Chapter 7
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CHAPTER 7
STANDARD COSTING AND VARIANCE ANALYSIS
14.
a. Total purchases = AP × AQp = $0.13 × 115,000 = $14,950
b. Material price variance = (AP × AQp) - (SP × AQ)
= $14,950 - ($0.14 × 115,000)
= $14,950 - $16,100
= $1,150 F
c. Material quantity variance = (SP × AQu) - (SP × SQ)
= ($0.14 × 100,000) - ($0.14 × 97,900)
= $14,000 - $13,706
= $294 U
15.
a. $10,080 ÷ 4,200 = $2.40 per quart
AQ x AP
AQ x SP
SQ x SP
4,200 x $2.40
4,200 x $2.50
(1,000 x 4) x $2.50
$10,080
$10,500
$10,000
$ 420 F
$500 U
Material price variance
Material usage variance
b. The price variance would be based on the quantity of material purchased,
while the usage variance would be based on the quantity of material used in
production. Because the usage variance is based on the same quantities as
in part (a), it does not change.
AQp x AP
5,000 x $2.40
$12,000
AQp x SP
5,000 x $2.50
$12,500
$500 F
Material price variance
c. The purchasing agent would have responsibility for the price variance and the
production manager would have responsibility for the usage variance.
(CPA adapted)
16.
a. Material purchase price variance = $0.70 × 100,000 lbs. = $70,000 F
b. June
July
Aug.
Sept.
3,000 × 5 = 15,000 SQ; $2.10 × (16,400 – 15,000) = $2,940 U
3,400 × 5 = 17,000 SQ; $2.10 × (17,540 – 17,000) = 1,134 U
2,900 × 5 = 14,500 SQ; $2.10 × (14,950 – 14,500) =
945 U
2,500 × 5 = 12,500 SQ; $2.10 × (13,200 – 12,500) = 1,470 U
c. It is possible that the material purchased had been damaged in some way or
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Chapter 7
became tainted for use while being stored at the bankrupt vendor’s location.
(Ayesha Inc. should carefully assess the effect of this material’s usage on
labor efficiency to see if there is an unfavorable variance there.)
17.
a. and b.
Purchasing agent's responsibility:
Material Price Variance = (AP × AQp) - (SP × AQp)
= ($1.94 × 25,600) - ($1.90 × 25,600)
= $49,664 - $48,640
= $1,024 U
Production supervisor's responsibility:
Standard quantity of materials = 600 × 35 lbs. = 21,000
Material Quantity Variance = (SP × AQu) - (SP × SQ)
= ($1.90 × 21,400) - ($1.90 × 21,000)
= $40,660 - $39,900
= $760 U
c.
Explanations offered should consider the pattern of the variances. The pattern is
an unfavorable price variance and an unfavorable quantity variance. Perhaps
material usage was higher than expected and the inventory fell below an
acceptable level, requiring purchasing in a quantity that did not allow for a
quantity discount, purchasing from a nontraditional supplier at a higher price,
or needing to obtain materials quickly which added transportation costs to the
normal purchase price. There is also a possibility that a higher quality of
material was purchased at a higher price, but this seems unlikely given the
unfavorable quantity variance.
The quantity variance could be just inefficiency in production or inferior
material resulting in increased waste and shrinkage.
18.
a. Standard hours = 10 × 670 = 6,700
b.
AP × AQ
$127,500
SP × AQ
$18 × 6,800
$122,400
$5,100 U
SP × SQ
$18 × 6,700
$120,600
$1,800 U
Labor Rate Variance Labor Efficiency Variance
$6,900 U
Total Labor Variance
c. Wage rate per hour = $127,500 ÷ 6,800 = $18.75
Chapter 7
19.
3
a. Since the labor rate variance is favorable, the actual cost of direct labor must
be $5,500 less than the standard cost. The standard cost is $80,500.
AP x AQ
$7.50 × 10,000
$75,000
SP x AQ
SP × 10,000
$80,500
$ 5,500 F
Labor rate variance
$80,500 ÷ 10,000 actual direct labor hours equals a standard rate of $8.05.
b. Since the actual hours are 1,000 less than the standard, the efficiency
variance is 1,000 hours x $8.05 = $8,050 F.
