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Chapter 11
Standard Costs and Operating Performance Measures
Solutions to Questions
11-1 A quantity standard indicates how much of an input should be used to make a unit of output. A price standard indicates how much the input should cost. 11-2 Ideal standards assume perfection and do not allow for any inefficiency. Ideal standards are rarely, if ever, attained. Practical standards can be attained by employees working at a reasonable, though efficient pace and allow for normal breaks and work interruptions. 11-3 Under management by exception, managers focus their attention on results that deviate from expectations. It is assumed that results that meet expectations do not require investigation. 11-4 eparating an overall variance into a price variance and a quantity variance provides more information. !oreover, price and quantity variances are usually the responsibilities of different managers. 11-5 "he materials price variance is usually the responsibility of the purchasing manager. "he materials quantity and labor efficiency variances are usually the responsibility of production managers and supervisors. 11-6 "he materials price variance can be computed either when materials are purchased or when they are placed into production. It is usually better to compute the variance when materials are purchased because that is when ' "he !c(raw$)ill *ompanies, Inc., +,-, ., !anagerial Accounting, -.th /dition the purchasing manager, who has responsibility for this variance, has completed his or her work. In addition, recogni#ing the price variance when materials are purchased allows the company to carry its raw materials in the inventory accounts at standard cost, which greatly simplifies bookkeeping. 11"his combination of variances may indicate that inferior quality materials were purchased at a discounted price, but the low$ quality materials created production problems. 11-! If standards are used to find who to blame for problems, they can breed resentment and undermine morale. tandards should not be used to find someone to blame for problems. 11-" everal factors other than the contractual rate paid to workers can cause a labor rate variance. %or example, skilled workers with high hourly rates of pay can be given duties that require little skill and that call for low hourly rates of pay, resulting in an unfavorable rate variance. &r unskilled or untrained workers can be assigned to tasks that should be filled by more skilled workers with higher rates of pay, resulting in a favorable rate variance. Unfavorable rate variances can also arise from overtime work at premium rates. 11-1# If poor quality materials create production problems, a result could be excessive labor time and therefore an unfavorable labor efficiency variance. Poor

quality materials would not ordinarily affect the labor rate variance. 11-11 If overhead is applied on the basis of direct labor$hours, then the variable overhead efficiency variance and the direct labor efficiency variance will always be favorable or unfavorable together. 0oth variances are computed by comparing the number of direct labor$hours actually worked to the standard hours allowed. "hat is, in each case the formula is1 /fficiency 2ariance 3 45A) 6 )7 &nly the 8 49 part of the formula, the standard rate, differs between the two variances. 11-12 A statistical control chart is a graphical aid that helps identify variances that should be investigated. Upper and lower limits are set on the control chart. Any variances falling between those limits are considered to be normal. Any variances falling outside of those limits are considered abnormal and are investigated. 11-13 If labor is a fixed cost and standards are tight, then the only way to generate favorable labor efficiency variances is for every workstation to produce at capacity. )owever, the output of the entire system is limited by the

capacity of the bottleneck. If workstations before the bottleneck in the production process produce at capacity, the bottleneck will be unable to process all of the work in process. In general, if every workstation is attempting to produce at capacity, then work in process inventory will build up in front of the workstations with the least capacity. 11-14 "he difference between delivery cycle time and throughput time is the waiting period between when an order is received and when production on the order is started. "hroughput time is made up of process time, inspection time, move time, and queue time. "hese four elements can be classified into value$added time 5process time7 and non$value$added time 5inspection time, move time, and queue time7. 11-15 An !*/ of less than - means that the production process includes non$value$added time. An !*/ of ,.:,, for example, means that :,; of throughput time consists of actual processing, and that the other <,; consists of moving, inspection, and other non$value$added activities.

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$%ercise 11-1 5+, minutes7 -. *ost per -=$gallon container................................... ?ess +; cash discount........................................... @et cost................................................................... Add shipping cost per container 5>-., B -,,7........ "otal cost per -=$gallon container 5a7...................... @umber of quarts per container 5-= gallons C : quarts per gallon7 5b7................... tandard cost per quart purchased 5a7 B 5b7........... +. *ontent per bill of materials............................... Add allowance for evaporation and spillage 5A.< quarts B ,.D= 3 E., quartsF E., quarts 6 A.< quarts 3 ,.: quarts7.............. "otal................................................................... Add allowance for reGected units 5E., quarts B :, bottles7.................................. tandard quantity per salable bottle of solvent. . .. Item /chol Standard Quantity E.+ quarts >--=.,, +.., --+.A, -.., >--:.,, <, >-.D, A.< quarts ,.: quarts E., quarts ,.+ quarts E.+ quarts

Standard Cost Standard Price per Bottle >-.D, per quart >-=.=E

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$%ercise 11-2 5+, minutes7 -. @umber of helmets............................................... tandard kilograms of plastic per helmet.............. "otal standard kilograms allowed......................... tandard cost per kilogram................................... "otal standard cost............................................... Actual cost incurred 5given7.................................. "otal standard cost 5above7.................................. "otal material varianceHunfavorable................... +. Actual Iuantity of Input, at Actual Price 5AI C AP7 .=,,,, C ,.< +-,,,, C 4!E 4!-<E,,,, 4!-A-,,,, -<E,,,, 4! .,,,,

tandard Iuantity Actual Iuantity of Input, Allowed for &utput, at at tandard Price tandard Price 5AI C P7 5 I C P7 ++,=,, kilograms C +-,,,, kilogramsJ C 4!E per kilogram 4!E per kilogram 4!-A-,,,, 3 4!-E,,,,, 3 4!-<E,,,, Price 2ariance, Iuantity 2ariance, 4!D,,,, % 4!-+,,,, U "otal 2ariance, 4!.,,,, U J.=,,,, helmets C ,.< kilograms per helmet 3 +-,,,, kilograms

Alternatively, the variances can be computed using the formulas1 !aterials price variance 3 AI 5AP 6 P7 ++,=,, kilograms 54!A.<, per kilogramJ 6 4!E.,, per kilogram7 3 4!D,,,, % J 4!-A-,,,, B ++,=,, kilograms 3 4!A.<, per kilogram !aterials quantity variance 3 P 5AI 6 I7 4!E per kilogram 5++,=,, kilograms 6 +-,,,, kilograms7 3 4!-+,,,, U

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$%ercise 11-3 5+, minutes7 -. @umber of meals prepared..................... tandard direct labor$hours per meal..... "otal direct labor$hours allowed.............. tandard direct labor cost per hour......... "otal standard direct labor cost............... Actual cost incurred................................ "otal standard direct labor cost 5above7. "otal direct labor variance....................... +. Actual )ours of Input, at the Actual 4ate 5A) C A47 D<, hours C >-,.,, per hour 3 >D,<,, Actual )ours of Input, at the tandard 4ate 5A) C 47 D<, hours C >D.A= per hour 3 >D,.<, :,,,, C ,.+= -,,,, C >D.A= >D,A=, >D,<,, D,A=, > -=, %avorable tandard )ours Allowed for &utput, at the tandard 4ate 5 ) C 47 -,,,, hours C >D.A= per hour 3 >D,A=,

4ate 2ariance, /fficiency 2ariance, >+:, U >.D, % "otal 2ariance, >-=, %

Alternatively, the variances can be computed using the formulas1 ?abor rate variance 3 A)5A4 6 47 3 D<, hours 5>-,.,, per hour 6 >D.A= per hour7 3 >+:, U ?abor efficiency variance 3 45A) 6 )7 3 >D.A= per hour 5D<, hours 6 -,,,, hours7 3 >.D, %

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$%ercise 11-4 5+, minutes7 -. @umber of items shipped................................... tandard direct labor$hours per item................. "otal direct labor$hours allowed......................... tandard variable overhead cost per hour......... "otal standard variable overhead cost............... Actual variable overhead cost incurred.............. "otal standard variable overhead cost 5above7. "otal variable overhead variance....................... +. Actual )ours of Input, at the Actual 4ate 5A) C A47 +,.,, hours C >..+, per hourJ 3 >A,.<, Actual )ours of Input, at the tandard 4ate 5A) C 47 +,.,, hours C >..+= per hour 3 >A,:A= -+,,,,, C ,.,+ +,:,, C >..+= > A,E,, >A,.<, A,E,, > ::, %avorable

tandard )ours Allowed for &utput, at the tandard 4ate 5 ) C 47 +,:,, hours C >..+= per hour 3 >A,E,,

2ariable &verhead 4ate 2ariance, >--= %

2ariable &verhead /fficiency 2ariance, >.+= % "otal 2ariance, >::, %

J>A,.<, B +,.,, hours 3 >..+, per hour Alternatively, the variances can be computed using the formulas1 2ariable overhead rate variance1 A)5A4 6 47 3 +,.,, hours 5>..+, per hour 6 >..+= per hour7 3 >--= % 2ariable overhead efficiency variance1 45A) 6 )7 3 >..+= per hour 5+,.,, hours 6 +,:,, hours7 3 >.+= %

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$%ercise 11-5 5+, minutes7 -. "hroughput time 3 Process time K Inspection time K !ove time K Iueue time 3 +.A days K ,.. days K -., days K =., days 3 D., days

+. &nly process time is value$added timeF therefore the manufacturing cycle efficiency 5!*/7 is1 !*/ 3 2alue$added time +.A days 3 3 ,.., "hroughput time D., days

.. If the !*/ is .,;, then .,; of the throughput time was spent in value$ added activities. *onsequently, the other A,; of the throughput time was spent in non$value$added activities. :. Lelivery cycle time 3 Mait time K "hroughput time 3 -:., days K D., days 3 +.., days

=. If all queue time is eliminated, then the throughput time drops to only : days 5+.A K ,.. K -.,7. "he !*/ becomes1 !*/ 3 2alue$added time +.A days 3 3 ,.<A= "hroughput time :., days

"hus, the !*/ increases to <A.=;. "his exercise shows quite dramatically how lean production can improve the efficiency of operations and reduce throughput time.

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$%ercise 11-6 5+, minutes7 -. "he standard price of a kilogram of white chocolate is determined as follows1 Purchase price, finest grade white chocolate......................... ?ess purchase discount, E; of the purchase price of NA.=,. . hipping cost from the supplier in 0elgium............................ 4eceiving and handling cost.................................................. tandard price per kilogram of white chocolate...................... NA.=, 5,.<,7 ,.., ,.,: NA.+:

+. "he standard quantity, in kilograms, of white chocolate in a do#en truffles is computed as follows1 !aterial requirements............................... Allowance for waste.................................. Allowance for reGects................................. tandard quantity of white chocolate........ ,.A, ,.,. ,.,+ ,.A=

.. "he standard cost of the white chocolate in a do#en truffles is determined as follows1 tandard quantity of white chocolate 5a7....... tandard price of white chocolate 5b7............ tandard cost of white chocolate 5a7 C 5b7.... ,.A= kilogram NA.+: per kilogram N=.:.

