-53 (continued) 3. The general features and characteristics associated with the introduction and operation of a standard cost system that make it an effective tool for cost control include the following. Standard setting can be a participative process with those individuals most familiar with the variables associated with standard setting available to provide the most accurate information. This sense of participation will help establish the legitimacy of the standards and give the participants a greater feeling of being part of the operation. 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 performance reports. 4. The consequences of having the standards set by an outside consulting firm are the following: There could be negative employee reaction as the employees did not participate in the standard setting process. There could be dissatisfaction if the standards contain cost elements that are not controllable by the production groups but they are held responsible for unfavorable variances. The outside firm may not fully understand the manufacturing process; this could result in poor management decisions based on faulty information.

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13-54 Standard cost sheet (10 minutes) 1. Standard unit cost per cutting board: Direct material Lumber (1.50 bd. ft.1 x $3.00/bd.ft.) $4.50 Pads (4 pads x $0.05/pad) .20 Direct labor Prepare/cut (14.4/60 hrs.2 x $8.00/hr.) 1.92 Assemble/ finish (15/60 hrs. x $8.00/hr.) 2.00 Total standard unit cost 1 1.25 board feet x (5+1) ) 5 = 1.50 board feet. 2 12 minutes/board x (5+1) ) 5 = 14.4 minutes.

$4.70 3.92 $8.62

2. The advantages of implementing a standard cost system include the following. Standard costs are incorporated into the accounting system making record keeping easier and facilitating cost analysis. Standard costs provide the basis for building a companys budget. Standard costs serve as goals; they encourage cooperation and coordination among all elements of the corporation. The variance analysis associated with standard costs provides a feedback system to those responsible for controlling costs. 3. a. The role of purchasing manager in the development of standards includes establishing the standard cost for material required by the bill of materials, determining if the company should take advantage of price reductions available through economic order size, and obtaining data regarding the availability of materials. b. The role of industrial engineer in the development of standards includes preparing the bill of materials that specifies the types and quantities of material required, establishing, in conjunction with the manufacturing supervisor, any allowances for scrap, shrinkage and waste, and participating in time studies and test runs to facilitate the establishment of time standards. c. The role of cost accountant in the development of standards includes reviewing all information regarding material and labor standards received from other departments, establishing the labor rate standards based on the type of labor required, determining application rates for indirect costs such as material handling and manufacturing overhead, and converting physical standards such as hours and quantities to monetary equivalents.

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13-55Standard Cost Sheet (20 min) 1. Standard cost for ten-gallon batch of raspberry sherbet a. b. Standard Standard Quantity Rate Direct materials Raspberries (7.5 qts.* x $.80) = $6.00 Other ingredients Direct labor Sorting Blending Packaging c. (3 min. x 6 qts.)/60 x (12 min./ 60) x (40 qts.** x $9.00 = $9.00 = $.38) = 2.70 1.80 4.50 15.20 $30.20 (10 gal. x $.45) = 4.50 $10.50

Standard cost per ten-gallon batch

0 *6 quarts x (4 + 1)/4 = 7.5 quarts required to obtain 6 acceptable quarts. **4 quarts per gallon x 10 gallons = 40 quarts. 2. a. In general, the purchasing manager is held responsible for unfavorable materials price variances. Causes of these variances include the following: Failure to correctly forecast price increases Purchasing nonstandard or uneconomical lots Not purchasing from suppliers offering the most favorable terms As a small producer, ColdKings competitive strategy is likely to be differentiation through brand recognition as the firm has done. The success of the competitive strategy requires that the firm maintains high quality and good cost control. Unfavorable price variances decrease the profit of the firm and, unless corrected in the short run, may compromise the firms competitive position and the survival of the firm in the long run.

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13-55 (continued) b. In general, the production manager or foreman is held responsible for unfavorable labor efficiency variances. Causes of these variances include the following: Poorly trained labor Substandard or inefficient equipment Inadequate supervision Unfavorable efficiency variances increase costs, decrease profits, and may affect the quality of the firms products. Continuous unfavorable efficiency variances jeopardize the competitive position of the firm and threaten the success of the firms strategy.