AP x AQ
SP x AQ
SP x SQ
$7.50 × 10,000
$8.05 × 10,000
$8.05 × 11,000
$75,000
$80,500
$88,550
$ 5,500 F
$ 8,050 F
Labor rate variance
Labor efficiency variance
c. Work in Process Inventory
Labor Rate Variance
Labor Efficiency Variance
Wages Payable
d. Labor Rate Variance
Labor Efficiency Variance
Cost of Goods Sold
88,550
5,500
8,050
75,000
5,500
8,050
13,550
(CPA adapted)
20.
a. Actual cost = Standard cost + Total unfavorable variance
= ($250 × 350) + $3,500
= $87,500 + $3,500
= $91,000
b. Labor efficiency variance = (SP × AH) - (SP × SH)
= ($250 × 330) - ($250 × 350)
= $82,500 - $87,500
= $5,000 F
c. Rate variance + Efficiency variance = Total variance
Rate variance + (- $5,000 F) = $3,500 U
Rate variance = $3,500 + $5,000
Rate variance = $8,500 U
d. Work in Process Inventory
87,500
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Chapter 7
Labor Rate Variance
Wages Payable
Labor Efficiency Variance
8,500
91,000
5,000
e. Because the favorable efficiency variance is coupled with an unfavorable rate
variance, one explanation is that the firm used, on average, a more skilled
mix of labor than it expected to use. For example, the firm may have used
more senior auditors and managers than it intended to use. Without additional
information on the original mix of employees and the actual mix of employees,
no specific conclusions can be reached.
21.
Units produced
Standard hours per unit
Standard hours
Standard rate per hour
Actual hours worked
Actual labor cost
Labor rate variance
Labor efficiency variance
Case A Case B
Case C
1,000
1,000
240
3.5
0.9
2.5
3,500
900
600
$7.25 $10.20
$10.50
3,400
975
560
$23,800 $8,970
$6,180
$850F
$975F
$300U
$725F
$765U
$420F
Case A:
Standard hours = 1,000 × 3.5 = 3,500
LRV = AQ (AP - SP)
-$850 = 3,400 (AP - $7.25)
-$850 = 3,400AP - $24,650
$23,800 = 3,400AP
$7.00 = AP
Actual labor cost = $7.00 × 3,400 = $23,800
LEV = SP (AQ - SQ)
LEV = $7.25 (3,400 – 3,500) = $7.25 (100) = $725 F
Case B:
Units produced = 900 ÷ 0.9 = 1,000
LEV = SP (AQ - SQ)
$765 = SP (975 - 900)
$765 = SP (75)
$10.20 = SP
LRV = AQ (AP - SP)
Case D
1,500
3.0
4,500
$7.00
4,900
$31,850
$2,450F
$2,800U
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5
-$975 = 975 (AP - $10.20)
-$975 = 975AP - $9,945
$8,970 = 975AP
$9.20 = AP
Actual labor cost = $9.20 × 975 = $8,970
Case C:
Standard hours = 600 ÷ 240 = 2.5
(AP × AQ) – LRV = (SP × AQ)
$6,180 - $300 = $5,880
$5,880 = $10.50 × AQ
$5,880 ÷ $10.50 = AQ
AQ = 560
LEV = SP (AQ - SQ)
LEV = $10.50 (560 - 600) = $10.50 (-40) = $420 F
Case D:
Actual labor rate = $31,850 ÷ 4,900 = $6.50
LRV = AQ (AP - SP)
LRV = $31,850 – ($7 × 4,900)
LRV = $31,850 - $34,300
LRV = $2,450 F
LEV = (SP × AQ) – (SP × SQ)
$2,800 = $34,300 - $7 SQ
-$31,500 = -$7SQ
SQ = 4,500
Standard hours per unit = 4,500 ÷ 1,500 = 3
22.
a. Material price variance = $61,000 – ($3  20,000)
= $61,000 - $60,000
= $1,000 U
Standard quantity of material = 3,900  4.8 = 18,720 gallons
Material quantity variance = ($3  18,350) – ($3  18,720)
= $55,050 - $56,160
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Chapter 7
= $1,110 F
b. Standard quantity of time = 3,900  1/3 hour = 1,300 hours
($9.02  1,290)
($9.00  1,290)
($9.00  1,300)
$11,635.80
$11,610.00
$11,700.00
$25.80 U_______
$90.00 F_________
Labor Rate Variance
Labor Efficiency Variance
$64.20 F__________________
Total Labor Variance
23.
