Chap 013

CHAPTE CHAPTER R 13 THE FLEXIB FLEXIBLE LE BUDGE BUDGET T AND STAN STANDAR DARD D 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 committ committee ee member member,, howeve however, r, erred erred in saying saying that the operation operation was ineffici inefficient. ent. The firm earned $5 million million operating income from 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.

13.2 Yes. 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 operati operation on carries carries out the operation operation withou withoutt wastin wasting g any of the resources. resources. An operation can achieve its goals even though it wasted resources in attaining the goal. goal. An operati operation on can be effic efficien ientt in using using resource resources s in operati operations ons withou withoutt achieving the goal it sets out to attain.

13-4 A standard is the cost a firm expects expects to incur for an operation. 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. 13-5 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 the level levels s of deta detailils s of the the budget budget.. A mast master er budget budget is prepa prepared red befo before re the 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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13-6

Flexible budgets can reflect changes in factors that have effects on operations including changes in inflation rates and activity levels.

13-7

Prime costs are direct materials and direct labor. These costs are variable 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.

13-8

Of the three, three, standards s tandards based on the average average of recent recent histo historic rical al performan performance ce 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.

13-9

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.

13-10 Altho Although ugh the total total materia materials ls cost cost varianc variance e is small small and insign insignif ifica icant, nt, the total total

variance variance can be a result of substantial substantial price and efficiency efficiency variances 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 paid due to overt overtim ime e premi premium um shou should ld not not have have any any effe effect ct on dire direct ct labor labor varianc variances. es. For firms firms that that includ include e overti overtime me premium premium in the total wages, wages, rate rate variances are likely to be unfavorable.

Blocher, Chen, Cokins, Lin: Cost Managemen, 3e

13- 2

©The McGraw-Hill Companies, Inc., 2005

13-13 The performance of a division should should not be considered considered as less than satisfactory satisfactory

simp simply ly becau because se all all varia varianc nces es are unfa unfavo vora rable ble.. A firm firm expe expects cts unfa unfavo vorab rable le 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 othe otherr hand hand,, an unf unfavor avorab able le vari varian ance ce may may sig signal nal that hat the performance of the division is below the expectation if the firm uses a currently attainable attainable standard. Firms with currently attainable attainable standards expect the division 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

sugges suggests ts that that the the firm firm paid paid a lowe lowerr actua actuall cost cost of mate materia rials ls than than the the price prices s 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 The impo importa rtanc nce e of such such facto factors rs as qual qualit ity, y, relia reliabi bilility ty,, and and avai availa labi bilility ty ofte often n 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 highes highestt favora favorable ble varian variances. ces. Rather, Rather, it is the one with with happy happy custome customers rs and consistently better products. 13-18 Establishin Establishing g a standard standard cost system system and identifying identifying variances from the standard

are steps in gaining a better understanding of the operations and to improve the opera operati tion ons. s. The The focu focus s of a stan standa dard rd cost cost syste system m shou should ld be on infl influe uenc ncin ing g behavior with positive reinforcements and motivations. Standard costing systems should never never be used as the whipping 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 standar standards, ds, authori authoritari tarian an contro controll procedure procedures, s, poor poor commun communica icatio tion, n, excessi excessive ve 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. Solutions Manual

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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 firm’s 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.


13- 4


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

a. Operating income sales volume variance: $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

Sales (900 x $840) Total variable expenses Contribution margin Fixed expenses Operating income a.

$756,000 414,000 $342,000 180,000 $162,000

Operating income flexible budget variance: $162,000 - $165,000 = $3,000 U

b.

Contribution margin flexible budget variance: $342,000 - $315,000 = $27,000 F c. Selling price variance:

($840 - $800) x 900 = $36,000 F Or

$756,000 - $720,000 = $36,000 F


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13-24 Flexible budget and Variances (10 minutes)

1.

a.

Budget data: Selling price Variable cost

$48,000 ) 12,000 = $4.00 per unit $18,000 ) 12,000 = $1.50 per unit

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

$60,000 22,500 $37,500 16,000 $21,500

b. Contribution margin earned for the period: $64,000 - $24,000 = Flexible budget contribution margin Contribution margin flexible budget variance

$40,000 37,500 $ 2,500 F

c. Operating income flexible budget variance: $25,000 - $21,500 =

$3,500 F

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) =

$7,500 F $7,500 F

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. Solutions Manual

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13-25

1.

