Standard Costing and The Balance Scorecard
Standard Costing and The Balance Scorecard
Standard Costing and The Balance Scorecard
&
The Balance
Scorecard
Table of Contents:
Page
Number
10.1. Introduction:
10.2. Unit standard: Standard cost
10.3. Definition of Budgeted Cost:
Illustration
Exercise
10.1. Introduction:
If you were to design a cost accounting system with no accounting education other than financial
accounting courses, you would probably design an accounting system that collects, summarizes,
and reports actual costs. This approach would be consistent with the implicit assumption
throughout every financial accounting course that when financial statements report historical cost
data, such as would normally be the case for cost-of-goods-sold and ending inventory, that the
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information reported represents actual costs. Therefore, it comes as a surprise to most students
that the initial journal entries to record the production and movement of inventory in the costing
systems of most manufacturing firms are not based on actual costs at all, but rather are based on
budgeted per-unit costs.
In most manufacturing firms, the initial journal entries to debit work-in-process, finished goods
and cost-of-goods-sold are based on the actual quantity of output produced, multiplied by
budgeted data about the inputs necessary to produce those outputs, and the budgeted costs of
those inputs. Then, at the end of the month (or possibly quarterly), an adjusting or closing
entry is made to record in the inventory accounts the difference between actual costs incurred, and
the budgeted information that has formed the basis for the journal entries during the month. The
nature of this adjusting entry depends on the materiality of the amounts involved. If the
differences between actual costs and budgeted costs are small, this adjusting entry might be made
in an expedient manner, involving only cost-of-goods-sold, but if the differences are large, the
adjusting entry might also involve work-in-process and finished goods inventory accounts.
The accounting system described above is called a standard costing system, and it is widely-used
by companies in the manufacturing sector of the economy. This chapter describes standard costing
systems, and explains why companies use them. But first we discuss a related concept, standard
costs, which constitutes an important component of standard costing systems.
10.2. Standard Costs:
A standard, as the term is usually used in management accounting, is a budgeted amount for a
single unit of output. A standard cost for one unit of output is the budgeted production cost for
that unit. Standard costs are calculated using engineering estimates of standard quantities of
inputs, and budgeted prices of those inputs. For example, for an apparel manufacturer, standard
quantities of inputs are required yards of fabric per jean and required hours of sewing operator
labor per jean. Budgeted prices for those inputs are the budgeted cost per yard of fabric and the
budgeted labor wage rate.
Standard quantities of inputs can be established based on ideal performance, or on expected
performance, but are usually based on efficient and attainable performance. Research in
psychology has determined that most people will exert the greatest effort when goals are
somewhat difficult to attain, but not extremely difficult. If goals are easily attained, managers and
employees might not work as hard as they would if goals are challenging. But also, if goals appear
out of reach, managers and employees might resign themselves to falling short of the goal, and
might not work as hard as they otherwise would. For this reason, standards are often established
based on efficient and attainable performance.
Hence, a standard is a type of budgeted number; one characterized by a certain amount of rigor in
its determination, and by its ability to motivate managers and employees to work towards the
companys objectives for production efficiency and cost control.
There is an important distinction between standard costs and a standard costing system. Standard
costs are a component in a standard costing system. However, even companies that do not use
standard costing systems can utilize standards for budgeting, planning, and variance analysis.
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A standard cost is the expected or budgeted cost of materials, labor, and manufacturing overhead
required to produce one unit of product.Standard costs are predetermined costs: target costs that
should be incurred under efficient operating conditions. A standard cost provides cost expectations
per unit of activity and a budget provides the cost expectation for the total activity. Example: If the
budget is for 10 000 units and the budgeted cost is Tk.30 000, the standard cost is Tk.3 per unit.
Standard costs mostly used in organizations with common or repetitive operations, in manufacturing
organizations. The standard costs should be developed for repetitive operations and product standard
costs are derived simply by combining the standard costs from the operations which are necessary to
make the product. Only by comparing the total actual costs with total standard costs for each
operation or responsibility centre for a period can control be effectively achieved. A comparison of
standard product costs with actual costs that involves several different responsibility centres is cl early
inappropriate.
10.3 Budget costs: A budget relates to an entire activity or operation.
Unit Standard Cost:
The unit standard cost is calculated as follows:
Price standard Quantity standard
Price standard: A price standard is the price that should be paid per unit of input (such as pound of
material).
Quantity standard: A quantity standard is the quantity of input allowed per unit of output (for
example, pounds of material allowed per one unit of product).
Standard Costing Systems:
A standard costing system initially records the cost of production at standard. Units of inventory
flow through the inventory accounts (from work-in-process to finished goods to cost of goods sold)
at their per-unit standard cost. When actual costs become known, adjusting entries are made that
restate each account balance from standard to actual (or to approximate such a restatement). The
components of this adjusting entry provide information about the companys performance for the
period, particularly with regard to production efficiency and cost control.
10.4. Standard Costing Systems and Flexible Budgeting:
There is an important connection between flexible budgeting, which was discussed in Chapter 5,
and standard costing. In fact, a standard costing system tracks inventory during the period at the
flexible budget amount. Recall that the flexible budget is the budgeted per-unit cost multiplied by
the actual number of units. Hence, a standard costing system answers the question: what would
the income statement and balance sheet look like, if costs and per-unit input requirements were
exactly as planned, given the actual output achieved (units made and units sold).
Given the point made in the previous paragraph, it follows that the adjustment made at periodend to restate the inventory accounts for the difference between the standard cost account balance
and the actual cost account balance constitutes the difference between the flexible budget amount
and actual costs. For direct costs, such as materials and labor, this adjusting entry represents the
sum of the price (or labor wage rate) variance and the efficiency (or quantity) variance. For
overhead costs, this adjusting entry represents misapplied overhead. For variable overhead,
misapplied overhead consists of the sum of the spending variance and the efficiency variance. For
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fixed overhead, misapplied overhead consists of the sum of the spending variance and the volume
variance. These overhead variances are discussed in Chapter 17.
Hence, standard costing systems track inventory at flexible budget amounts during the period,
and post adjusting entries at the end of the period that provide variance information that
managers use for performance evaluation and control.
10.5. Standard cost sheet
A standard cost sheet calculates the total standard cost for one unit of product. It lists the standard
costs for one unit of product for the following:
a. Materials (Price standard Quantity standard)
b. Labor (Price standard Quantity standard)
c. Variable manufacturing overhead (Price standard Quantity standard)
d. Fixed manufacturing overhead (Price standard Quantity standard)
10.6. How Standards Are Developed
Standards can be based on:
e. historical experience
f. engineering studies, and
g. input from operating personnel.
10.7. Types of Standards
1. Basic cost standards: constant standards that are left unchanged over long periods. A base
is provided for a comparison with actual costs through a period of years with the same
standard, and efficiency trends can be established over time. Do not represent current
costs.
2. Ideal standards: Ideal standards are standards that reflect perfect operating efficiency. Ideal
standards are virtually unattainable and can result in low employee morale and a decline in
performance. Perfect performance, the minimum costs that are possible under the most
efficient operating conditions. May have adverse impact on employee motivation.
3. Currently attainable standard costs: Currently attainable standards are demanding but
attainable under efficient operating conditions. Such standards allow for normal machine
downtime and employee rest periods. Costs to be incurred under efficient operating
conditions. Difficult, but not impossible to achieve. Allowances are made for normal
spoilage, machine breakdowns and lost time. The standards represent a target that can be
achieved under efficient conditions, but which is also viewed as being neither too easy to
achieve nor impossible to achieve, provides the best norm to which actual costs should be
compared. Planning and control. 46% of the 300 UK manufacturing companies reported
that they used achievable but difficult to attain standards, 50% used average past
performance standards and 4% used maximum efficiency standards.