a. Actual material price = $83,300 ÷ 17,000 = $4.90 per square yard
Material price variance: AQp (AP – SP) = 17,000 × ($4.90 – $5.00) = $1,700 F
Material usage variance: SP × (AQu – SQ) = $5 × (16,500 – 15,000) = $7,500
U
b. Raw Material Inventory
Accounts Payable
Material Price Variance
85,000
83,300
1,700
Work in Process Inventory
75,000
Material Usage Variance
7,500
Raw Material Inventory
82,500
c. Actual labor rate = $79,800 ÷ 7,600 = $10.50
Labor rate variance: AQ × (AP – SP) = 7,600 × ($10.50 – $10.00) = $3,800 U
Labor efficiency variance = (SP × AQ) - (SP × SQ)
= ($10 × 7,600) – ($10 × 7,500)
= $76,000 – $75,000
= $1,000 U
d. Work in Process Inventory
Labor Rate Variance
Labor Efficiency Variance
Wages Payable
75,000
3,800
1,000
79,800
e. The material price variance is favorable. The purchasing agent may have
purchased an optimum quantity with a negotiated price. It is also possible that
the materials are of lower quality. This possibility is evident in both the
unfavorable material usage variance and the unfavorable labor efficiency
variance. It is possible that the workers had difficulty working with the
materials or that the inferior quality slowed down the machinery or resulted in
defective units being produced. All of these factors would require additional
Chapter 7
7
materials to be used to complete the required production level. The
unfavorable labor rate variance could have been the result of the company
using more experienced workers, a tight labor market due to a strong
economy or standards that had not been updated for a change in contractual
wage rates negotiated in a union contract.
(CPA adapted)
24.
a. Standard quantity of material = 2 yards × 10,000 shirts = 20,000 yards
Standard labor time = 0.7 hours × 10,000 shirts = 7,000 DLHs
b.
AP × AQp
SP × AQp
$3 × 30,000
$90,000
$89,700
$300 F
Material Price Variance
SP × AQu
$3 × 20,120
$60,360
SP × SQu
$3 × 20,000
$60,000
$360 U_______
Material Quantity Variance
AP × AQ
SP × AQ
$7.50 × 7,940
$59,550
$58,756
$794 F
Labor Rate Variance
SP × SQ
$7.50 × 7,000
$52,500
$7,050 U_____
Labor Efficiency Variance
$6,256 U
Total Labor Variance
c. The pattern is a favorable material price variance and an unfavorable material
quantity variance. If the quality level of cotton is below the expected level, a
favorable price variance would be incurred. However, the lower quality cotton
could result in more waste and shrinkage during production and thus more
materials yardage is required to make a t-shirt than expected.
d. The favorable labor rate variance is coupled with an unfavorable labor
efficiency variance. One explanation is that the firm used, on average, a less
skilled mix of labor than it expected to use and thus the average labor time
per t-shirt was greater than expected. Additionally, the use of inferior quality
material could also have contributed to the excess time taken to manufacture
the shirts.
e. Material Price Variance
300
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Chapter 7
Cost of Goods Sold
Material Quantity Variance
60
360
To dispose of the material variances
Labor Rate Variance
Cost of Goods Sold
Labor Efficiency Variance
794
6,256
7,050
To dispose of the labor variances
25.
a. SQ = 4,800 × 0.5 = 2,400 square yards
b. SH = 4,800 × 2 = 9,600 hours
c. Since the quantity of material purchased and used is the same, all material
variances are based on the same quantity.
Material quantity variance = (SP × AQ) – (SP × SQ)
$600 U = $6 (AQ – SQ)
$600 U = $6 AQ - $6(2,400)
$600 U = $6 AQ - $14,400
$15,000 = $6 AQ
AQ = 2,500 yards
Material price variance = (AP × AQ) – (SP × AQ)
= $14,550 – ($6 × 2,500)
= $14,550 - $15,000
= $450 F
d. Labor efficiency variance = SP (AH - SH)
= $17 (9,760 – 9,600)
= $17 (160)
= $2,720 U
e. Standard prime cost per travel bag:
Material (0.5 × $6)
$ 3.00
Labor (2 × $17)
34.00
Total
$37.00
f. AP = SP - (labor rate variance ÷ AQ)
= $17 - ($1,464 ÷ 9,760)
= $17 - $0.15
= $16.85
Actual cost to produce one bag:
Material ($14,550 ÷ 4,800)
Labor [$16.85 × (9,760 ÷ 4,800)]
$ 3.03
34.26
Chapter 7
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Total (rounded for both material and labor)
$37.29
g. The actual cost to produce a bag is $37.29; the standard cost is $37 or an
unfavorable difference of $0.29. The two primary factors creating the cost
overrun are the unfavorable $0.125 ($600  4,800) per unit material quantity
variance and the unfavorable $0.57 ($2,720 ÷ 4,800) per unit labor efficiency
variance. There were favorable material price and labor rate variances. It is
likely that a lower quality material and less skilled labor were used than the
standard allowed, resulting in excess usage of material and labor time.
26.
a. Budged machine hours = 144,000 units × 3.5 MHs per unit = 504,000 MHs
VOH rate = $2,016,000 ÷ 504,000 MHs = $4 per MH
FOH rate = $3,528,000 ÷ 504,000 MHs = $7 per MH
b. Standard MHs = 11,800 × 3.5 = 41,300
Actual VOH
VOH Rate x Actual Hours
Applied VOH
$4 × 40,800
$4 × 41,300
$171,000
$163,200
$165,200
$7,800 U
$2,000 F________
VOH Spending Variance VOH Efficiency Variance
$5,800 U______________________
Total VOH Variance
c. Actual FOH
Budgeted FOH
Applied FOH
$3,528,000 ÷ 12
$7 × 41,300
$284,500
$294,000
$289,100
$9,500 F
$4,900 U________
FOH Spending Variance
Volume Variance
$4,600 F______________________
Total FOH Variance
d. The company expected to produce 12,000 units per month and, thus, use
42,000 MHs. By only producing 11,800 units, the standard hours were 41,300
or 700 MHs less than expected. Since FOH is applied to each standard MH at
$7 per hour, the volume variance is $4,900 U. Alternatively, each unit requires
3.5 MHs or receives $24.50 of FOH. By not producing an expected 200 units,
the company underapplied (200 × $24.50) or $4,900 of FOH
32.
a. 5,100 × 12 = 61,200 standard hours
b. 58,000 MHs × $50 × 0.70 fixed = $ 2,030,000 budgeted monthly FOH
c. Actual OH for month
Budget at output (61,200 × $50 × 0.3) + $2,030,000
Controllable OH variance
$2,927,000
(2,948,000)
$ 21,000 F
d. Budget per month for FOH
$2,030,000
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Chapter 7
Applied FOH (61,200 × $50 × 0.70)
Noncontrollable variance
44.
(2,142,000)
$ 112,000 F
a. Standard quantity of material = 48,000 × 1.85 = 88,800 pounds
Standard quantity of labor time = 48,000 × 0.04 = 1,920 hours
b.
AP × AQp
SP × AQp
$3.15 × 100,000
$3.50 × 100,000
$315,000
$350,000
$35,000 F
Material Purchase Price Variance
SP × AQu
SP × SQ
$3.50 × 95,000
$3.50 × 88,800
$332,500
$310,800
$21,700 U
Material Quantity Variance
AP × AQ
SP × AQ
SP × SQ
$12.10 × 2,200
$12.00 × 2,200
$12.00 × 1,920
$26,620
$26,400
$23,040
$220 U
$3,360 U
Labor Rate Var.
Labor Efficiency Var.
$3,580 U________________
Total Labor Variance
c. It doesn’t seem that the purchasing agent made such a “great deal” because
there was substantial excess material and labor usage during July. It is
possible that the material was defective in some way and, even though there
is still a very large net favorable variance because of the substantially
discounted price, the company may have to worry about potential future
product returns, higher-than-normal warranty work on products, and customer
dissatisfaction with the product.
46.
Material
Fiberglass:
Price Variance = (AP × AQp) - (SP × AQp)
= ($1.83 × 2,100,000) - ($1.80 × 2,100,000)
= $0.03 × 2,100,000
= $63,000 U
Quantity Variance = (SP × AQu) - (SP × SQ)
= ($1.80 × 1,380,000) - ($1.80 × 1,200,000)
= $1.80 × 180,000
= $324,000 U
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11
Paint (4 quarts = 1 gallon)
Price Variance = (AP × AQp) - (SP × AQp)
= ($55.50 × 1,000) - ($60 × 1,000)
= $4.50 × 1,000
= $4,500 F
Quantity Variance = (SP × AQu) - (SP × SQ)
= ($60 × 924) - ($60 × 900)
= $60 × 24
= $1,440 U
Trim:
Price Variance = (AP × AQp) - (SP × AQp)
= ($205 × 640) - ($200 × 640)
= $5 × 640
= $3,200 U
Quantity Variance = (SP × AQu) - (SP × SQ)
= ($200 × 608) - ($200 × 600)
= $200 × 8
= $1,600 U
SH for labor = 600 boats × 40 hours = 24,000 DLH
Labor
AP × AQ
$23.50 × 23,850
$560,475
SP × AQ
$25.00 × 23,850
$596,250
$35,775 F
Labor Rate Var.
SP × SQ
$25.00 × 24,000
$600,000
$3,750 F
Labor Efficiency Var.
$39,525 F
Total Labor Variance