Sales Volume Variance (10 min)

Flexible Sales Budget Flexible Volume Actual Variance Budget Variance 3,800 -03,800

Units

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

Master Budget 200 U

4,000

$53,200

$3,800 U $57,000

1

$3,000 U $60,000

$19,000 7,700 $26,700 $26,500

$3,800 U $15,200 100 U 7,600 $3,900 U $22,800 $7,700 U $34,200

2

$800 400 1,200 $1,800

$16,000 10,000 $26,000 $ 500

$1,000 U $15,000 1,000 U 9,000 $2,000 U $24,000 $9,700 U $10,200

3

F $16,000 F 8,000 F $24,000 U $36,000

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

1

Budget selling price per unit x number of units = ($60,000/4,000) x 3,800 = $15 per unit x 3,800 = $57,000

2

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

3

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

Sales volume variances Contribution margin: Operating income: Flexible budget variances Contribution margin: Operating income:

$34,200 - $36,000 = $10,200 - $12,000 =

$1,800 U $1,800 U

$26,500 - $34,200 = $500 - $10,200 =

$7,700 U $9,700 U


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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

3,800

4,100

4,000

$57,000 $61,500 $60,000 =D3 ÷ D2xB2

or

$15,200 $16,400 $16,000

=D5 ÷ D2xB2

or

8,000 =D6 ÷ D2xB2

or

C2 4 Variable costs: 5

Manufacturing

C2 6

Selling & Admin.

7,600

8,200

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

Manufacturing

11

Selling & Admin.

$15,000 $15,000 $15,000 = D10 9,000

9,000

9,000 = D11

12 Total fixed costs

$24,000 $24,000 $24,000 =B10+B11;

13 Operating income

$10,200 $12,900 $12,000 =B8-B12;

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C8-

C12


13- 10 ©The McGraw-Hill Companies, Inc., 2005

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)

28,800

Materials Purchase Price Variance-PVC (720 X $1)

Accounts Payable (720 X $41)

720 29,520

Purchased 720 pounds PVC from TVC Chemical Inc. at $41 per pound. Standard price: $40 per pound. Oct. 9 Work-in-Process Inventory

31,200

Materials Usage Variance-PVC

2,400

Materials Inventory (720 X $40)

28,800

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.



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 = (AP - $5.00) x 2,000 - $200/2,000

2.

= AP - $5.00

AP

= $5.00 - $0.10

AP

= $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

$90,000

Total direct materials purchased (pounds) Standard cost per pound of direct materials

30,000 x

3.25

Total standard cost of direct materials purchased Direct materials price variance

97,500 $ 7,500 F

3. Total direct materials used at standard cost per pound 28,000 x $3.25 = Less: unfavorable direct materials usage variance

$91,000 -

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


6,500 $84,500

÷

$3.25 26,000


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

3.

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

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60,000 +

2,000 62,000

13-31Materials Price Variance (5 min)

1,400 x $1.10

1,400 x $1.00

Price Variance

AQ x $1.00

1,300 x $1.00

Usage Variance

Direct materials price 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



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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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



13-34Standard Direct Materials Cost (5 min)

Standard direct material cost per bag of Inset-Be-Gone Total direct materials in the final product

60 lbs.

Proportion of direct materials input remained in the finished product

) 75%

Total standard quantity of DM per bag of Inset-Be-Gone Purchase price per pound

x

Total purchase price before purchase discount Purchase discount

$2.50 $200.00 4.00

Standard direct material cost per bag

Solutions Manual

80 lbs.

13-19

$196.00

13-35Standard Direct Materials Cost (5 min)

Total direct materials per package of SS-2 Standard purchase price per poundof Natura Total purchase price before purchase discount Purchase discount (3/15)

x $5.00 $60.00 1.80

Standard direct material cost per package of SS-2


12 lbs.