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13-56Fill in Missing Data (20 min)

Operating Res ult Flexible Budget Variance Flexible Budget S ales Volume Variance Master Budget

Units Sales revenue Variable cost Manufacturing Selling and administrative Contribution margin Fixed cost Operating income
a. -0-

900 $9,500 $4,800 2,300 $2,400 1,200 $1,200

0 ($400) U $600 (500) ($300) (200) ($500) F U U U U

900 $9,900 $5,400 1,800 $2,700 1,000 $1,700

100 F $1,100 F $600 (200) $300 $0 $300 U U F F

800 $8,800 $4,800 1,600 $2,400 1,000 $1,400

b. Flexible budget unit (Same as the actual units sold): c. Sales volume variance (unit): d. Budget selling price per unit: Flexible budget Sales revenues: e. Selling price flexible budget variance: f. Sales revenue sales volume variance: 900 - 800 = $8,800/800 units = $11 900 x $11 = $9,500 - 9,900 = $9,900 - 8,800 = 800 x $6 =

900 100 F $9,900 $400 U $1,100 F $4,800 $5,400 $4,800 $2,300 $1,800 $500 U U

g. Standard variable manufacturing cost per unit: $600/(900 - 800) = $6 Variable manufacturing cost-Master budget: i. Variable manufacturing cost-Actual: j. Actual: unit Flexible budget: l. Flexible budget variance:
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h. Variable manufacturing cost-Flexible budget: 900 x $6 = $5,400 - 600 = Variable selling and administrative expense: $9,500 - 4,800 - 2,400 = 900 x $2 = $2,300 - $1,800 = $200

k. Standard selling and administrative cost: $1,600/800 units = $2 per

m. Sales volume variance:$1,800 - $1,600 =

n. Contribution margin Flexible budget variance: $400 U - $600 F + $500 U = p. Flexible budget contribution margin: or q. Master budget contribution margin: $8,800 - $4,800 - $1,600 = or s. Fixed cost - Actual: t. Fixed cost - Master budget: u. Fixed cost - Flexible budget: v. Fixed cost sales volume variance: w. Fixed cost flexible budget variance: x. Flexible budget Operating income: or or $1,000 - 1,000 = $1,200 - $1,000 = $2,700 - $1,000 = $1,100 F - $600 U - $200 U = $2,400 - $1,200 = $2,400 - $1,400 = $2,400 $300 F $1,200 $1,000 $1,000 0 $200 U $1,700 $500 U $300 F $300 F r. Contribution margin sales volume variance: $2,700 - $2,400 = $300 F $2,400 + $300 U = $9,900 - $5,400 - $1,800 = $300 U $2,700 $2,700

y. Operating income flexible budget variance: $1,200 - $1,700 = $500 U (n) $300 U + (w) $200 U = (r) $300 F - (u) $0 = z. Operating income sales volume variance: $1,700 - $1,400 =

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13-57 Fill in Missing Data (15 min)

Operating Result Flexible Budget Variance Flexible Budget Sales Volume Variance Master Budget

Units Sales revenue Variable cost: Manufacturing Selling & administrative Contribution margin Fixed cost Operating income
1.

1,600 $38,400 $27,200 4,000 $7,200 6,200 $1,000 $1,600 U 1,600 U (800) U ($4,000) U 1,400 F ($2,600) U

1,600 $40,000 $25,600 3,200 $11,200 7,600 $3,600

100

1,500 $37,500 24,000 3,000 $10,500 7,600 $2,900

$2,500 F (1,600) U (200) U $700 F 0 $700 F

a & b Actual units sold: Master budget units + Favorable sales volume variance 1,500 + 100 F = 1,600 units c. Budgeted selling price per unit: $37,500 ) 1,500 = $25 per unit Sales revenue sales volume variance: d. Sales revenue - flexible budget: e. Sales revenue - actual: $40,000 - 1,600 U = Variable manufacturing cost: f. Standard cost per unit: $24,000 ) 1,500 = $16 Total flexible budget amount: g. Sales volume variance:$25,600 - 24,000 = (Or, 100 units x $16 = 1,600 U) h. Actual amount incurred: $25,600 + 1,600 U = $27,200 Variable selling and administrative expense: i. Flexible budget variance: U j. Total master budget amount:
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100 x $25 = $2,500 F 1,600 x $25 = $40,000 $38,400

