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DISCUSSION QUESTIONS
18-1
18-2
Chapter 18
Chapter 18
18-3
and reduce the amount of inefficiency resulting from the learning required to change production from one product to another. Large
work in process inventories result from long
production runs, and large inventories are
likely to be viewed by department managers
as buffers that can be used to absorb
machine breakdowns, employee absenteeism, and slack demand for the product.
Although carrying large inventories is costly,
the carrying costs do not affect the efficiency
variance, which in turn encourages departmental managers to overproduce. Since efficiency variances measure the use of inputs in
relation to output volume, efforts to control
quality tend to be oriented to inspection
alone. Stopping the process to experiment
with alternative production methods to permanently correct a problem or improve quality
can result in an unfavorable labor efficiency
variance. In contrast, increasing the volume of
production and reworking or discarding
defects has a smaller impact on the efficiency
variance.
18-4
Chapter 18
EXERCISES
E18-1
Quantity
Actual materials purchased
at actual cost .........................
Actual materials purchased
at standard cost ....................
Materials purchase price
variance..................................
4,500 lbs.
= Amount
$ 60,300
13.50 standard
4,500
$ (.10)
4,000 lbs.
Unit Cost
$13.41 actual
4,000
60,750
$
$ (.09)
Unit Cost
4,000 lbs.
$13.50 standard
3,800
200 lbs.
13.50 standard
13.50 standard
(450) fav.
= Amount
$ 53,640
13.50 standard
4,000
Quantity
Unit Cost
$13.40 actual
4,500
Quantity
Actual materials used at
actual cost .............................
Actual materials used at
standard cost ........................
Materials price usage
variance..................................
54,000
$
(360) fav.
= Amount
$ 54,000
51,300
$ 2,700 unfav.
E18-2
Quantity
Actual materials purchased
at actual cost .........................
Actual materials purchased
at standard cost ....................
Materials purchase price
variance..................................
5,000
Unit Cost
$22.00 actual
5,000
22.50 standard
5,000
Quantity
$ (.50)
Unit Cost
5,000
$22.50 standard
4,400
600
22.50 standard
22.50 standard
= Amount
$110,000
112,500
$ (2,500) fav.
= Amount
$112,500
99,000
$ 13,500 unfav.
Chapter 18
18-5
E18-2 (Concluded)
Quantity
Actual materials issued at
standard cost ........................
Standard quantity of
materials at standard
cost.........................................
Materials quantity variance .......
Unit Cost
4,400
$22.50 standard
4,300
100
22.50 standard
22.50 standard
= Amount
$99,000
96,750
$ 2,250 unfav.
E18-3
(1)
Actual materials purchased
at actual cost .........................
Actual materials purchased
at standard cost ....................
Materials purchase price
variance..................................
Quantity
6,000
(2)
Materials beginning
inventory ................................
Materials purchased during
month .....................................
Materials available for use.........
Materials issued to
production .............................
Materials ending inventory........
4.00 standard
6,000
$ .20
Unit Cost
7,100
$4.00 standard
6,900
200
4.00 standard
4.00 standard
Quantity
2,000
Unit Cost
$4.12 actual
= Amount
$25,200
24,000
$ 1,200 unfav.
= Amount
$28,400
27,600
$ 800 unfav.
= Amount
$ 8,240
6,000
8,000
4.20 actual
4.18 average
25,200
$33,440
7,100
900
4.18 average
4.18 average
29,678
$ 3,762
Quantity
Actual materials used at
actual average cost...............
Actual materials used at
standard cost ........................
Materials price usage
variance..................................
Unit Cost
$4.20 actual
6,000
Quantity
Actual materials used at
standard cost ........................
Standard quantity allowed
at standard cost ....................
Materials quantity variance .......
7,100
7,100
7,100
Unit Cost
$4.18 average
4.00 standard
$ .18
= Amount
$29,678
28,400
$ 1,278 unfav.
18-6
Chapter 18
E18-3 (Concluded)
(3)
Materials beginning
inventory ................................
Materials purchased during
month .....................................
Materials available for use.........
Materials issued to
production .............................
Materials ending inventory........
Quantity
= Amount
$4.12 actual
$ 8,240
6,000
8,000
4.20 actual
25,200
$33,440
2,000
5,100
900
4.12 oldest
4.20 newest
4.20 newest
8,240
21,420
$ 3,780
2,000
5,100
7,100
Unit Cost
$4.12 oldest
4.20 newest
7,100
4.00 standard
= Amount
$ 8,240
21,420
$29,660
28,400
$ 1,260 unfav.
Quantity
Unit Cost
= Amount
2,000
$4.12 actual
$ 8,240
6,000
8,000
4.20 actual
25,200
$33,440
6,000
1,100
900
4.20 newest
4.12 oldest
4.12 oldest
25,200
4,532
$ 3,708
Quantity
Actual materials used at
actual cost .............................
Unit Cost
2,000
Quantity
Actual materials used at
actual cost .............................
6,000
1,100
7,100
7,100
Unit Cost
$4.20 newest
4.12 oldest
4.00 standard
= Amount
$25,200
4,532
$29,732
28,400
$ 1,332 unfav.
Chapter 18
18-7
E18-4
Actual labor hours worked ........
Actual labor hours worked ........
Labor rate variance ....................
Hours
650
650
650
Rate
= Amount
$ 9.80 actual
$6,370
10.00 standard
6,500
$ (.20)
$ (130) fav.
Hours
650
Rate
= Amount
$10.00 standard
$6,500
600
50
10.00 standard
10.00 standard
6,000
$ 500 unfav.
E18-5
(1)
Actual materials purchased ......
Actual materials purchased ......
Materials purchase price
variance..................................
Quantity
1,500
1,500
1,500
Quantity
1,350
1,350
Unit Cost
= Amount
$ 3.80 actual
$5,700
4.00 standard
6,000
$ (.20)
1,350
$ (300) fav.
Unit Cost
= Amount
$ 3.80 actual
$5,130
4.00 standard
5,400
$ (.20)
$ (270) fav.