$58.20


13-36Materials Price and Usage Variance (5 min)

22,000 x AP = $26,400

22,000 x $1.25 = $27,500 Price Variance

20 x 1,000 x $1.25 = $25,000 Usage 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

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Actual direct materials used in production

12,600 sq. ft.

Total standard direct materials for the units manufactured: Number of desks manufactured

1,000

Standard quantity of vinyl per desk

x

Total

12,000

Excess vinyl used in production

sq. ft. 600 sq. ft.

Standard cost of vinyl per sq. ft.

x $ 2.25

Direct materials (vinyl) usage variance


12

$1,350 U


13-38Labor Rate Variance (5 min)

40,000 x $25 = $1,000,000

40,000 x SR

Rate Variance

42,000 x SR

$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

40,000

Standard hourly rate

x $24.00

Total

- 960,000

Direct labor rate variance

Solutions Manual

$40,000 U

13-23

13-39Standard Labor Rate and Efficiency Efficiency Variance (5 min)

11,000 x $30.00

11,000 x SR $33,000 F

Rate Variance

12,000 x SR ?

Efficiency Va Variance

1. Total actual direct labor hours

11,000

Actual hourly rate

x

Total actual total direct labor cost

$30.00

$330,000

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

33,000 $363,000

÷

11,000 $33.00

2. Direct labor efficiency variance: = (AH – SH) x SR = (11,000 - 12,000) x $33.00 = $33,000 F



13-40Standard Labor Rate and Total Hours Hours (5 min)

200 x AR = $1,000

200 x SR

$100 F

SH x SR

$165 U

Rate Variance

Efficiency Variance

1. Total actual direct labor cost

$1,000

Favo Favora rabl ble e dire direc ct labo laborr rate rate vari varian ance ce

+

Direct Direct labor labor hours hours worked worked at the standa standard rd hourly hourly rate Total direct labor hours worked Standard dire irect labor rate per hour 2. Total Total standard standard direct direct labor hours hours allowed: allowed: Efficiency variance = (200 - SH) x $5.50 = $165 SH = 200 - ($165 ÷ $5.50) = 200 - 30 = 170 hours

Solutions Manual

13-25

100 100 $1,100 $1,100

÷

200 $5.50

13-41Labor Efficiency Variance (5 min)

20,000 x AR = $378,000

20,000 x SR

$6,000 U

SH x SR ?

Rate Variance

Efficiency Variance

1. Standard direct labor hourly rate: Total payroll

$378,000

Unfavorable direct labor rate variance

-

Direct labor hours worked x Standard hourly rate Actual direct labor hours

6,000 $372,000 20,000

÷

Standard direct labor hourly rate

$18.60

2. Direct labor efficiency efficiency variance: Budgeted total direct hours

24,000

Budgeted units to manufacture

÷

8,000

Standard direct labor hour per unit Total units manufactured

3 x

Total standard hours for units manufactured

6, 6,000 18,000

Direct Direct labor labor effic efficien iency cy varian variance ce = (AH – SH) SH) x SR SR = (20,000 - 18,000) x $18.60 = $37,200 U



13-42Labor Rate and Efficiency Variances (5 min)

3,000 x AR = $69,000

3,000 x $20.00 = $60,000

Rate Variance 1. Direct labor rate variance:

2 x 1,600 x $20.00 = 3,200 x $20.00 = $64,000

Efficiency Variance $69,000 - 3,000 x $20 =

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

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1,600 x 2 =

$9,000 U 3,000 3,200 200 x $20.00 $4,000 F


AH x $18.00 = $207,000

AH x $16.00

Rate Variance

10,000 x 1.5 x $16.00 = $240,000

Efficiency Variance

1. Direct labor rate variance: Difference in hourly wage rates: Actual direct labor hourly rate $18.00 Standard direct labor hourly rate - 16.00 Actual direct labor hours spent: Actual direct labor costs $207,000 Actual direct labor hourly rate $18.00 ÷ Total actual direct labor hours spent Direct labor rate variance

$2.00 U

x 11,500 $23,000 U

2. Direct labor efficiency variance: 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 manager’s 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



410 x $21.00 = $8,610

410 x $20.00

Rate Variance 1.