1,600 x $16 = $25,600 $1,600 U

$4,000 - 3,200 = ($3,200/1,600) x 1,500 =

13- 45

$800 $3,000

k. Sales volume variance:$3,200 - 3,000 = Contribution margin: l. Actual amount: n. Flexible budget amount: or

$200

U $7,200 U

(e) $38,400 (h) 27,200 - 4,000 =

m. Flexible budget variance: $1,600 U + 1,600 U + (i) 800 U =$4,000

(d) $40,000 - (f) 25,600 - 3,200 = $11,200 (l) $7,200 + (m) 4,000 U = $11,200 $700 F

p. Sales volume variance:$2,500 F - 1,600 U - 200 U = q. Master budget amount:

$37,500 - 24,000 - (j) 3,000 = $10,500 [Or, (n) $11,200 - (p) 700 F= $10,500]

r. Fixed cost - Actual: s. Fixed cost - Flexible budget: t. Fixed cost - Master budget: u. Fixed cost flexible budget variance: v. Fixed cost sales volume variance: U x. Operating income - Master budget: y. Operating income sales volume variance: (Or, $700 - 0 = $700 F)
2.

(l) $7,200 - 1,000 = (n) $11,200 - 3,600 = Same as (s) (r) $6,200 - (s) 7,600 = (s) 7,600 - (t) 7,600 =

$6,200 $7,600 $7,600 $1,400 F - 0$2,600

w. Operating income flexible budget variance: $1,000 - 3,600 =

(q) $10,500 - (t) 7,600 = $2,900 $3,600 - 2,900 = $700 F

Actual selling price per unit: (e) $38,400 (b) 1,600 = $24

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Operating Result

Flexible Budget Variance

Flexible Budget

Sales Volume Variance

Master Budget

Units 900 Sales revenue $52,600 Variable cost 20,075 Fixed cost 10,350 Operating income $22,175

0 $1,300 F 5,125 F 1,075 F $7,500 F

900 $51,300 25,200 11,425 $14,675

75 F $4,275 F (2,100) U 0 $2,175

825 $47,025 23,100 11,425 $12,500

13-58Fill in Missing Data (15 min) a. Flexible budget variance b. Sales volume variance c. Sales unit flexible budget variance: d. Units sold - flexible budget: e. Sales volume variance in units: F f. Total sales in flexible budget: Sales revenue sales volume variance: F h. Sales revenue - master budget: i. Variable costs: 825 x $57 = $47,025 Or, (f) $51,300 - (g) $4,725 = $47,025 $52,600 - $10,350 - $22,175 = $20,075 900 x $28 = $25,200 5,125
j. Standard (budgeted) variable cost per unit = $23,100 ) 825 = $28

-0900 900 - 825 = 75

$52,600 - $1,300 = $51,300 $57 x 75 units = $4,275

g. Budgeted selling price per unit = $51,300 ) 900 units = $57

Total variable cost - Flexible budget:

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k. Variable cost flexible budget variance: $20,075 - $25,200 =

F l. Variable cost sales volume variance: $25,200 - $23,100 = U Or, 75 x $28 = U m. Fixed cost - flexible budget: n. Fixed cost flexible budget variance: $10,350 - $11,425 = F p. Fixed cost sales volume variance: q. Operating income flexible budget variance: $1,300 F + (k) $5,125 F + (n) $1,075 F = F r. Flexible budget operating income:$22,175 - (q) 7,500 F = $14,675 Or, (f) $51,300 - (j) $25,200 - (m) $11,425 = s. Operating income sales volume variance: (r) $14,675 - $12,500 = F or (g) $4,275 - (l) $2,100 = F $2,175 $2,175 $14,675 $7,500 -0$11,425 $1,075 $2,100 $2,100

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Flexible O perating Budget Result Variance