Challenging but attainable standards tend to result in higher performance levels than ideal standards. If
standards are too tight and never achievable, workers become frustrated and performance levels
decline.
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10.8. Why Standard Cost Systems Are Adopted/ Purposes of standard costingor Reasons for
using a Standard Costing System:
(i) To assist in setting budgets and evaluating managerial performance.
(ii) To improve planning and control. A standard cost system compares actual amounts with
standard amounts to determine variances from the standard. The use of a standard cost
system for operational control in an advanced manufacturing environment can produce
dysfunctional behavior. However, standards in the advanced manufacturing environment
are still useful for planning, such as developing bids.
(iii) To facilitate product costing.Standard costing uses standard costs for direct materials, direct
labor, and overhead. Standard cost systems provide readily available unit cost information
that can be used for pricing decisions.
(iv)Act as a control device by highlighting those activities that do not conform to plan, and
thus alerting decision-makers to those situations that may be out of control and in need of
corrective action.
(v) To provide a prediction of future costs that can be used for decision-making purposes.
(vi)To simplify the task of tracing costs to products for inventory valuation purposes.
(vii) To provide a challenging target that individuals are motivated to achieve.
Costs under the three product cost assignment approaches are summarized below:
PRODUCT COSTING SYSTEM
Actual costing system
Normal costing system
Standard costing system
MANUFACTURING COSTS
Direct Materials
Actual
Actual
Standard
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Direct Labor
Actual
Actual
Standard
Overhead
Actual
Budgeted
Standard
Product specifications derived from an intensive study of the input quantity necessary
for each operation.
The most suitable materials for each product based on product design and quality
policy, and the optimal quantity that should be used after taking into account any
wastage or loss that is considered inevitable in the production process.
Material quantity standards are recorded on a bill of materials, which describes and
states the required quantity of materials for each operation to complete the product.
Price standards take into account the advantages to be obtained by determining the
most economical order quantity and quantity discounts. NB vendor reliability
Analyse each operation to eliminate any unnecessary elements and to determine the
most efficient production method. Then the most efficient methods of production,
equipment and operating conditions are standardized. Time measurements to
determine the number of standard hours required by an average worker to complete
the job.NB Unavoidable delays! Wage policy!
Many different costs, power used to operate machinery vary directly and
proportionately with activity
Standard overhead rate per unit of activity where overheads vary with activity
The cost of variable overhead resources per unit of output cannot be studied and
measured. There is no observable direct relationship between resources required and
units of output. Necessary to measure the relationship using past data.
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Objective: to find the activity measure that exerts the greatest influence on cost
Mostly used: direct labour hours or machine hours: variable overhead rate per unit of
activity derived from the statistical analysis is applied to the standard labour or
machine usage to derive a standard variable overhead cost per unit of output.
Fixed overheads are largely independent of changes in activity, and remain constant
over wide ranges of activity in the short term.
It is inappropriate for cost control purposes to unitize fixed overheads to derive a fixed
overhead rate per unit of activity.
Standard fixed overhead rates are established for each production department by
estimating the fixed departmental overheads for a period, usually a year.
The budgeted fixed annual overhead is divided by the budgeted level of activity to
derive a standard fixed overhead rate per unit of activity.
The most frequently used activity bases are machine hours for machine-related
overheads and direct labour hours for non-machine-related overheads.
The standard machine or direct labour hour rate is applied to the standard labour or
machine usage per unit of output to derive the standard fixed overhead cost for a
product.
Example: if the budgeted fixed overheads and direct labour hours for a department are
respectively Tk.500 000 and 50 000 direct labour hours, the standard fixed overhead
rate would be Tk.10 per direct labour hour. The standard fixed overhead cost for a
product with a standard usage of two standard direct labour hours would be Tk.20.
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Control over costs is best affected through action at the point where they are incurred.
Standards should be set for labour, materials and variable overheads consumed in
performing an operation. For stock valuation purposes it is necessary to establish
product cost standards.
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Actual quantity of
input at standard price
(SP AQ)
Standard quantity of
input at standard price
(SP SQ)
(AP SP)AQ
(AQ SQ)SP
Price variance
(AP SP)AQ
Direct materials price variance
The materials price variance can be computed at one of two points:
1. When the raw materials are issued for use in production
2. When the raw materials are purchased
Variances should be calculated at the earliest point possible so management can take any
necessary corrective action. Thus, the price variance for materials should be calculated at the time
of purchase.
Responsibility for the materials price variance is usually assigned to the purchasing agent.
Using the materials price variance to evaluate performance can produce undesirable behavior. For
example, if the purchasing agent feels pressured to produce favorable price variances:
j. materials of lower quality might be purchased (perhaps resulting in unfavorable usage variances), or
k. In order to take advantage of quantity discounts, large amounts of inventory might be purchased (eliminating some of the benefits of JIT).
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at standard rate
(AH SR)
Denominator volume is the expected production volume selected at the beginning of the
year when the standard fixed overhead rate is established. The standard fixed overhead rate
is determined on an annual basis.
3. Apply manufacturing overhead using the standard variable overhead rate (SVOR) and the
standard fixed overhead rate (SFOR).
Manufacturing overhead in a standard costing system is applied based on the standard hours
allowed for production achieved rather than on the actual hours worked.
The Manufacturing Overhead Control account would include the following items:
Manufacturing Overhead Control
Actual overhead costs
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(AH SH)SVOR
Variable overhead efficiency variance
If variable overhead costs change in proportion to changes in the base, such as direct labor
hours, then responsibility for the variable overhead efficiency variance should be assigned to
the production manager because the production manager has responsibility for the use of direct
labor.
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Variable overhead
rate Actual hours
(SVOR AH)
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The expected production volume is selected at the beginning of the year when the standard fixed
overhead rate is established.
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The output used to calculate the fixed overhead rate can be viewed as the activity capacity
acquired. Actual output can be viewed as the activity capacity used.
The fixed overhead volume variance is calculated as follows:
Budgeted fixed overhead
Budgeted fixed
overhead
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As a general principle, variances should be investigated if the anticipated benefits of the investigation exceed the expected costs of investigating.
Most firms adopt the general guideline of investigating variances only if they fall outside an
acceptable range.
Lower control limit
Direct
materials
variance
Direct
labor
variance
Variable
overhead
variances
Fixed
Actual cost
AP AQ
SP AQ
SH SR
Direct labor efficiency variance
AH SVOR
Actual fixed
overhead
SR AH
Standard cost
SP SQ
Budgeted fixed
overhead
overhead
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SH SVOR
Applied fixed
overhead
SH SFOR
variances
Direct
Costs:
Overhead
Costs:
All three costing systems record the cost of inventory based on actual output units
produced. The static budget level of production does not appear anywhere in this table.
Actual costing and normal costing are identical with respect to how direct costs are
treated.
With respect to overhead costs, actual costing and normal costing use different
overhead rates, but both costing systems multiply the overhead rate by the same
amount: the actual quantity of the allocation base incurred.
Normal costing and standard costing use the same overhead rate.
Standard costing records the cost of inventory using a flexible budget concept: the
inputs that should have been used for the output achieved.
There are costing systems other than these three. For example, some service sector companies
apply direct costs using budgeted prices multiplied by actual quantities of inputs. For example,
many accounting firms track professional labor costs using budgeted professional staff hourly
rates multiplied by actual staff time incurred on each job.
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3 kg
3,500 kg
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Normal loss in production is 20% of input. Due to shortage of material A, the standard mix was
charged.
Actual results for April 2008 were:
Material A: 105 kg @Tk.20 per kg.