SH x $20.00 = $8,440

Efficiency Variance

Direct labor rate variance: Total direct labor payroll

$8,610

Actual total direct labor hours at standard hourly rate: 410 hours x $20 =

8,200

Direct labor rate variance

$410 U

2. Direct labor efficiency variance: Actual direct labor hours

410 hrs.

Total standard direct labor hours for the output: Total output (gallons)

8,440

Standard output per direct labor hour Difference in labor direct hours Standard direct labor cost per hour Direct labor efficiency variance

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÷

20

422 12 F x $ 20 $240 F

13-45Actual Labor Hours (5 min)

1.Direct labor efficiency variance = (AH - SH) x SR $27,000 = (AH - 10,000) x $25.00 AH

= 10,000 + $27,000 / $25.00

AH

= 11,080 hours

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



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

3. Direct labor flexible budget variance =

$5,500 U + $4,000 U

=

$9,500 U

Solutions Manual

13-31

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

18,000

Standard direct labor rate

x

Total actual direct labor hours at the standard rate Direct labor rate variance - Favorable Total direct labor payroll in May


$50.00 $900,000

-

120,000 $780,000


13-48Total Payroll (5 min)

Actual direct labor hours

10,500

Standard direct labor rate

x

Total direct labor hours worked at the standard rate Direct labor favorable rate variance Total direct labor payroll for May

Solutions Manual

13-33

$24.00 $252,000

-

8,400 $243,600

13-49Standard Direct Labor Cost Per Unit (5 min)

Total hours paid per week per employee

40

Hourly wage

x

Weekly wages per employee

$1,200

Employee benefit (40%)

+

Total weekly payroll cost per employee Direct labor cost per productive hour

÷

35

x

3

$48

Number of standard direct labor hours per unit


480 $1,680

Weekly productive hours per employee

Standard direct labor cost per unit

$30

$144


13-50 Actual and Standard Labor Rates (5 min)

1.

Actual direct labor hourly wage rate: Total payroll for direct labor

$675,000

Actual direct labor hours 2.

27,000 hrs.

÷

Actual direct labor rate

$25.00per hour

Standard direct labor hourly rate: Total payroll for direct labor

$675,000

Direct labor rate variance - Favorable

+

Total actual hours at standard hourly rate Actual direct labor hours

16,200 $691,200 27,000

÷

Standard direct labor hourly rate 3.

$25.60 per hour

Direct labor efficiency variance: Actual direct labor hours

27,000

Total standard direct labor for the units manufactured

30,000

Favorable direct labor efficiency variance in hours Standard hourly wage rate

x

Direct labor efficiency variance

Solutions Manual

3,000

13-35

$76,800

$25.60 F

13-51Total Direct Materials Cost in Flexible Budget (5 min)

1.

Flexible budget direct materials cost Master budget data: Total direct materials

$273,600

Number of units

÷

144,000

Direct materials cost per unit

$1.90

Number of units manufactured during March

x

Direct materials cost in the flexible budget for March 2.

11,400 $21,660

Direct materials flexible budget variance: Actual direct materials cost

$22,000

Flexible budget direct materials cost Direct materials flexible budget variance


- 21,660 $

340 U


13-52 Flexible budget and direct labor variances (5 minutes)

1.

Master budget Total variable cost

$2,700,000

Total number of papers to be processed

1,500,000

)

Total standard variable cost to process one paper Total number of papers processed during the year

$1.80 x

1,200,000

Total budgeted variable cost for 1,200,000 papers

$2,160,000

Fixed costs per year

150,000

Expected total cost to process 1,200,000 papers 2.

$2,310,000

Total actual labor cost

$855,000

Actual total labor hours

19,000

Standard labor rate per hour ($600 ) 15)

x

40.00

Total labor hours worked at the standard hourly rate

- 760,000

Direct labor rate variance 3.

$95,000 U

Actual total labor hours

19,000

Total standard labor hours for 1,200,000 paper: (1,200,000 ) 1,000) x 15 =

18,000

Excess labor hour

1,000

Standard labor rate per hour

x

Direct labor efficiency variance

Solutions Manual

13-37

40.00 $40,000 U

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.