Quantity
1,350
1,020
330
Unit Cost
= Amount
$ 4.00 standard
$5,400
4.00 standard
4,080
4.00 standard
$1,320 unfav.
(2)
Actual labor hours worked ........
Actual labor hours worked ........
Labor rate variance ....................
Hours
310
310
310
Rate
= Amount
$12.30 actual
$3,813
12.00 standard
3,720
$ .30
$ 93 unfav.
Hours
310
Rate
= Amount
$12.00 standard
$3,720
340
(30)
12.00 standard
12.00 standard
4,080
$ (360) fav.
18-8
Chapter 18
E18-6
Actual factory overhead ...................................................................
Standard overhead chargeable to actual production
(11,000 standard hours allowed $12.50 overhead rate)
Overall factory overhead variance ..................................................
Actual factory overhead ...................................................................
Budget allowance based on standard hours allowed:
Variable overhead (11,000 standard machine
hours allowed $4.50 variable overhead rate)......
$49,500
Fixed overhead budgeted ........................................
96,000
Controllable variance ........................................................................
Budget allowance based on standard hours allowed
(from above) ..............................................................................
Standard factory overhead chargeable to production
(11,000 standard hours allowed $12.50 overhead rate)
Volume variance ..............................................................................
Controllable variance.............................
Volume variance ...................................
Overall factory overhead variance .......
$166,000
137,500
$ 28,500 unfav.
$166,000
145,500
$ 20,500 unfav.
$145,500
137,500
$ 8,000 unfav.
$20,500 unfav.
8,000 unfav.
$28,500 unfav.
E18-7
Actual factory overhead ...................................................................
Standard overhead chargeable to actual production
(5,700 standard hours allowed $22 overhead rate)...............
Overall factory overhead variance ..................................................
$130,000
125,400
$ 4,600 unfav.
$130,200
125,400
$ 4,800 unfav.
(200) fav.
4,800 unfav.
4,600 unfav.
Chapter 18
18-9
E18-8
Actual factory overhead ...................................................................
Standard overhead chargeable to actual production
(4,200 standard hours allowed $24.80 overhead rate)
Overall factory overhead variance ..................................................
Actual factory overhead ...................................................................
Budget allowance based on actual machine hours:
Variable overhead (4,600 actual machine
hours $5.80 variable overhead rate) ...............
$26,680
Fixed overhead budgeted ........................................
85,500
Spending variance ............................................................................
Budget allowance based on actual machine hours....
Budget allowance based on standard hours allowed:
Variable overhead (4,200 standard machine hours
allowed $5.80 variable overhead rate)............
$24,360
Fixed overhead budgeted ........................................
85,500
Variable efficiency variance .............................................................
Budget allowance based on standard hours allowed
Standard overhead chargeable to actual production
(4,200 standard hours allowed $24.80 overhead rate)
Volume variance ..............................................................................
Spending variance ............................................................................
Variable efficiency variance .............................................................
Volume variance ..............................................................................
Overall factory overhead variance ..................................................
$121,000
104,160
$ 16,840 unfav.
$121,000
112,180
$ 8,820 unfav.
$112,180
109,860
$ 2,320 unfav.
$109,860
104,180
$ 5,700 unfav.
$
8,820
2,320
5,700
$ 16,840
unfav.
unfav.
unfav.
unfav.
18-10
Chapter 18
E18-9
Actual factory overhead ...................................................................
Standard overhead chargeable to actual production
(2,050 standard hours allowed $5 overhead rate).................
Overall factory overhead variance ...............................
Actual factory overhead ...................................................................
Budget allowance based on actual hours:
Variable overhead (1,900 actual hours $1.50).....
$ 2,850
Fixed overhead .........................................................
7,000
Spending variance ............................................................................
$ 10,500
10,250
$
250 unfav.
$ 10,500
9,850
650 unfav.
650
(225)
(175)
250
unfav.
fav.
fav.
unfav.
E18-10
Actual factory overhead ...................................................................
Standard overhead chargeable to actual production (38,000
units 2 standard hours per unit $9 overhead rate)
Overall factory overhead variance ..................................................
E18-10 (Concluded)
$700,000
684,000
$ 16,000 unfav.
Chapter 18
(1)
18-11
Two-variance method:
$700,000
696,000
$ 4,000 unfav.
$696,000
684,000
$ 12,000 unfav.
$
4,000 unfav.
12,000 unfav.
$ 16,000 unfav.
$700,000
705,000
$ (5,000) fav.
$705,000
696,000
$ 9,000 unfav.
$696,000
684,000
$ 12,000 unfav.
18-12
Chapter 18
E18-11
Materials price variance:
Actual
Quantity
Ingredients
(lbs.)
Cocoa beans
325,000
Milk.................. 1,425,000
Sugar .............. 250,000
Standard
Cost
Standard
per lb.
Cost
$.60
$ 195,000
.50
712,500
.40
100,000
$1,007,500
Actual
Cost
$201,500
684,000
97,500
$983,000
Materials
Price Variance
$ 6,500 unfav.
(28,500) fav.
(2,500) fav.
$(24,500) fav.
Actual
Quantity
Ingredients
(Lbs.)
Cocoa beans
325,000
Milk .............. 1,425,000
Sugar .............. 250,000
2,000,000
Standard
Formula
for Actual
Quantity
(Lbs.)*
320,000
1,480,000
200,000
2,000,000
Difference
in Lbs.
5,000
(55,000)
50,000
0
Standard
Cost
per Lb.
$.60
.50
.40
Materials
Mix Variance
$ 3,000 unfav.
(27,500) fav.
20,000 unfav.
$ (4,500) fav.
400
387
13
$ 2,530
$32,890 unfav.
Chapter 18
18-13
E18-12
(1) Materials purchase price variance:
Actual
Standard
Quantity
Cost
Purchased
per
Standard
Ingredients
in Liters
Liter
Cost
Echol ..............
25 000
$.200
$ 5,000
Protex..............
13 000
.425
5,525
Benz ..............
40 000
.150
6,000
CT-40 ..............
7 500
.300
2,250
$18,775
Actual
Cost
$ 5,365
6,240
5,840
2,220
$19,665
Materials
Purchase
Price Variance
$365 unfav.