Sales Flexible Volume Budget Variance

M aster Budget

Units sold 1,200 0 1,200 200 F 1,000 Revenues $69,600 ($2,400) U $72,000 $12,000 F $60,000 Variable cost: 56,800 (8,800) U 48,000 (8,000) U 40,000 Contribution $12,800 $11,200 U $24,000 $4,000 F $20,000 m argin Fixed costs 7,000 (2,000) U 5,000 0 5,000 Operating incom e $5,800($13,200) U $19,000 $4,000 F $15,000
13-59Fill in Missing Data (15 min) a. 0 b. 1,200 c. 1,200 1,000 = 200 F d. Budgeted selling price per unit: $60,000 ) 1,000 = $60 Flexible budget revenues: 1,200 x $60 = $72,000 e. $69,600 - $72,000 = $2,400 U f. $72,000 - $60,000 = $12,000 F g. Standard (budgeted) variable cost per unit: $40,000 ) 1,000 = $40 Flexible budget variable cost: 1,200 x $40 = $48,000 h. $48,000 - $40,000 = $8,000 U i. $11,200 U - (e) $2,400 U = $8,800 U j. (g) $48,000 + (i) $8,800 = $56,800 k. $69,600 - (j) $56,800 = $12,800 l. $12,800 + $11,200 = $24,000 Or, $72,000 - $48,000 = $24,000
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m. $12,000 F - $8,000 U = $4,000 F Or, Budgeted contribution margin per unit: $60 - $40 = $20 200 x $20 = $4,000 F n. $60,000 - $40,000 = $20,000 Or, q. - 0 r. $5,000 s. $7,000 - $5,000 = $2,000 U t. $20,000 - $5,000 = $15,000 u. $4,000 F v. $15,000 + $4,000 = $19,000 Or, Or, $24,000 - $5,000 = $19,000 $11,200 U + $2,000 U = $13,200 U w. $5,800 - $19,000 = $13,200 U 1,000 x $20 = $20,000 p. $12,800 - $5,800 = $7,000

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13-60Basic Analysis of Direct Labor Variances (10 min) 1. Actual Cost 5,800 x AR = $127,600 Actual Input x Budget Price 5,800 x $ 20 = $116,000 Flexible Budget 1,200 x 5 x $20 =$120,000

Rate Variance $127,600 - $116,000 = $11,600 U

Efficiency Variance $116,000 - $120,000 = $4,000 F

2. The unfavorable rate variance arises because the actual labor rate per hour, $127,600 5,800 = $22, exceeds the budgeted rate of $20 by 10%. The reasons for this unfavorable variance could include the hiring of more skilled workers than planned, an unexpected labor rate increase negotiated with a trade union, or the initial $20 standard being set without a careful analysis. The $4,000 favorable efficiency variance could be due to the hiring of more skilled workers, above-expected productivity by existing workers due to a plant layout change, or the initial standard of 5 hours per dinette being set without conducting a careful analysis.

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13-61Working backward (10 minutes) AH x AR Rate Variance $11,600 F SR = $30 AH = 1.16 SH 1. EV = (AH SH) X SR $24,000 = (1.16 SH SH) x $30 .16 SH = 800 SH = 5,000 hours 2. 3. AH = 1.16 SH AH = 1.16 x 5,000 = 5,800 hours RV = (AR SR) x AH - $11,600 = (AR - $30) x 5,800 AR - $30 = - $2 AR = $28 4. SH = Number of units manufactured x Standard hours per unit 5,000 = Number of units manufactured x 2 Number of units manufactured = 2,500 AH x SR SH X SR

Efficiency Variance $24,000 U

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13-62 All variances (60 minutes) 1. a. Direct material price variance. Formula: Actual quantity x (Actual price - Standard price) Calculation of actual prices: Actual cost ) Actual quantity Housing units $44,000 ) 2,200 = $20 per unit Printed circuit boards $75,200 ) 4,700 = $16 per unit Reading heads $101,200 ) 9,200 = $11 per unit Calculation of variance: Housing units 2,200 x ($20 - $20) = $0 Printed circuit boards 4,700 x ($16 - $15) = 4,700 U Reading heads 9,200 x ($11 - $10) = 9,200 U Total direct material price variance $13,900 U b Direct material usage variance Formula: Standard price x (Actual quantity - Standard quantity) Calculation of standard quantities: Actual units x Standard quantity per unit Housing units 2,200 x 1 = 2,200 parts Printed circuit boards 2,200 x 2 = 4,400 parts Reading heads 2,200 x 4 = 8,800 parts Calculation of variance: Housing units $20 x (2,200 - 2,200) = $ 0 Printed circuit boards $15 x (4,700 - 4,400) = 4,500 Reading heads $10 x (9,200 - 8,800) = 4,000 $8,500

