CHAPTER 9standard costing:a functional-based control approach

  discussion questions

9-1

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.

1. Standard costs are essentially budgeted amounts on a per-unit basis. Unit standards serve as inputs in building budgets.

2. The quantity decision is determining how much input should be used per unit of output. The pricing decision determines how much should be paid for the quantity of input used.

3. Historical experience is often a poor choice for establishing standards because the historical amounts may include more inefficiency than is desired.

4. Ideal standards are perfection standards, representing the best possible outcomes. Currently attainable standards are standards that are challenging but allow for inefficiency. Currently attainable standards are often chosen because many feel they tend to motivate rather than frustrate.

5. By identifying standards and assessing deviations from the standards, managers can locate areas where change or corrective behavior is needed.

6. Managers generally tend to have more control over the quantity of an input used, rather than the price paid per unit of input.

7. The materials price variance is often computed at the point of purchase rather than issuance because it provides control information sooner. If the variance is computed at the point of issuance and a problem is detected, this problem could have been ongoing for weeks or months (depending on how long the direct materials were in inventory before being used).

8. Disagree. A direct materials usage variance can be caused by factors beyond the control of the production manager (e.g., purchase of a lower quality of direct materials than normal).

9. Disagree. Using higher-priced workers to perform lower-skilled tasks is an example of an event that will create a direct labor rate variance that is controllable.

10. Inefficient direct labor, machine downtime, bored workers, and poor quality direct materials are possible causes of an unfavorable direct labor efficiency variance.

11. Part of a variable overhead spending variance can be caused by inefficient use of overhead resources.

12. The volume variance is caused by the actual volume differing from the expected volume used to compute the predetermined standard fixed overhead rate. If the actual volume is different from the expected volume, then the company has either lost or earned a contribution margin. The volume variance signals this outcome. If the variance is large, then the loss or gain is large since the volume variance understates the effect.

13. Control limits indicate how large a variance must be before it is judged to be material and the process is out of control. Current practice sets the control limits subjectively and bases them on past experience, intuition, and judgment.

14. All three approaches break the total overhead variance into component variances. The four-variance approach divides overhead into fixed and variable categories (based on unit-level behavior). It computes the variable overhead spending and efficiency variances and the fixed spending and volume variances. The three-variance approach computes the spending variance (the sum of the fixed and variable spending variances of the four-variance approach) and the variable efficiency and fixed overhead volume variances (same as those of the four-variance analysis). The two-variance analysis computes a budget variance, which is the sum of the spending variances and the variable overhead efficiency variances, and a volume variance, which is identical to that computed using a four-variance analysis.

15. The direct materials usage and direct labor efficiency variances can be broken into mix and yield variances. The mix variance indicates the deviation from the standard mix of direct materials or direct labor. The yield variance calculates the difference between the actual yield and the standard yield.

9-1

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.

CORNERSTONE Exercises

Cornerstone Exercise 9.1

1. Standard quarts of oil allowed:

SQ = Unit quantity standard × Actual output

= 6.2 × 980

= 6,076 quarts

2. Direct labor hours allowed:

SH = Unit labor standard × Actual output

= (24/60) × 980

= 0.4 × 980

= 392 direct labor hours

3. If 970 oil changes were performed instead of 980, the standard quantities allowed would be lower, since the production of fewer oil changes takes less oil and fewer direct labor hours. The SQ for oil would be 6,014 quarts (6.2 × 970), and the SH for direct labor hours would be 388 hours (0.4 × 970).

Cornerstone Exercise 9.2

1. Formulas:

Materials price variance (MPV) = (AP – SP)AQ = ($5.10 – $5.05)6,020

= $0.05 × 6,020 = $301 U

Materials usage variance (MUV) = (AQ – SQ)SP = (6,020 – 6,076)$5.05

= (56 × $5.05) = $282.80 F

2. AQ × AP AQ × SP SQ × SP

= 6,020 × $5.10 = 6,020 × $5.05 = 6,076 × $5.05

= $30,702.00 = $30,401.00 = $30,683.80

MPV MUV

$301 U $282.80 F


Cornerstone Exercise 9.2 (Concluded)

3. Total direct materials variance = (AP × AQ) × (SP × SQ) = MPV + MUV

= ($5.10 × 6,020) – ($5.05 × 6,076)

= $30,702.00 – $30,683.80

= $18.20 U

Notice that $18.20 U is also equal to the sum of the MPV and MUV.