715 unfav.
(160) fav.
(30) fav.
$890 unfav.
Ingredients
Echol ..............
Protex..............
Benz ..............
CT-40 ..............
Actual
Quantity
Used in
Liters
26 800
12 660
37 400
7 140
84 000
Standard
Formula
for Actual
Quantity
in Liters*
28 000
14 000
35 000
7 000
84 000
Difference
in Liters
(1 200)
(1 340)
2 400
140
0
Standard
Cost per
Liter
$.200
.425
.150
.300
Materials
Mix Variance
$(240.00) fav.
(569.50) fav.
360.00 unfav.
42.00 unfav.
$(407.50) fav.
140
136
4
$135
$540 unfav.
18-14
Chapter 18
E18-13
BENJAMIN PRODUCTS COMPANY
Department 2
Factory Overhead Variance Report
For Month Ending June 30
(1)
Budget
Allowable
Normal
Capacity
Direct labor hours ........................................
Capacity ........................................................
(2)
Budget
Allowance
Standard
Hours
6,000
100%
(3)
Actual
Cost
(4)
Controllable
Variance
Unfav. (Fav.)
(3) (2)
$ 60
20
(30)
20
5,100
85%
$ 2,400
2,100
800
100
$ 2,040
1,785
680
85
$ 2,100
1,805
650
105
$ 5,400
$ 4,590
$ 4,660
$ 6,000
5,400
1,020
960
120
540
360
$ 6,000
5,400
1,020
960
120
540
360
$ 6,200
5,400
1,020
960
120
540
372
$14,400
$14,400
$14,612
$19,800
$18,990
$19,272
200
0
0
0
0
0
12
$282
unfav.
16,830
$ 2,160 unfav.
$19,272
16,830
$ 2,442 unfav.
Controllable variance............................
Volume variance....................................
$ 2,442 unfav.
282 unfav.
2,160 unfav.
Chapter 18
18-15
E18-14 APPENDIX
$15,000 budgeted overhead
2,500 budgeted machine hours
$6 overhead rate
$2 variable rate
$16,500
14,400
$ 2,100 unfav.
$16,500
15,400
$ 1,100 unfav.
$15,400
16,200
$ (800) fav.
$16,200
14,400
$ 1,800 unfav.
$ 1,100 unfav.
(800) fav.
1,800 unfav.
$ 2,100 unfav.
18-16
Chapter 18
E18-15 APPENDIX
$16,800 budgeted overhead
1,200 budgeted labor hours
$4 variable rate
$15,800
$15,800
$16,480
15,680
$ 800 unfav.
$ 4,480
4,680
$ (200) fav.
$11,200
11,700
$ (500) fav.
$ (680)fav.
800 unfav.
(200)fav.
(500)fav.
$ (580)fav.
16,380
$ (580) fav.
16,480
$ (680)fav.
Chapter 18
18-17
PROBLEMS
P18-1
(1)
Factory overhead per unit:
Variable ($30 2/3) .........................................................
Fixed ($30 1/3) .............................................................
$20
10
$30
Yards
18,000
18,000
Unit Cost
= Amount
$1.38 actual
$24,840
1.35 standard
24,300
18,000
Yards
9,500
10,000
(500)
Unit Cost
= Amount
$1.35 standard
$12,825
1.35 standard
13,500
1.35 standard
$ (675) fav.
Hours
2,100
2,100
2,100
Rate
= Amount
$9.15 actual
$19,215
9.00 standard
18,900
$ .15
$315 unfav.
Hours
2,100
2,000
100
Rate
= Amount
$9.00 standard
$18,900
9.00 standard
18,000
9.00 standard
$ 900 unfav.
$ .03
540 unfav.
$16,650
$10,000
6,000
16,000
$ 650 unfav.
$16,000
15,000
$ 1,000 unfav.
18-18
Chapter 18
P18-2
(1)
Materials
Direct
Labor
4,600
500
4,600
500
4,600
500
4,600
500
4,100
200
4,100
0
4,100
140
4,100
200
0
600
4,900
500
600
5,200
150
540
4,930
250
600
5,150
3 units
2 units
1/2 hr.
1 hr.
14,700
10,400
2,465
5,150
Quantity
16,000
$ .10
Unit Cost
14,800
$4.50 standard
14,700
100
4.50 standard
4.50 standard
12,000
12,000
12,000
= Amount
$73,600
4.50 standard
16,000
Quantity
Actual material B purchased
at actual cost .........................
Actual material B purchased
at standard cost ....................
Material B purchase price
variance..................................
Unit Cost
$4.60 actual
16,000
Quantity
Actual material A used at
standard cost ........................
Standard quantity of material
A allowed at standard cost ..
Material A quantity variance .....
Unit Cost
$1.95 actual
72,000
$ 1,600 unfav.
= Amount
$66,600
66,150
$ 450 unfav.
= Amount
$23,400
2.00 standard
$ (.05)
Factory
Overhead
24,000
$
(600) fav.
Chapter 18
18-19
P18-2 (Continued)
Quantity
Actual material B used at
standard cost ........................
Standard quantity of material
B allowed at standard cost ..
Material B quantity variance .....
$2.00 standard
10,400
600
2.00 standard
2.00 standard
2,550
Rate
$10.20 actual
2,550
2,550
Hours
Unit Cost
11,000
Hours
Actual labor hours worked at
actual labor rate ....................
Actual labor hours worked at
standard labor rate ...............
Labor rate variance ....................
10.00 standard
$.20
Rate
2,550
$10.00 standard
2,465
85
10.00 standard
10.00 standard
= Amount
$22,000
20,800
$ 1,200 unfav.
= Amount
$26,010
25,500
$ 510 unfav
= Amount
$25,500
24,650
$ 850 unfav.
$75,000
77,250
$ (2,250) fav.
$75,000
75,750
$ (750) fav.
$75,750
77,250
$ (1,500) fav.
$
(750) fav.
(1,500) fav.
$ (2,250) fav.
