CHAPTER 10

Standard Costing, Operational Performance

Measures, and the Balanced Scorecard

ANSWERS TO REVIEW QUESTIONS

10-17 Several factors that managers often consider when determining the significance of a
variance are as follows: size of variance, extent to which the variances are recurring, trends
in the variances, controllability of the variances, and the perceived costs and benefits of
investigating the variances.
10-20 Advantages of a standard-costing system include the following:
(a) Standard costs provide a basis for sensible cost comparisons. Standard costs enable the
managerial accountant to compute the standard allowed cost, given actual output, which
then serves as a sensible benchmark to compare with the actual cost incurred.
(b) Computation of standard costs and cost variances enables managers to employ
management by exception.
(c) Variances provide a means of performance evaluation and rewards for employees.
(d) Since the variances are used in performance evaluation, they provide motivation for
employees to adhere to standards.
(e) Use of standard costs in product costing results in more stable product costs than if
actual production costs were used.
(f) A standard-costing system usually is less expensive than an actual- or normal-costing
system.
10-21 Seven areas in which operational performance measures are being used are as follows:
(a) Raw material and scrap
(b) Inventory
(c) Machinery
(d) Product quality
(e) Production and delivery
(f) Productivity
(g) Innovation and learning

SOLUTIONS TO EXERCISES

EXERCISE 10-31 (15 MINUTES)

Direct-material price variance = PQ(AP – SP)

= 240,000($.62 – $.60)
= $4,800 Unfavorable

Direct-material quantity variance = SP(AQ – SQ)

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 = $.60(210,000 – 200,000*)
= $6,000 Unfavorable

*SQ = 200,000 kilograms = 50,000 units × 4 kilograms per unit

Direct-labor rate variance = AH(AR – SR)

= 13,000($12.20* – $12.00)
= $2,600 Unfavorable

*AR = $158,600 ÷ 13,000 hours

Direct-labor efficiency variance = SR(AH – SH)

= $12.00(13,000 – 12,500*)
= $6,000 Unfavorable

*SH = 12,500 hours = 50,000 units × .25 hours per unit

EXERCISE 10-35 (30 MINUTES)

Direct Direct
Material Labor
Standard price or rate per unit of input............................ $16 per lb $20 per hre
Standard quantity per unit of output ................................ 2.75 lbs per unitc 4 hrs per unitf
Actual quantity used per unit of output ........................... 3 lbs per unita 3.5 hrs
Actual price or rate per unit of input ................................ $14 per lb $21 per hr
Actual output....................................................................... 20,000 units 20,000 units
Direct-material price variance ........................................... $120,000 F —
Direct-material quantity variance...................................... $80,000 Ub —
Total of direct-material variances ..................................... $40,000 F —
Direct-labor rate variance .................................................. — $ 70,000 Ud
Direct-labor efficiency variance ........................................ — $200,000 F
Total of direct-labor variances .......................................... — $130,000 F

Explanatory notes:

a. Direct-material price variance = PQ(AP – SP)

$120,000 F = PQ($14 – $16)

PQ = 60,000 lbs

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 Actual quantity used = quantity purchased

AQ = PQ = 60,000 lbs

60,000 lbs
Actual quantity per unit of output = = 3 lbs per unit
20,000 units

b. Total direct-material variance = price variance + quantity variance

$40,000 F = $120,000 F + quantity variance
Quantity variance = $80,000 U

c. Direct-material quantity variance = SP(AQ – SQ)

$80,000 U = $16(60,000 – SQ)

SQ = 55,000 lbs
55,000 lbs
Standard quantity per unit = = 2.75 lbs per unit
20,000 units

d. Total direct-labor variance = rate variance + efficiency variance

$130,000 F = rate variance + $200,000 F
Rate variance = $70,000 U

e. AH = 20,000 units × 3.5 hrs per unit = 70,000 hrs

Direct-labor rate variance = AH(AR – SR)
$70,000 U = 70,000($21 – SR)
SR = $20

f. Direct-labor efficiency variance = SR(AH – SH)

$200,000 F = $20 (70,000 – SH)

SH = 80,000 hrs
Standard hrs per unit = 80,000 hrs/20,000 units
= 4 hrs per unit

EXERCISE 10-41 (15 MINUTES)

1. Raw-Material Inventory ............................................... 144,000

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 Direct-Material Price Variance ................................... 4,800
Accounts Payable............................................... 148,800

2. & 3. Work-in-Process Inventory ........................................ 120,000

Direct-Material Quantity Variance............................. 6,000
Raw-Material Inventory ...................................... 126,000

Work-in-Process Inventory........................................ 150,000

Direct-Labor Rate Variance ....................................... 2,600
Direct-Labor Efficiency Variance .............................. 6,000
Wages Payable................................................... 158,600

4. Cost of Goods Sold .................................................... 19,400

Direct-Material Price Variance.......................... 4,800
Direct-Material Quantity Variance .................... 6,000
Direct-Labor Rate Variance............................... 2,600
Direct-Labor Efficiency Variance ..................... 6,000

SOLUTIONS TO PROBLEMS
PROBLEM 10-43 (25 MINUTES)