Material B: 95 kg @Tk.9 per kg.
Input
200 kg
Output
165 kg.
Loss
35 kg
Required:
(a)
(b)
(c)
(d)
PROBLEM 3
For the following information of Middle Company Ltd. are: To produce one unit of a product
requires:
Direct Material
2lbs @ Tk. 10.00
Direct labor
3 hrs@ Tk. 7.00
Variable overhead 3 hrs @ Tk.5.00
Fixed overhead
3 hrs @ Tk. $4.00
During a month 12,400 units were produced at costs of Tk. 8, 45,900.Actual Costs: Material
purchased & used Tk. 2, 48,000; 25,000 lbs. @ Tk. 9.92. Labor used 37,000 hrs @ Tk.7.10 Tk.2, 62,700
Factory overhead Fixed Tk.1, 52,000; Variable overhead Tk. 1, 83,200. Normal & Budgeted
Capacity 37,500 direct labor hour. There is no beginning & ending inventory & only one type of
material & labor has been used. Direct Material 25,000 lbs @ Tk.10.00 Tk. 2,50,000; Direct labor
37,500hrs@ Tk.7.00 ; Tk.2,62,500; Variable OH 37,500 Hrs @ Tk.5.00 Tk. 1,87,500 ; Fixed FOH
37,500 hrs @ Tk.4.00 Tk. 1, 50,000
Required:
(a) Calculate the Material Price variance;
(b) Calculate the Material Quantity Variance;
(c) Journalize these variances.
(d) Calculate the Labor Rate Variance;
(e) Calculate the labor Efficiency Variance;
(f) Variable Spending Variance;
(g) Variable Efficiency Variance;
(h) Fixed Spending Variance;
(i) Fixed Efficiency Variance;
Solution:
a. Material price variance= (Actual Price Standard price) * Actual Quantity
= ($9.92- 10.00) *25,000
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= $2,000 (F)
b. Material Quantity Variance = (Actual Quantity Standard Quantity) * Standard price
per unit = (25,000- 12,400) *$10.00 = $2,000 (UF)
c. Journal entries:
a. Material Inventory --------------------------Dr.
$2, 48,000
Accounts Payable ----------------------------------------------------$2, 48,000
(At the time of purchase recorded at actual price )
b. Work in Process ----------------------------Dr.
2, 48,000
Material Quantity Variance ------------------ Dr
2,000
Material Inventory ---------------------------------------------2,48,000
Material Price variance---------------------------------------- 2,000
( standard price)
If variances are recorded at the time of purchases:
a. Material Inventory --------------------------Dr.
$2, 50,000
Accounts Payable ----------------------------------$2, 48,000
Material Price Variance------------------------------ 2,000
(Material purchase price variance)
b. . Work in Process ----------------------------Dr.
2,48,000
Material Quantity Variance ------------------ Dr
2,000
Material Inventory ---------------------------------------------2,50,000
4. Labor Rate Variance = (Actual Rate- Standard Rate) * Actual Hours
= ( Tk.7.10- 7.00) *37,000
=Tk.3,700 (U)
d. Labor Efficiency Variance == (Actual Hr.- Standard hr ) * Actual Rate
= (37,000- 12,400) * $ 7.00
=$1,400 (F)
e. Variable spending variance = (1,85,000- 1,83,200) = $1,800 (F)
f. Variable Efficiency Variance = Flexible budget based on Actual hrs Flexible budget
based on Standard hrs = (1,50,000+$5.00*37,000) (1,50,000+$5.00*37,200) = $1,000 (F)
g. Volume Variance = Flexible budget based on Standard hrs (SH*SR) = (1,50,000+
$5.00*37,200) ( 37,200* $9.00) = $1,200 (F)
h. Fixed Spending Variance = Budgeted Fixed Overhead- Actual Fixed Factory
Overhead
= $1, 50,000--- 1, 52,000
= 2,000 (UF)
9. Fixed Efficiency Variance = $37,20037,000 = $200(F)
PROBLEM 4:
The standard cost sheet for one of the Carver Companys products is presented below:
Direct materials (4 feet @ $6.00)................
Direct labor (1 hour @ $12.00)...................
Variable overhead (1 hour @ $5.00)...........
Fixed overhead (1 hour @ $3.00a)..............
$24.00
12.00
5.00
3.00
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$44.00
10,000 units
$241,800
$131,250
$48,000
$40,000
Required:
(d) Calculate the Materials price variance;
(e) Calculate the materials usage variance;
(f) Calculate the total material cost variance
(g) Calculate the labor rate variance
(h) Calculate the labor efficiency variance
(i) Calculate the total labor cost variance
(j) Calculate the variable overhead spending variance
(k) Calculate the variable overhead efficiency variance
(l) Calculate the fixed overhead spending variance
(m)Calculate the fixed overhead volume variance
Solution:
(a) Materials price variance = (AP-SP)* AQ
=39,000($6.20 $6.00)
= $7,800 unfavorable
(b) Materials usage variance = (AQ- SQ) *SP
=$6.00[39,000 (4 feet 10,000)]
= $6,000 favorable
Total material cost variance= Materials price variance+ Materials usage variance
=$7,800 unfavorable+$6,000 favorable
=$1,800 unfavorable
(d) Labor rate variance =10,500 hours ($12.50 $12.00)
= $5,250 unfavorable
(e) Labor efficiency variance =$12(10,500 10,000)
= $6,000 unfavorable
(f) Total labor cost variance= Labor rate variance+ Labor efficiency variance
=$5,250 unfavorable+$6,000 unfavorable
=$11250 unfavorable
(g) Variable overhead spending variance= $48,000 (10,500 $5)
= $4,500 favorable
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Instructions:
2. Calculate the direct materials price and usage variances.
3. Calculate the direct labor rate variance, the direct labor efficiency variance, and the
total direct labor variance.
4. Compute the variable manufacturing overhead spending and efficiency variances.
PROBLEM 3
1. Direct materials price variance:
Actual quantity purchased
at Actual price
Actual quantity
purchased
at Standard price
5,000 sq. ft. $8/sq. ft.
$40,000
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at Standard price
4,250 sq. ft. $8/sq. ft.
$34,000
at Standard price
900 units 5 sq. ft. $8/sq.
ft.
$36,000
$2,000 Favorable
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$2,200 F
4,000 U
$1,800 U
$10,500
$500 Favorable
Variable overhead spending variance
Variable manufacturing overhead efficiency variance:
Standard variable overhead rate Actual hours
(AQ SVOR)
2,200 hours $5/hour
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$11,000
$5/hour
$9,000
$2,000 Unfavorable
Variable overhead efficiency variance
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PROBLEM 6
The Mills Company manufactures roofing shingles. The production process involves heating and
compressing asphalt into sheets and then rolling coarse sand into the hot asphalt. The sheets are then
cooled, cut into shingles, and packaged.
The following standard costs were developed:
STANDARD COST SHEET PER SHINGLE
Direct materials:
Asphalt...........................................................
Sand................................................................
Direct labor..........................................................
Variable manufacturing overhead.....................
Fixed manufacturing overhead.........................
Total standard cost per shingle...................
2 lbs. $0.08/lb.
2 lbs. $0.02/lb.
.01 hrs. $7/hr.
.01 hrs. $3/hr.
$0.16
0.04
0.07
0.03
?
?
The following information is available regarding the companys operations for the period:
Shingles produced.......................................................
500,000
Materials purchased:
Asphalt...................................................................
Sand........................................................................
Materials used:
Asphalt...................................................................
Sand........................................................................
775,000 pounds
850,000 pounds
Direct labor...................................................................
