Chapter 10 – Standard Costing and Analysis of Direct Costs
Solution:
10–55
93. Venazio Products uses a standard costing system to assist in the evaluation of operations.
The company has had considerable employee difficulties in recent months, so much so that
management has hired a new production supervisor (Ralph Moreno). Moreno has been on the
job for six months and has seemingly brought order to an otherwise chaotic situation.
The vice-president of manufacturing recently commented that “Moreno has really done the
trick. Ralph’s team-building/morale-boosting exercises have truly brought things under
control.” The vice-president’s comments were based on both a plant tour, where he observed a
contented work force, and review of a performance report that showed a total labor variance
of $14,000F. This variance is truly outstanding, given that it is less than 2% of the company’s
budgeted labor cost. Additional data follow.
· Total completed production amounted to 20,000 units.
· A review of the firm’s standard cost records found that each completed unit requires 2.75
hours of labor at $14 per hour. Venazio’s production actually required 42,000 labor hours at a
total cost of $756,000.
Required:
A. As judged by the information contained in the performance report, should the vice-
president be concerned about the company’s labor variances? Why?
B. Calculate Venazio’s direct-labor variances.
C. On the basis of your answers to requirement “B,” should Venazio be concerned about its
labor situation? Why?
D. Briefly analyze and explain the direct-labor variances.
94. A manufacturing company is expected to complete a task in 45 minutes. During a recent
accounting period, 3,200 completed units were produced, resulting in the following labor
variances:
Labor rate variance: $520 favorable
Labor efficiency variance: $2,800 unfavorable
The standard labor rate is $14 per hour.
Required:
Calculate (1) the standard hours allowed for the work performed, (2) the actual hours worked,
and (3) the actual wage rate.
10–58
95. Too-Jay Enterprises recently experienced a fire, forcing the company to use incomplete
information to analyze operations. Consider the following data and assume that all materials
purchased during the period were used in production:
Direct materials:
Standard price per pound: $9
Actual price per pound: $8
Price variance: $20,000F
Total of direct-material variances: $2,000F
Direct labor:
Actual hours worked: 40,000
Actual rate per hour: $15
Efficiency variance: $28,000F
Total of direct-labor variances: $12,000U
Halo completed 12,000 units.
Required:
Determine the following: (1) actual materials used, (2) direct-material quantity variance, (3)
direct-labor rate variance, (4) standard labor rate per hour, and (5) standard labor time per
finished unit.
Chapter 10 – Standard Costing and Analysis of Direct Costs
Solution:
10–60
96. Danielle Augusta is the long-time catering director of Windamere, a hotel noted
throughout the industry for quality, profitability, and cost control. The hotel recently catered a
steak dinner for a 2,000-person convention. Strict standards were in place for the dinner: 0.75
pounds of beef per plate at $9 per pound. A review of the accounting records shortly after the
convention showed that 1,680 pounds of beef were purchased and consumed, costing the hotel
$13,440.
Required:
A. Calculate the cost of beef budgeted for the dinner and the total beef variance (i.e., the
difference between budgeted and actual cost). Should this variance be of concern to the hotel?
Why?
B. Assess the job that Augusta did in “managing” the beef purchase by performing a variance
analysis. Comment on your findings.
C. Assume that the hotel received a number of complaints shortly after the dinner concluded.
Explain a possible reason behind the conventioneers’ unhappiness.
Chapter 10 – Standard Costing and Analysis of Direct Costs
Solution:
10–62
97. The following events occurred at Eureka Manufacturing (EM), an assembler of engine
parts, during March:
1. Because of a stock shortage at its regular supplier, EM had to rely on a new vendor for two
purchases of raw material parts. The vendor required EM to pay air-freight charges; however,
upon arrival, the company found the goods to be above-average in quality.
2. The local municipality raised its property tax rates by 2%.
3. A flu outbreak on the assembly line forced management to use more experienced, senior
personnel to complete production orders on a timely basis. These workers more than made up
for lost time.
4. A shoddy maintenance program resulted in an abnormally high number of breakdowns on
machine no. 76 and slowed production.
5. The implementation of a new program had positive effects for the company with respect to
material usage and worker productivity.
Required:
Create a table with the following headings: material price variance, material quantity
variance, labor rate variance, and labor efficiency variance. Determine which of these
variances would be affected by the individual events and whether the variance would be
favorable or unfavorable.
Solution:
98. Standard costs are said to be useful in performance evaluation. Assume that the standard
direct materials cost per unit of finished product is $6 (three pounds at $2 per pound).
Required:
A. Explain how such a standard can be used to evaluate performance.
B. Why is the degree of controllability important when utilizing standard costs to evaluate
performance?
Solution:
99. For the quarter just ended, Halston, Inc. reported the following variances in one of its
manufacturing departments:
Material price variance, U
Material quantity variance, F
Labor efficiency variance, F
Labor rate variance, negligible
Machine hours efficiency, F
The sum of the favorable variances exceeded the unfavorable materials price variance by a
considerable amount. The quality of the output from the department was the same as usual.
Halston operates very close to a JIT system for materials purchases, with virtually all material
acquired during the quarter being used in manufacturing activities.
Required:
Is there any connection among these variances? If so, explain.
Solution:
100. Standard cost systems can have motivational effects; some are desirable, some are not.
Consider the following situation:
The materials purchasing manager is paid a salary plus a bonus based on the net favorable
materials price variance. Generally, this bonus amounts to 30 – 40% of the manager’s total
compensation. Due to the bankruptcy of a company in a related field, there is an opportunity
to buy a key raw material. The standards for this material call for grade 2A, usually purchased
for $56 per ton. Because of the bankruptcy, the company can obtain a higher grade, 4A, for
$62 per ton. While the quality of the final product will be the same regardless of the grade of
material used, there will be substantial savings in material yield and labor productivity if 4A
is used. These savings are expected to be two-to-three times the additional cost of $6 per ton.
Required:
A. How would an unfavorable price variance on a particular purchase affect the overall price
variance for the year and the manager’s bonus?
B. Would the use of the materials price variance as a basis for the manager’s bonus lead to a
desirable or undesirable behavioral outcome? Explain being sure to note whether the manager
would likely pursue acquisition of the grade 4A material.
Solution:
101. Howard Company has established the following standards:
Direct materials: 2.0 pounds at $4.10
Direct labor: 1.5 hours at $7 per hour
Additional information was extracted from the accounting records:
Actual production: 32,000 completed units
Direct materials purchased: 70,000 pounds at $3.82, or $267,400
Direct materials consumed: 65,000 pounds
Actual labor incurred: 51,000 hours at $6.30, or $321,300
Direct-labor rate variance: $35,700 favorable
Direct-labor efficiency variance: $21,000 unfavorable
Assume that the company computes variances at the earliest point in time.
Required:
A. What is the amount of Direct Material Purchase Price Variance?
B. Prepare the journal entry to record the usage of direct materials.
C. Prepare the journal entry to record the incurrence of direct labor costs.
Solution: