ACT 2131 (PJJ)
TUTORIAL 6
1. Describe the relationship that unit standards have with flexible budgeting.
2. Why is historical experience often a poor basis for establishing standards?
3. What are ideal standards? Currently attainable standards? Of the two, which is
usually adopted? Why?
4. Discuss the differences among actual costing, normal costing, and standards
costing.
5. When should a standard cost variance be investigated?
6. Explain why the materials price variance is often computed at the point of
purchase rather than at the point of issuance?
7. Associated Media Graphics (AMG) is a rapidly expanding company involved in
the mass reproduction of instructional materials. Ralph Boston, owner and
manager of AMG, has made a concerted effort to provide a quality product at a
fair price with delivery on the promised due date. Expanding sales have been
attributed to this philosophy. As the business grows, however, Ralph is finding it
increasingly difficult to personally supervise the operations of AMG. As a result,
he is beginning to institute an organizational structure that would facilitate
management control.
One recent change was to designate the operating departments as cost
centers, with control over departmental operations transferred from Ralph to each
departmental manager. However, quality control stills reports directly to Ralph, as
do the finance and accounting functions. A materials manager was hired to
purchase all materials and oversee inventory handling (receiving, storage, and so
on) and record keeping. The materials manager is also responsible for maintaining
an adequate inventory based upon planned production levels.
The loss of personal control over the operations of AMG caused Ralph to
look for a method to evaluate performance efficiently. Dave Cress, a new cost
accountant, proposed the use of a standard costing system. Variances for
materials, labor and overhead could then be calculated and reported directly to
Ralph.
Required
1. Assume that AMG is going to implement a standard costing system and
establish standards for materials, labor, and overhead.
a. Who should be involved in setting the standards for each cost
component?
b. What factors should be considered in establishing the standards for
each cost component?
2. Describe the basis for assignment of responsibility under a standard costing
system. (CMA adapted).
8. Seasonal Confections, Inc., a manufacturer of candies for various seasons of the
year, wants to set up a standards costing system. The controller decided to set up a
standards cost card for one product line. He chose the chocolate bunny line, which
operates from February through April of each year. The chocolate bunnies are 8”
tall dark chocolate molded rabbits. They are very popular each Easter season. Last
year, Seasonal Confections produced 40,000 dark chocolate bunnies with the
following total cost:
Direct materials (340,000 oz. @ $0.30)
Direct labor (10,000 DLH @ $9)
$102,000
90,000
Required
1. Compute the direct materials allowed per bunny in ounces.
2. Compute the direct labor hours allowed per bunny in hours.
3. Set up a standards cost card for the prime cost of one chocolate bunny.
9. Guerin Corporation produces leather purses. The company uses a standards
costing system and has set the following standards for materials and labor:
Leather (5 strips @ $7)
$35
Direct labor
21
Total prime cost
$56
During the year, Guerin produced 34,000 leather purses. Actual leather purchased
was 173,500 strips at $6.82 per strip. There were no beginning or ending
inventories of leather. Actual direct labor was 50,900 hours at $13.50 per hour.
Required
1. Compute the costs of leather and direct labor that should have been incurred
for the production of 34,000 leather purses.
2. Compute the total budget variance for materials and labor.
3. Break down the total variance for materials into a price variance and a usage
variance.
4. Break down the total variance for labor into a rate variance and an efficiency
variance.
10. Zawatsky Products produces instructional aids. Among the company’s products
are whiteboards, which use colored markers instead of chalk. They are
particularly popular for conference rooms in educational institutions and
executive offices of large corporations. The standard cost of materials and labor
for this product follow:
Direct materials
11 lbs @ $7.95
Direct labor
4 hrs @ $9.40
During the first month of the year, 20,100 boards were produced. Information
concerning actual costs and usage of materials and labor follows:
Materials purchased
222,500 lbs. @ $8.05
Materials used
Direct labor
220,400 lbs.
79,900 hrs,; total cost: $759,050
Required
1. Compute the materials price and usage variances.
2. Compute the labor rate and efficiency variances.
3. Prepare journal entries for all activity relating to materials and labor for the
month.
11. Chef’s-Best Company is planning to produce 800,000 electric mixers for the
coming year. Each mixer requires one-half standard hour of labor for completion.
The company uses direct labor hours to assign overhead to products. The total
overhead budgeted for the year coming is $1,120,000, and the standard fixed
overhead rate is $0.55 per unit produced. Actual results for the year follow:
Actual production (units)
786,000
Actual direct labor hours
390,000
Actual variable overhead
$695,000
Actual fixed overhead
$430,300
Required
1. Compute the applied fixed overhead.
2. Compute the fixed overhead spending and volume variances.
3. Compute the applied variable overhead.
4. Compute the variable overhead spending and efficiency variances.
12. Mediamet Company produces one product and uses a standard costing system.
The direct labor standard indicates that three labor hours should be used for every
unit produced. The normal production volume is 120,000 units of this product.