U U U

Total direct material quantity variance

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13-62 (Continued-1) 1. c. Direct labor efficiency variance. Formula: Standard rate x (Actual hours - Standard hours) Calculation of standard hours: Actual units x Standard hours per unit Assembly Group 2,200 x 2 = 4,400 hours PCB Group2,200 x 1 = 2,200 hours RH Group 2,200 x 1.5 = 3,300 hours Calculation of variance: Assembly Group $10 x (3,900 - 4,400) = PCB Group (2,400 - 2,200) = $2,200 RH Group $12 x (3,500 - 3,300) = U Total direct labor efficiency variance $5,000 F $11 x U $2,400 $ 400 F

d. Direct labor rate variance. Formula: Total wage paid - Actual hours x Standard rate Calculation of variance: Assembly Group $31,200 (3,900 x $10) = $7,800 F PCB Group$31,060 (2,400 x $11) = $4,660 U RH Group $50,000 (3,500 x $12) = $8,000 U Total direct labor rate variance $4,860 U e. Selling price variance. Formula: Units sold x (Actual price Budgeted price) Calculate budgeted unit price: Total budgeted sales ) Budgeted units $400,000 ) 2,000 = $200 per unit Actual price: Actual revenue ) Actual units $396,000 ) 2,200 = $180 per unit Variance: 2,200 x ($180 - $200) = $44,000 U
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13-62 (Continued-2) f. Contribution margin sales volume variance. Formula: Budgeted unit contribution margin x (Actual units - Budgeted units) Calculate budgeted unit contribution margin: Total budgeted contribution ) Budgeted units $122,000 ) 2,000 = $61 per unit Calculate variance: $61 x (2,200 - 2,000) = $12,200 F 2. The unfavorable variance of $58,660 between budgeted and actual contribution margin for Funtime Inc. during May 2001 can be explained as the reconciliation of contribution margin variance shown below: Direct material price variances $ 13,900 U Direct material price variances 8,500 U Direct labor efficiency variances 400 F Direct labor rate variances 4,860 U Selling price variance 44,000 U Contribution margin volume variance 12,200 F Total contribution margin variances $58,660 U 3. Behavioral factors that may promote friction among the production managers and between the production managers and the maintenance manager include the following. The managers of the PCB and RH groups will be dissatisfied with the maintenance manager as equipment downtime has caused them to incur additional overtime costs. The Assembly Group is dependent on the input of the other production department. In order to increase production, the managers of the Assembly Group are likely to pressure the other managers. This type of pressure is most probably the reason why the PCB and RH groups began rejecting parts that would normally have been modified and used. 4. An evaluation of Jack Rath's report leads to conclusion that it is incomplete as he has not identified the real causes of the unfavorable results and has left management to draw its own conclusions. In addition, Rath has only addressed the labor issues and has failed to account for the material variances or mention the maintenance problems that resulted in downtime for some departments. The department managers are likely to resent the report as being unfair.

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13-63 Comprehensive Variance Analysis (20 minutes) 1. a. Revising the standards immediately would facilitate their use in a master budget. Use of revised standards would minimize production coordination problems and facilitate cash planning. Revised standards would facilitate more meaningful cost-volume-profit analysis and result in simpler, more meaningful variance analysis. Standards are often used in decision analysis such as make-or-buy, product pricing, or product discontinuance. The use of obsolete standards would impair the analysis. b. Standard costs are carried through the accounting system in a standard cost system. Retaining the current standards and expanding the analysis of variances would eliminate the need to make changes in the accounting system. Changing standards could have an adverse motivational impact on the persons using them. Retaining the current standards would preserve the well known benchmark and allow for consistency in reporting variances throughout the year. Changing standards could have an adverse psychological impact on the persons using them. Retaining the current standards would preserve the well known benchmark and allow for consistency in reporting variances throughout the year. Variances are often computed and ignored. Retaining the current standards and expanding the analysis of variances would force a diagnosis of the costs and would increase the likelihood that significant variances would be investigated.