(MPV + MUV) = $301.00 U + $282.80 F = $18.20 U

4. If the actual quantity purchased was 6,100 quarts, the materials price variance would be calculated at the time of purchase.

Materials price variance (MPV) = (AP – SP)AQ = ($5.10 – $5.05)6,100

= $0.05 × 6,100 = $305 U

There would be no impact on the materials usage variance because the actual quantity purchased is not used in that computation; the actual quantity used in production is part of the materials usage variance.

Cornerstone Exercise 9.3

1. Formulas:

Labor rate variance (LRV) = (AR – SR)AH = ($14.50 – $14.00)386 = $193 U

Labor efficiency variance (LEV) = (AH – SH)SR = (386 – 392)$14.00

= 6 × $14.00 = $84 F

2. AH × AR AH × SR SH × SR

= 386 × $14.50 = 386 × $14 = 392 × $14

= $5,597 = $5,404 = $5,488

LRV LEV

$193 U $84 F


Cornerstone Exercise 9.3 (Concluded)

3. Total direct labor variance = (AR × AH) – (SR × SH) = LRV + LEV

= ($14.50 × 386) – ($14.00 × 392)

= $5,597 – $5,488

= $109 U

Notice that $109 U is also equal to the sum of the LRV and LEV.

(LRV + LEV) = $193 U + $84 F = $109 U

4. If the actual direct labor wage rate was $12.40 in June, the direct labor rate variance would be:

Labor rate variance (LRV) = (AR – SR)AH = ($12.40 – $14.00)386 = $617.60 F

The direct labor efficiency variance would be unaffected since the actual rate is not a part of the calculation.

Cornerstone Exercise 9.4

1. Variance for June = $328,000 – $330,500 = $2,500 U

Variance for July = $328,000 – $343,000 = $15,000 U

Variance for August = $328,000 – $346,800 = $18,800 U

Variance for September = $328,000 – $314,000 = $14,000 F

Variance for October = $328,000 – $332,000 = $4,000 U

Variance for November = $328,000 – $323,000 = $5,000 F

July and August should be investigated, as their variances are greater than $14,500 from standard.

2. 4% of standard cost = 0.04 × $328,000 = $13,120

Under this allowable deviation from standard, September would be investigated, as well as July and August since their variances are greater than 4percent of standard.


Cornerstone Exercise 9.5

1. Cost of Goods Sold 25,790

Direct Materials Price Variance 13,450

Direct Labor Efficiency Variance 12,340

Direct Materials Usage Variance 1,100

Direct Labor Rate Variance 870

Cost of Goods Sold 1,970

Adjusted Cost of Goods Sold = $1,500,000 – $1,970 + $25,790

= $1,523,820

2. Immaterial variance account balances are in MUV and LRV. The closing entry is:

Direct Materials Usage Variance 1,100

Direct Labor Rate Variance 870

Cost of Goods Sold 1,970

Prime Percentage

Costs of Total

Work in Process $165,200 12.32%

Finished Goods 126,000 9.39

Cost of Goods Sold 1,050,000 78.29

Total $1,341,200 100.00%

Work in Process (0.1232 × $12,340) 1,520

Finished Goods (0.0939 × $12,340) 1,159

Cost of Goods Sold (0.7829 × $12,340) 9,661

Direct Labor Efficiency Variance 12,340

Work in Process (0.1232 × $13,450) 1,657

Finished Goods (0.0939 × $13,450) 1,263

Cost of Goods Sold (0.7829 × $13,450) 10,530

Direct Materials Price Variance 13,450

Work in Finished Cost of

Process Goods Goods Sold

Unadjusted balance $236,000 $180,000 $1,500,000

Add: MPV 1,657 1,263 10,530

Less: MUV (1,100)

Less: LRV (870)

Add: LEV 1,520 1,159 9,661

Adjusted balance $239,177 $182,422 $1,518,221

Cornerstone Exercise 9.6

1. Total variable overhead variance = Actual variable overhead – (Variable overhead rate × Standard hours for actual production)

= $88,670 – [$3.40 × (0.20 × 131,000)] = $88,670 – $89,080

= $410 F

2. If production had been 129,600 units, fewer direct labor hours would have been allowed at standard and the flexible budget amount for variable overhead would be smaller. Thus, the total variable overhead variance would turn into an unfavorable variance of $542 ($88,670 – $88,128).

Cornerstone Exercise 9.7

1. Variable overhead spending variance

= Actual variable overhead – (SVOR × AH)

= $88,670 – ($3.40 × 26,350)

= $920 F

2. Variable overhead efficiency variance = (AH – SH)SVOR

= (26,350 – 26,200)$3.40

= $510 U

3.