18-20
Chapter 18
P18-2 (Concluded)
(3)
Standard cost of units transferred to finished goods:
(4,600 units $37.50 standard cost per unit of product...........
Standard cost of spoiled units charged to factory overhead:
Material A (200 units of product 100% complete 3 units
each $4.50)...........................................................................
Material B (200 units of product 0% complete 2 units
each $2.00)............................................................................
Direct labor (200 units 70% complete 1/2 hr. each $10.00)
Factory overhead (200 units 100% complete 1 hr. each
$15.00) ...................................................................................
Total cost of spoiled units ...........................................................
Work in process, ending inventory:
Material A (600 units of product 100% complete 3 units
each $4.50)............................................................................
Material B (600 units of product 100% complete 2 units
each $2.00)............................................................................
Direct labor (600 units 90% complete 1/2 hr. each $10.00)
Factory overhead (600 units 100% complete 1 hr. each
$15.00) ......................................................................................
Total standard cost of work in process, ending inventory.......
$172,500
2,700
0
700
3,000
6,400
8,100
2,400
2,700
9,000
$ 22,200
P18-3
(1)
Material
B
8,000
3,000
5,000
3,000
0
1,000
9,000 units
Conversion
Costs
8,000
3,000
5,000
2,000
2,000
1,000
10,000 units
Chapter 18
18-21
P18-3 (Continued)
(2)
Actual quantity of Material A
used........................................
Actual quantity of Material A
used........................................
Material A price usage variance
Gallons
Unit Cost
= Amount
50,000
$1.00 actual
$ 50,000
50,000
50,000
1.20 standard
$(.20)
60,000
$ (10,000) fav.
Gallons
Actual quantity of Material A
used........................................
Standard quantity of Material
A allowed ...............................
Material A quantity variance .....
Unit Cost
$1.20 standard
44,000
6,000
1.20 standard
1.20 standard
18,000
Unit Cost
$.75 actual
18,000
= Amount
$60,000
52,800
$ 7,200 unfav.
= Amount
$ 13,500
.70 standard
18,000
Square Feet
50,000
Square Feet
Actual quantity of Material B
used........................................
Actual quantity of Material B
used........................................
Material B price usage
variance..................................
$.05
Unit Cost
12,600
$
900 unfav.
= Amount
18,000
$.70 standard
$ 12,600
18,000
0
.70 standard
.70 standard
12,600
0
Hours
10,200
10,200
10,200
Rate
= Amount
$12.00 actual
$122,400
11.50 standard
117,300
$.50
$ 5,100 unfav.
Hours
10,200
10,000
200
Rate
= Amount
$11.50 standard $117,300
11.50 standard
115,000
11.50 standard $ 2,300 unfav.
18-22
Chapter 18
P18-3 (Concluded)
Actual factory overhead .....................................................................
Budget allowance based on standard hours allowed:
Variable overhead (10,000 equivalent units
1 standard hour per unit $1.80 variable rate)...... $18,000
Fixed overhead budgeted (7,800 labor hours
at normal capacity $5 fixed rate).......................... 39,000
Controllable variance ............................................................
Budget allowance based on standard
hours allowed (above)...................................................................
Standard overhead chargeable to actual production
(10,000 standard hours allowed $6.80 overhead rate)
Volume variance ..................................................................................
$ 60,100
57,000
$ 3,100 unfav.
$ 57,000
68,000
$(11,000) fav.
Materials
17,000
4,000
13,000
0
2,150
850
16,000
Conversion
Costs
17,000
4,000
13,000
3,200
860
850
17,910
(2)
Quantity
Actual materials purchased at
actual cost .............................
Actual materials purchased at
standard cost ........................
Materials purchase price
variance..................................
60 000 kg
Unit Cost
$3.95 actual
60 000
4.00 standard
60 000
Quantity
$(.05)
Unit Cost
= Amount
$237,000
240,000
$ (3,000) fav.
= Amount
50 000 kg
$4.00 standard
$200,000 unfav.
48 000
2 000 kg
4.00 standard
4.00 standard
192,000
$ 8,000 unfav.
Chapter 18
18-23
P18-4 (Concluded)
Hours
Actual labor hours at actual
rate .........................................
Actual labor hours at standard
rate .........................................
Labor rate variance ....................
Rate
= Amount
9,000
$12.00 actual
$108,000
9,000
9,000
11.00 standard
$ 1.00
99,000
$ 9,000 unfav.
Hours
Actual labor hours at standard
rate .........................................
Standard labor hours allowed
at standard rate (17,910
equivalent units 1/2 hour
per unit)..................................
Labor efficiency variance ..........
Rate
9,000
$11.00 standard
8,955
45
11.00 standard
11.00 standard
= Amount
$ 99,000
98,505
$
495 unfav.
$134,900
134,000
$
900 unfav.
$134,000
133,730
$
270 unfav.
$133,730
125,370
$ 8,360 unfav.
18-24
Chapter 18
P18-5
(1)
Materials
Units completed and transferred out this period .................. 32,000
Less all units in beginning inventory ....................................
5,000
Equivalent units started and completed this period ............. 27,000
Add equivalent units required to complete beginning
inventory this period......................................................
0
Add equivalent units in ending inventory ..............................
2,000
Equivalent units of production this period............................. 29,000
Standard quantity allowed per unit of product ...................... 3 units
Standard quantity allowed for current production ................ 87,000
(2)
Actual materials purchased
at actual cost .........................
Actual materials purchased
at standard cost ....................
Materials purchase price
variance..................................
Quantity
100,000
6.00 standard
$
.54
Unit Cost
100,000
$ 6.00 standard
92,000
8,000
6.00 standard
6.00 standard
Unit Cost
92,000
$ 6.00 standard
87,000
5,000
6.00 standard
6.00 standard
Hours
Actual labor hours worked at
actual labor rate ....................
Actual labor hours worked at
standard labor rate ...............
Labor rate variance ....................
$ 6.54 actual
100,000
Quantity
Actual materials issued at
standard cost ........................
Standard quantity of materials
at standard cost ....................
Materials quantity variance .......
Unit Cost
100,000
Quantity
Actual materials purchased at
standard cost ........................
Actual materials issued at
standard cost ........................
Materials inventory variance .....
Rate
Conversion
Costs
32,000
5,000
27,000
3,000
1,600
31,600
1/4 hr.
7,900 hrs.
= Amount
$654,000
600,000
$ 54,000 unfav.
= Amount
$600,000
552,000
$ 48,000 unfav.
= Amount
$552,000
522,000
$ 30,000 unfav.
= Amount
8,000
$10.60 actual
$ 84,800
8,000
8,000
10.00 standard
$ .60
80,000
$ 4,800 unfav.
Chapter 18
18-25
P18-5 (Concluded)
Hours
Actual labor hours worked at
standard labor rate ...............
Standard labor hours allowed
at standard labor rate ...........
Labor efficiency variance ..........
Rate
8,000
$10.00 standard
7,900
100
10.00 standard
10.00 standard
= Amount
$80,000
79,000
$ 1,000 unfav.
$75,000
79,000
$ (4,000) fav.
$75,000
84,000
$ (9,000) fav.
$84,000
83,800
$ 200 unfav.
$83,800
$ (9,000) fav.
200 unfav.
4,800 unfav.
$ (4,000) fav.
79,000
$4,800 unfav.
18-26
Chapter 18
P18-6
(1)
Standard Cost
per dozen
$53.10
53.10
26.40
26.70
Total
Standard Cost
$ 53,100
90,270
31,680
25,632
$200,682
(2)
Yards
95,000
95,000
95,000
(a)
Actual quantity used ..............
Standard quantity allowed:
1,000 24 yards ....................
1,700 24 yards ....................
1,200 24 yards ....................
Standard cost per yard ..........
Materials quantity variance ...
(b)
Actual hours worked ..............
Standard hours allowed:
1,000 3 hours......................
1,700 3 hours......................
960 3 hours.........................
Standard cost per hour..........
Labor efficiency variance ......
(c)
Actual labor rate .....................
Standard labor rate.................
Actual hours worked ..............
Labor rate variance ................
Unit Cost
= Amount
$1.12 actual
$106,400
1.10 standard
104,500
$ .02
Lot 22
24,100
Lot 23
40,440
$ 1,900 unfav.
Lot 24
28,825
24,000
40,800
28,800
100
(360)
25
$1.10
$1.10
$1.10
$110 unfav. $(396) fav.
$27.50 unfav.
Lot 22
2,980
Lot 23
5,130
Lot 24
2,890
3,000
5,100
2,880
(20)
30
10
$4.90
$4.90
$4.90
$(98) fav.
$ 147 unfav.
$49 unfav.
Lot 23
Lot 24
Lot 22
$5.00
$5.00
$5.00
4.90
4.90
4.90
$ .10
$ .10
$ .10
2,980
5,130
2,890
$ 298 unfav. $ 513 unfav. $ 289 unfav.
Chapter 18
18-27
P18-6 (Concluded)
(4) Actual factory overhead ..................................................
Budget allowance based on standard hours
allowed:
Variable overhead ($4 60% (3,000 +
5,100 + 2,880 standard hours)) ................................ $26,352
Fixed overhead budgeted (($576,000 12)
40%) ........................................................................ 19,200
Controllable variance.......................................................
Budget allowance based on standard hours allowed ..
Standard overhead chargeable to production
(10,980 standard hours $4.00) ................................
Volume variance ...............................................................
$45,600
45,552
$
48 unfav.
$45,552
43,920
$ 1,632 unfav.
18-28
Chapter 18
P18-7
CLAFFY MANUFACTURING COMPANY
Department 2
Factory Overhead Variance Report
For Month Ending February 28
(1)
(2)
(3)
(4)
Budget
Budget
Budget
Allowance Allowance Allowance
Normal
Standard
Actual
Actual
Capacity
Hours
Hours
Cost
Processing time in hours ...............
6,000
5,700
5,840
Capacity ............................................
100%
95%
97.33%
Variable factory overhead:
Indirect labor..............................
Manufacturing supplies ...........
Repairs ......................................
Heat, power, and light ...............
Total variable cost ..............
Fixed factory overhead:
Supervision................................
Indirect labor..............................
Manufacturing supplies............
Maintenance...............................
Heat, power, and light...............
Machinery depreciation ...........
Insurance and taxes ................
Total fixed cost....................
Total factory overhead ....................
(5)
(6)
Variable
Efficiency Spending
Variance Variance
Unfav.
Unfav.
(Fav.)
(Fav.)
(3) (2)
(4) (3)
$ 2,000
2,400
1,000
300
$ 5,700
$ 1,900
2,280
950
285
$ 5,415
$ 1,947
2,336
973
292
$ 5,548
$ 1,920
2,325
1,050
325
$ 5,620
$ 47
56
23
7
$(27)
(11 )
77
33
$ 4,000
6,200
2,000
1,100
1,400
4,500
900
$20,100
$25,800
$ 4,000
6,200
2,000
1,100
1,400
4,500
900
$20,100
$25,515
$ 4,000
6,200
2,000
1,100
1,400
4,500
900
$20,100
$25,648
$ 4,000
6,200
2,000
1,080
1,400
4,500
970
$20,150
$25,770
0
0
0
0
0
0
0
0
0
0
(20 )
0
0
70
24,510
$1,005 unfav.
$133
$122
unfav.
unfav.
$29,160
$18,000
720 Unfav.
28,800
$29,520
$30,000
$18,000
$29,850
$18,300
$ 3,000
1,700
3,000
6,500
1,800
1,000
600
400
$18,000
$ 3,000
1,700
3,200
6,500
1,800
1,000
700
400
$11,550
Total
variable overhead$12,000$11,520 $11,160
............................
Fixed factory overhead:
Supervision .................... $ 3,000
$ 3,000
Supplies..........................
1,700
1,700
Machinery maintenance .
3,000
3,000
Depreciation of machinery
6,500
6,500
Insurance........................
1,800
1,800
Property tax ...................
1,000
1,000
Gas heating....................
600
600
Electricity
(lighting).......
400
400
...........................
Total
fixed overhead......
...........................