1. Direct-material price variance = (PQ × AP) – (PQ × SP)

= (36,000 × $1.38) – (36,000 × $1.35)
= $49,680 – $48,600
= $1,080 Unfavorable

2. Direct-material quantity variance = (AQ × SP) – (SQ × SP)

= (19,000 × $1.35) – (20,000* × $1.35)
= $25,650 - $27,000
= $1,350 Favorable

*1,000 units × 20 yards per unit = 20,000 yards

3. Direct-labor rate variance = (AH × AR) – (AH × SR)

= (4,200 × $9.15) – (4,200 × $9.00)
= $38,430 – $37,800
= $630 Unfavorable

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4. Direct-labor efficiency variance = (AH × SR) – (SH × SR)
= (4,200 × $9.00) – (4,000* × $9.00)
= $37,800 – $36,000
= $1,800 Unfavorable

*1,000 units × 4 hours per unit = 4,000 hours

PROBLEM 10-59 (25 MINUTES)

1. (a) Direct-material price variance = PQ(AP – SP)

Calculation Price
Product PQ(AP – SP) Variance
Standard tent ................... 4,200 ($6.40* – $6)................................. $1,680 U
Deluxe tent....................... 1,600 ($7.90† – $8)................................. 160 F
Direct-material
price variance.................................................................................... $1,520 U

*$6.40 = $26,880 ÷ 4,200

†$7.90 = $12,640 ÷ 1,600

(b) Direct-material quantity variance = SP(AQ – SQ)

Calculation Quantity
Product SP(AQ – SQ) Variance
Standard tent ................. $6 (2,500 – 2,400*).................................. $600 U
Deluxe tent..................... $8 (1,440 – 1,440†).................................. -0-
Direct-material
quantity variance ............................................................................... $600 U
*2,400 = 200 tents × 12 yards per tent
†1,440 = 240 tents × 6 yards per tent

2. Raw-Material Inventory................................................. 38,000*

Direct-Material Price Variance ..................................... 1,520
Accounts Payable............................................... 39,520

To record purchase of tent fabrics.

*$38,000 = (4,200 yards × $6 per yard) + (1,600 yards × $8 per yard)

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 Work-in-Process Inventory .......................................... 25,920*
Direct-Material Quantity Variance ............................... 600
Raw-Material Inventory ...................................... 26,520†

To record use of direct material.

*$25,920 = (2,400 yards × $6 per yard) + (1,440 yards × $8 per yard)
†$26,520 = (2,500 yards × $6 per yard) + (1,440 yards × $8 per yard)

PROBLEM 10-60 (50 MINUTES)

1. a. Direct-labor rate variance = (AH × AR) – (AH × SR)

= (36,500 × $8.24*) – (36,500 × $8.20)
= $1,460 Unfavorable
*$300,760 ÷ 36,500 hours

b. Direct-labor efficiency variance = (AH × SR) – (SH × SR)

= (36,500 × $8.20) – (37,200* × $8.20)
= $5,740 Favorable
*Standard allowed direct-labor hours:

Completed units................ 5,600 units × 6 hours per unit 33,600 hours

Partially completed
units ............................... 800 units × 75% × 6 hours per unit 3,600 hours
Total standard
hours allowed................ 37,200 hours

c. Actual quantity of material used:

Direct-material quantity variance = (AQ × SP) – (SQ × SP)
= (AQ × $5.00) – (51,200* × $5.00)
= $1,500 Unfavorable
Therefore: $5(AQ – 51,200) = $1,500
AQ – 51,200 = 300
AQ = 51,500 kilograms

*Standard quantity of material allowed:

Completed units................... 5,600 units × 8 kilograms 44,800 kilograms
Partially completed

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 units .................................. 800 units × 8 kilograms 6,400 kilograms
Total standard
quantity allowed............... 51,200 kilograms

d. Actual price paid per kilogram of direct material:

Actual price = $249,250/50,000
= $4.985 per kilogram

e. Direct-material and direct-labor cost transferred to finished goods:

Direct-material
cost transferred ......................................... 5,600 units × $40 $224,000
Direct-labor
cost transferred ......................................... 5,600 units × $49.20 _275,520
Total cost transferred .................................... $499,520

f. Direct-material and direct-labor cost in September 30 balance of Work-in-Process

Inventory:
Direct material ................................................. 800 units × $40 per unit $32,000
Direct labor ...................................................... 800 units × 75% × $49.20 _29,520
Total cost in ending
Work-in-Process Inventory........................ $61,520

2. Raw-Material Inventory......................................................... 250,000

Direct-Material Price Variance................................... 750*
Accounts Payable ...................................................... 249,250

*Direct-material price variance = PQ(AP – SP)

= 50,000($4.985 – $5.00) = $750 Favorable

To record the purchase of raw material and the direct-material price variance.

Work-in-Process Inventory .................................................. 256,000*

Direct-Material Quantity Variance ....................................... 1,500
Raw-Material Inventory .............................................. 257,500†

*51,200 × $5.00 = $256,000

†51,500 × $5.00 = $257,500

To add the direct-material cost to work in process and record the direct-material
quantity variance.

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 Work-in-Process Inventory .................................................. 305,040*
Direct-Labor Rate Variance.................................................. 1,460
Direct-Labor Efficiency Variance.............................. 5,740
Wages Payable ........................................................... 300,760

*37,200 × $8.20 = $305,040

To add the direct-labor cost to work-in-process, record the direct-labor rate and
efficiency variances, and recognize the actual direct-labor cost.

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