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$%ercise 11- 5., minutes7 -. a. @otice in the solution below that the materials price variance is computed on the entire amount of materials purchased, whereas the materials quantity variance is computed only on the amount of materials used in production. Actual Iuantity tandard Iuantity of Input, at Actual Iuantity of Allowed for &utput, at Actual Price Input, at tandard Price tandard Price 5AI C AP7 5AI C P7 5 I C P7 +=,,,, microns C +=,,,, microns C -E,,,, micronsJ C >,.:E per micron >,.=, per micron >,.=, per micron 3 >-+,,,, 3 >-+,=,, 3 >D,,,, Price 2ariance, >=,, % +,,,,, microns C >,.=, per micron 3 >-,,,,, Iuantity 2ariance, >-,,,, U J.,,,, toys C < microns per toy 3 -E,,,, microns Alternatively, the variances can be computed using the formulas1 !aterials price variance 3 AI 5AP 6 P7 +=,,,, microns 5>,.:E per micron 6 >,.=, per micron7 3 >=,, % !aterials quantity variance 3 P 5AI 6 I7 >,.=, per micron 5+,,,,, microns 6 -E,,,, microns7 3 >-,,,, U

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$%ercise 11- 5continued7 b. Lirect labor variances1 Actual )ours of Input, at the Actual 4ate 5A) C A47 tandard )ours Allowed Actual )ours of Input, for &utput, at the at the tandard 4ate tandard 4ate 5A) C 47 5 ) C 47 :,,,, hours C .,D,, hoursJ C >E.,, per hour >E.,, per hour 3 >.+,,,, 3 >.-,+,, >.<,,,, 4ate 2ariance, /fficiency 2ariance, >:,,,, U >E,, U "otal 2ariance, >:,E,, U

J.,,,, toys C -.. hours per toy 3 .,D,, hours Alternatively, the variances can be computed using the formulas1 ?abor rate variance 3 A) 5A4 6 47 :,,,, hours 5>D.,, per hourJ 6 >E.,, per hour7 3 >:,,,, U J>.<,,,, B :,,,, hours 3 >D.,, per hour ?abor efficiency variance 3 4 5A) 6 )7 >E.,, per hour 5:,,,, hours 6 .,D,, hours7 3 >E,, U

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$%ercise 11- 5continued7 +. A variance usually has many possible explanations. In particular, we should always keep in mind that the standards themselves may be incorrect. ome of the other possible explanations for the variances observed at Lawson "oys appear below1 Materials Price Variance ince this variance is favorable, the actual price paid per unit for the material was less than the standard price. "his could occur for a variety of reasons including the purchase of a lower grade material at a discount, buying in an unusually large quantity to take advantage of quantity discounts, a change in the market price of the material, or particularly sharp bargaining by the purchasing department. Materials Quantity Variance ince this variance is unfavorable, more materials were used to produce the actual output than were called for by the standard. "his could also occur for a variety of reasons. ome of the possibilities include poorly trained or supervised workers, improperly adGusted machines, and defective materials. Labor Rate Variance ince this variance is unfavorable, the actual average wage rate was higher than the standard wage rate. ome of the possible explanations include an increase in wages that has not been reflected in the standards, unanticipated overtime, and a shift toward more highly paid workers. Labor Efficiency Variance ince this variance is unfavorable, the actual number of labor hours was greater than the standard labor hours allowed for the actual output. As with the other variances, this variance could have been caused by any of a number of factors. ome of the possible explanations include poor supervision, poorly trained workers, low$quality materials requiring more labor time to process, and machine breakdowns. In addition, if the direct labor force is essentially fixed, an unfavorable labor efficiency variance could be caused by a reduction in output due to decreased demand for the companyOs products. It is worth noting that all of these variances could have been caused by the purchase of low quality materials at a cut$rate price.

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$%ercise 11-! 5+, minutes7 -. Actual Iuantity Actual Iuantity tandard Iuantity of Input, at of Input, at Allowed for &utput, Actual Price tandard Price at tandard Price 5AI C AP7 5AI C P7 5 I C P7 +,,,,, pounds C +,,,,, pounds C -E,:,, poundsJ C >+..= per pound >+.=, per pound >+.=, per pound 3 >:A,,,, 3 >=,,,,, 3 >:<,,,, Price 2ariance, Iuantity 2ariance, >.,,,, % >:,,,, U "otal 2ariance, >-,,,, U J:,,,, units C :.< pounds per unit 3 -E,:,, pounds Alternatively, the variances can be computed using the formulas1 !aterials price variance 3 AI 5AP 6 P7 +,,,,, pounds 5>+..= per pound 6 >+.=, per pound7 3 >.,,,, % !aterials quantity variance 3 P 5AI 6 I7 >+.=, per pound 5+,,,,, pounds 6 -E,:,, pounds7 3 >:,,,, U

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$%ercise 11-! 5continued7 +. Actual )ours of Input, at the Actual 4ate 5A) C A47 tandard )ours Actual )ours of Input, Allowed for &utput, at at the tandard 4ate the tandard 4ate 5A) C 47 5 ) C 47 A=, hours C E,, hoursJ C >-+.,, per hour >-+.,, per hour 3 >D,,,, 3 >D,<,, >-,,:+= 4ate 2ariance, /fficiency 2ariance, >-,:+= U ><,, % "otal 2ariance, >E+= U

J:,,,, units C ,.+ hours per unit 3 E,, hours Alternatively, the variances can be computed using the formulas1 ?abor rate variance 3 A) 5A4 6 47 A=, hours 5>-..D, per hourJ 6 >-+.,, per hour7 3 >-,:+= U J-,,:+= B A=, hours 3 >-..D, per hour ?abor efficiency variance 3 4 5A) 6 )7 >-+.,, per hour 5A=, hours 6 E,, hours7 3 ><,, %

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$%ercise 11-" 5-= minutes7 @otice in the solution below that the materials price variance is computed for the entire amount of materials purchased, whereas the materials quantity variance is computed only for the amount of materials used in production. Actual Iuantity tandard Iuantity Actual Iuantity of of Input, at Allowed for &utput, Input, at Actual Price tandard Price at tandard Price 5AI C AP7 5AI C P7 5 I C P7 +,,,,, pounds C +,,,,, pounds C -.,E,, poundsJ C >+..= per pound >+.=, per pound >+.=, per pound 3 >:A,,,, 3 >=,,,,, 3 >.:,=,, Price 2ariance, >.,,,, % -:,A=, pounds C >+.=, per pound 3 >.<,EA= Iuantity 2ariance, >+,.A= U J.,,,, units C :.< pounds per unit 3 -.,E,, pounds Alternatively, the variances can be computed using the formulas1 !aterials price variance 3 AI 5AP 6 P7 +,,,,, pounds 5>+..= per pound 6 >+.=, per pound7 3 >.,,,, % !aterials quantity variance 3 P 5AI 6 I7 >+.=, per pound 5-:,A=, pounds 6 -.,E,, pounds7 3 >+,.A= U

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$%ercise 11-1# 5., minutes7 -. @umber of units manufactured................................ tandard labor time per unit 5-E minutes B <, minutes per hour7..................... "otal standard hours of labor time allowed.............. tandard direct labor rate per hour......................... "otal standard direct labor cost............................... Actual direct labor cost............................................ tandard direct labor cost....................................... "otal varianceHunfavorable.................................... +. Actual )ours of Input, at the Actual 4ate 5A) C A47 +,,,,, C,.. <,,,, C>-+ >A+,,,, >A.,<,, A+,,,, >-,<,,

tandard )ours Allowed Actual )ours of Input, at for &utput, at the the tandard 4ate tandard 4ate 5A) C 47 5 ) C 47 =,A=, hours C <,,,, hoursJ C >-+.,, per hour >-+.,, per hour 3 ><D,,,, 3 >A+,,,, >A.,<,, 4ate 2ariance, /fficiency 2ariance, >:,<,, U >.,,,, % "otal 2ariance, >-,<,, U

J+,,,,, units C ,.. hours per unit 3 <,,,, hours Alternatively, the variances can be computed using the formulas1 ?abor rate variance 3 A) 5A4 6 47 =,A=, hours 5>-+.E, per hourJ 6 >-+.,, per hour7 3 >:,<,, U J>A.,<,, B =,A=, hours 3 >-+.E, per hour ?abor efficiency variance 3 4 5A) 6 )7 >-+.,, per hour 5=,A=, hours 6 <,,,, hours7 3 >.,,,, %

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$%ercise 11-1# 5continued7 .. Actual )ours of Input, at the Actual 4ate 5A) C A47 tandard )ours Actual )ours of Input, Allowed for &utput, at at the tandard 4ate the tandard 4ate 5A) C 47 5 ) C 47 =,A=, hours C <,,,, hours C >:.,, per hour >:.,, per hour 3 >+.,,,, 3 >+:,,,, >+-,E=, 4ate 2ariance, /fficiency 2ariance, >-,-=, % >-,,,, % "otal 2ariance, >+,-=, %

Alternatively, the variances can be computed using the formulas1 2ariable overhead rate variance 3 A) 5A4 6 47 =,A=, hours 5>..E, per hourJ 6 >:.,, per hour7 3 >-,-=, % J>+-,E=, B =,A=, hours 3 >..E, per hour 2ariable overhead efficiency variance 3 4 5A) 6 )7 >:.,, per hour 5=,A=, hours 6 <,,,, hours7 3 >-,,,, %

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$%ercise 11-11 5+, minutes7 -. If the total variance is >D. unfavorable, and the rate variance is >EA favorable, then the efficiency variance must be >-E, unfavorable, because the rate and efficiency variances taken together always equal the total variance. Pnowing that the efficiency variance is >-E, unfavorable, one approach to the solution would be1 /fficiency variance 3 4 5A) 6 )7 >D.,, per hour 5A) 6 -+= hoursJ7 3 >-E, U >D.,, per hour C A) 6 >-,-+= 3 >-E,JJ >D.,, per hour C A) 3 >-,.,= A) 3 >-,.,= B >D.,, per hour A) 3 -:= hours J=, Gobs C +.= hours per Gob 3 -+= hours JJMhen used with the formula, unfavorable variances are positive and favorable variances are negative. +. 4ate variance 3 A) 5A4 6 47 -:= hours 5A4 6 >D.,, per hour7 3 >EA % -:= hours C A4 6 >-,.,= 3 6>EAJ -:= hours C A4 3 >-,+-E A4 3 >-,+-E B -:= hours A4 3 >E.:, per hour JMhen used with the formula, unfavorable variances are positive and favorable variances are negative.

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$%ercise 11-11 5continued7 An alternative approach would be to work from known to unknown data in the columnar model for variance analysis1 tandard )ours Actual )ours of Input, at Actual )ours of Input, Allowed for &utput, at the Actual 4ate at the tandard 4ate the tandard 4ate 5A) C A47 5A) C 47 5 ) C 47 -:= hours C -:= hours C -+= hoursQ C >E.:, per hour >D.,, per hourJ >D.,, per hourJ 3 >-,+-E 3 >-,.,= 3 >-,-+= 4ate 2ariance, /fficiency 2ariance, >EA %J >-E, U "otal 2ariance, >D. UJ
Q

=, tune$upsJ C +.= hours per tune$upJ 3 -+= hours J(iven

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Pro&lem 11-12 5:= minutes7 -. a. In the solution below, the materials price variance is computed on the entire amount of materials purchased whereas the materials quantity variance is computed only on the amount of materials used in production1 Actual Iuantity of Input, at Actual Price 5AI C AP7 Actual Iuantity tandard Iuantity of Input, at Allowed for &utput, at tandard Price tandard Price 5AI C P7 5 I C P7 -+,,,, ounces C D,.A= ouncesJ C >+,.,, per ounce >+,.,, per ounce 3 >+:,,,,, 3 >-EA,=,, >++=,,,, Price 2ariance, >-=,,,, % D,=,, ounces C >+,.,, per ounce 3 >-D,,,,, Iuantity 2ariance, >+,=,, U

J.,A=, units C +.= ounces per unit 3 D,.A= ounces Alternatively, the variances can be computed using the formulas1 !aterials price variance 3 AI 5AP 6 P7 -+,,,, ounces 5>-E.A= per ounceJ 6 >+,.,, per ounce7 3 >-=,,,, % J>++=,,,, B -+,,,, ounces 3 >-E.A= per ounce !aterials quantity variance 3 P 5AI 6 I7 >+,.,, per ounce 5D,=,, ounces 6 D,.A= ounces7 3 >+,=,, U b. Res, the contract probably should be signed. "he new price of >-E.A= per ounce is substantially lower than the old price of >+,.,, per ounce, resulting in a favorable price variance of >-=,,,, for the month. !oreover, the material from the new supplier appears to cause little or no problem in production as shown by the small materials quantity variance for the month.

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Pro&lem 11-12 5continued7 +. a. Actual )ours of Actual )ours of tandard )ours Input, at the Input, at the Allowed for &utput, at Actual 4ate tandard 4ate the tandard 4ate 5A) C A47 5A) C 47 5 ) C 47 =,<,, hoursJ C =,<,, hours C =,+=, hoursJJ C >-+.,, per hour >-+.=, per hour >-+.=, per hour 3 ><A,+,, 3 >A,,,,, 3 ><=,<+= 4ate 2ariance, /fficiency 2ariance, >+,E,, % >:,.A= U "otal 2ariance, >-,=A= U J.= technicians C -<, hours per technician 3 =,<,, hours JJ.,A=, units C -.: hours per technician 3 =,+=, hrs Alternatively, the variances can be computed using the formulas1 ?abor rate variance 3 A) 5A4 6 47 =,<,, hours 5>-+.,, per hour 6 >-+.=, per hour7 3 >+,E,, % ?abor efficiency variance 3 4 5A) 6 )7 >-+.=, per hour 5=,<,, hours 6 =,+=, hours7 3 >:,.A= U b. @o, the new labor mix probably should not be continued. Although it decreases the average hourly labor cost from >-+.=, to >-+.,,, thereby causing a >+,E,, favorable labor rate variance, this savings is more than offset by a large unfavorable labor efficiency variance for the month. "hus, the new labor mix increases overall labor costs.

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Pro&lem 11-12 5continued7 .. Actual )ours of Input, at the Actual 4ate 5A) C A47 Actual )ours of tandard )ours Input, at the Allowed for &utput, tandard 4ate at the tandard 4ate 5A) C 47 5 ) C 47 =,<,, hoursJ C =,+=, hoursJJ C >..=, per hour >..=, per hour 3 >-D,<,, 3 >-E,.A= >-E,+,, 4ate 2ariance, /fficiency 2ariance, >-,:,, % >-,++= U "otal 2ariance, >-A= %

J 0ased on direct labor hours1 .= technicians C -<, hours per technician 3 =,<,, hours JJ .,A=, units C -.: hours per unit 3 =,+=, hours Alternatively, the variances can be computed using the formulas1 2ariable overhead rate variance 3 A) 5A4 6 47 =,<,, hours 5>..+= per hourJ 6 >..=, per hour7 3 >-,:,, % J>-E,+,, B =,<,, hours 3 >..+= per hour 2ariable overhead efficiency variance 3 4 5A) 6 )7 >..=, per hour 5=,<,, hours 6 =,+=, hours7 3 >-,++= U 0oth the labor efficiency variance and the variable overhead efficiency variance are computed by comparing actual labor$hours to standard labor$hours. "hus, if the labor efficiency variance is unfavorable, then the variable overhead efficiency variance will be unfavorable as well.

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Pro&lem 11-13 5., minutes7 -. a., b., and c. 1 "hroughput timeHdays1 Process time 5x7................................... Inspection time..................................... !ove time............................................. Iueue time........................................... "otal throughput time 5y7...................... +.,.< ,.: :.. A.: Month ! +., ,.A ,.. =., E., -.D ,.A ,.: =.E E.E " -.E ,.< ,.: <.A D.=

!anufacturing cycle efficiency 5!*/71 Process time 5x7 B "hroughput time 5y7........................... +E.:; +=.,; +-.<; -E.D; Lelivery cycle timeHdays1 Mait time from order to start of production.......................................... -<., "hroughput time................................... A.: "otal delivery cycle time....................... +..:

-A.= E., +=.=

-D., E.E +A.E

+,.= D.= .,.,

+. All of the performance measures display unfavorable trends. "hroughput time per unit is increasingHlargely because of an increase in queue time. !anufacturing cycle efficiency is declining and delivery cycle time is increasing. In addition, the percentage of on$time deliveries has dropped.

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Pro&lem 11-13 5continued7 .. a. and b. Month # "hroughput timeHdays1 Process time 5x7................................................. Inspection time................................................... !ove time........................................................... Iueue time......................................................... "otal throughput time 5y7.................................... !anufacturing cycle efficiency 5!*/71 Process time 5x7 B "hroughput time 5y7.............. -.E ,.< ,.: ,., +.E <:..; $ -.E ,., ,.: ,., +.+ E-.E;

As a company reduces non$value$added activities, the manufacturing cycle efficiency increases rapidly. "he goal, of course, is to have an efficiency of -,,;. "his will be achieved when all non$value$added activities have been eliminated and process time is equal to throughput time.

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Pro&lem 11-14 5:= minutes7 -. a. Actual Iuantity tandard Iuantity Actual Iuantity of of Input, at Allowed for &utput, Input, at Actual Price tandard Price at tandard Price 5AI C AP7 5AI C P7 5 I C P7 <,,,,, pounds C <,,,,, pounds C :=,,,, poundsJ C >-.D= per pound >+.,, per pound >+.,, per pound 3 >--A,,,, 3 >-+,,,,, 3 >D,,,,, Price 2ariance, >.,,,, % :D,+,, pounds C >+.,, per pound 3 >DE,:,, Iuantity 2ariance, >E,:,, U J-=,,,, pools C .., pounds per pool 3 :=,,,, pounds Alternatively, the variances can be computed using the formulas1 !aterials price variance 3 AI 5AP 6 P7 <,,,,, pounds 5>-.D= per pound 6 >+.,, per pound7 3 >.,,,, % !aterials quantity variance 3 P 5AI 6 I7 >+.,, per pound 5:D,+,, pounds 6 :=,,,, pounds7 3 >E,:,, U

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Pro&lem 11-14 5continued7 b. Actual )ours of tandard )ours Input, at the Actual )ours of Input, Allowed for &utput, at Actual 4ate at the tandard 4ate the tandard 4ate 5A) C A47 5A) C 47 5 ) C 47 --,E,, hours C --,E,, hours C -+,,,, hoursJ C >A.,, per hour ><.,, per hour ><.,, per hour 3 >E+,<,, 3 >A,,E,, 3 >A+,,,, 4ate 2ariance, /fficiency 2ariance, >--,E,, U >-,+,, % "otal 2ariance, >-,,<,, U J-=,,,, pools C ,.E hours per pool 3 -+,,,, hours Alternatively, the variances can be computed using the formulas1 ?abor rate variance 3 A) 5A4 6 47 --,E,, hours 5>A.,, per hour 6 ><.,, per hour7 3 >--,E,, U ?abor efficiency variance 3 4 5A) 6 )7 ><.,, per hour 5--,E,, hours 6 -+,,,, hours7 3 >-,+,, %

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Pro&lem 11-14 5continued7 c. Actual )ours of Input, at the Actual 4ate 5A) C A47 Actual )ours of tandard )ours Input, at the Allowed for &utput, at tandard 4ate the tandard 4ate 5A) C 47 5 ) C 47 =,D,, hours C <,,,, hoursJ C >..,, per hour >..,, per hour 3 >-A,A,, 3 >-E,,,, >-E,+D, 4ate 2ariance, /fficiency 2ariance, >=D, U >.,, % "otal 2ariance, >+D, U

J-=,,,, pools C ,.: hours per pool 3 <,,,, hours Alternatively, the variances can be computed using the formulas1 2ariable overhead rate variance 3 A) 5A4 6 47 =,D,, hours 5>..-, per hourJ 6 >..,, per hour7 3 >=D, U J>-E,+D, B =,D,, hours 3 >..-, per hour 2ariable overhead efficiency variance 3 4 5A) 6 )7 >..,, per hour 5=,D,, hours 6 <,,,, hours7 3 >.,, %

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Pro&lem 11-14 5continued7 +. ummary of variances1 !aterial price variance............................ !aterial quantity variance....................... ?abor rate variance................................. ?abor efficiency variance........................ 2ariable overhead rate variance............. 2ariable overhead efficiency variance.... @et variance........................................... > .,,,, E,:,, --,E,, -,+,, =D, .,, >-<,+D, % U U % U % U

"he net unfavorable variance of >-<,+D, for the month caused the plantOs variable cost of goods sold to increase from the budgeted level of >-E,,,,, to >-D<,+D,1 0udgeted cost of goods sold at >-+ per pool.......... Add the net unfavorable variance, as above........... Actual cost of goods sold........................................ >-E,,,,, -<,+D, >-D<,+D,

"his >-<,+D, net unfavorable variance also accounts for the difference between the budgeted net operating income and the actual net operating income for the month. 0udgeted net operating income............................... Leduct the net unfavorable variance added to cost of goods sold for the month.................................. @et operating income.............................................. >.<,,,, -<,+D, >-D,A-,

.. "he two most significant variances are the materials quantity variance and the labor rate variance. Possible causes of the variances include1 !aterials quantity variance1 &utdated standards, unskilled workers, poorly adGusted machines, carelessness, poorly trained workers, inferior quality materials. ?abor rate variance1 &utdated standards, change in pay scale, overtime pay.

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Pro&lem 11-15 5:= minutes7 -. "he standard quantity of plates allowed for tests performed during the month would be1 0lood tests..................................... mears........................................... "otal................................................ Plates per test................................ tandard quantity allowed.............. "he variance analysis for plates would be1 Actual Iuantity tandard Iuantity Actual Iuantity of of Input, at Allowed for &utput, Input, at Actual Price tandard Price at tandard Price 5AI C AP7 5AI C P7 5 I C P7 -+,,,, plates C E,:,, plates C >+.=, per plate >+.=, per plate 3 >.,,,,, 3 >+-,,,, >+E,+,, Price 2ariance, >-,E,, % -,,=,, plates C >+.=, per plate 3 >+<,+=, Iuantity 2ariance, >=,+=, U Alternatively, the variances can be computed using the formulas1 !aterials price variance 3 AI 5AP 6 P7 -+,,,, plates 5>+..= per plateJ 6 >+.=, per plate7 3 >-,E,, % J>+E,+,, B -+,,,, plates 3 >+..= per plate. !aterials quantity variance 3 P 5AI 6 I7 >+.=, per plate 5-,,=,, plates 6 E,:,, plates7 3 >=,+=, U -,E,, +,:,, :,+,, C + E,:,,

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Pro&lem 11-15 5continued7 @ote that all of the price variance is due to the hospitalOs <; quantity discount. Also note that the >=,+=, quantity variance for the month is equal to +=; of the standard cost allowed for plates. +. a. "he standard hours allowed for tests performed during the month would be1 0lood tests1 ,.. hour per test C -,E,, tests............. mears1 ,.-= hour per test C +,:,, tests................ "otal standard hours allowed................................... "he variance analysis would be1 Actual )ours of Input, at the Actual 4ate 5A) C A47 tandard )ours Actual )ours of Input, at Allowed for &utput, at the tandard 4ate the tandard 4ate 5A) C 47 5 ) C 47 -,-=, hours C D,, hours C >-:.,, per hour >-:.,, per hour 3 >-<,-,, 3 >-+,<,, >-.,E,, 4ate 2ariance, /fficiency 2ariance, >+,.,, % >.,=,, U "otal 2ariance, >-,+,, U =:, hours .<, hours D,, hours

Alternatively, the variances can be computed using the formulas1 ?abor rate variance 3 A) 5A4 6 47 -,-=, hours 5>-+.,, per hourJ 6 >-:.,, per hour7 3 >+,.,, % J>-.,E,, B -,-=, hours 3 >-+.,, per hour ?abor efficiency variance 3 4 5A) 6 )7 >-:.,, per hour 5-,-=, hours 6 D,, hours7 3 >.,=,, U

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Pro&lem 11-15 5continued7 b. "he policy probably should not be continued. Although the hospital is saving >+ per hour by employing more assistants than senior technicians, this savings is more than offset by other factors. "oo much time is being taken in performing lab tests, as indicated by the large unfavorable labor efficiency variance. And, it seems likely that most 5or all7 of the hospitalOs unfavorable quantity variance for plates is traceable to inadequate supervision of assistants in the lab. .. "he variable overhead variances follow1 Actual )ours of Input, at the Actual 4ate 5A) C A47 tandard )ours Actual )ours of Input, Allowed for &utput, at the tandard 4ate at the tandard 4ate 5A) C 47 5 ) C 47 -,-=, hours C D,, hours C ><.,, per hour ><.,, per hour 3 ><,D,, 3 >=,:,, >A,E+, 4ate 2ariance, /fficiency 2ariance, >D+, U >-,=,, U "otal 2ariance, >+,:+, U

Alternatively, the variances can be computed using the formulas1 2ariable overhead rate variance 3 A) 5A4 6 47 -,-=, hours 5><.E, per hourJ 6 ><.,, per hour7 3 >D+, U J>A,E+, B -,-=, hours 3 ><.E, per hour 2ariable overhead efficiency variance 3 4 5A) 6 )7 ><.,, per hour 5-,-=, hours 6 D,, hours7 3 >-,=,, U Res, the two variances are closely related. 0oth are computed by comparing actual labor time to the standard hours allowed for the output of the period. "hus, if the labor efficiency variance is favorable 5or unfavorable7, then the variable overhead efficiency variance will also be favorable 5or unfavorable7.

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Pro&lem 11-16 5., minutes7 -. alex quantity standard1 4equired per -,$liter batch 5D.< liters B ,.E7........... ?oss from reGected batches 5-S= C -+ liters7........... "otal quantity per good batch................................. @yclyn quantity standard1 4equired per -,$liter batch 5-+ kilograms B ,.E7.... ?oss from reGected batches 5-S= C -= kilograms7... "otal quantity per good batch................................. Protet quantity standard1 4equired per -,$liter batch.................................... ?oss from reGected batches 5-S= C = kilograms7..... "otal quantity per good batch................................. +. "otal minutes per E$hour day.................................... ?ess rest breaks and cleanup................................... Productive time each day......................................... Productive time each day :+, minutes per day 3 "ime required per batch .= minutes per batch 3 -+ batches per day "ime required per batch............................................ 4est breaks and clean up time 5<, minutes B -+ batches7..................................... "otal.......................................................................... ?oss from reGected batches 5-S= C :, minutes7........ "otal time per good batch......................................... .= minutes = minutes :, minutes E minutes :E minutes -+., liters +.: liters -:.: liters -=., kilograms .., kilograms -E., kilograms =., kilograms -., kilograms <., kilograms :E, minutes <, minutes :+, minutes

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Pro&lem 11-16 5continued7 .. tandard cost card1 Standard Quantity or %ime -:.: liters -E., kilograms <., kilograms :E minutes, or ,.E hour Standard Price or Rate >-.=, per liter >+.E, per kilogram >..,, per kilogram >D.,, per hour Standard Cost >+-.<, =,.:, -E.,, A.+, >DA.+,

alex..................... @yclyn................... Protet.................... ?abor time............. "otal standard cost per acceptable batch..................

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Pro&lem 11-1 5., minutes7 -. a., b., and c. Month 1 "hroughput time in days1 Process time.................................... Inspection time................................. !ove time........................................ Iueue time during production.......... "otal throughput time....................... !anufacturing cycle efficiency 5!*/71 Process time B "hroughput time...... Lelivery cycle time in days1 Mait time to start of production........ "hroughput time............................... "otal delivery cycle time................... +.,.E ,.. +.E <., .=.,; D., <., -=., +., ,.A ,.: :.: A.= ! -.D ,.A ,.: <., D., " -.E ,.A ,.= A., -,.,

+<.A; +-.-; -E.,; --.= A.= -D., -+., D., +-., -:., -,., +:.,

+. a. Areas where the company is improving1 Quality control& "he number of defects has decreased by over =,; in the last four months. !oreover, both warranty claims and customer complaints are down sharply. In short, overall quality appears to have significantly improved. Material control& "he purchase order lead time is only half of what it was four months ago, which indicates that purchases are arriving in less time. "his trend may be a result of the companyOs move toward TI" purchasing. 'eli(ery performance& "he process time has decreased from +.- days to -.E days over the last four months.

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Pro&lem 11-1 5continued7 b. Areas of deterioration1 Material control& crap as a percentage of total cost has tripled over the last four months. Machine performance& !achine downtime has doubled over the last four months. "his may be a result of the greater setup time, or it may Gust reflect efforts to get the new equipment operating properly. Also note that use of the machines as a percentage of availability is declining rapidly. 'eli(ery performance& All delivery performance measures are moving in the wrong direction. "hroughput time and delivery cycle time are both increasing, and the manufacturing cycle efficiency is decreasing. .. a. and b. Month # "hroughput time in days1 Process time............................................ Inspection time......................................... !ove time................................................. Iueue time during production.................. "otal throughput time................................ !anufacturing cycle efficiency 5!*/71 Process time B "hroughput time.............. -.E ,.A ,.= ,., .., <,.,; $ -.E ,., ,.= ,., +.. AE..;

As non$value$added activities are eliminated, the manufacturing cycle efficiency improves. "he goal, of course, is to have an efficiency of -,,;. "his is achieved when all non$value$added activities have been eliminated and process time equals throughput time.

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Pro&lem 11-1! 5:= minutes7 "his problem is more difficult than it looks. Allow ample time for discussion. -. Actual Iuantity tandard Iuantity Actual Iuantity of of Input, at Allowed for &utput, Input, at Actual Price tandard Price at tandard Price 5AI C AP7 5AI C P7 5 I C P7 -+,,,, yards C --,+,, yardsJJ C >:.,, per yardJ >:.,, per yardJ 3 >:E,,,, 3 >::,E,, >:=,<,, Price 2ariance, Iuantity 2ariance, >+,:,, % >.,+,, U "otal 2ariance, >E,, U J >++.:, B =.< yards 3 >:.,, per yard JJ +,,,, sets C =.< yards per set 3 --,+,, yards Alternatively, the variances can be computed using the formulas1 !aterials price variance 3 AI 5AP 6 P7 -+,,,, yards 5>..E, per yardJ 6 >:.,, per yard7 3 >+,:,, % J>:=,<,, B -+,,,, yards 3 >..E, per yard !aterials quantity variance 3 P 5AI 6 I7 >:.,, per yard 5-+,,,, yards 6 --,+,, yards7 3 >.,+,, U

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Pro&lem 11-1! 5continued7 +. !any students will miss parts + and . because they will try to use product costs as if they were hourly costs. Pay particular attention to the computation of the standard direct labor time per unit and the standard direct labor rate per hour. Actual )ours of Input, at the Actual 4ate 5A) C A47 Actual )ours of tandard )ours Input, at the Allowed for &utput, tandard 4ate at the tandard 4ate 5A) C 47 5 ) C 47 +,E,, hours C .,,,, hoursJJ C ><.,, per hourJ ><.,, per hourJ 3 >-<,E,, 3 >-E,,,, >-E,+,, 4ate 2ariance, /fficiency 2ariance, >-,:,, U >-,+,, % "otal 2ariance, >+,, U

J +,E=, standard hours B -,D,, sets 3 -.= standard hours per set, >D.,, standard cost per set B -.= standard hours per set 3 ><.,, standard rate per hour. JJ +,,,, sets C -.= standard hours per set 3 .,,,, standard hours. Alternatively, the variances can be computed using the formulas1 ?abor rate variance 3 A) 5A4 6 47 +,E,, hours 5><.=, per hourJ 6 ><.,, per hour7 3 >-,:,, U J>-E,+,, B +,E,, hours 3 ><.=, per hour ?abor efficiency variance 3 4 5A) 6 )7 ><.,, per hour 5+,E,, hours 6 .,,,, hours7 3 >-,+,, %

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Pro&lem 11-1! 5continued7 .. Actual )ours of Input, at the Actual 4ate 5A) C A47 Actual )ours of tandard )ours Input, at the Allowed for &utput, tandard 4ate at the tandard 4ate 5A) C 47 5 ) C 47 +,E,, hours C .,,,, hours C >+.:, per hourJ >+.:, per hourJ 3 ><,A+, 3 >A,+,, >A,,,, 4ate 2ariance, /fficiency 2ariance, >+E, U >:E, % "otal 2ariance, >+,, %

J>..<, standard cost per set B -.= standard hours per set 3 >+.:, standard rate per hour Alternatively, the variances can be computed using the formulas1 2ariable overhead rate variance 3 A) 5A4 6 47 +,E,, hours 5>+.=, per hourJ 6 >+.:, per hour7 3 >+E, U J>A,,,, B +,E,, hours 3 >+.=, per hour 2ariable overhead efficiency variance 3 4 5A) 6 )7 >+.:, per hour 5+,E,, hours 6 .,,,, hours7 3 >:E, %

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Pro&lem 11-1" 5:= minutes7 -. a. !aterials quantity variance 3 P 5AI 6 I7 >=.,, per foot 5AI 6 D,<,, feetJ7 3 >:,=,, U >=.,, per foot C AI 6 >:E,,,, 3 >:,=,,JJ >=.,, per foot C AI 3 >=+,=,, AI 3 -,,=,, feet J >.,+,, units C . foot per unit JJ Mhen used with the formula, unfavorable variances are positive and favorable variances are negative. "herefore, >==,<=, B -,,=,, feet 3 >=.., per foot b. !aterials price variance 3 AI 5AP 6 P7 -,,=,, feet 5>=.., per foot 6 >=.,, per foot7 3 >.,-=, U "he total variance for materials is1 !aterials price variance................... !aterials quantity variance.............. "otal variance................................... Alternative approach to parts 5a7 and 5b71 Actual Iuantity tandard Iuantity Actual Iuantity of of Input, at Allowed for &utput, at Input, at Actual Price tandard Price tandard Price 5AI C AP7 5AI C P7 5 I C P7 -,,=,, feet C -,,=,, feet C D,<,, feetJJ C >=.., per foot >=.,, per footJ >=.,, per footJ 3 >==,<=,J 3 >=+,=,, 3 >:E,,,, Price 2ariance, Iuantity 2ariance, >.,-=, U >:,=,, UJ "otal 2ariance, >A,<=, U J (iven JJ .,+,, units C . foot per unit 3 D,<,, feet >.,-=, U :,=,, U >A,<=, U

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Pro&lem 11-1" 5continued7 +. a. ?abor rate variance 3 A) 5A4 6 47 :,D,, hours 5>A.=, per hourJ 6 47 3 >+,:=, %JJ >.<,A=, 6 :,D,, hours C 4 3 6>+,:=,JJJ :,D,, hours C 4 3 >.D,+,, 4 3 >E.,, J >.<,A=, B :,D,, hours JJ >-,<=, % K >E,, U. JJJ Mhen used with the formula, unfavorable variances are positive and favorable variances are negative. b. ?abor efficiency variance 3 4 5A) 6 )7 >E per hour 5:,D,, hours 6 )7 3 >E,, U >.D,+,, 6 >E per hour C ) 3 >E,,J >E per hour C ) 3 >.E,:,, ) 3 :,E,, hours J Mhen used with the formula, unfavorable variances are positive and favorable variances are negative. Alternative approach to parts 5a7 and 5b71 Actual )ours of Input, at the Actual 4ate 5A) C A47 tandard )ours Actual )ours of Input, at Allowed for &utput, the tandard 4ate at the tandard 4ate 5A) C 47 5 ) C 47 :,D,, hoursJ C :,E,, hours C >E.,, per hour >E.,, per hour 3 >.D,+,, 3 >.E,:,, >.<,A=,J 4ate 2ariance, /fficiency 2ariance, >+,:=, % >E,, UJ "otal 2ariance, >-,<=, %J

J(iven. c. "he standard hours allowed per unit of product are1 :,E,, hours B .,+,, units 3 -.= hours per unit
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Pro&lem 11-21 5:= minutes7 -. tandard cost for a ten$gallon batch of raspberry sherbet. Lirect material1 4aspberries 5A.= quarts- C >,.E, per quart7................ &ther ingredients 5-, gallons C >,.:= per gallon7....... Lirect labor1 orting 5-E minutes+ B <, minutes per hour7 C >D.,, per hour.................................................................... 0lending 5-+ minutes B <, minutes per hour7 C >D.,, per hour.................................................................... Packing 5:, quarts. C >,..E per quart7....................... tandard cost per ten$gallon batch................................
+

><.,, :.=, >-,.=, +.A, -.E, :.=, -=.+, >.,.+,

< quarts C 5= B :7 3 A.= quarts required to obtain < acceptable quarts. . minutes per quart C < quarts. . : quarts per gallon C -, gallons 3 :, quarts. +. a. In general, the purchasing manager is held responsible for unfavorable material price variances. *auses of these variances include the following1 U Incorrect standards. U %ailure to correctly forecast price increases. U Purchasing in nonstandard or uneconomical lots. U %ailure to take available purchase discounts. U %ailure to control transportation costs. U Purchasing from suppliers other than those offering the most favorable terms. )owever, failure to meet price standards may be caused by an unexpected increase in orders or changes in production schedules. In this case, the responsibility for unfavorable material price variances should rest with the sales manager or the manager of production planning. 2ariances may also be caused by external events that are uncontrollable, e.g., a strike at a supplierOs plant.

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Pro&lem 11-21 5continued7 b. In general, the production manager or foreman is held responsible for unfavorable labor efficiency variances. *auses of these variances include the following1 U Incorrect standards. U Poorly trained labor. U ubstandard or inefficient equipment. U Inadequate supervision. U !achine breakdowns from poor maintenance. U Poorly motivated employees. U %ixed labor force with demand less than capacity. %ailure to meet labor efficiency standards may also be caused by the use of inferior materials or poor production planning. In these cases, responsibility should rest with the purchasing manager or the manager of production planning. 2ariances may also be caused by external events that are uncontrollable, e.g., low unemployment leading to the inability to hire and retain skilled workers. 5Unofficial *!A olution, adapted7
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Case 11-22 5., minutes7 "his case may be difficult for some students to grasp because it requires looking at standard costs from an entirely different perspective. In this case, standard costs have been inappropriately used as a means to manipulate reported earnings rather than as a way to control costs. -. ?ansing has evidently set very loose standards in which the standard prices and standard quantities are far too high. "his guarantees that favorable variances will ordinarily result from operations. If the standard costs are set artificially high, the standard cost of goods sold will be artificially high and thus the divisionOs net operating income will be depressed until the favorable variances are recogni#ed. If ?ansing saves the favorable variances, he can release Gust enough in the second and third quarters to show some improvement and then he can release all of the rest in the last quarter, creating the annual 8*hristmas present.9 +. ?ansing should not be permitted to continue this practice for several reasons. %irst, it distorts the quarterly earnings for both the division and the company. "he distortions of the divisionOs quarterly earnings are troubling because the manipulations may mask real signs of trouble. "he distortions of the companyOs quarterly earnings are troubling because they may mislead external users of the financial statements. econd, ?ansing should not be rewarded for manipulating earnings. "his sets a moral tone in the company that is likely to lead to even deeper trouble. Indeed, the permissive attitude of top management toward the manipulation of earnings may indicate the existence of other, even more serious, ethical problems in the company. "hird, a clear message should be sent to division managers like ?ansing that their Gob is to manage their operations, not their earnings. If they keep on top of operations and manage well, the earnings should take care of themselves.

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Case 11-22 5continued7 .. tacy *ummins does not have any easy alternatives available. he has already taken the problem to the President, who was not interested. If she goes around the President to the 0oard of Lirectors, she will be putting herself in a politically difficult position with little likelihood that it will do much good if, in fact, the 0oard of Lirectors already knows what is going on. &n the other hand, if she simply goes along, she will be violating the *redibility standard of ethical conduct for management accountants. "he )ome ecurity LivisionOs manipulation of quarterly earnings does distort the entire companyOs quarterly reports. And the *redibility standard clearly stipulates that management accountants have a responsibility to 8disclose all relevant information that could reasonably be expected to influence an intended userOs understanding of the reports, analyses, or recommendations.9 Apart from the ethical issue, there is also a very practical consideration. If !erced )ome Products becomes embroiled in controversy concerning questionable accounting practices, tacy *ummins will be viewed as a responsible party by outsiders and her career is likely to suffer dramatically and she may even face legal problems. Me would suggest that !s. *ummins quietly bring the manipulation of earnings to the attention of the audit committee of the 0oard of Lirectors, carefully laying out in a non$confrontational manner the problems created by ?ansingOs practice of manipulating earnings. If the President and the 0oard of Lirectors are still not interested in dealing with the problem, she may reasonably conclude that the best alternative is to start looking for another Gob.

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Case 11-23 5<, minutes7 -. "he number of units produced can be computed by using the total standard cost applied for the period for any inputHdirect materials, direct labor, or variable manufacturing overhead. Using the standard cost applied for direct materials, we have1 "otal standard cost applied for the period >:,=,,,, 3 tandard cost per unit >-E per unit 3 ++,=,, units "he same answer can be obtained by using direct labor or variable manufacturing overhead. +. -.E,,,, poundsF see below for a detailed analysis. .. >+.D= per poundF see below for a detailed analysis. :. -D,:,, direct labor$hoursF see below for a detailed analysis. =. >-=.A= per direct labor$hourF see below for a detailed analysis. <. tandard variable overhead cost applied Add1 &verhead efficiency variance......... Leduct1 &verhead rate variance............. Actual variable overhead cost incurred... >=:,,,, :,+,, U 5see below7 -,.,, % >=<,D,,

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Case 11-23 5continued7 Lirect materials analysis1 Actual Iuantity of Inputs, at Actual Price 5AI C AP7 -.E,,,, pounds C >+.D= per poundJJJ 3 >:,A,-,, Actual Iuantity of Inputs, at tandard Price 5AI C P7 -.E,,,, poundsJJ C >. per pound 3 >:-:,,,, tandard Iuantity Allowed for &utput, at tandard Price 5 I C P7 -.=,,,, poundsJ C >. per pound 3 >:,=,,,,

Price 2ariance, Iuantity 2ariance, ><,D,, % >D,,,, U "otal 2ariance, >+,-,, U J ++,=,, units C < pounds per unit 3 -.=,,,, pounds JJ >:-:,,,, B >. per pound 3 -.E,,,, pounds JJJ >:,A,-,, B -.E,,,, pounds 3 >+.D= per pound Lirect labor analysis1 Actual )ours of tandard )ours Actual )ours of Input, Input, at the Allowed for &utput, at the Actual 4ate tandard 4ate at the tandard 4ate 5A) C A47 5A) C 47 5 ) C 47 -D,:,, L?)s C -D,:,, L?)sJJ C -E,,,, L?)sJ C >-=.A= per L?)JJJ >-= per L?) >-= per L?) 3 >.,=,==, 3 >+D-,,,, 3 >+A,,,,, 4ate 2ariance, /fficiency 2ariance, >-:,==, U >+-,,,, U "otal 2ariance, >.=,==, U J ++,=,, units C ,.E L?)s per unit 3 -E,,,, L?)s JJ >+D-,,,, B >-= per L?) 3 -D,:,, L?)s JJJ >.,=,==, B -D,:,, L?)s 3 >-=.A= per L?)

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. olutions !anual, *hapter -A:

Case 11-23 5continued7 2ariable overhead analysis1 Actual )ours of Input, at the Actual 4ate 5A) C A47 >=<,D,,JJ Actual )ours of Input, at the tandard 4ate 5A) C 47 -D,:,, L?)s C >. per L?) 3 >=E,+,, tandard )ours Allowed for &utput, at the tandard 4ate 5 ) C 47 -E,,,, L?)s C >. per L?) 3 >=:,,,,

4ate 2ariance, >-,.,, %

/fficiency 2ariance, >:,+,, UJ

J *omputed using -D,:,, actual L?)s at the >. per L?) standard rate. JJ >=E,+,, 6 >-,.,, 3 >=<,D,,.

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. A= !anagerial Accounting, -.th /dition

'ppendi% 11'
Predetermined O(erhead )ates and O(erhead 'nal*sis in a Standard Costing S*stem

$%ercise 11'-1 5-= minutes7 -. "he total overhead cost at the denominator level of activity must be determined before the predetermined overhead rate can be computed. "otal fixed overhead cost per year.................................... "otal variable overhead cost 5>+ per L?) C :,,,,, L?)s7.......................................... "otal overhead cost at the denominator level of activity. . . >+=,,,,, E,,,,, >..,,,,,

Predetermined 3 &verhead at the denominator level of activity overhead rate Lenominator level of activity >..,,,,, 3 3 >E.+= per L?) :,,,,, L?)s +. tandard direct labor$hours allowed for the actual output 5a7.............................. Predetermined overhead rate 5b7............. &verhead applied 5a7 C 5b7.......................

.E,,,, L?)s >E.+= per L?) >.-.,=,,

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. olutions !anual, Appendix --A A<

$%ercise 11'-2 5-= minutes7 -. %ixed overhead %ixed portion of the 3 predetermined overhead rate Lenominator level of activity >+=,,,,, 3 +=,,,, L?)s 3 >-,.,, per L?) 0udget 3 Actual fixed $ 0udgeted fixed variance overhead overhead 3 >+=:,,,, $ >+=,,,,, 3 >:,,,, U %ixed portion of 2olume 3 the predetermined C Lenominator $ variance hours overhead rate

+.

tandard hours allowed

3 >-,.,, per L?) C 5+=,,,, L?)s $ +<,,,, L?)s7 3 >-,,,,, %

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. AA !anagerial Accounting, -.th /dition

$%ercise 11'-3 5-= minutes7 -. "otal overhead at the Predetermined 3 denominator activity overhead rate Lenominator activity 3 3 >-.D, per L?) C .,,,,, per L?) K >-<E,,,, .,,,,, L?)s >++=,,,, .,,,,, L?)s

3 >A.=, per L?) 2ariable element1 5>-.D, per L?) C .,,,,, L?)s7 B .,,,,, L?)s 3 >=A,,,, B .,,,,, L?)s 3 >-.D, per L?) %ixed element1 >-<E,,,, B .,,,,, L?)s 3 >=.<, per L?) +. Lirect materials, +.= yards C >E.<, per yard......................... Lirect labor, . L?)sJ C >-+.,, per L?)............................... 2ariable manufacturing overhead, . L?)s C >-.D, per L?) %ixed manufacturing overhead, . L?)s C >=.<, per L?).... "otal standard cost per unit................................................... J.,,,,, L?)s B -,,,,, units 3 . L?)s per unit. >+-.=, .<.,, =.A, -<.E, >E,.,,

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. olutions !anual, Appendix --A AE

$%ercise 11'-4 5+, minutes7 -. Predetermined 3 >. per !) C <,,,,, !)s K >.,,,,,, overhead rate <,,,,, !)s 3 >:E,,,,, <,,,,, !)s

3 >E per !) 2ariable portion of >. per !) C <,,,,, !)s the predetermined 3 <,,,,, !)s overhead rate 3 >-E,,,,, <,,,,, !)s

3 >. per !) %ixed portion of >.,,,,,, the predetermined 3 <,,,,, !)s overhead rate 3 >= per !) +. "he standard hours per unit of product are1 <,,,,, hours B :,,,,, units 3 -.= hours per unit (iven this figure, the standard hours allowed for the actual production would be1 :+,,,, units C -.= hours per unit 3 <.,,,, standard hours allowed. <,,,,, denominator hours C >= per hour 3 >.,,,,,,.

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. AD !anagerial Accounting, -.th /dition

$%ercise 11'-4 5continued7 .. 2ariable overhead rate variance1 2ariable overhead rate variance 3 5A) C A47 6 5A) C 47 5>-E=,<,,7 6 5<:,,,, hours C >. per hour7 3 ><,:,, % 2ariable overhead efficiency variance1 2ariable overhead efficiency variance 3 4 5A) 6 )7 >. per hour 5<:,,,, hours 6 <.,,,, hours7 3 >.,,,, U "he fixed overhead variances are as follows1 Actual %ixed &verhead >.,+,:,, 0udgeted %ixed &verhead >.,,,,,,J %ixed &verhead Applied to Mork in Process <.,,,, hours C >= per hour 3 >.-=,,,, 2olume 2ariance, >-=,,,, %

0udget 2ariance, >+,:,, U

JAs originally budgeted. Alternative approach to the budget variance1 0udget 3 Actual fixed $ 0udgeted fixed variance overhead overhead 3 >.,+,:,, $ >.,,,,,, 3 >+,:,, U Alternative approach to the volume variance1 %ixed portion of tandard 2olume 3 the predetermined Lenominator $ hours 2ariance hours overhead rate allowed 3 >= per hour 5<,,,,, hours $ <.,,,, hours7 3 >-=,,,, %

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. olutions !anual, Appendix --A E,

$%ercise 11'-5 5-, minutes7 *ompany A1 "his company has a favorable volume variance because the standard hours allowed for the actual production are greater than the denominator hours. *ompany 01 "his company has an unfavorable volume variance because the standard hours allowed for the actual production are less than the denominator hours. *ompany *1 "his company has no volume variance because the standard hours allowed for the actual production and the denominator hours are the same.

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. E!anagerial Accounting, -.th /dition

$%ercise 11'-6 5-= minutes7 -. D,=,, units C : hours per unit 3 .E,,,, hours. +. and .. Actual %ixed &verhead >-DE,A,,J 0udgeted %ixed &verhead >+,,,,,, %ixed &verhead Applied to Mork in Process .E,,,, hours C >= per hourJ 3 >-D,,,,, 2olume 2ariance, >-,,,,, UJ

0udget 2ariance, >-,.,, %

J(iven. :. 0udgeted fixed overhead %ixed element of the 3 predetermined overhead rate Lenominator activity 3 >+,,,,,, Lenominator activity

3 >= per hour "herefore, the denominator activity is1 >+,,,,,, B >= per hour 3 :,,,,, hours.

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. olutions !anual, Appendix --A E+

$%ercise 11'- 5-= minutes7 -. -:,,,, units produced C . !)s per unit 3 :+,,,, !)s +. Actual fixed overhead incurred.................. Add1 %avorable budget variance............... 0udgeted fixed overhead cost................... >+<A,,,, .,,,, >+A,,,,,

0udgeted fixed overhead %ixed element of the 3 predetermined overhead rate Lenominator activity 3 >+A,,,,, :=,,,, !)s

3 >< per !) .. %ixed portion of tandard 2olume 3 the predetermined Lenominator $ hours 2ariance hours overhead rate allowed 3 >< per !) 5:=,,,, !)s $ :+,,,, !)s7 3 >-E,,,, U Alternative solution to parts -$.1 Actual %ixed &verhead >+<A,,,,J
+ .

0udgeted %ixed &verhead >+A,,,,,-

0udget 2ariance, >.,,,, %J

%ixed &verhead Applied to Mork in Process :+,,,, !)s+ C >< per !). 3 >+=+,,,, 2olume 2ariance, >-E,,,, U

>+<A,,,, K >.,,,, 3 >+A,,,,,. -:,,,, units C . !)s per unit 3 :+,,,, !)s >+A,,,,, B :=,,,, denominator !)s 3 >< per !)

J(iven.

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Pro&lem 11'-! 5., minutes7 -. Lirect materials, . yards C >:.:, per yard................................. Lirect labor, - L?) C >-+.,, per L?)....................................... 2ariable manufacturing overhead, - L?) C >=.,, per L?)J..... %ixed manufacturing overhead, - L?) C >--.E, per L?)JJ...... tandard cost per unit............................................................... J >+=,,,, B =,,,, L?)s 3 >=.,, per L?). JJ >=D,,,, B =,,,, L?)s 3 >--.E, per L?). +. !aterials variances1 !aterials price variance 3 AI 5AP 6 P7 +:,,,, yards 5>:.E, per yard 6 >:.:, per yard7 3 >D,<,, U !aterials quantity variance 3 P 5AI 6 I7 >:.:, per yard 5-E,=,, yards 6 -E,,,, yardsJ7 3 >+,+,, U J<,,,, units C . yards per unit 3 -E,,,, yards ?abor variances1 ?abor rate variance 3 A) 5A4 6 47 =,E,, L?)s 5>-..,, per L?) 6 >-+.,, per L?)7 3 >=,E,, U ?abor efficiency variance 3 4 5A) 6 )7 >-+.,, per L?) 5=,E,, L?)s 6 <,,,, L?)sJ7 3 >+,:,, % J<,,,, units C - L?) per unit 3 <,,,, L?)s >-..+, -+.,, =.,, --.E, >:+.,,

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. olutions !anual, Appendix --A E:

Pro&lem 11'-! 5continued7 .. 2ariable overhead variances1 Actual L?)s of Input, at the Actual 4ate 5A) C A47 >+D,=E, Actual L?)s of tandard L?)s Input, at the Allowed for &utput, tandard 4ate at the tandard 4ate 5A) C 47 5 ) C 47 =,E,, L?)s <,,,, L?)s C >=.,, per L?) C >=.,, per L?) 3 >+D,,,, 3 >.,,,,, 4ate 2ariance, /fficiency 2ariance, >=E, U >-,,,, % "otal 2ariance, >:+, %

Alternative solution for the variable overhead variances1 2ariable overhead rate variance 3 5A) C A47 6 5A) C 47 5>+D,=E,7 6 5=,E,, L?)s C >=.,, per L?)7 3 >=E, U 2ariable overhead efficiency variance 3 4 5A) 6 )7 >=.,, per L?) 5=,E,, L?)s 6 <,,,, L?)s7 3 >-,,,, % %ixed overhead variances1 %ixed &verhead Actual %ixed 0udgeted %ixed Applied to &verhead &verhead Mork in Process ><,,:,, >=D,,,, <,,,, L?)s C >--.E, per L?) 3 >A,,E,, 0udget 2ariance, 2olume 2ariance, >-,:,, U >--,E,, %

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. E= !anagerial Accounting, -.th /dition

Pro&lem 11'-! 5continued7 Alternative approach to the budget variance1 0udget 3 Actual fixed $ 0udgeted fixed variance overhead overhead 3 ><,,:,, $ >=D,,,, 3 >-,:,, U Alternative approach to the volume variance1 %ixed portion of tandard 2olume 3 the predetermined Lenominator $ hours 2ariance hours overhead rate allowed 3 >--.E, per L?) 5=,,,, L?)s $ <,,,, L?)s7 3 >--,E,, % :. "he choice of a denominator activity level affects standard unit costs in that the higher the denominator activity level chosen, the lower standard unit costs will be. "he reason is that the fixed portion of overhead costs is spread over more units as the denominator activity rises. "he volume variance cannot be controlled by controlling spending. "he volume variance simply reflects whether actual activity was greater than or less than the denominator activity. "hus, the volume variance is controllable only through activity.

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. olutions !anual, Appendix --A E<

Pro&lem 11'-" 5:= minutes7 -. Lirect materials price and quantity variances1 !aterials price variance 3 AI 5AP 6 P7 <:,,,, feet 5>E.== per foot 6 >E.:= per foot7 3 ><,:,, U !aterials quantity variance 3 P 5AI 6 I7 >E.:= per foot 5<:,,,, feet 6 <,,,,, feetJ7 3 >..,E,, U J.,,,,, units C + feet per unit 3 <,,,,, feet +. Lirect labor rate and efficiency variances1 ?abor rate variance 3 A) 5A4 6 47 :.,=,, L?)s 5>-=.E, per L?) 6 >-<.,, per L?)7 3 >E,A,, % ?abor efficiency variance 3 4 5A) 6 )7 >-<.,, per L?) 5:.,=,, L?)s 6 :+,,,, L?)sJ7 3 >+:,,,, U J.,,,,, units C -.: L?)s per unit 3 :+,,,, L?)s .. a. 2ariable overhead spending and efficiency variances1 Actual )ours of Input, at the Actual 4ate 5A) C A47 >-,E,,,, Actual )ours of tandard )ours Input, at the Allowed for &utput, tandard 4ate at the tandard 4ate 5A) C 47 5 ) C 47 :.,=,, L?)s :+,,,, L?)s C >+.=, per L?) C >+.=, per L?) 3 >-,E,A=, 3 >-,=,,,, 4ate 2ariance, /fficiency 2ariance, >A=, % >.,A=, U

Alternative solution1 2ariable overhead rate variance 3 5A) C A47 6 5A) C 47 5>-,E,,,,7 6 5:.,=,, L?)s C >+.=, per L?)7 3 >A=, % 2ariable overhead efficiency variance 3 4 5A) 6 )7 >+.=, per L?) 5:.,=,, L?)s 6 :+,,,, L?)s7 3 >.,A=, U

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. EA !anagerial Accounting, -.th /dition

Pro&lem 11'-" 5continued7 b. %ixed overhead budget and volume variances1 Actual %ixed &verhead >+--,E,, 0udgeted %ixed &verhead >+-,,,,,J %ixed &verhead Applied to Mork in Process :+,,,, L?)s C >< per L?) 3 >+=+,,,, 2olume 2ariance, >:+,,,, %

0udget 2ariance, >-,E,, U

JAs originally budgeted. "his figure can also be expressed as1 .=,,,, denominator L?)s C >< per L?) 3 >+-,,,,,. Alternative solution1 0udget variance1 0udget 3 Actual fixed $ 0udgeted fixed variance overhead overhead 3 >+--,E,, $ >+-,,,,, 3 >-,E,, U 2olume variance1 %ixed portion of tandard 2olume 3 the predetermined Lenominator $ hours 2ariance hours overhead rate allowed 3 ><.,, per L?) 5.=,,,, L?)s $ :+,,,, L?)s7 3 >:+,,,, %

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. olutions !anual, Appendix --A EE

Pro&lem 11'-" 5continued7 :. "he total of the variances would be1 Lirect materials variances1 Price variance................................................ Iuantity variance........................................... Lirect labor variances1 4ate variance................................................. /fficiency variance......................................... 2ariable manufacturing overhead variances1 4ate variance................................................. /fficiency variance......................................... %ixed manufacturing overhead variances1 0udget variance............................................. 2olume variance............................................ "otal of variances.............................................. > <,:,, U ..,E,, U E,A,, % +:,,,, U A=, % .,A=, U -,E,, U :+,,,, % >-E,.,, U

@ote that the total of the variances agrees with the >-E,.,, variance mentioned by the president. It appears that not everyone should be given a bonus for good cost control. "he materials quantity variance and the labor efficiency variance are <.A; and ..<;, respectively, of the standard cost allowed and thus would warrant investigation. "he companyOs large unfavorable variances 5for materials quantity and labor efficiency7 do not show up more clearly because they are offset by the favorable volume variance. "his favorable volume variance is a result of the company operating at an activity level that is well above the denominator activity level used to set predetermined overhead rates. 5"he company operated at an activity level of :+,,,, standard hoursF the denominator activity level set at the beginning of the year was .=,,,, hours.7 As a result of the large favorable volume variance, the unfavorable quantity and efficiency variances have been concealed in a small 8net9 figure. "he large favorable volume variance may have been achieved by building up inventories.

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. ED !anagerial Accounting, -.th /dition

Pro&lem 11'-1# 5:= minutes7 -. "otal rate1 2ariable rate1 %ixed rate1 PV+DA,=,, 3 PVE.=, per hour .=,,,, hours PVEA,=,, 3 PV+.=, per hour .=,,,, hours PV+-,,,,, 3 PV<.,, per hour .=,,,, hours

+. .+,,,, standard hours C PVE.=, per hour 3 PV+A+,,,,. .. 2ariable overhead variances1 Actual )ours of Input, at the Actual 4ate 5A) C A47 PVAE,,,, tandard )ours Actual )ours of Input, Allowed for &utput, at at the tandard 4ate the tandard 4ate 5A) C 47 5 ) C 47 .,,,,, hours C .+,,,, hours C PV+.=, per hour PV+.=, per hour 3 PVA=,,,, 3 PVE,,,,, 4ate 2ariance, /fficiency 2ariance, PV.,,,, U PV=,,,, %

Alternative solution1 2ariable overhead rate variance 3 5A) C A47 6 5A) C 47 5PVAE,,,,7 6 5.,,,,, hours C PV+.=, per hour7 3 PV.,,,, U 2ariable overhead efficiency variance 3 4 5A) 6 )7 PV+.=, per hour 5.,,,,, hours 6 .+,,,, hours7 3 PV=,,,, %

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. olutions !anual, Appendix --A D,

Pro&lem 11'-1# 5continued7 %ixed overhead variances1 Actual %ixed &verhead PV+,D,:,, 0udgeted %ixed &verhead PV+-,,,,, %ixed &verhead Applied to Mork in Process .+,,,, hours C PV< per hour 3 PV-D+,,,, 2olume 2ariance, PV-E,,,, U

0udget 2ariance, PV<,, %

Alternative solution1 0udget variance1 0udget 3 Actual fixed $ 0udgeted fixed variance overhead overhead 3 PV+,D,:,, $ PV+-,,,,, 3 PV<,, % 2olume variance1 %ixed portion of tandard 2olume 3 the predetermined Lenominator $ hours 2ariance hours overhead rate allowed 3 PV<.,, per hour 5.=,,,, hours $ .+,,,, hours7 3 PV-E,,,, U 2erification1 2ariable overhead rate variance........ 2ariable overhead efficiency variance %ixed overhead budget variance........ %ixed overhead volume variance....... Underapplied overhead......................

PV .,,,, U =,,,, % <,, % -E,,,, U PV-=,:,, U

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. D!anagerial Accounting, -.th /dition

Pro&lem 11'-1# 5continued7 :. 2ariable overhead Rate (ariance) "his variance includes both price and quantity elements. "he overhead spending variance reflects differences between actual and standard prices for variable overhead items. It also reflects differences between the amounts of variable overhead inputs that were actually used and the amounts that should have been used for the actual output of the period. 0ecause the variable overhead spending variance is unfavorable, either too much was paid for variable overhead items or too many of them were used. Efficiency (ariance) "he term 8variable overhead efficiency variance9 is a misnomer, because the variance does not measure efficiency in the use of overhead items. It measures the indirect effect on variable overhead of the efficiency or inefficiency with which the activity base is utili#ed. In this company, the activity base is labor$hours. If variable overhead is really proportional to labor$hours, then more effective use of labor$hours has the indirect effect of reducing variable overhead. 0ecause +,,,, fewer labor$hours were required than indicated by the labor standards, the indirect effect was presumably to reduce variable overhead spending by about PV=,,,, 5PV+.=, per hour C +,,,, hours7. %ixed overhead Bud*et (ariance) "his variance is simply the difference between the budgeted fixed cost and the actual fixed cost. In this case, the variance is favorable which indicates that actual fixed costs were lower than anticipated in the budget. Volume (ariance) "his variance occurs as a result of actual activity being different from the denominator activity in the predetermined overhead rate. In this case, the variance is unfavorable, so actual activity was less than the denominator activity. It is difficult to place much of a meaningful economic interpretation on this variance. It tends to be large, so it often swamps the other, more meaningful variances if they are simply netted against each other.