$16,500
$48,000
Budgeted fixed manufacturing overhead for the period is $60,000, and the standard fixed overhead rate
is based on expected capacity of 6,000 direct labor hours.
Instructions:
1. Calculate the standard fixed manufacturing overhead rate.
2. Complete the standard cost card for roofing shingles.
3. Calculate the following variances:
4. Materials price and usage variances for asphalt and sand
5. Direct labor rate and efficiency variances
6. Variable manufacturing overhead spending and efficiency variances
7. Fixed manufacturing overhead spending and volume variances
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PROBLEM 4
Standard fixed manufacturing overhead rate =
1.
=
$60,000
6,000 direct labor hours
2.
0.10
Actual quantity
purchased
Standard price
800,000 lbs. $0.08/lb.
$64,000
Actual quantity
purchased
Standard price
900,000 lbs. $0.02/lb.
$18,000
Standard quantity
Standard price
500,000 2 lbs. $0.08/lb.
$80,000
$18,000 Favorable
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Standard quantity
Standard price
500,000 2 lbs. $0.02/lb.
$20,000
$3,000 Favorable
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$16,500
$1,200 Unfavorable
Variable overhead spending variance
Variable manufacturing overhead efficiency variance:
Standard variable overhead
rate Actual hours
(SVOR AH)
5,100 DLH $3/hr.
$15,300
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FMO volume variance = SFOR [Expected capacity Standard hours allowed for production
level achieved]
= ($10)(6,000 DLH 5,000 DLH allowed)
= ($10)(1,000 DLH)
= $10,000
The Mills Company produced 500,000 shingles, a level for which 5,000 direct labor hours are
allowed.
The Mills Company budgeted 6,000 direct labor hours. The volume variance resulted from the
company operating at a level other than the budgeted level of 6,000 direct labor hours.
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PROBLEM 7
The Commodore Company uses standard costing for direct materials and direct labor. Management
would like to use standard costing for variable and fixed overhead also.
The following monthly cost functions were developed for manufacturing overhead items:
Overhead Item
Cost Function
Indirect materials.................................
Indirect labor........................................
Repairs and maintenance....................
Utilities..................................................
Insurance...............................................
Rent........................................................
Depreciation.........................................
The cost functions are considered reliable within a relevant range of 30,000 to 55,000 direct labor
hours.
Commodore expects to operate at 40,000 direct labor hours per month.
Information for the month of September is as follows:
Actual overhead costs incurred:
Indirect materials..............................................
Indirect labor.....................................................
Repairs and maintenance.................................
Utilities...............................................................
Insurance............................................................
Rent.....................................................................
Depreciation......................................................
Total................................................................
Actual direct labor hours worked.......................
Standard direct labor hours allowed for
production achieved.........................................
$4,500
17,000
8,000
10,000
2,100
4,000
20,000
$65,600
42,000
44,000
Instructions:
1. Calculate the standard manufacturing overhead rate based upon expected capacity, showing the
breakdown between the fixed overhead rate and the variable overhead rate.
2. Calculate the variable manufacturing overhead spending variance.
3. Calculate the variable manufacturing overhead efficiency variance.
4.
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Utilities..............................................
Insurance..........................................
Rent....................................................
Depreciation.....................................
Variable manufacturing overhead......
Fixed manufacturing overhead..........
SFOR =
$26,000
40,000 direct labor hours
= SFOR + SVOR
= $0.65 + $0.95
= $1.60 per direct labor hour
2. Variable manufacturing overhead spending variance:
Actual variable overhead
($4,500 + $17,000 + $8,000 + $10,000)
$39,500
$400 Favorable
(Standard activity
SFOR)
44,000 DLH $0.65/hr.
$28,600
$26,000
$2,600 Favorable
Fixed overhead volume variance
The volume variance could also be calculated as follows:
FMO volume variance
level achieved]
Direct labor
Direct materials
Standard
Quantity
Standard
Price
2.6 hours
12.0 pounds
$44.00/hour
$14.00/pound
Standar
d
Cost
$114.40
168.00
During April, the company purchased 330,000 pounds of direct material at a total cost of
$4,686,000. The total factory wages for June were $3,200,000, of which 90% was for direct labor.
The company manufactured 25,000 units of product during April using 302,000 pounds of
direct material and 64,000 direct labor hours.
Required:
aWhat is the price variance for the direct material acquired by the company during April?
bWhat is the direct material quantity variance for April?
cWhat is the direct labor rate variance for April?
d What is the direct labor efficiency variance for April?
(a) Solution
First, calculate the actual price per unit of materials as follows.
Total cost of $4,686,000 330,000 lbs. = $14.20 per pound
Then calculate the materials price variance as follows.
Materials price variance = AQ x (AP SP) = 330,000 x ($14.20 $14.00) = $66,000 (U)
Part (b) Solution:
First, calculate the standard quantity as follows.
25,000 units x 12.0 pounds per unit = 300,000 pounds
Page 35 of 76
$237,600
$198,000
During March, the company completed 28,000 units of product, worked 172,000 direct laborhours, and incurred the following total manufacturing overhead costs:
Total fixed overhead costs
Total variable overhead costs
$230,600
$197,800
The denominator activity used to calculate its predetermined overhead rate was 180,000 direct
labor-hours.
Required:
aWhat is the variable overhead (VOH) spending variance for March?
bWhat is the variable overhead (VOH) efficiency variance for March?
cWhat is the fixed overhead budget variance for March?
dWhat is the fixed overhead volume variance for March?
Page 37 of 76
Page 38 of 76
Page 39 of 76
Standard Costing-Exercise
Q. No. 1.
Reebok Products Incorporation produces a broad line of sports equipment and uses a standard cost
system for control purposes. Last year the company produced 8,000 varsity footballs. The standard
costs associated with this football, along with the actual costs incurred last year, are given below (per
football)
Particulars
Standard cost
Actual cost
Direct Materials:
Standard: 3.70 feet at $5.00 per foot
$18.50
Actual: 4.00 feet at $4.80 per foot
$19.20
Direct labor:
Standard: 0.90 hour at $7.50 per foot
Actual: 0.80 hour at $8.00 per foot
6.75
2.25
6.40
$27.50
2.20
$27.80
The president was elated when he saw that actual costs exceeded standard cost by only $.30 per
football. He stated, I was afraid that our unit cost might get out of hand when we gave out those
raises last year in order to stimulate output. But it was obvious our costs are well under control.
There is no inventory of material on hand to start the year. During the year, 32,000 feet of materials
were purchased and used in production.
Required:
1.
(j) Calculate the material price variance, material quantity variance and material cost variance for
the year.
(k) Prepare the journal entries to record all activity relating to direct materials for the year.
2.
(a) Calculate the labor rate variance, labor efficiency variance; labor cost variance for the year.
(b) Prepare the journal entries to record all activity relating to direct labor cost for the year.
Page 40 of 76
3. Calculate Variable Spending Variance, variable efficiency variance and total variable Overhead
Variance for the year.
4. Was the president correct in his statement that our costs are well under control ? Explain.
5. State possible causes of each variance that you have computed.
Q. No. 2.
Miller Toy Company manufacturers a plastic swimming pool at its Westwood Plant. The plant has
been experiencing problems as shown by its June contribution format income statement below:
Particulars
Budget
Actual
Sales (15,000 pools)
$4,50,000
$4,50,000
Less: Variable expenses:
Variable cost of goods sold
1,80,000
1,96,290
Variable selling expenses
20,000
20,000
Total variable expenses
Contribution Margin
Less: Fixed expenses:
Manufacturing overhead
Selling and administrative
Total fixed expenses
Net operating income
2,00,000
2,50,000
2,16,290
2,33,710
1,30,000
84,000
2,14,000
36,000
1,30,000
84,000
2,14,000
19,710
Page 41 of 76
(a) Calculate the material price variance, material quantity variance and material cost variance for
the year.
(b) Calculate the labor rate variance, labor efficiency variance; labor cost variance for the year.
(c) Calculate Variable Spending Variance, variable efficiency variance and total variable Overhead
Variance for the year.
2. Summarize the variances that you computed in (1) above by showing the net overall favorable or
unfavorable variance for the month. What impact did this figure have on the companys income
statement? Show computations.
3. Pick out the two most significant variances that you computed in (1) above. Explain to Ms. Dunn
possible causes of these variances.
Q. No. 3.
Hiller Company manufacturers a plastic swimming pool at its Westwood Plant. The plant has been
experiencing problems as shown by its June contribution format income statement below:
Particulars
Sales (30,000 pools)
Less: Variable expenses:
Variable cost of goods sold
Variable selling expenses
Total variable expenses
Contribution Margin
Less: Fixed expenses:
Manufacturing overhead
Selling and administrative
Total fixed expenses
Net operating income
Budget
$9,00,000
Actual
$9,00,000
3,60,000
40,000
4,00,000
5,00,000
3,92,580
40,000
4,32,580
4,67,420
2,60,000
1,68,000
4,28,000
72,000
2,60,000
1,68,000
4,28,000
39,420
Page 42 of 76
(ii)
Used 98,400 pounds of materials in production. [Finished goods and work in process
inventories are insignificant and can be ignored.]
(iii)
Worked 23,600 direct labor hours at a cost of $7.00 per hour.
(iv)
Incurred variable manufacturing overhead costs totaling $36,580 for the month. A total of
11,800 machine hour was recorded.
If the companys policy to close all variances to cost of goods sold on a monthly basis.
Required:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Page 44 of 76
The Mills Company manufactures roofing shingles. The production process involves heating and
compressing asphalt into sheets and then rolling coarse sand into the hot asphalt. The sheets are then
cooled, cut into shingles, and packaged.
The following standard costs were developed:
STANDARD COST SHEET PER SHINGLE
Direct materials:
Asphalt...........................................................
Sand................................................................
Direct labor..........................................................
Variable manufacturing overhead.....................
Fixed manufacturing overhead.........................
Total standard cost per shingle...................
2 lbs. $0.08/lb.
2 lbs. $0.02/lb.
.01 hrs. $7/hr.
.01 hrs. $3/hr.
$0.16
0.04
0.07
0.03
?
?
The following information is available regarding the companys operations for the period:
Shingles produced.......................................................
500,000
Materials purchased:
Asphalt...................................................................
Sand........................................................................
Materials used:
Asphalt...................................................................
Sand........................................................................
775,000 pounds
850,000 pounds
Direct labor...................................................................
$16,500
$48,000
Budgeted fixed manufacturing overhead for the period is $60,000, and the standard fixed overhead rate
is based on expected capacity of 6,000 direct labor hours.
Instructions:
(a) Calculate the Material Price variance;
(b) Calculate the Material Quantity Variance;
(c) Calculate Material cost variance
(d) Calculate the Labor Rate Variance;
(e) Calculate the labor Efficiency Variance;
(f) Calculate labor variance;
(g) Calculate Variable Spending Variance;
(h) Calculate Fixed Spending Variance;
(i) Calculate Total Spending Variance;
(j) Calculate Variable Efficiency Variance;
(k) Calculate Fixed Efficiency Variance;
(l) Calculate Total Efficiency Variance;
(m)Calculate Variable Volume Variance;
(n) Calculate Fixed Volume Variance;
(o) Calculate Volume Variance;
(p) Calculate Overhead Variance;
Page 45 of 76
Q. No. 7.
Xavier Company produces a single product. Variable Manufacturing Overhead is applied to products
on the basis of direct labour hours. The standard costs for one unit of product are as follows:
Direct material: 6 ounces at $0.50 per ounce ................$3
Direct Labour: 1.8 hrs at $10 per hrs.....................
18
Variable manufacturing OH: 1.8 hrs at $5 per frs........... 9
Total standard variable cost.............................. .
$30
During June, 2,000 units were produced. The cost associated with Junes operations was as follows:
Material purchases: 18,000 Ounces at $0.60 per ounce......$10,800
Material used in production: 14,000 ounces................ ---Direct Labour 4,000 hrs at $9.75 per hrs................. 39,000
Variable manufacturing overhead costs incurred ...........20,800
Required:
a. Calculate the Material Price variance.
b. Calculate the Material Quantity variance.
c. Calculate the Labour rate variance.
d. Calculate the Labour Efficiency variance.
e. Calculate labor cost variance;
e. Variable spending Variance.
f. Variable Efficiency Variance.
Q. No. 8.
The standard cost sheet for one of the Carver Companys products is presented below:
Direct materials (4 feet @ $6.00)................
Direct labor (1 hour @ $12.00)...................
Variable overhead (1 hour @ $5.00)...........
Fixed overhead (1 hour @ $3.00a)..............
Standard unit cost.........................................
$24.00
12.00
5.00
3.00
$44.00
10,000 units
$241,800
$131,250
$48,000
$40,000
Purchase
cost
Material A
3,600
$14,940
Material B
3,800
10,830
Material C
--_________________________________________________
b. Inventories on hand at the start of the month:
_________________________________________________
Inventory
Amount
cost
Material A
Material B
Material C
500 pounds
400 pounds
2,500 gallons
Page 47 of 76
$ 2,000
1,200
12,500
_________________________________________________
c. Materials issued into production during the month:
_________________________________________________
Amount
Cost
Material A
3,450 pounds
?
Material B
3,500 pounds
?
Material C
2,400 gallons
?
_________________________________________________
d.
e.
f.
Required:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
A total of 2,700 hours of direct labor time were recorded for the month; direct labor
cost for the month was $20,250.
Variable overhead cost is allocated to production on a basis of direct labor-hours.
There was no work in process at the beginning or end of the month.
Determine the standard variable cost of one batch of each product.
For direct materials: Compute the price variance for each material purchased.
Prepare a journal entry to record each purchase.
Compute the quantity variance for the month for each material.
Prepare journal entries to record the placing of materials into production.
For direct labor: Compute the rate and efficiency variances for the month.
Prepare a journal entry to record the direct labor cost for the month.
State the possible causes of each variance that you have computed.
Q. No. 10.
The Alpha company produces Toys for national distribution. The management has recently
established a standard costing system to control cost. Estimated standard costs are :
Material : 12 pieces per unit @Tk0.56 per piece.
Labour : 2 hours per unit @Tk.2.75 per hour.
During the month of December , 2002 the Alpha Company produced 1,000 units of finished goods.
Production information for December is as follows :
14,000 pieces of direct material were purchased used. The actual cost of direct material was Tk.7,140 ;
Direct labor cost incurred was 2,500 hours and cost Tk.8,000.
Required :
a. Computation of Material price and Efficiency and Labor rate and Efficiency variances.
b. A brief Explanation to management giving significance of each variance.
Q. No. 11.
The Porter Company employs a Standard costing system. The overhead standards were set using an
activity level of 5,700 standards direct labor hour.
Standard Quantity
Standard Cost
Total
Direct Materials
10 pounds
$2.00 per pound
$20.00
Page 48 of 76
Direct Labor
.25 hours
5.00
Variable Overhead
2.00
Fixed Overhead
3.00
---------------
$30.00
========
During November , the Porter Company produced 24,000 units. 2,10,000 pounds of direct material
were purchased used. The actual cost of direct material was $2.20 per pound ; Direct labor incurred
was 7,500 hours at $16.00 per hour. Actual variable overhead was $21,000 ; Actual Fixed overhead was
$36,000.