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.

Solutions Manual

13-39

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 company’s 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.

Blocher, Chen, Cokins, Lin: Cost Management, 3e

13- 40


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

(10 gal. x

$.45) =

4.50 $10.50

(3 min. x 6 qts.)/60 x

$9.00 =

2.70

(12 min./ 60) x

$9.00 =

1.80

(40 qts.** x

$.38) =

Direct labor Sorting Blending Packaging c.

Standard cost per ten-gallon batch

4.50 15.20 $30.20

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, ColdKing’s 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 firm’s competitive position and the survival of the firm in the long run.

Solutions Manual

13- 41

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 firm’s products. Continuous unfavorable efficiency variances jeopardize the competitive position of the firm and threaten the success of the firm’s strategy.


13- 42


13-56Fill in Missing Data (20 min) Operating Result

Units

Flexible Budget Variance

900

Sales revenue

Flexible Budget

0

Sales Volume Variance

900

Master Budget

100 F

800

$9,500

($400) U

$9,900

$1,100 F

$8,800

$4,800

$600 F

$5,400

$600 U

$4,800

2,300

(500) U

1,800

(200) U

1,600

$2,400

($300) U

$2,700

$300 F

$2,400

1,200

(200) U

1,000

$0

1,000

$1,200

($500) U

$1,700

Variable cost Manufacturing Selling and administrative Contribution margin Fixed cost Operating income

$300 F

$1,400

a. -0b. Flexible budget unit (Same as the actual units sold):

900

c. Sales volume variance (unit):

900 - 800 =

100 F

d. Budget selling price per unit:

$8,800/800 units = $11

Flexible budget Sales revenues:

900 x $11 =

$9,900

e. Selling price flexible budget variance:

$9,500 - 9,900 =

$400 U

f. Sales revenue sales volume variance:

$9,900 - 8,800 =

$1,100 F

g. Standard variable manufacturing cost per unit: $600/(900 - 800) = $6 Variable manufacturing cost-Master budget:

800 x $6 =

$4,800

h. Variable manufacturing cost-Flexible budget: 900 x $6 =

$5,400

i. Variable manufacturing cost-Actual:

$4,800

$5,400 - 600 =

Variable selling and administrative expense: j. Actual:

$9,500 - 4,800 - 2,400 =

$2,300

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

unit Flexible budget:

900 x $2 =

l . Flexible budget variance:

$2,300 - $1,800 =

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

13- 43

$200

$1,800 $500 U U

n. Contribution margin Flexible budget variance:

$400 U - $600 F + $500 U = p. Flexible budget contribution margin:

or

$300 U

$2,400 + $300 U =

$2,700

$9,900 - $5,400 - $1,800 =

$2,700

q. Master budget contribution margin:

$8,800 - $4,800 - $1,600 =

$2,400

r . Contribution margin sales volume variance: $2,700 - $2,400 = $300 F

or

$1,100 F - $600 U - $200 U =

s. Fixed cost - Actual:

$2,400 - $1,200 =

$1,200

t. Fixed cost - Master budget:

$2,400 - $1,400 =

$1,000

u. Fixed cost - Flexible budget:

$300 F

$1,000

v. Fixed cost sales volume variance:

$1,000 - 1,000 =

0

w. Fixed cost flexible budget variance:

$1,200 - $1,000 =

$200 U

x. Flexible budget Operating income:

$2,700 - $1,000 =

$1,700

y. Operating income flexible budget variance: $1,200 - $1,700 = $500 U

or

(n) $300 U + ( w ) $200 U =

z. Operating income sales volume variance: $1,700 - $1,400 =

or


(r ) $300 F - ( u) $0 =

13- 44

$500 U $300 F $300 F


13-57 Fill in Missing Data (15 min) Operating Result

Units


Flexible Budget

1,600

Sales revenue


Master Budget

100

1,600

F

1,500

$38,400

$1,600 U

$40,000

$2,500 F

$37,500

$27,200

1,600 U

$25,600

(1,600) U

24,000

4,000

(800) U

3,200

(200) U

3,000

$7,200

($4,000) U

$11,200

Variable cost: Manufacturing Selling & administrative Contribution margin Fixed cost

6,200

Operating income 1.