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. olutions !anual, Appendix --A D+

Pro&lem 11'-11 5:= minutes7 -. "otal rate1 2ariable rate1 %ixed rate1 ><,,,,,, 3 >-, per L?) <,,,,, L?)s >-+,,,,, 3 >+ per L?) <,,,,, L?)s >:E,,,,, 3 >E per L?) <,,,,, L?)s >+-E . -+ >=:

+. Lirect materials1 . pounds at >A per pound............ Lirect labor1 -.= L?)s at >-+ per L?)................... 2ariable overhead1 -.= L?)s at >+ per L?)........... %ixed overhead1 -.= L?)s at >E per L?)............... tandard cost per unit.............................................

.. a. :+,,,, units C -.= L?)s per unit 3 <.,,,, standard L?)s. b. Actual costs !anufacturing &verhead <,<,=,, Applied costs &verapplied overhead <.,,,,, J +.,=,,

J<.,,,, standard L?)s C >-, per L?) 3 ><.,,,,,. :. 2ariable overhead variances1 Actual )ours of Input, at the Actual 4ate 5A) C A47 >-+.,=,, tandard )ours Actual )ours of Input, at Allowed for &utput, at the tandard 4ate the tandard 4ate 5A) C 47 5 ) C 47 <=,,,, L?)s C <.,,,, L?)s C >+ per L?) >+ per L?) 3 >-.,,,,, 3 >-+<,,,, 4ate 2ariance, /fficiency 2ariance, ><,=,, % >:,,,, U

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. D. !anagerial Accounting, -.th /dition

Pro&lem 11'-11 5continued7 Alternative solution1 2ariable overhead rate variance 3 5A) C A47 6 5A) C 47 5>-+.,=,,7 6 5<=,,,, L?)s C >+ per L?)7 3 ><,=,, % 2ariable overhead efficiency variance 3 4 5A) 6 )7 >+ per L?) 5<=,,,, L?)s 6 <.,,,, L?)s7 3 >:,,,, U %ixed overhead variances1 Actual %ixed &verhead >:E.,,,, 0udgeted %ixed &verhead >:E,,,,,J %ixed &verhead Applied to Mork in Process <.,,,, L?)s C >E per L?) 3 >=,:,,,, 2olume 2ariance, >+:,,,, %

0udget 2ariance, >.,,,, U

J*an be expressed as1 <,,,,, denominator L?)s C >E per L?) 3 >:E,,,,, Alternative solution1 0udget variance1 0udget 3 Actual fixed $ 0udgeted fixed variance overhead overhead 3 >:E.,,,, $ >:E,,,,, 3 >.,,,, U 2olume variance1 %ixed portion of tandard 2olume 3 the predetermined Lenominator $ hours 2ariance hours overhead rate allowed 3 >E per L?) 5<,,,,, L?)s $ <.,,,, L?)s7 3 >+:,,,, %

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. olutions !anual, Appendix --A D:

Pro&lem 11'-11 5continued7 "he companyOs overhead variances can be summari#ed as follows1 2ariable overhead1 4ate variance................................... ><,=,, % /fficiency variance........................... :,,,, U %ixed overhead1 0udget variance............................... .,,,, U 2olume variance.............................. +:,,,, % &verapplied overheadHsee part ...... >+.,=,, % =. &nly the volume variance would have changed. It would have been unfavorable because the standard L?)s allowed for the yearOs production 5<.,,,, L?)s7 would have been less than the denominator L?)s 5<=,,,, L?)s7.

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. D= !anagerial Accounting, -.th /dition

Pro&lem 11'-12 5:= minutes7 -. and +. Lenominator of .,,,,, L?)s1 >-.=,,,, B .,,,,, L?)s................... >+A,,,,, B .,,,,, L?)s................... "otal predetermined rate...................... Lenominator of :,,,,, L?)s1 >-E,,,,, B :,,,,, L?)s................... >+A,,,,, B :,,,,, L?)s................... "otal predetermined rate...................... .. 'enominator /cti(ity) !01000 'L,s Lirect materials, : feet C >E.A= per foot................ >.=.,, Lirect labor, + L?)s C >-= per L?).................. .,.,, 2ariable overhead, + L?)s C >:.=, per L?).. D.,, %ixed overhead, + L?)s C >D.,, per L?)............ -E.,, tandard cost per unit...... >D+.,, 'enominator /cti(ity) "01000 'L,s ame............................. >.=.,, ame............................. .,.,, Per 'irect Labor+,our Variable -i.ed %otal >:.=, >D.,, >:.=, D.,, >-..=, >:.=, <.A= >--.+=

>:.=, ><.A=

ame............................. D.,, %ixed overhead, + L?)s C ><.A= per L?)......... -..=, tandard cost per unit.... >EA.=,

:. a. -E,,,, units C + L?)s per unit 3 .<,,,, standard L?)s. b. Actual costs !anufacturing &verhead ::<,:,, Applied costs &verapplied overhead :E<,,,, J .D,<,,

J.<,,,, standard L?)s C >-..=, predetermined rate per L?) 3 >:E<,,,,.

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. olutions !anual, Appendix --A D<

Pro&lem 11'-12 5continued7 c. 2ariable overhead variances1 Actual L?)s of Input, at the Actual 4ate 5A) C A47 >-A:,E,, Actual L?)s of tandard L?)s Input, at the Allowed for &utput, tandard 4ate at the tandard 4ate 5A) C 47 5 ) C 47 .E,,,, L?)s C .<,,,, L?)s C >:.=, per L?) >:.=, per L?) 3 >-A-,,,, 3 >-<+,,,, 4ate 2ariance, /fficiency 2ariance, >.,E,, U >D,,,, U

Alternative solution1 2ariable overhead rate variance 3 5A) C A47 6 5A) C 47 5>-A:,E,,7 6 5.E,,,, L?)s C >:.=, per L?)7 3 >.,E,, U 2ariable overhead efficiency variance 3 4 5A) 6 )7 >:.=, per L?) 5.E,,,, L?)s 6 .<,,,, L?)s7 3 >D,,,, U %ixed overhead variances1 Actual %ixed &verhead >+A-,<,, 0udgeted %ixed &verhead >+A,,,,,J %ixed &verhead Applied to Mork in Process .<,,,, L?)s C >D per L?) 3 >.+:,,,, 2olume 2ariance, >=:,,,, %

0udget 2ariance, >-,<,, U

J*an be expressed as1 .,,,,, denominator L?)s C >D per L?) 3 >+A,,,,,.

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Pro&lem 11'-12 5continued7 Alternative solution1 0udget variance1 0udget 3 Actual fixed $ 0udgeted fixed variance overhead overhead 3 >+A-,<,, $ >+A,,,,, 3 >-,<,, U 2olume variance1 %ixed portion of tandard 2olume 3 the predetermined Lenominator $ hours 2ariance hours overhead rate allowed 3 >D.,, per L?) 5.,,,,, L?)s $ .<,,,, L?)s7 3 >=:,,,, % ummary of variances1 2ariable overhead rate variance.................. 2ariable overhead efficiency variance......... %ixed overhead budget variance................. %ixed overhead volume variance................ &verapplied overhead................................. >.,E,, U D,,,, U -,<,, U =:,,,, % >.D,<,, %

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Pro&lem 11'-12 5continued7 =. "he maGor disadvantage of using normal activity is the large volume variance that ordinarily results. "his occurs because the denominator activity used to compute the predetermined overhead rate is different from the activity level that is anticipated for the period. In the case at hand, the company has used a long$run normal activity figure of .,,,,, L?)s to compute the predetermined overhead rate, whereas activity for the period was expected to be :,,,,, L?)s. "his has resulted in a large favorable volume variance that may be difficult for management to interpret. In addition, the large favorable volume variance in this case has masked the fact that the company did not achieve the budgeted level of activity for the period. "he company had planned to work :,,,,, L?)s, but managed to work only .<,,,, L?)s 5at standard7. "his unfavorable result is concealed due to using a denominator figure that is out of step with current activity. &n the other hand, using long$run normal activity as the denominator results in unit costs that are stable from year to year. "hus, managementOs decisions are not clouded by unit costs that Gump up and down as the activity level rises and falls.

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'ppendi% 11+
,ournal $ntries to )ecord -ariances

$%ercise 11+-1 5+, minutes7 -. "he general ledger entry to record the purchase of materials for the month is1 4aw !aterials 5-+,,,, meters at >..+= per meter7..................... !aterials Price 2ariance 5-+,,,, meters at >,.-, per meter %7........ Accounts Payable 5-+,,,, meters at >..-= per meter7............ .D,,,, -,+,, .A,E,,

+. "he general ledger entry to record the use of materials for the month is1 Mork in Process 5-,,,,, meters at >..+= per meter7..................... !aterials Iuantity 2ariance 5=,, meters at >..+= per meter U7...................... 4aw !aterials 5-,,=,, meters at >..+= per meter7............ .+,=,, -,<+= .:,-+=

.. "he general ledger entry to record the incurrence of direct labor cost for the month is1 Mork in Process 5+,,,, hours at >-+.,, per hour7 ?abor 4ate 2ariance 5-,DA= hours at >,.+, per hour U7....................... ?abor /fficiency 2ariance 5+= hours at >-+.,, per hour %7................. Mages Payable 5-,DA= hours at >-+.+, per hour7................ +:,,,, .D= .,, +:,,D=

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$%ercise 11+-2 5:= minutes7 -. a. Actual Iuantity Actual Iuantity tandard Iuantity of Input, at of Input, at Allowed for &utput, Actual Price tandard Price at tandard Price 5AI C AP7 5AI C P7 5 I C P7 -,,,,, yards C -,,,,, yards C A,=,, yardsJ C >-..E, per yard >-:.,, per yard >-:.,, per yard 3 >-.E,,,, 3 >-:,,,,, 3 >-,=,,,, Price 2ariance, >+,,,, % E,,,, yards C >-:.,, per yard 3 >--+,,,, Iuantity 2ariance, >A,,,, U J.,,,, units C +.= yards per unit 3 A,=,, yards Alternatively, the variances can be computed using the formulas1 !aterials price variance 3 AI 5AP 6 P7 -,,,,, yards 5>-..E, per yard 6 >-:.,, per yard7 3 >+,,,, % !aterials quantity variance 3 P 5AI 6 I7 >-:.,, per yard 5E,,,, yards 6 A,=,, yards7 3 >A,,,, U

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$%ercise 11+-2 5continued7 b. "he Gournal entries would be1 4aw !aterials 5-,,,,, yards C -:.,, per yard7.................... !aterials Price 2ariance 5-,,,,, yards C >,.+, per yard %7........ Accounts Payable 5-,,,,, yards C >-..E, per yard7......... Mork in Process 5A,=,, yards C >-:.,, per yard7.................... !aterials Iuantity 2ariance 5=,, yards U C >-:.,, per yard7.................... 4aw !aterials 5E,,,, yards C >-:.,, per yard7........... +. a. Actual )ours of Input, at the Actual 4ate 5A) C A47 -:,,,,, +,,,, -.E,,,, -,=,,,, A,,,, --+,,,,

Actual )ours of tandard )ours Input, at the Allowed for &utput, at tandard 4ate the tandard 4ate 5A) C 47 5 ) C 47 =,,,, hours C :,E,, hoursJ C >E.,, per hour >E.,, per hour 3 >:,,,,, 3 >.E,:,, >:.,,,, 4ate 2ariance, /fficiency 2ariance, >.,,,, U >-,<,, U "otal 2ariance, >:,<,, U

J.,,,, units C -.< hours per unit 3 :,E,, hours

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$%ercise 11+-2 5continued7 Alternative olution1 ?abor rate variance 3 A) 5A4 6 47 =,,,, hours 5>E.<, per hourJ 6 >E.,, per hour7 3 >.,,,, U J>:.,,,, B =,,,, hours 3 >E.<, per hour ?abor efficiency variance 3 4 5A) 6 )7 >E.,, per hour 5=,,,, hours 6 :,E,, hours7 3 >-,<,, U b. "he Gournal entry would be1 Mork in Process 5:,E,, hours C >E.,, per hour7........................ ?abor 4ate 2ariance 5=,,,, hours C >,.<, per hour U7..................... ?abor /fficiency 2ariance 5+,, hours U C >E.,, per hour7........................ Mages Payable 5=,,,, hours C >E.<, per hour7............... .E,:,, .,,,, -,<,, :.,,,,

.. "he entries are1 entry 5a7, purchase of materialsF entry 5b7, issue of materials to productionF and entry 5c7, incurrence of direct labor cost. 5a7 0al.J 4aw !aterials -:,,,,, 5b7 --+,,,, +E,,,, Accounts Payable 5a7 -.E,,,, !aterials Price 2ariance 5a7 +,,,, 5c7 ?abor 4ate 2ariance .,,,, 5b7 5c7 Mork in Process -,=,,,, .E,:,, Mages Payable 5c7 :.,,,, !aterials Iuantity 2ariance 5b7 A,,,, ?abor /fficiency 2ariance 5c7 -,<,,