Required :
(l) Calculate total Manufacturing Cost Variance
(m)Journalize the above for the month of November, 2002.
c. Prepare an Income Statement assume 30,000 units are sold for $60.00 per unit and that selling
& distribution expenses are $1,00,000.
Q. No. 12.
Superior Door Company produces a single product. Variable manufacturing overhead is applied t
products on the basis of direct labor hours. The standard costs for one unit of product are as
follows:
Direct Material : 6 ounces @ $0.50 per ounces
= $3.00
Direct Labor:
1.80 hours @ $10.00 per hour
= 18.00
Variable Factory Overhead: 1.80 hours @ $5.00 per Hr.
=9.00
-------------------------Standard cost per unit
$30.00
=========
During March, 2000 units were produced. The costs associated with marchs operations were as
follows:
Material Purchased: 18,000 ounces @ $0.60 per ounces
=$10,800
Material Used in production: 14,000 ounces
Direct labor: 4,000 hrs @ $9.75 per hour
= 39,000
Variable cost incurred
= 20,800
Q. No. 13.
The Memo fax company produces Toys for national distribution. The management has recently
established a standard costing system to control cost. Estimated standard costs are :
Material: 24 pieces per unit @Tk0.56 per piece.
Labour: 4 hours per unit @Tk.2.75 per hour.
Page 49 of 76
During the month of December, 2000 the Alpha Company produced 2,000 units of finished goods.
Production information for December is as follows:
28,000 pieces of direct material were purchased used. The actual cost of direct material was Tk.14,
280; Direct labor cost incurred was 5,000 hours and cost Tk.16, 000.
Required :
c. Computation of Material price and Efficiency and Labor rate and Efficiency variances.
d. A brief Explanation to management giving significance of each variance.
Q. No. 14.
The XYZ Company Ltd. employs a Standard costing system. The overhead standards were set using
an activity level of 1,900 standards direct labor hour.
Standard Quantity
Direct Materials
10 pounds
Direct labor
.25 hours
Standard Cost
$1.00 per pound
Total
$10.00
2.50
Variable Overhead
1.00
Fixed Overhead
1.50
---------------
Total--------------- $15.00
========
During November, the XYZ Company produced 8,000 units. 70,000 pounds of direct material were
purchased used. The actual cost of direct material was $1.10 per pound; direct labor incurred was
2,500 hours at $8.00 per hour. Actual variable overhead was $7,000; Actual Fixed overhead was
$12,000.
Required :
(a) Calculate the Material Price variance;
(b) Calculate the Material Quantity Variance;
(c) Calculate Material cost variance
(d) Calculate the Labor Rate Variance;
(e) Calculate the labor Efficiency Variance;
(f) Calculate labor variance;
(g) Calculate Variable Spending Variance;
(h) Calculate Fixed Spending Variance;
(i) Calculate Total Spending Variance;
(j) Calculate Variable Efficiency Variance;
(k) Calculate Fixed Efficiency Variance;
(l) Calculate Total Efficiency Variance;
(m)Calculate Variable Volume Variance;
(n) Calculate Fixed Volume Variance;
(o) Calculate Volume Variance;
Page 50 of 76
Q. No. 19.
Chackroback Company uses a standard cost system & sets predetermined overhead rates on a basis of
direct labor hours . The following data are taken from the company flexible budget for 2010;
Denominator activity ( direct labor hours)
10,000
Variable Overhead costs
$25,000
Fixed Overhead Costs
$59,000
A standard cost card showing the standard cost to produce one unit of the company s product is
given below :
Direct Material : 3 Yards @ $4.40
$13.20
Direct Labor :
2 hours @ $6.00
12.00
Overhead Costs 140% of Direct labor costs
16.80
-------------------------Standard cost per unit
$42.00
=========
During 2010 the company produced 6,000 units of the product & incurred the following costs :
Material Purchased , 24,000 yards @4.80
Material used in production (in yards)
Direct labor cots incurred , 11,600 hours @6.50
Variable overhead costs incurred
Fixed overhead costs incurred
=$1,15,200;
18,500
75,400;
29,500;
60,000
The company records the material at actual costs when received, & determine the price variance
when the materials are requisition for production .
Required :
g. Calculate the Material Price variance;
h. Calculate the Material Quantity Variance;
i. Calculate the Labor Rate Variance;
j. Calculate the labor Efficiency Variance;
k. Variable Spending Variance;
l. Variable Efficiency Variance;
m. Fixed Spending Variance;
n. Fixed Efficiency Variance;
Q. No. 20.
Ms. Naming Incorporation manages the marketing department at Swatch lighting Company. Naming
is evaluated based on her ability to meet budgeted revenues . For May ,2010 Naming Revenues
Budget was as follows :
Price Per unit
Unit sales
Floor Lamps
Hanging Lamps
Ceiling Lamps
$120
65
80
Page 53 of 76
$1,600
2,150
4,200
The actual sales generated by Ms. Incorporation s marketing department in May are as follows :
$115
70
75
Units Sales
$1,95,500
1,41,400
3,11,250
Required :
a. Compute the revenue price variance ;
b. Compute the revenue mix variance;
c. Compute the revenue volume variance;
d. Based on your answer (a) , (b) & (c) evaluate the performance of Ms. Incorporation
Q. No. 21.
Jana corporation sells the two brands of glasses plain & chic. Jana provides the following
information for sales in the month of June 2010;
Static Budget Total contribution margin
$5,600
Budgeted units to be sold of all glasses in June 2001 2,000 units;
Budgeted Contribution Margin per unit of Plain $2.00
Budgeted Contribution Margin per unit of chic $6.00
Total sales quantity variance
$1,400 U
Actual sales mix percentage of Plain
60%
Required :
a. Compute the sales quantity variances for each of the product for June 2010;
b Compute the individual product and total sales mix variance for June 2010;
c. Compute the individual product and total sales volume variance for June 2010;
e. Briefly describe the conclusions you would draw from the variances.
Q. No. 22.
For the following information of Middle Company Ltd. are : To produce one unit of a product
requires :
Direct Material 2lbs @$10.00
Direct labor 3 hrs@ $7.00
Variable OH 3 Hrs @ $5.00
Fixed FOH
3 hrs @ $4.00
During a month 12,400 units were produced at a costs of $8,45,900.
Actual Costs :
Material purchased & used
$2,48,000;
Labor used 37,000 hrs @ $7.10
2,62,700
Factory OH:
Fixed
$1,52,000
Variable
1,83,200
Page 54 of 76
Normal & Budgeted Capacity 37,500 direct labor hour. There is no beginning & ending inventory
& only one type of material & labor has been used.
Direct Material 25,000 lbs @ $10.00
Direct labor 3,750hrs@ $7.00
Variable OH 3,750 Hrs @ $5.00
Fixed FOH
3,750 hrs @ $4.00
= $2,50,000
= 2,62,500
= 1,87,500
= 1,50,000
Required :
o. Calculate the Material Price variance;
p. Calculate the Material Quantity Variance;
q. Calculate the Labor Rate Variance;
r. Calculate the labor Efficiency Variance;
s. Variable Spending Variance;
t. Variable Efficiency Variance;
u. Fixed Spending Variance;
v. Fixed Efficiency Variance;
Q. No. 23.
Mr. Santiago was shocked to see the loss for the month, particularly since sales were exactly as
budgeted. He stated. " I sure hope the plant has a standard cost system in operation. If it doesn't. I
won't have the slightest idea of where to start looking for the problem." The plant does use a standard
cost system with the following standard variable cost per ingot:
Standard Quantity
Standard Price
Standard
or Hours
or Rate
Cost
4.0 pounds
$10.00
Direct labor
0.6 hours
5.40
Variable overhead
0.3 hours*
0.60
Direct materials
$16.00
Mr. Santiago has determined that during the month of October the plant produced 5,000 units and
incurred the following costs:
Page 55 of 76
a. Purchased 25,000 pounds of materials at a cost of $2.95 per pound. There were no raw
materials in inventory at the beginning of the month.
b. Used 19,800 pounds of materials in production. ( Finished goods and work in process
inventories are nominal and can be ignored. )
c. Worked 3,600 direct labor-hours at a cost of $8.70 per hour.
d. Incurred a total variable overhead cost of $4,320 for the month. A total of 1,800 machine hours was recorded.