The budgeted overhead for the coming year follows:
Fixed overhead
$864,000*
Variable overhead
1,440,000
*at normal volume
Mediamet applies overhead on the basis of direct labor hours.
During the year, Mediamet produced 120,600 units, worked 361,800
direct labor hours, and incurred actual fixed overhead costs of $940,320 and
actual variable overhead cost of $1,443,500.
Required
1. Calculate the standard fixed overhead rate and the standard variable overhead
rate.
2. Compute the applied fixed overhead and the applied variable overhead. What
is the total fixed overhead variance? Total variable overhead variance?
3. Break down the total fixed overhead variance into a spending variance and a
volume variance. Discuss the significance of each.
4. Compute the variable overhead spending and efficiency variances. Discuss the
significance of each.
13. At the beginning of 2008, Krayler Company had the following standard cost sheet
for one of its chemical product:
Direct materials (6 lbs. @ $6.40)
$38.40
Direct labor (1.8 hrs. @ $18.00)
32.40
Fixed overhead (1.8 hrs. @ $8.00)
14.40
Variable overhead (1.8 hrs. @ $1.50)
Standard cost per unit
2.70
$87.90
Kayler computes its overhead rates using practical volume, which is 288,000
units. The actual results for 2008 are:
a. Unit produced: 280,000
b. Materials purchased: 1,684,700 pounds at $6.60
c. Materials used: 1,684,000 pounds
d. Direct labor: 515,000 hours at $18.10
e. Fixed overhead: $4,140,200
f. Variable overhead: $872,000
Required
1. Compute price 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.
Solution:
(1) Unit standards are used to build flexible budgets. Unit standards for variable
costs are the variable cost component of a flexible budgeting formula.
(2) Historical experience is often a poor choice for establishing standards because the
his- torical amounts may include more ineffi- ciency than is desired
(3) Ideal standards are perfection standards, representing the best possible
outcomes. Currently attainable standards are standards that are challenging but allow some
waste. Currently attainable standards are often chosen because many feel they tend to
mo- tivate rather than frustrate.
(4) Actual costing assigns actual manufacturing costs to products. Normal costing
assigns actual prime costs and estimated overhead costs to products. Standard costing
assigns estimated manufacturing costs to products.
(5) A standard cost variance should be investi- gated if the variance is material and if
the benefit of investigating and correcting the deviation is greater than the cost.
(6) The materials price variance is often com- puted at the point of purchase rather
than issuance because it provides control infor- mation sooner. When this is done, the
vari- ance may be called the materials purchase price variance, and it is the responsibility
of the purchasing manager rather than the production manager.
(7) 1.
a. The operating personnel of each cost center should be involved in setting
standards. They are the primary source for quantity information. The mate- rials
manager and purchasing manager are a source of information for ma- terial prices,
and personnel are knowledgeable on wage information. The Accounting
Department should be involved in overhead standards and should provide
information about past prices and usage. Finally, if infor- mation about absolute
efficiency is desired, industrial engineers can pro- vide important input.
b. Standards should be attainable; they should include an allowance for waste,
breakdowns, etc. Market prices for materials as well as labor (un- ions) should be
a consideration for setting standards. Labor prices should include fringe benefits,
and material prices should include freight, taxes, etc.
2. In principle, before formal responsibility is assigned, the causes of the vari- ances
must be known. To be responsible, a manager must have the ability to control or
influence the variance. The following assignments of responsibility are general in nature
and have exceptions:
MPV: Purchasing manager
MUV: Production manager
LRV: Production manager
LEV: Production manager
OH variances: Departmental managers
(8) 1. SQ direct materials per unit = 340,000/40,000 = 8.5 oz per bunny
2. SH direct labor hours per unit = 10,000/40,000 = 0.25 hrs. per bunny
3. Standard Cost for Dark Chocolate Bunny:
Standard
Direct materials
Direct labor
Total standard unit prime cost
Standard
Standard
Price
Usage
Cost
$0.30
9.00
8.50 oz.
0.25 hr.
$2.55
2.25
$4.80
(9)
1.
Materials:
Labor:
$35  34,000 = $1,190,000
$21  34,000 = $714,000
2.
Variance
Materials
Labor
Actual Cost*
Budgeted Cost
$1,183,270
687,150
$1,190,000
714,000
$ 6,730
26,850
*$173,500  $6.82; 50,900  $13.50
3.
MPV
= (AP – SP)AQ= ($6.82 – $7.00)173,500 = $31,230 F
MUV = (AQ – SQ)SP= (173,500 – 170,000)$7 = $24,500 U
AP  AQ
$6.82  173,500
SP  AQ
$7  173,500
$31,230 F
Price
SP  SQ
$7  170,000
$24,500 U
Usage
= (AR – SR)AH= ($13.50 – $14.00)50,900 = $25,450 F
4.