4. If 26,100 direct labor hours had been worked in February, the variable overhead spending variance would be smaller, but still favorable. However, the variable overhead efficiency variance would be favorable since 26,100 hours is less than the standard direct labor hours allowed for actual production (0.2 × 131,000 = 26,200 direct labor hours) by 100 hours.


Cornerstone Exercise 9.8

1. Fixed overhead spending variance

= Actual fixed overhead – Budgeted fixed overhead

= $68,300 – $65,000 = $3,300 U

2. Volume variance = Budgeted fixed overhead – Applied fixed overhead

= Budgeted fixed overhead – (Fixed overhead rate × SH)

= $65,000 – [$2.50 × (131,000 × 0.2)] = $500 F

3.

Note: Standard direct labor hours for actual production = 0.2 × 131,000 = 26,200 direct labor hours

4. If 129,600 units had been produced in February, there would have been no impact on the fixed overhead spending variance (assuming that actual fixed overhead stayed the same). However, there would have been an unfavorable volume variance. That volume variance would have been $200 U [$65,000 – ($2.50 × 0.2 × 129,600)].


Cornerstone Exercise 9.9

1. SM = Standard mix proportion × Total actual input quantity

SM tomato sauce = 0.325 × 2,000 = 650 pounds

SM cheese = 0.375 × 2,000 = 750 pounds

SM sausage = 0.300 × 2,000 = 600 pounds

2. Direct Material AQ SM AQ – SM SP (AQ – SM)SP

Tomato sauce 700 650 50 $1.40 $ 70

Cheese 840 750 90 2.80 252

Sausage 460 600 (140) 2.10 (294)

Mix variance $ 28 U

3. Actual mix proportion tomato sauce = 700/2,000 = 0.35, or 35%

Actual mix proportion cheese = 840/2,000 = 0.42, or 42%

Actual mix proportion sausage = 460/2,000 = 0.23, or 23%

The mix variance is unfavorable because a larger percentage of the relatively more expensive input, cheese, was used.

4. Tomato sauce now accounts for 35 percent (700/2,000) of the total, and cheese accounts for only 35 percent (700/2,000). The mix variance will be
favorable since relatively more of the cheaper input, tomato sauce, is used, less of the more expensive cheese is used, and the standard amount of sausage is used.


Cornerstone Exercise 9.10

1. SM = Standard mix proportion × Total actual input quantity

SM machine operators = 0.50 × 400 = 200 hours

SM packers = 0.50 × 400 = 200 hours

2. Direct Labor AQ SM AQ – SM SP (AQ – SM)SP

Machine operators 160 200 (40) $16 $ (640)

Packers 240 200 40 12 480

Mix variance $ 160 F

3. Actual mix proportion machine operators = 160/400 = 0.40, or 40%

Actual mix proportion packers = 240/400 = 0.60, or 60%

The mix variance is favorable because a larger percentage of the relatively less expensive input, packers, was used.

4. Since both types of labor account for 50 percent of total direct labor hours, and are exactly equal to their standard mix proportion, there would be no direct labor mix variance.

Cornerstone Exercise 9.11

1. Using the standard mix for 16 pizzas:

Yield ratio = 16 pizzas/40 pounds of input = 0.40

2. Standard cost of the yield (SPy) = $85.40/16 pizzas yielded = $5.34 per pizza

3. Standard yield = Yield ratio × Actual amount of inputs

= 0.40 × 2,000 pounds = 800 pizzas

4. Yield variance = (Standard yield – Actual yield)SPy

= (800 – 780)$5.34 = $106.80 U

5. If the 2,000 pounds of direct materials put into process resulted in 825 pizzas, then the yield variance would be favorable. That is, the actual yield of 825 pizzas is greater than the standard yield of 800 pizzas.

Exercises

Exercise 9.12

1. Likely coworkers: operating personnel, cost accountants, and engineers. The operating personnel of each cost center should be involved in setting standards; they are the primary source for quantity information. The materials manager has information on material prices, and personnel have information about wages. The Accounting Department should be involved in standard setting and should provide information about past prices and usage. Finally, industrial engineers can provide input about absolute efficiency. In setting price standards for labor and materials, current and future market conditions and special contractual arrangements need to be considered. Engineering studies on efficiency and the need for proper motivation are major factors for quantity standards.

2. The standard prime cost per 10-gallon batch of strawberry jam is as follows:

Strawberries (7.5 qts.a @ $0.80) $ 6.00