Total...........................
factory overhead.........
$11,300
$ 3,255
2,325
930
4,650
$ 3,360
2,400
960
4,800
$ 3,300
2,600
950
4,700
$ 3,500
2,500
1,000
5,000
(3)
(2)
Machine hours......................
Capacity utilized ..................
(1)
$30,000
$18,700
$ 3,100
1,650
3,200
6,500
1,900
1,100
845
405
Fav.
$(360)
0
0
0
0
0
0
0
0
Unfav.
$840
100
(50)
200
0
100
100
245
5
$145
(125)
30
90
Actual
Cost
$(105)
(75)
(30)
(150)
Spending
Variance
(5) (3)
Variable
Efficiency
Variance
(3) - (2)
$ 3,400
2,200
960
4,740
(7)
(6)
(5)
P18-8
Unfav.
$690
0
0
200
0
0
0
100
0
$ 45
275
20
50
Spending
Quantity
Variance
(4) (3)
(8)
Unfav.
$150
100
(50)
0
0
100
100
145
5
$100
(400)
10
40
Spending
Price
Variance
(5) - (4)
(9)
Chapter 18
18-29
18-30
Chapter 18
P18-8 (Concluded)
Reconciliation of variances:
Actual factory overhead .....................................................................
Standard overhead chargeable to work in process ...................
Overall factory overhead variance...............................................
$30,000
28,800
$ 1,200 unfav.
Spending variance:
Spending quantity variance ................................. $690 unfav.
Spending price variance.......................................
150 unfav.
Variable efficiency variance ...............................................................
Volume variance ..................................................................................
Overall factory overhead variance ....................................................
$840 unfav.
(360) fav.
720 unfav.
$ 1,200 unfav.
P18-9 APPENDIX
Equivalent production for September.
Transferred out ..........................................................................
Less beginning inventory.........................................................
Started and finished this period..............................................
Add beginning inventory (work this period) ..........................
Add ending inventory (work this period)................................
Equivalent units of product......................................................
Materials
42,000
10,000
32,000
0
5,000
37,000
Conversion
42,000
10,000
32,000
5,000
4,500
41,500
Pieces
76,000
76,000
76,000
Unit Cost
= Amount
$.50 actual
$ 38,000
.48 standard
36,480
$.02
$ 1,520 unfav.
Pieces
76,000
Unit Cost
= Amount
$.48 standard $ 36,480
74,000
2,000
.48 standard
.48 standard
35,520
$
960 unfav.
Hours
22,500
22,500
22,500
Rate
= Amount
$8.00 actual
$180,000
7.60 standard
171,000
$.40
$ 9,000 unfav.
Hours
22,500
Rate
= Amount
$7.60 standard $171,000
20,750
1,750
7.60 standard
7.60 standard
157,700
$ 13,300 unfav.
Chapter 18
18-31
$42,000
39,500
$ 2,500* unfav.
*The spending variance includes the difference between actual and budgeted
fixed cost, $200 ($8,200 $8,000). This portion could be separately labeled as a
fixed spending variance, leaving a balance of $2,300 as the variable spending
variance.
Budget allowance based on actual hours worked ..........................
Actual hours (22,500) standard overhead rate ($1.80) .................
Idle capacity variance.........................................................................
$39,500
40,500
$ (1,000) fav.
$40,500
37,350
$ 3,150 unfav.
Gallons
600,000
600,000
600,000
Unit Cost
= Amount
$1.917 actual
$1,150,000
2.000 standard
1,200,000
$(.083)
$(50,000) fav.
Drums:
Actual quantity purchased ........
Actual quantity purchased ........
Materials purchase price
variance..................................
Drums
85,000
85,000
85,000
Unit Cost
$1 actual
1 standard
0
= Amount
$85,000
85,000
0
Raw material:
Actual quantity used ..................
Standard quantity allowed.........
Materials quantity variance .......
Gallons
700,000
600,000
100,000
Unit Cost
$2 standard
2 standard
2 standard
= Amount
$1,400,000
1,200,000
$ 200,000 unfav.
18-32
Chapter 18
Rate
= Amount
$1 standard
$ 60,000
1 standard
60,000
1 standard
0
Hours
65,000
65,000
65,000
Rate
= Amount
$7.231 actual
$ 470,000
7.000 standard 455,000
$ .231
$15,000 unfav.
Hours
65,000
60,000
5,000
Rate
= Amount
$7 standard
$ 455,000
7 standard
420,000
7 standard
$35,000 unfav.
Factory overhead:
Actual factory overhead .....................................................................
Budget allowance based on actual hours worked:
Variable overhead (65,000 actual hours
$6 variable overhead rate) .................................... $390,000
Fixed overhead budget ..............................................
275,000
Spending variance ..............................................................................
Budget allowance based on actual hours worked (see above)
Actual hours (65,000) standard overhead rate ($10) ....................
Idle capacity variance.........................................................................
$666,500
665,000
$1,500 unfav.
$665,000
650,000
$15,000 unfav.
Chapter 18
18-33
$275,000
260,000
$ 15,000 unfav.
$665,000
635,000
$ 30,000 unfav.
(or)
65,000 actual hours $6 variable overhead rate
60,000 standard hours allowed $6 variable overhead rate ..........
Variable efficiency variance (5,000 hours $6) ...............................
$390,000
360,000
$ 30,000 unfav.
$260,000
240,000
$ 20,000 unfav.
18-34
Chapter 18
CASES
C18-1
(1)
(2)
(a) The use of participative cost standards to motivate plant managers and
department heads has several benefits. These benefits result from contact
with executive management through the interchange of ideas, negotiation
between the parties, and a final compromise in establishing the standard.
This allows the plant managers and department heads to personally identify
with these standards, which will increase their desire to achieve a goal they
have accepted.
In this case, however, the standard-setting process does not appear to be
participative. Executive management appears to follow through with the
interchange of ideas, but the negotiation and final compromise are missing.
Executive management merely reviews recommendations before setting the
standards, without discussing the standards further with plant management.
As a consequence, plant managers may become frustrated with the standard-setting system and a negative impact upon motivation could result.