LRV
LEV
= (AH – SH)SR= (50,900 – 51,000)$14 = $1,400 F
AR  AH
$13.50  50,900
SR  AH
$14  50,900
$25,450 F
Rate
SR  SH
$14  51,000
$1,400 F
Efficiency
(10)
1. MPV = (AP – SP)AQ= ($8.05 – $7.95)222,500 = $22,250 U
MUV = (AQ – SQ)SP= [220,400 – (20,100  11)]$7.95 = $5,565 F
(A three-pronged variance diagram is not shown because MPV is for materials purchased
and not materials used.)
2. LRV = (AR – SR)AH= ($9.50 – $9.40)79,900 = $7,990 U
Note: AR = $759,050/79,900 = $9.50
LEV = (AH – SH)SR= [79,900 – (20,100  4)]$9.40 = $4,700 F
AR  AH
$9.50  79,900
SR  AH
$9.40  79,900
$7,990 U
Rate
SR  SH
$9.40  80,400
$4,700 F
Efficiency
F
F
3.
a
Materials Inventory ..................................
1,768,875
MPV............................................................
b
Accounts Payable ..............................
22,250
c
Work in Process ......................................
MUV ......................................................
1,757,745
1,791,125
5,565
d
Materials Inventory ............................
1,752,180
e
Work in Process ......................................
LRV ............................................................
755,760
7,990
LEV .......................................................
f
Accrued Payroll ..................................
4,700
759,050
a
$7.95  222,500 =1,768,875
b
$8.05  222,500 =1,791,125
c
$7.95  221,100 =1,757,745
d
$7.95  222,500 = 1,768,875
e
$9.40  80,400 = 755,760
f
$9.50  79,900 = 759,050
(11) 1.
Fixed overhead rate = $0.55/(1/2 hr. per unit) = $1.10 per DLH
SH = 786,000  0.5 = 393,000
Applied FOH = $1.10  393,000 = $432,300
2.
Fixed overhead analysis:
Actual FOH
$430,300
Budgeted FOH
$1.10  400,000*
$9,700 F
Spending
*400,000 expected hours = 0.5 hour  800,000 units)
3.
4.
Applied FOH
$1.10  393,000
$7,700 U
Volume
Variable OH rate = ($1,120,000 – $440,000)/400,000= $1.70 per DLH
Variable overhead analysis:
Actual VOH
$695,000
Budgeted VOH
$1.70  390,000
$32,000 U
Spending
Applied VOH
$1.70  393,000
$5,100 F
Efficiency
(12)
1.
Standard fixed overhead rate
Standard variable overhead rate
= $864,000/(120,000  3) = $2.40per DLH
= $1,440,000/360,000= $4.00 per DLH
2.
Fixed:
120,600  3  $2.40 = $868,320
Variable: 120,600  3  $4.00 = $1,447,200
Total FOH variance
= $940,320 – $868,320= $72,000 U
Total VOH variance
= $1,447,200 – $1,443,500= $3,700 F
3.
Fixed overhead analysis:
Actual FOH
Budgeted FOH
Applied FOH
$940,320
$864,000
$868,320
$76,320 U
$4,320 F
Spending
Volume
The spending variance is the difference between planned and actual costs.
Each item’s variance should be analyzed to see if these costs can be reduced. The volume
variance is the incorrect prediction of volume, or alternatively, it
is a signal of the loss or gain that occurred because of producing at a level different from
the expected level.
4.
Variable overhead analysis:
Actual VOH
Budgeted VOH
Applied VOH
$1,443,500
$1,447,200
$4  361,800
$3,700 F
$0
Spending
Efficiency
The variable overhead spending variance is the difference between the actual
variable overhead costs and the budgeted costs for the actual hours used. The
variable overhead efficiency variance is the savings or extra cost attributable to the
efficiency of labor usage.
(13)
MPV = (AP – SP)AQ= ($6.60 – $6.40)1,684,700= $336,940 U
MUV = (AQ – SQ)SP= (1,684,000 – 1,680,000)$6.40= $25,600 U
Note: There is no three-pronged analysis for materials because materials pur- chased is
different from the materials used. (MPV uses materials purchased and MUV uses
materials used.)
1.
2. LRV = (AR – SR)AH= ($18.10 – $18.00)515,000= $51,500 U
LEV = (AH – SH)SR= [515,000 – (1.8  280,000 units)]$18.00= $198,000 U
AR  AH
$18.10  515,000
3.
4.
SR  AH
$18  515,000
SR  SH
$18  504,000
$51,500 U
$198,000 U
Rate
Efficiency
Fixed overhead analysis:
Actual FOH
Budgeted FOH
Applied FOH
$4,140,200
$8  518,400
$8  504,000
$7,000 F
$115,200 U
Spending
Volume
Note: Practical volume in hours = 1.8  288,000 = 518,400 hours
Variable overhead analysis:
Actual VOH
$872,000
Budgeted VOH
$1.50  515,000
$99,500 U
Spending
Efficiency
Applied VOH
$1.50  504,000
$16,500 U