It is the company's policy to close all variances to cost of goods sold on a monthly basis.
Required:
1. Compute the following variances for the month:
a. Direct materials price and quantity variances.
b. Direct labor rate and efficiency variances.
c. Variable overhead spending and efficiency variances.
2. Summarize the variances that you computed in (1) above by showing the net overall favorable
or unfavorable variance for the month. What impact did this figure have on the company's net
income?
Basic Q. No. 24.
High-Tech. Inc. produces a single product and uses a standard cost system to help in the control of
costs. Overhead is applied to production on a basis of machine-hours. According to the company's
flexible budget, the following denominator activity level chosen for 2010):
Variable overhead costs
$31,500
72,000
$103,500
15,000
16,000
Page 56 of 76
$26,500
70,000
At the end of the year, the company's Manufacturing Overhead account contained the
following data:
Manufacturing overhead
Actual Cost
96,500
92,000
Applied costs
4,500
Management would like to determine the cause of the $4,500 under-applied overhead before closing
the amount to cost of goods sold.
Required:
1. Compute the predetermined overhead rate that would have been used during 19x8. Break it
down into variable and fixed cost elements.
2. Show how the $92,000 "Applied Costs" figure in the Manufacturing overhead account was
computed.
3. Analyze the $4,500 under-applied overhead figure in term of the variable overhead spending
and efficiency variances and the fixed overhead budget and volume variances.
4. Explain the meaning of each variances and the fixed overhead budget and volume variances.
5. Explain the meaning of each variance that you computed in (3) above, and indicate how each
variance is controlled.
Q. No. 25.
At the beginning of 2010, Little man Company had the following standard cost sheet for one of its
products:
Direct materials (5 lbs @ 1.60)
$8.00
13.50
3.00
2.25
Page 57 of 76
$26.75
Little man computes its overhead rates using practical volume, which is 72,000 units. The actual
results for 2010 are
a. Units produced: 70,000
b. Materials purchased: 372,000 pounds at $1,50
c. Materials used: 368,000 pounds
d. Direct labor: 112,000 hours at $8.95
e. Fixed overhead: $214,000
f.
Required:
1. Compute once and usage variances for materials.
2. Compute the labor rate and labor efficiency variances.
3. Compute the fixed overhead spending and volume variances.
4. Compute the variable overhead spending and efficiency variances.
Q. No. 26.
Riche Company produces a popular frozen dessert, which is sold in half gallons. Recently the
company adopted the following standards for one half gallon of the frozen dessert:
Direct materials (70 oz @ $0.008)
$0.56
0.86
$1.42
During the first week of operation, the company experienced the following actual results:
a. Half gallon units produced: 5,000.
b. Ounces of materials purchased: 370,000 ounces at @0.0085.
Page 58 of 76
Direct Labor
? pounds
2.5 hours
? per pound
$9 per hour
$22.50
During the past month, the company purchased 6,000 pounds of direct materials costs of $16,500. All
of this material was used in the production of 1,400 units product. Direct labor cost totaled $28,500 for
the month. The following variances have been computed:
Materials quantity variance
$1,200 U
300 F
4,500 F
Required:
1. For direct materials:
a. Compute the standard price per pound for materials.
b. Compute the standard quantity allowed for materials for the month's production.
c. Compute the standard quantity of materials allowed per unit of production.
a. For direct labor:
Page 59 of 76
a. Compute the actual direct labor cost per hour for the month.
b. Compute the labor rate variance.
Q. No. 28.
Cycle. Inc. assembles a physical fitness product known as aero cycle, which exercises both the upper
and lower body simultaneously. The company purchases all row materials in sets prepackaged by a
subcontractor. Cycle. Inc. established a standard costing system in its first month of existence (June
2010). The standard costs are as follows:
1 package raw materials @ $700
$700
66
15
44
The following data were obtained from Cycle. Inc.'s accounting records for June 2010, when 2,000
aero cycles were assembled:
Debit
Credit
67,500
7,000
$6,750
16,500
Q. No. 29.
The Commodore Company uses standard costing for direct materials and direct labor. Management
would like to use standard costing for variable and fixed overhead also. The following monthly cost
functions were developed for manufacturing overhead items:
Overhead Item
Indirect materials.................................
Indirect labor........................................
Repairs and maintenance....................
Utilities..................................................
Insurance...............................................
Rent........................................................
Depreciation.........................................
Cost Function
$0.10 per DLH
$0.40 per DLH
$0.20 per DLH
$0.25 per DLH
$2,000
$4,000
$20,000
The cost functions are considered reliable within a relevant range of 30,000 to 55,000 direct labor
hours. Commodore expects to operate at 40,000 direct labor hours per month.
Information for the month of September is as follows:
Actual overhead costs incurred:
Indirect materials..............................................
Indirect labor.....................................................
Repairs and maintenance.................................
Utilities...............................................................
Insurance............................................................
Rent.....................................................................
Depreciation......................................................
Total................................................................
Actual direct labor hours worked.......................
Standard direct labor hours allowed for
production achieved.........................................
$4,500
17,000
8,000
10,000
2,100
4,000
20,000
$65,600
42,000
44,000
Instructions:
1.
Calculate the standard manufacturing overhead rate based upon expected capacity,
showing the breakdown between the fixed overhead rate and the variable overhead rate.
Q. No. 30.
Apex Company produces a single product. Variable Manufacturing Overhead is applied to products
on the basis of direct labour hours. The standard costs for one unit of product are as follows:
Direct material: 6 ounces at Tk.0.50 per ounce............... .Tk.3
Direct Labour: 1.8 hrs at Tk.10 per hrs.....................
18
Variable manufacturing OH: 1.8 hrs at Tk.5 per frs........... 9
Total standard variable cost.............................. .
Tk.30
During June, 2,000 units were produced. The cost associated with Junes operations was as follows:
Material purchases: 18,000 Ounces at Tk.0.60 per ounce......Tk.10, 800
Material used in production: 14,000 ounces................ ---Direct Labour 4,000 hrs at Tk.9.75 per hrs................. 39,000
Variable manufacturing overhead costs incurred ...........20,800
Required:
(i) Calculate the Material Price variance.
(ii) Calculate the Material Quantity variance.
(iii)Calculate the Labour rate variance.
(iv) Calculate the Labour Efficiency variance.
(v) Calculate labor cost variance;
(vi) Calculate the Variable spending Variance.
(vii) Calculate the Variable Efficiency Variance.
Q. No. 31.
The XYZ Company Ltd. employs a Standard costing system. The overhead standards were set using
an activity level of 3,800 standards direct labor hour.
Standard Quantity
Standard Cost
Total
Direct Materials
10 pounds
Tk. 2.00 per pound
$20.00
Page 62 of 76
Direct labor
.25 hours
Variable Overhead
Fixed Overhead
5.00
2.00
?