(b) The use of tight, but attainable, standards can have a positive motivation
effect on department heads and plant managers. This is particularly true if
they participated in setting the standards and are confident that good performance will be recognized and rewarded. However, if the standards are
perceived as being unattainable, then the motivation will probably be negative because they feel there is no use in trying for an unreachable goal. The
unfavorable variances being the norm seems to imply that the standards are
too tight, and this could be part of the cause for the low motivation among
first-line supervisors.
Under the present system, there is no motivation for department heads to control overhead costs because all overhead costs are allocated on the basis of
actual units produced, and the actual production output in other departments
can have a significant impact on the overhead cost charged to each department.
The use of standard, predetermined department factory overhead rates,
applied on the basis of standard activity allowed for actual production, should
provide useful cost control information and enhance cost control on the part of
department heads.
Chapter 18
18-35
C18-2
(1)
(2)
18-36
Chapter 18
C18-2 (Concluded)
(3)
Employee behavior could be affected adversely when standard cost variances are
the sole basis for performance evaluation. Employees may subvert the system and
attempt to build slack into the standard so that they can meet or exceed the standard. There can be a minimal level of motivation since exceptional performance is
not rewarded. Employees may tend to engage in activities that are not in the best
overall interest of the company just to meet standard. Overemphasis on price variances can result in a large number of low cost vendors, high levels of inventory,
and poor quality materials and parts. Overemphasis on efficiency variances can
result in long production runs, large work in process inventories, and attempts to
control quality through inspection alone.
C18-3
(1)
Had Stevens not confined his initial remarks to telling the employees that production standards were too low, but rather explained why, the results of the conference would certainly have been more effective. Furthermore, he should have
remained with the group and joined the discussion. He failed to establish twoway communication, to exchange ideas, to air differences of opinion, and to provide reasons why certain practices could or could not be followed. Had he
remained with the group, Stevens could have stated that he had been thinking
about the problem of production standards and, in his opinion, such and such
should be done. Then he could have asked the group what it thought about following the outlined approach. The ensuing discussion should shape a suggested course of action representing the groups opinions as well as those of
Stevens.
It is poor practice for a manager to abdicate, as Stevens did in this incident.
An important part of a managers job is to provide effective leadership, to show
the way by offering a plan, by giving reasons, and by taking into account suggestions offered by the members affected by the plan. Using this approach, the
managers ideas, the groups wishes, and the needs of the enterprise can be
blended into an effective program.
It might be that the employees were correct, that standards should be
reduced. For example, errors in calculating the standards are possible. The
employees must be given the opportunity to present reasons for their recommendations.
Both facts and experience are important in determining the level of production standards adopted. Stevens should abstain from forcing any decision. It
may take several weeks or months for events to demonstrate what standards
should be established, for they will be influenced, among other things, by the
verification of the employees major beliefs, the correctness of Stevens statements, the extent of modifications required, and the full comprehension of the
situation by the employees.
Chapter 18
18-37
C18-3 (Concluded)
(2)
18-38
Chapter 18
C18-4
(1)
$10.50
4.50
15.20
$30.20
(a) For the most part, the purchasing manager is responsible for unfavorable
materials price variances. Causes of unfavorable materials price variances
at ColdKing are likely to include one or more of the following:
(1) failure to correctly forecast price increases
(2) purchasing nonstandard or uneconomical lot sizes
(3) purchasing from suppliers other than those offering the most favorable
prices
(b) The production manager or foreman is usually held responsible for unfavorable labor efficiency variances. Causes of unfavorable labor efficiency variances could include one or more of the following:
(1) poorly trained employees
(2) substandard or inefficient equipment or machinery
(3) inadequate supervision
(4) poor quality of materials (in particular, the raspberries that must be
sorted by hand)
Chapter 18
18-39
C18-5
(1)
(2)
(3)
$4.50
.20
$4.70
$1.92
2.00
$3.92
$8.62
18-40
Chapter 18
C18-6
(1)
Actual
Standard
Unit Cost
Material Quantity
Cost
Cost
Variance
Maxen ..... 8,480
$2.05
$2.00
$.05
Salex ....... 25,200
.70
.75
(.05)
Cralyn ..... 18,540
.90
1.00
(.10)
Net materials purchase price variance........................................
Actual quantities at individual standard materials costs:
Maxan .....
8,480 gallons @ $2.00 ........ $16,960
Salex ...... 25,200
@
.75 ........ 18,900
Cralyn ..... 18,540
@
1.00 ........ 18,540
52,220 gallons
Standard (expected) output from actual input (52,220
.80 = 41,776) multiplied by $1.30 weighted average of
standard materials cost output ......................................
Materials mix variance ..........................................................
Standard (expected) output from actual input at weighted
average of standard materials cost output ...................
Actual output quantity at weighted average of standard
materials cost (40,000 $1.30) .......................................
Materials yield variance ........................................................
Price
Variance
$424 unfav.
(1,260) fav.
(1,854) fav.
$(2,690) fav.
$54,400.00
54,308.80
$
91.20 unfav.
$54,308.80
52,000.00
$ 2,308.80 unfav.
An analysis of the portion of the mix variance attributable to each material follows:
Actual
Material Quantity
Maxan 8,480 gals.
Salex
Actual
Quantity
Total
Using
Standard
Actual
Standard
Formula Quantity = Formula
100
52,220 gals. 8,355 gals.
625
Standard
Materials
Quantity
Unit
Mix
Variation Cost
=
Variance
125 gals.
$2.00
$250.00 unfav.
25,200
300
625
52,220
25,066
134
.75
Cralyn 18,540
225
625
52,220
18,799
(259)
1.00
52,220 gals.
52,220 gals.
100.50 unfav.
(259.00) fav.
Rounding difference...........................................................................................................
(.30)
$ 91.20 unfav.
Chapter 18
18-41
C18-6 (Concluded)
(2)
Before LAR Chemical Company management can control costs, they need to
know which costs are out of line, within whose area of responsibility has the
cost variance appeared, what is the cause of the cost variance, and who has the
responsibility to correct the cause of the variance.
