Management Advisory Services Review

STANDARD COSTING SYSTEM

Problem 1
At the beginning of 2016, Sydney Company had the following standard cost sheet for the one of its
chemical products:

Direct materials (6 lbs. @ ₱6.40) ₱38.40

Direct labor (1.8 hrs. @ ₱18) 32.40
Fixed overhead (1.8 hrs. @ ₱8) 14.40
Variable overhead (1.8 hrs. @ ₱1.50) 2.70
Standard cost per unit ₱87.90

Sydney computes its overhead rates using practical volume, which is 288,000 units.

The actual results for 2016 are:

a. Units produced: 280,000
b. Materials purchased: 1, 684,700 pounds at P6.60
c. Materials used: 1,684,000 pounds
d. Direct labor: 515,000 hours at ₱18.10
e. Fixed overhead: ₱4,140,200
f. Variable overhead: ₱872,000

Requirements:

1. Compute price and usage variances for materials.

2. Compute the labor rate and labor efficiency variances.

3. Compute the fixed overhead spending and volume variances.

4. Compute the variable overhead spending and efficiency variances.

Problem 2
The Gold plant of Melbourne’s Small Motor Division produces a major sub-assembly for motorcycles.
The plant uses a standard costing system for production costing and control. The standard cost sheet
for the sub-assembly follows:

Direct materials (7 lbs. @ ₱6) ₱42

Direct labor (2 hrs. @ ₱12) 24
Variable overhead (2 hrs. @ ₱10) 20
Fixed overhead (2 hrs. @ ₱6) 12
Standard unit cost ₱98

During the year, the Gold plant had following actual production activity:
a. Production of sub-assemblies totaled 70,000 units.
b. A total of 465,000 pounds of materials was purchased at ₱5.80 per pound.
c. There were 26,400 pounds of materials in beginning inventory (carried at ₱6 per pound). There
was no ending inventory.
d. The company used 150,000 direct labor hours at a total cost of ₱1,950,000.
e. Actual fixed overhead totaled ₱913,000.
f. Actual variable overhead totaled ₱1,470,000.

The Gold plant’s practical activity is 75,000 units per year. Standard overhead rates are computed
based on practical activity measured in standard direct labor hours.

Requirements:
1. Compute the materials price and usage variances. Of the two materials variances, which is viewed
as the most controllable? To whom would you assign responsibility for the usage variance in this
case? Explain.
2. Compute the labor rate and efficiency variances. Who is usually responsible for the labor
efficiency variance? What are some possible causes for this variance?
3. Compute the variable overhead spending and efficiency variances.
4. Compute the fixed overhead spending and volume variances. Interpret the volume variance. What
can be done to reduce this variance?
MODULE 7: STANDARD COSTING FOR COST CONTROL

ACTIVITY BASED COSTING METHOD

Problem 1

The Juneau plant produces two calculators and has two production departments: assembly and
packaging. Information for the products is given below:

Deluxe Regular Total

Units produced 20,000 200,000
Prime costs ₱160,000 ₱1,500,000 ₱1,660,000
Direct labor hours 20,000 160,000 180,000
Number of setups 60 40 100
Machine hours 10,000 80,000 90,000
Inspection hours 2,000 16,000 18,000
Number of moves 180 120 300

The following table presents activity information about the departments and products:

Assembly Packaging Total

Direct labor hours:
Deluxe 10,000 10,000 20,000
Regular 150,000 10,000 160,000
Total 160,000 20,000 180,000
Machine hours:
Deluxe 2,000 8,000 10,000
Regular 8,000 72,000 80,000
Total 10,000 80,000 90,000

Overhead Costs:
Setting equipment ₱120,000 ₱120,000 ₱240,000
Moving material 60,000 60,000 120,000
Machining 20,000 180,000 200,000
Inspection 16,000 144,000 160,000
Total ₱216,000 ₱504,000 ₱720,000

Requirements:

1. Compute the predetermined overhead rate for each department if Assembly uses labor hours and
Packaging uses machine hours.
2. Calculate the per unit cost for each product if departmental overhead rates are used. (Round
answer to the nearest centavo.)
3. Compute the predetermined plant-wide overhead rate based on direct labor hours.
4. Calculate the per unit cost of each product if a plantwide overhead rate is used. (Round answer to
the nearest centavo.)
5. Calculate the overhead rates for each overhead activity.
6. Calculate the per unit cost of each product if activity rates are used to assign overhead. (Round
answer to the nearest centavo.)

Problem 2 Service Cost Allocation

Kare Foods Company specializes in the production of frozen dinners. The first of the two
operating departments cooks the food. The second is responsible for packaging and freezing the
dinners. The dinners are sold by the case, each case containing 25 dinners. Two support
departments provide support for Kare’s operating units: Maintenance and Power. Budgeted data for
the coming quarter are given below. The company does not separate fixed and variable costs.

Support Departments Producing Departments

Particulars Packaging
Maintenance Power Cooking
and Freezing
Overhead Costs ₱340,000 ₱200,000 ₱75,000 ₱55,000
Machine Hours ---------- 40,000 40,000 20,000
Kilowatt Hours 20,000 ---------- 100,000 80,000
Direct Labor Hours ---------- ---------- 5,000 30,000

2
MODULE 7: STANDARD COSTING FOR COST CONTROL

The predetermined rate for Cooking is computed on the basis of machine hours; direct labor
hours are used for Packaging and Freezing. The prime costs for one case of standard dinner total ₱16.
It takes two machine hours to produce a case of dinners in the Cooking Department and 0.5 direct
labor hour to process a case of standard dinners in the Packaging and Freezing Department. Recently,
the Air Force has requested a bid on a three-year contract that will supply standard frozen dinners to
Minuteman missile officers and staff on duty in the field. The locations of the missile sites were
remote, and the Air Force had decided that frozen dinners were the most economical means of
supplying food to personnel on duty. The bidding policy of Kare Foods is full manufacturing costs
plus 20%. Assume that the lowest bid of the other competitors is ₱48.80 per case.

PERT DIAGRAM

Problem 1

Super Parental Guardians Construction Firm will soon begin to work on a building for Arci that
was initially started by another firm that has gone out of business. The construction firm’s schedule
of activities and related expected completion time for Arci project are presented in the following time
table:

Activity Code Activity Description Estimated Time (in weeks)

A–B Obtain on-site work permits 1
B–E Repair damages done by vandals 8
B–C Inspect construction materials left on site 1
C–E Order and receive construction materials 2
C–D Apply for waiver to add new materials 3
D–E Obtain waiver to add new materials 2
E–F Perform electric work 5
F–G Complete interior partitions 4

Requirements:
1. Prepare the program evaluation review technique (PERT) network for Arci project.
2. Identify critical path and its expected time in weeks.
3. Identify shortest path and its slack time in weeks.

Problem 2

Ang Probinsyano Company is faced with the following program evaluation review technique (PERT)
network situation for a certain project (time in days):

START
2–4–6 A 4 – 20 – 36
FINISH

L
4.5 – 8 – 11.5
I 6 – 8 – 16
S
8 – 10 – 12
T
4 – 12 – 20 8 – 12 – 16
O
Requirements:
1. Calculate the expected time (te) for each activity.

2. Identify the critical path/s.

3. What is the shortest time to complete the entire project?