J+,,,, yards of material at a standard cost of >-:.,, per yard

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Pro&lem 11+-3 5<, minutes7 -. a. Actual Iuantity tandard Iuantity Actual Iuantity of of Input, at Allowed for &utput, at Input, at Actual Price tandard Price tandard Price 5AI C AP7 5AI C P7 5 I C P7 .+,,,, feet C .+,,,, feet C +D,<,, feetJ C >:.E, per foot >=.,, per foot >=.,, per foot 3 >-=.,<,, 3 >-<,,,,, 3 >-:E,,,, Price 2ariance, Iuantity 2ariance, ><,:,, % >-+,,,, U "otal 2ariance, >=,<,, U JE,,,, footballs C ..A ft. per football 3 +D,<,, feet Alternatively, the variances can be computed using the formulas1 !aterials price variance 3 AI 5AP 6 P7 .+,,,, feet 5>:.E, per foot 6 >=.,, per foot7 3 ><,:,, % !aterials quantity variance 3 P 5AI 6 I7 >=.,, per foot 5.+,,,, feet 6 +D,<,, feet7 3 >-+,,,, U b. 4aw !aterials 5.+,,,, feet C >=.,, per foot7. . !aterials Price 2ariance 5.+,,,, feet C >,.+, per foot %7........... Accounts Payable 5.+,,,, feet C >:.E, per foot7.............. Mork in Process 5+D,<,, feet C >=.,, per foot7....................... !aterials Iuantity 2ariance 5+,:,, feet U C >=.,, per foot7...................... 4aw !aterials 5.+,,,, feet C >=.,, per foot7.............. -<,,,,, <,:,, -=.,<,, -:E,,,, -+,,,, -<,,,,,

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Pro&lem 11+-3 5continued7 +. a. Actual )ours of Actual )ours of tandard )ours Input, at the Input, at the Allowed for &utput, Actual 4ate tandard 4ate at the tandard 4ate 5A) C A47 5A) C 47 5 ) C 47 <,:,, hoursJ C <,:,, hours C A,+,, hoursJJ C >E.,, per hour >A.=, per hour >A.=, per hour 3 >=-,+,, 3 >:E,,,, 3 >=:,,,, 4ate 2ariance, /fficiency 2ariance, >.,+,, U ><,,,, % "otal 2ariance, >+,E,, % J E,,,, footballs C ,.E hours per football 3 <,:,, hours JJ E,,,, footballs C ,.D hours per football 3 A,+,, hours Alternatively, the variances can be computed using the formulas1 ?abor rate variance 3 A) 5A4 6 47 <,:,, hours 5>E.,, per hour 6 >A.=, per hour7 3 >.,+,, U ?abor efficiency variance 3 4 5A) 6 )7 >A.=, per hour 5<,:,, hours 6 A,+,, hours7 3 ><,,,, % b. Mork in Process 5A,+,, hours C >A.=, per hour7. ?abor 4ate 2ariance 5<,:,, hours C >,.=, per hour U7...................... ?abor /fficiency 2ariance 5E,, hours % C >A.=, per hour7 ............... Mages Payable 5<,:,, hours C >E.,, per hour7................ =:,,,, .,+,, <,,,, =-,+,,

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Pro&lem 11+-3 5continued7 .. Actual )ours of Actual )ours of tandard )ours Input, at the Input, at the Allowed for &utput, Actual 4ate tandard 4ate at the tandard 4ate 5A) C A47 5A) C 47 5 ) C 47 <,:,, hours C <,:,, hours C A,+,, hours C >+.A= per hour >+.=, per hour >+.=, per hour 3 >-A,<,, 3 >-<,,,, 3 >-E,,,, 4ate 2ariance, /fficiency 2ariance, >-,<,, U >+,,,, % "otal 2ariance, >:,, % Alternatively, the variances can be computed using the formulas1 2ariable overhead rate variance 3 A) 5A4 6 47 <,:,, hours 5>+.A= per hour 6 >+.=, per hour7 3 >-,<,, U 2ariable overhead efficiency variance 3 4 5A) 6 )7 >+.=, per hour 5<,:,, hours 6 A,+,, hours7 3 >+,,,, % :. @o. )e is not correct in his statement. "he company has a large, unfavorable materials quantity variance that should be investigated. Also, the overhead rate variance equals -,; of standard, which should also be investigated. It appears that the companyOs strategy to increase output by giving raises was effective. Although the raises resulted in an unfavorable rate variance, this variance was more than offset by a large, favorable efficiency variance.

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Pro&lem 11+-3 5continued7 =. "he variances have many possible causes. ome of the more likely causes include the following1 Materials (ariances) %avorable price variance1 (ood price, inferior quality materials, unusual discount due to quantity purchased, drop in market price, less costly method of freight, outdated or inaccurate standards. Unfavorable quantity variance1 *arelessness, poorly adGusted machines, unskilled workers, inferior quality materials, outdated or inaccurate standards. Labor (ariances) Unfavorable rate variance1 Use of highly skilled workers, change in pay scale, overtime, outdated or inaccurate standards. %avorable efficiency variance1 Use of highly skilled workers, high$quality materials, new equipment, outdated or inaccurate standards. Variable o(erhead (ariances) Unfavorable rate variance1 Increase in costs, waste, theft, spillage, purchases in uneconomical lots, outdated or inaccurate standards. %avorable efficiency variance1 ame as for labor efficiency variance.

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Pro&lem 11+-4 5A= minutes7 -. a. 0efore the variances can be computed, we must first compute the standard and actual quantities of material per hockey stick. "he computations are1 Lirect materials added to work in process 5a7. . tandard direct materials cost per foot 5b7........ tandard quantity of direct materials 5a7 B 5b7. . tandard quantity of direct materials 5a7........... @umber of sticks produced 5b7.......................... tandard quantity per stick 5a7 B 5b7................. >--=,+,, >..,, .E,:,, feet .E,:,, feet E,,,, :.E feet

Actual quantity of direct materials used per stick last year1 :.E feet K ,.+ feet 3 =., feet. Mith these figures, the variances can be computed as follows1 Actual Iuantity of Input, at Actual Price 5AI C AP7 Actual Iuantity of Input, at tandard Price 5AI C P7 <,,,,, feet C >..,, per foot 3 >-E,,,,, >-A:,,,, Price 2ariance, ><,,,, % :,,,,, feetJ C >..,, per foot 3 >-+,,,,, Iuantity 2ariance, >:,E,, U tandard Iuantity Allowed for &utput, at tandard Price 5 I C P7 .E,:,, feet C >..,, per foot 3 >--=,+,,

JE,,,, units C =., feet per unit 3 :,,,,, feet

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Pro&lem 11+-4 5continued7 Alternatively, the variances can be computed using the formulas1 !aterials price variance 3 AI 5AP 6 P7 <,,,,, feet 5>+.D, per footJ 6 >..,, per foot7 3 ><,,,, % J>-A:,,,, B <,,,,, feet 3 >+.D, per foot !aterials quantity variance 3 P 5AI 6 I7 >..,, per foot 5:,,,,, feet 6 .E,:,, feet7 3 >:,E,, U b. 4aw !aterials 5<,,,,, feet C >..,, per foot7....... -E,,,,, !aterials Price 2ariance 5<,,,,, feet C >,.-, per foot %7................... <,,,, Accounts Payable 5<,,,,, feet C >+.D, per foot7...................... -A:,,,, Mork in Process 5.E,:,, feet C >..,, per foot7. . . !aterials Iuantity 2ariance 5-,<,, feet U C >..,, per foot7.......................... 4aw !aterials 5:,,,,, feet C >..,, per foot7. --=,+,, :,E,, -+,,,,,

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Pro&lem 11+-4 5continued7 +. a. 0efore the variances can be computed, we must first determine the actual direct labor hours worked for last year. "his can be done through the variable overhead efficiency variance, as follows1 2ariable overhead efficiency variance 3 4 5A) 6 )7 >-.., per hour C 5A) 6 -<,,,, hoursJ7 3 ><=, U >-.., per hour C A) 6 >+,,E,, 3 ><=,JJ >-.., per hour C A) 3 >+-,:=, A) 3 >+-,:=, B >-.., per hour A) 3 -<,=,, hours J E,,,, units C +., hours per unit 3 -<,,,, hours JJ Mhen used in the formula, an unfavorable variance is positive. Me must also compute the standard rate per direct labor hour. "he computation is1 ?abor rate variance 3 5A) C A47 6 5A) C 47 >AD,+,, 6 5-<,=,, hours C 47 3 >.,.,, % >AD,+,, 6 -<,=,, hours C 4 3 6>.,.,,J -<,=,, hours C 4 3 >E+,=,, 4 3 >E+,=,, B -<,=,, hours 4 3 >=.,, per hour J Mhen used in the formula, a favorable variance is negative.

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. olutions !anual, Appendix --0 --,

Pro&lem 11+-4 5continued7 (iven these figures, the variances are1 Actual )ours of Input, at the Actual 4ate 5A) C A47 tandard )ours Actual )ours of Input, Allowed for &utput, at at the tandard 4ate the tandard 4ate 5A) C 47 5 ) C 47 -<,=,, hours C -<,,,, hours C >=.,, per hour >=.,, per hour 3 >E+,=,, 3 >E,,,,, >AD,+,, 4ate 2ariance, /fficiency 2ariance, >.,.,, % >+,=,, U "otal 2ariance, >E,, %

Alternatively, the variances can be computed using the formulas1 ?abor rate variance 3 A) 5A4 6 47 -<,=,, hours 5>:.E, per hourJ 6 >=.,, per hour7 3 >.,.,, % JAD,+,, B -<,=,, hours 3 >:.E, per hour ?abor efficiency variance 3 4 5A) 6 )7 >=.,, per hour 5-<,=,, hours 6 -<,,,, hours7 3 >+,=,, U b. Mork in Process 5-<,,,, hours C >=.,, per hour7........................ ?abor /fficiency 2ariance 5=,, hours U C >=.,, per hour7......................... ?abor 4ate 2ariance 5-<,=,, hours C >,.+, per hour %7............... Mages Payable 5-<,=,, hours C >:.E, per hour7.................. E,,,,, +,=,, .,.,, AD,+,,

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Pro&lem 11+-4 5continued7 .. Actual )ours of Input, at the Actual 4ate 5A) C A47 tandard )ours Actual )ours of Input, Allowed for &utput, at at the tandard 4ate the tandard 4ate 5A) C 47 5 ) C 47 -<,=,, hours C -<,,,, hours C >-.., per hour >-.., per hour 3 >+-,:=, 3 >+,,E,, >-D,E,, 4ate 2ariance, /fficiency 2ariance, >-,<=, % ><=, U "otal 2ariance, >-,,,, %

Alternatively, the variances can be computed using the formulas1 2ariable overhead rate variance 3 A) 5A4 6 47 -<,=,, hours 5>-.+, per hourJ 6 >-.., per hour7 3 >-,<=, % J>-D,E,, B -<,=,, hours 3 >-.+, per hour 2ariable overhead efficiency variance 3 4 5A) 6 )7 >-.., per hour 5-<,=,, hours 6 -<,,,, hours7 3 ><=, U

' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved. olutions !anual, Appendix --0 --+

Pro&lem 11+-4 5continued7 :. -or materials) %avorable price variance1 Lecrease in outside purchase priceF fortunate buyF inferior quality materialsF unusual discounts due to quantity purchasedF less costly method of freightF inaccurate standards. Unfavorable quantity variance1 Inferior quality materialsF carelessnessF poorly adGusted machinesF unskilled workersF inaccurate standards. -or labor) %avorable rate variance1 Unskilled workers 5paid lower rates7F pieceworkF inaccurate standards. Unfavorable efficiency variance1 Poorly trained workersF poor quality materialsF faulty equipmentF work interruptionsF fixed labor and insufficient demand to fill capacityF inaccurate standards. -or (ariable o(erhead) %avorable rate variance1 Lecrease in supplier pricesF less usage of lubricants or indirect materials than plannedF inaccurate standards. Unfavorable efficiency variance1 ee comments under direct labor efficiency variance above. =. Standard Quantity or ,ours :.E feet +., hours +., hours Standard Price Standard or Rate Cost >..,, per foot >-:.:, >=.,, per hour -,.,, >-.., per hour +.<, >+A.,,

Lirect materials.............. Lirect labor.................... 2ariable overhead.......... "otal standard cost.........

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