Standard costs and the variances from them help management to begin to
answer these issues. Specifically, the variances indicate where management
should begin its investigation:
(a) Price variationsthe information to identify the causes of the price variances usually can be obtained in the Purchasing Department. A review of
purchasing procedures and records would disclose whether the variances
were caused by permanent changes in prices, poor purchasing practices, or
poor production scheduling requiring incurrence of extra costs to expedite
shipments. The information obtained will identify the department responsible for the extra cost and provide clues to improve the control.
(b) Mix and yield variancesthe information to identify the cause of these variances usually can be obtained in the production departments. A review of
materials records and handling procedures would disclose whether the mix
variance was caused by the use of wrong proportions, entering excess
materials into the process because of carelessness, or adjustment of the
mix to accommodate off-standard materials quality caused by the same factors. Thus, the yield variance would often be explained by the same information. Nonstandard proportions would often result in nonstandard yields and
excess materials inputs. The information obtained would help identify the
department responsible and provide clues to improve the control.
C18-7
(1)
5,200 lbs.
$.10
$ 520 unfav.
5,300 lbs.
5,000
300 lbs.
$2
$ 600 unfav.
8,200 hrs.
$.10
$ 820 unfav.
18-42
Chapter 18
C18-7 (Continued)
(d) Direct labor used ........................................................
Direct labor required at standard for 5,000 units
produced......................................................................
Unfavorable direct labor use .....................................
Standard wage rate per direct labor hour ................
Direct labor efficiency variance ................................
8,200 hrs.
8,000
200 hrs.
$4
$ 800 unfav.
(e) Analysis by expenses of the factory overhead controllable variance for 5,000
units of production:
Factory
Overhead
Budgeted for
Factory
One-Month
Overhead
Factory
Period and
Controllable
Overhead
5,000-Unit
Variance
Charged
Output
Over (Under)
$ 9,840
3,300
$10,000
2,500
$ (160)
800
3,200
$16,340
2,500
$15,000
700
$1,340
$ 2,475
3,750
1,250
$ 7,475
$23,815
$ 2,250
3,750
1,250
$ 7,250
$22,250
$ 225
0
0
$ 225
$1,565
Clearly indicating where the responsibilities for price and quantity variances lie
and charging the variances to the departments with initial responsibility reduces
the conflict but does not eliminate it.
The specific cause(s) of the variance needs to be determined before there can
be certainty that the proper department is charged. For example, if materials
were purchased at higher than standard prices because the Manufacturing
Department required a rush order, then the price variance is the responsibility of
the Manufacturing Department. If the materials provided by the Purchasing
Department were of slightly lower quality than specifications required, due to
careless purchasing, the excess quantity used by Manufacturing is the
Purchasing Departments responsibility.
Chapter 18
18-43
C18-7 (Continued)
(3)
Even if the variances are properly charged to the two departments, it can be
argued that the Purchasing Departments variance is influenced by the excess
quantity required by Manufacturing. In this case, the extra 300 pounds will
increase the Purchasing Departments variance (accumulated over several periods) by $30 (300 lbs. $.10). The $30 is the joint responsibility of the two departments.
Generally, the Manufacturing Department manager cannot control the price of
the overhead items. Therefore, the prices should not influence the data in the
departmental report. Further, the allocation method for service department costs
is not sufficiently explained to determine what part (if any) of this variation can
be identified with the department. The fixed overhead items listed in this case
normally are outside a department managers control. Supplies and indirect
labor remain.
Control can be exercised at the departmental level over the amount of items
used. Therefore, emphasis should be placed on the quantities within the variances, with little or no emphasis on dollar values. The major use of the dollar values would be to establish the quantity level of each variance that would be
economically worth managements attention.
18-44
Chapter 18
C18-7 (Concluded)
TO:
Department ManagerManufacturing
FROM: Performance Analysis
RE:
Controllable Factory Overhead PerformanceNovember
Quantity
Indirect labor:
Favorable indirect labor use
(dollar value$400) .........................................
100 hrs.
Suppliesoil:
Unfavorable oil use (dollar value$500)....... 1,000 gals.
Percent
Compared
to Standard
4%
20%
Commentary:
The dollar value of the oil variation and its large percentage require identifying
the cause and applying control procedures.
The indirect labor variation, although favorable, should be investigated to be
sure that it does not represent unaccomplished activities affecting other aspects
of the operations.
Computations:
Indirect labor:
Hours used .......................................................
Standard hours for 5,000 units of output
(5,000 .5 hrs.)...........................................
Favorable indirect labor variation ..................
Dollar value at standard wage rates ........
Suppliesoil:
Oil consumed ...................................................
Standard quantity for 5,000 units of output ..
Unfavorable oil consumption .........................
Dollar value at standard oil prices .................
(4)
2,400 hrs.
2,500
100 hrs.
$ 400
6,000 gals.
5,000
1,000 gals.
$ 500
Chapter 18
18-45
C18-8
(1)
(a) Revising the standards immediately would facilitate their use in a master
budget. Use of revised standards would minimize production coordination
problems and facilitate cash planning. Revised standards would facilitate
more meaningful cost-volume-profit analysis and result in simpler, more
meaningful variance analysis. Standards are often used in decision analysis
such as make-or-buy, product pricing, or product discontinuance. The use of
obsolete standards would impair the analysis.
(b) Standard costs are carried through the accounting system in a standard cost
system. Retaining the current standards and expanding the analysis of variances would eliminate the need to make changes in the accounting system.
Changing standards could have an adverse psychological impact on the
persons using them. Retaining the current standards would preserve the
well-known benchmarks and allow for consistency in reporting variances
throughout the year.
Variances are often computed and ignored. Retaining the current standards and expanding the analysis of variances would force a diagnosis of
the costs and would increase the likelihood that significant variances would
be investigated.
(2)
(a) Changes in prime costs per unit due to the use of new direct material.
Changes due to direct material price:
((new material price old material price) new
material quantity = ($7.77 $7.00) 1 pound) .........
.77 unfav.
(1.75) fav.
(.42) fav
$(1.40) fav.
.66 unfav.
$ (.74) fav.