---------------
---------------
During November, the XYZ Company produced 16,000 units. 1, 40,000 pounds of direct material were
purchased used. The actual cost of direct material was Tk. 2.50 per pound; direct labor incurred was
5,500 hours at Tk.16.00 per hour. Actual variable overhead was Tk.15, 000; Actual Fixed overhead was
Tk.25,000.
Required:
(a) Calculate the fixed overhead per unit.
(b) Calculate the standard cost per unit.
(c) Calculate the Material Price variance.
(d) Calculate the Material Quantity Variance.
(e) Calculate Material cost variance
(f) Calculate the Labor Rate Variance.
(g) Calculate the labor Efficiency Variance.
(h) Calculate labor variance;
(i) Calculate Variable Spending Variance;
(j) Calculate Fixed Spending Variance;
(k) Calculate Total Spending Variance;
(l) Calculate Variable Efficiency Variance;
(m)Calculate Fixed Efficiency Variance;
(n) Calculate Total Efficiency Variance;
(o) Calculate Variable Volume Variance;
(p) Calculate Fixed Volume Variance;
(q) Calculate Volume Variance;
(r) Calculate Manufacturing Overhead Variance;
(s) Total Manufacturing Cost Variance
Q. No. 32.
The ABC Company Ltd. employs a Standard costing system. The overhead standards were set using
an activity level of 1,900 standards direct labor hour.
Standard Quantity
Standard Cost
Total
Direct Materials
10 pounds
$1.00 per pound
$10.00
Direct labor
.25 hours
2.50
Variable Overhead
1.00
Fixed Overhead
?
---------------
Total---------------
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========
During November, the ABC Company produced 8,000 units. 70,000 pounds of direct material were
purchased used. The actual cost of direct material was $1.10 per pound; direct labor incurred was
2,500 hours at $8.00 per hour. Actual variable overhead was $7,000; Actual Fixed overhead was
$12,000.
Required:
(a) Calculate the Material Price variance;
(b) Calculate the Material Quantity Variance;
(c) Calculate Material cost variance
(d) Calculate the Labor Rate Variance;
(e) Calculate the labor Efficiency Variance;
(f) Calculate labor variance;
(g) Calculate Variable Spending Variance;
(h) Calculate Fixed Spending Variance;
(i) Calculate Total Spending Variance;
(j) Calculate Variable Efficiency Variance;
(k) Calculate Fixed Efficiency Variance;
(l) Calculate Total Efficiency Variance;
(m)Calculate Variable Volume Variance;
(n) Calculate Fixed Volume Variance;
(o) Calculate Volume Variance;
(p) Calculate Manufacturing Overhead Variance;
(q) Total Manufacturing Cost Variance
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Determine the current sales mix. You will need to know the sales for all major product groups. For
instance, for XYZ comnpany let's say there are 2 different products. Product 1 is selling $4,000 in
sales and Product 2 is selling $6,000 in sales per month.
2.
Calculate the percentage mix. Divide the sales for each product by the total. In this example Product
1 represents 40 percent ($4,000/$10,000) and Product 2 represents 60 percent ($6,000/$10,000).
3.
Track the change from month to month. Let's say in the following month, sales of Product 1
increased to $10,000, and Product 2 sales increased to $20,000.
4.
Calculate the new percentage. The new sales mix of Product 1 is 33 percent ($10,000/$30,000) and 66
percent for Product 2 ($20,000/$30,000).
5.
Calculate the variance in sales mix. Product 1 percentage of total sales changed from 40 to 33
percent. Divide the change by the previous month. The calculation is 7 divided by 40 equals 17.5
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Instructions
Determine the current sales mix. You will need to know the sales for all major product
groups. For instance, for XYZ comnpany let's say there are 2 different products. Product 1 is selling
$4,000 in sales and Product 2 is selling $6,000 in sales per month.
Calculate the percentage mix. Divide the sales for each product by the total. In this example Product
1 represents 40 percent ($4,000/$10,000) and Product 2 represents 60 percent ($6,000/$10,000).
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Track the change from month to month. Let's say in the following month, sales of Product 1
increased to $10,000, and Product 2 sales increased to $20,000.
Calculate the new percentage. The new sales mix of Product 1 is 33 percent ($10,000/$30,000) and 66
percent for Product 2 ($20,000/$30,000).
Calculate the variance in sales mix. Product 1 percentage of total sales changed from 40 to 33
percent. Divide the change by the previous month. The calculation is 7 divided by 40 equals 17.5
percent. This is the one-month variance for Product 1. Product 2 sales went from 60 percent of sales
to 66 percent of sales. The calculation is 6 divided by 60, or 10 percent sales variance.
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=$2, 56,000 UF
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What interferences can you draw from the variances computed in requirement 1?
3.
Compute the market share variance and market size variances for Coca-Cola in 2012. [Report all
variances in terms of contribution margin].
4.
Solution:
Requirement: (1)
Budget for 2012
Product
Selling per
carton
(1)
Kola
Soda
Limca
$60
$40
$70
Units sold
(4)
$40
$28
$45
Contribution
Margin per
unit (3)=(1)
(2)
20
12
35
Contribution
Margin per
unit (3)=1-2
17
15
Units sold
(4)
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4,00,000
6,00,000
15,00,000
25,00,000
4,80,000
9,00,000
Sales mix
(5)
Contribution
margin
(6)= (3) X (4)
16%
24%
60%
100%
80,00,000
72,00,000
3,75,00,000
5,27,00,000
Sales mix
(5)
Contribution
margin
(6)= (3) X (4)
81,60,000
1,35,00,000
16%
30%
$68
$46
22
16,20,000
54%
3,56,40,000
30,00,000
100%
5,73,00,000
Total sales-volume variance, the total sales-quantity variance and total sales-mix variance for each product
and in total for 2012.
Sales volume variance= [Actual sales quantity in units -budgeted sales quantity in units] X budgeted
margin per unit.
Kola
[4, 80,000-4,00,000] X $20.
$16,00,000 F
Soda
Limca
$36,00,000 F
$30,00,000 F
$82,00,000 F
Sales quantity variance= [Actual units of all products sold---Budgeted units of all products sold] X
Budgeted sales mix percentage X Budgeted contribution margin per unit.
Kola
[30, 00,000-25,00,000] X .16 X $20.
$16,00,000 F
Soda
Limca
Soda
Limca
$14,40,000 F
$75,00,000 F
$1,05,40,000 F
Sales-mix variance= Actual units of all products sold X [ Actual sales mix percentage--[ Budgeted sales mix
percentage] X Budgeted contribution margin per unit.
Kola
30, 00,000 X [0.16-0.16] X $20.
$0
$21,60,000 F
$45,00,000 UF
$23,40,000 UF
Flexible Budget:
Static Budget
Actual units of all products sold Budgeted units of all products sold
X Budgeted
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3.
4.
5.
6.
Compute the market size variances for August. [Report all variances in terms of contribution
margin].
7.
Solution:
Requirement: (1)
Total sales-volume variance for August= [Actual sales quantity in pounds- Budgeted sales quantity in
pounds] X budgeted contribution margin per pound
The total sales volume variances are:
Chocolate chip
=[57,600-45,000] X $20
=$2,52,000 F
Oatmeal
=[18,000-25,000] X $23
=$1,61,000 U
Coconut
=[9,600-10,000] X $26
=$10,400 UF
White Chocolate
=[13,200-5,000] X $30
=$2,46,000 F
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Requirement: (6)
By increasing its actual market share from the 10% budgeted to the actual 12.50%, Parle has a favorable
market share variance of $5, 64,000. There is a smaller offsetting unfavorable market size variance of $94,000
due to the 40,000 units decline in the total market from 10, 00,000 budgeted to an actual 9,60,000.
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