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13-63 (Continued) 2. a. Changes in prime costs per unit due to the use of new direct materials: Changes due to direct materials price (New materials price - Old materials price) x (New materials quantity) ($7.77 - $7.00) x 1 pound = $.77 U Changes due to the effect of direct materials quality on direct materials usage (Old materials quantity - New materials quantity) x (Old materials price) (1.25 pounds - 1.00) x $7.00 = $1.75 F Changes on direct labor usage due to the effect of direct materials quality (Old labor time - New labor time) x (Old labor rate) (24/60 - 22/60) x $12.60 = .42 F Total changes in prime costs per unit due to uses of new direct materials $1.40 F b. Changes in prime costs per unit due to the new labor contract: (New wage rate - Old wage rate) x New labor time ($14.40 - $12.60) x 22/60 = 0.66 U Total change in prime cost per unit $0.74 F

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13-64 Standard Cost in Process Costing; Variances, &Journal Entries (20 min) 1. Equivalent units of production in November: Units completed Work done for in-process ending inventory Equivalent units of production Standard quantity per unit Total standard quantity for production in November x Direct Materials 5,600 + 800 6,400 8 51,200 x + Direct Labor 5,600 600 6,200 6 37,200

a. Labor efficiency variance: (36,500 - 37,200) x $8.20 = $5,740 F b. Labor rate variance = $300,760 - 36,500 x $8.20 = $1,460 U c. Actual kilograms of materials used in November: 51,200 + $1,500 $5 = 51,500 kg. d. Material price variance = $750 - $1,500 = $750 Favorable Actual price per kilogram = $5 - $750 50,000 = $4.985 e. Total amount of prime costs transferred to the finished goods account in November: ($40.00 + $49.20) x 5,600 units = $499,520 f. Materials 800 x $40.00 $32,000 Labor 600 x $49.20 $29,520 $61,520 Total

Equivalent units of ending in-process inventory Standard cost per unit Ending inventory at standard cost

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13-64 (continued) 2. Materials inventory Materials purchase price variance Accounts payable Purchase 50,000 kilograms of materials for $249,250 Work in Process inventory Materials usage variance Materials inventory Issued 51,500 kilograms of materials to production Work in Process inventory Labor rate variance Labor efficiency variance Accrued Payroll Direct labor wages incurred for the manufacturing 300,760 305,040 1,460 5,740 256,000 1,500 257,500 250,000 750 249,250

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13-65Joint Direct Materials Variances (5 min) 25,000 x $12 = $300,000 Price Variance 1. Direct materials price variance: 25,000 x $10.00 = $250,000 5,000 x 4.5 x $10 = $225,000

Usage (Efficiency) Variance ($12 - 10) x 25,000 = $50,000 U

2. Standard direct raw materials for the units manufactured: 5,000 units produced x 4.5 tons per unit = Direct materials usage variance: (25,000 tons used - 22,500) x $10 = $25,000 U 3. Pure direct materials price variance: ($12 - 10) x 22,500 =$45,000 U Direct materials joint variance: ($12 - 10) x (25,000 - 22,500) = Total direct materials price variance 5,000 U $50,000 U 22,500 tons

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13-66Flexible Budget and Variances (15 min)

Units sold Revenues Professional labor Credit check Contribution Fixed costs Operating income
1.

Result 90 $36,000 9,500 14,850 $ 11,650 3,600 $ 8,050

Flexible Budget Variance 0 $ 4,500 (1,400) (1,350) $ 1,750 (600) $ 1,150

F U U F U F

Flexible Budget 90 $31,500 8,100 13,500 $ 9,900 3,000 $ 6,900

Sales Volume Variance -10 $ (3,500) 900 1,500 $ (1,100) 0 $ (1,100)

U U F F U U

Master Budget 100 $35,000 9,000 15,000 $11,000 3,000 $ 8,000

Master budget Number of apartments rented 100 Revenue per apartment rented $700 2 = $ 350 Total revenue $35,000 Variable costs: Professional labor 1.5 x $20 x 300 = $ 9,000 Credit check $50 x 300 = 15,000 24,000 Contribution margin $11,000 Other expenses 3,000 Operating income $8,000 Flexible budget Total revenue 90 x $350 = $31,500 Variable costs: Professional labor 1.5 x $20 x 270 = $ 8,100 Credit check $50 x 270 = 13,500 Total variable costs - 21,600 Contribution margin $ 9,900 Other expenses - 3,000 Operating income $6,900