$1,000

1,400 F ($2,600) U

$700 F

$10,500

7,600

0

7,600

$3,600

$700 F

$2,900

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:

100 x $25 = $2,500 F 1,600 x $25 = $40,000

e. Sales revenue - actual: $40,000 - 1,600 U =

$38,400

Variable manufacturing cost: f. Standard cost per unit: $24,000 ) 1,500 = $16

Total flexible budget amount:

1,600 x $16 = $25,600

g. Sales volume variance:$25,600 - 24,000 =

$1,600

U

(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:

$4,000 - 3,200 =

$800

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

$3,000

U j. Total master budget amount: Solutions Manual

13- 45

k. Sales volume variance:$3,200 - 3,000 =

$200

U

( e) $38,400 – (h) 27,200 - 4,000 =

$7,200

Contribution margin: l. Actual amount:

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

U

(d ) $40,000 - (f ) 25,600 - 3,200 = $11,200

or

(l) $7,200 + (m) 4,000 U = $11,200

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

$700

F

$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:

( l ) $7,200 - 1,000 =

$6,200

( n) $11,200 - 3,600 =

$7,600

Same as (s)

$7,600

(r) $6,200 - (s) 7,600 =

v. Fixed cost sales volume variance:

(s) 7,600 - (t) 7,600 =

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

$1,400 F - 0$2,600

U x. Operating income - Master budget:

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

y. Operating income sales volume variance:

$3,600 - 2,900 =

$700 F

(Or, $700 - 0 = $700 F) 2.

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


13- 46


Operating Result

Units


900

0

Flexible Budget


Master Budget

900

75 F

825

Sales revenue

$52,600

$1,300 F

$51,300

$4,275 F

Variable cost

20,075

5,125 F

25,200

(2,100) U

Fixed cost

10,350

1,075 F

11,425

0

11,425

Operating income $22,175

$7,500 F

$14,675

$2,175

$12,500

$47,025

13-58Fill in Missing Data (15 min) a. Flexible budget variance b. Sales volume variance c. Sales unit flexible budget variance:

-0-

d. Units sold - flexible budget:

900

e. Sales volume variance in units:

900 - 825 =

75

F f. Total sales in flexible budget: g.

$52,600 - $1,300 = $51,300

Budgeted selling price per unit = $51,300 ) 900 units = $57 Sales revenue sales volume variance:

$57 x 75 units =

$4,275

F h. Sales revenue - master budget:

825 x $57 = $47,025

Or, (f ) $51,300 - ( g ) $4,725 = $47,025 i. Variable costs: j.

$52,600 - $10,350 - $22,175 = $20,075

Standard (budgeted) variable cost per unit = $23,100 ) 825 = $28 Total variable cost - Flexible budget:

900 x $28 = $25,200

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

13- 47

5,125

23,100

F l. Variable cost sales volume variance: $25,200 - $23,100 =

$2,100

U Or, 75 x $28 =

$2,100

U m. Fixed cost - flexible budget:

$11,425

n. Fixed cost flexible budget variance: $10,350 - $11,425 =

$1,075

F p. Fixed cost sales volume variance:

-0-

q. Operating income flexible budget variance:

$1,300 F + ( k ) $5,125 F + ( n) $1,075 F =

$7,500

F r. Flexible budget operating income:$22,175 - ( q) 7,500 F = $14,675

Or, (f ) $51,300 - ( j ) $25,200 - ( m) $11,425 =

$14,675

s. Operating income sales volume variance:

(r ) $14,675 - $12,500 =

$2,175

F or (g ) $4,275 - ( l ) $2,100 =

$2,175

F


13- 48


Operatin Result

Units sold Revenues Variable cost: Contribution Fixed costs

ex e Budget Variance

1,200

0

a es Flexible Volume Budget Varianc

1,200

200 F

Master Budget

1,00

$69,600 ($2,400) U $72,000 $12,000 F $60,00 56,800

(8,800) U

48,000 (8,000) U

$12,800 $11,200 U $ 24,0 00 $ 4,0 00 F 7,000

(2,000) U

5,000

0

Operating income $5,800($13,200)U $ 19,0 00 $ 4,0 00 F

40,00 $2 0,0 00

5,00 $1 5,0 00

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 Solutions Manual

13- 49

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,

1,000 x $20 = $20,000

p. $12,800 - $5,800 = $7,000 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,

$24,000 - $5,000 = $19,000

w. $5,800 - $19,000 = $13,200 U

Or,

$11,200 U + $2,000 U = $13,200 U


13- 50


13-60Basic Analysis of Direct Labor Variances (10 min)

1.

Actual Cost

Actual Input x Budget Price

Flexible Budget

5,800 x AR

5,800 x $ 20

1,200 x 5 x $20

= $127,600

= $116,000

=$120,000

Rate Variance

Efficiency Variance

$127,600 - $116,000

$116,000 - $120,000

= $11,600 U

= $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.

Solutions Manual

13- 51

13-61Working backward (10 minutes)

AH x AR

AH x SR

Rate Variance $11,600 F

SH X SR

Efficiency Variance $24,000 U

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.

AH = 1.16 SH AH = 1.16 x 5,000 = 5,800 hours

3. 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


13- 52


13-62 All variances (60 minutes)

1. a. Direct material price variance. Actual quantity x (Actual price - Standard price) • Formula: • 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 Printed circuit boards

$20 x (2,200 - 2,200) = $ 0 $15 x (4,700 - 4,400) = 4,500

U Reading heads

$10 x (9,200 - 8,800) =

4,000

U Total direct material quantity variance U

Solutions Manual

13- 53

$8,500

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 = 2,200hours RH Group 2,200 x 1.5 = 3,300 hours •

• Calculation of variance:

Assembly Group

$10 x (3,900 - 4,400) = PCB Group $2,200 $12 x (3,500 - 3,300) =

(2,400 - 2,200) = RH Group 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. Units sold x (Actual price – Budgeted price) • Formula: • 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 Blocher, Chen, Cokins, Lin: Cost Managemen, 3e

13- 54


13-62 (Continued-2) f. Contribution margin sales volume variance. Budgeted unit contribution margin • Formula: x (Actual units - Budgeted units) Calculate budgeted unit contribution margin: • Total budgeted contribution ) Budgeted units $122,000 ) 2,000 = $61 per unit $12,200 F • Calculate variance: $61 x (2,200 - 2,000) = 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.

Solutions Manual

13- 55

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.


13- 56


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

Solutions Manual

$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

Direct Materials 5,600

Work done for in-process ending inventory

+

800

Equivalent units of production

Direct Labor 5,600 +

6,400

Standard quantity per unit

x

Total standard quantity for production in November

8 51,200

600 6,200

x

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

Labor

800

600

x $40.00

x $49.20

$32,000

$29,520

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


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Total

$61,520


13-64 (continued)

2. Materials inventory

250,000

Materials purchase price variance

750

Accounts payable

249,250

Purchase 50,000 kilograms of materials for $249,250 Work in Process inventory

256,000

Materials usage variance

1,500

Materials inventory

257,500

Issued 51,500 kilograms of materials to production Work in Process inventory

305,040

Labor rate variance

1,460

Labor efficiency variance

5,740

Accrued Payroll

300,760

Direct labor wages incurred for the manufacturing

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13-65Joint Direct Materials Variances (5 min)

25,000 x $12 = $300,000

25,000 x $10.00 = $250,000

Price Variance

5,000 x 4.5 x $10 = $225,000

Usage (Efficiency) Variance

1. Direct materials price 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 =

22,500 tons

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


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5,000 U $50,000 U


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)

Master Budget U 100 U $35,000 F 9,000 F 15,000 U $11,000 3,000 U $ 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.

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year

Operating Results Actual Purchase Standard Price Quantity Price Total Cost Price Variance 4,000 $68 $ 272,000 $60 $ 32,000 4,000 69 276,000 60 36,000 4,000 73 292,000 60 52,000 *** ** 24,000 40 960,000 60 480,000 * 36,000 $1,800,000 $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 4 th Quarter’s 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 4 th 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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Chap 013

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