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13-66 (continued) Operating result Total revenue Variable costs: Professional labor Credit check Total variable costs Contribution margin Other expenses Operating income 90 x $800 x 0.5 = $36,000 $55 x 270 = $ 9,500 14,850

- 24,350 $11,650 - 3,600 $8,050

Operating income flexible budget variance: $8,050 - $6,900 = $1,150 F Operating income sales volume variance: $6,900 - $8,000 = $1,100 U 2.

400 x AR = $9,500400 x $20 = $8,000 Rate variance = $9,500 - $8,000 = $1,500 U

270 x 1.5 x $20 = $8,100 Efficiency variance = $8,000 - $8,100 = $100 F

3. Among factors to be considered in evaluating the effectiveness of professional labor are: Number of units successfully rented Number of applicants Demand for apartments in the area Total number of apartments for rent in the area Quality (credit worthiness of applicant)

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13-67Acquisition Costs (5 min) 1. The firm will enjoy favorable price variances if it purchases from either of the new suppliers. 2. Among ethical issues of concern are a. Use of prisoners in manufacturing b. Purposes, uses, and control of the scholarship account Additional issues that can greatly affect the operating result include: c. Quality d. Reliability

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13-68 Price Variance (20 min)

1.

Operating Results Actual Purchase Standard Price Quantity Price Total Cost Price 1st Quarter 4,000 $68 $ 272,000 $60 nd 2 Quarter 4,000 69 276,000 60 rd 3 Quarter 4,000 73 292,000 60 th *** ** 4 Quarter 24,000 40 960,000 60 * Year 36,000 $1,800,000

Variance $ 32,000 36,000 52,000 480,000 $360,000

U U U F F

* Total actual purchases 36,000 x $50 = $1,800,000 ** $1,800,000 - ($272,000 + $276,000 + $292,000) = $960,000 *** $960,000 ) 24,000 = $40 Further analysis of the 4th Quarters price variance Price variance due to increase in the negotiated price ($76 - $60) x 24,000 = Price variance due to changes in exchange rate ($40 - $76) x 24,000 = Net Price Variance
2.

$384,000 U $864,000 F $480,000 F

The favorable purchase price variance for the 4th quarter and for the year is a result of fluctuations in foreign currency exchange rates. The firm gained $864,000 from the favorable changes in currency exchange rates. Without the favorable exchange rate in the fourth quarter, the firm would have a total unfavorable purchase price variance of $384,000 for the quarter. Nevertheless, the purchasing department should be credited for negotiating the term of purchases in local currencies, rather than in U.S. dollars.

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13-69 Direct materials and direct labor variances, solving unknowns (30 min.) DM AQ x AP = $136,500 AQ x $5 = ?

Price variance $6,500 U

AQ x $5 = ?

(4,500 x 6 x $5) = $135,000 Usage variance $5,000 U

DLAH x AR =?

AH x $30 = ? Rate variance $4,200 U

(4,500 x 2/3 x $30) = $90,000 Efficiency variance $6,000 F

1. Total standard direct labor cost for the panels manufactured: 4,500 units x 2/3 hour per unit x $30 per hour = $90,000 2. Total direct labor hours worked: Total hours worked at standard rate = $90,000 - $6,000 = $84,000 Total direct labor hours worked = $84,000 ) $30 = 2,800 hours 3. Actual direct labor hourly wage rate: ($84,000 + $4,200) ) 2,800 hours worked = $31.50 per hour 4. Total standard quantity of direct materials for the panels manufactured: 4,500 panels manufactured x 6 lbs. Per panel = 27,000 lbs. 5. Total direct materials used: (27,000 x $5 + $5,000) ) $5 = 28,000 lbs. 6. Total direct materials purchased: ($136,500 - $6,500) ) $5 = 26,000 lbs. 7. Actual direct materials price per pound: $136,500 ) 26,000 = $5.25 per pound

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