b.
$300 (U)
c.
$1,950 (F)
d.
$1,950 (U)
60. Point Company uses the standard costing method. The company’s main product is a fine-quality audio
speaker that normally takes 0.25 hour to produce. Normal annual capacity is 3,000 direct labor hours,
and budgeted fixed overhead costs for the year were $6,750. During the year, the company produced
and sold 8,000 units. Actual fixed overhead costs were $4,800. Compute the fixed overhead volume
variance.
a.
$300 (F)
b.
$300 (U)
c.
$1,950 (U)
d.
$2,250 (U)
61. Point Company uses the standard costing method. The company’s main product is a fine-quality audio
speaker that normally takes 0.25 hour to produce. Normal annual capacity is 3,000 direct labor hours,
and budgeted fixed overhead costs for the year were $6,750. During the year, the company produced
and sold 8,000 units. Actual fixed overhead costs were $4,800. Compute the fixed overhead variance.
a.
$300 (F)
b.
$300 (U)
c.
$1,950 (U)
d.
$2,250 (U)
62. Performance reports normally include all of the following except
a.
standard costs.
b.
normal capacity.
c.
total plantwide overhead costs.
d.
budgeted costs.
63. Which of the following statements is not true?
a.
Performance reports should be tailored to the responsibilities of the manager or
department for which they are prepared.
b.
Performance reports normally report standard costs and variances.
c.
Performance reports should contain space for explanation of variances.
d.
Performance reports do not present the causes of variances.
SHORT ANSWER
1. Discuss standard costing. As part of your discussion, define a standard cost. In addition, compare and
contrast standard costs and predetermined overhead costs. Include in your discussion at least three
reasons why standard costs are introduced into a standard cost accounting system. How is a standard
cost accounting system useful to management?
2. Love-My-Lips specializes in manufacturing lipstick. Legally Pink, one of more than 75 shades
produced by the company, is made from castor oil, beeswax, aloe vera, and a base compound.
For the next 12 months, the company’s purchasing agent believes that the cost of ingredients will be as
follows:
Ingredient
Standard Cost
Castor oil
$6.30
per gallon
Beeswax
$3.53
per pound
Aloe vera
$19.90
per gallon
Base compound
$21.00
per gallon
The direct labor time standard is 4 hours per case at a standard direct labor rate of $10.00 per hour.
The standard overhead rates are $16.00 per direct labor hour for the standard variable overhead rate
and $12.00 per direct labor hour for the standard fixed overhead rate.
a. Using these production standards, compute the standard unit cost of direct materials per case of
Legally Pink lipstick if it takes 0.4 gallon of castor oil, 1 pound of beeswax, 0.2 gallon of aloe vera,
and 1 gallon of base compound to produce one case.
b. Using the standard unit cost of direct materials per case determined in (a) and the production
standards given for direct labor and overhead, compute the standard unit cost of one case of Legally
Pink lipstick.
ANS:
3. Fantastic Lips, Inc., specializes in manufacturing lipstick. Racy Red, one of more than 75 shades
produced by the company, is made from castor oil, beeswax, aloe vera, and a base compound. For the
next 12 months, the company’s purchasing agent believes that the cost of ingredients will be as
follows:
Ingredient
Standard Cost
Castor oil
$6.95
per gallon
Beeswax
$5.40
per pound
Aloe vera
$19.60
per gallon
Base compound
$25.00
per gallon
The direct labor time standard is 4 hours per case at a standard direct labor rate of $11.00 per hour. The
standard overhead rates are $15.00 per direct labor hour for the standard variable overhead rate and
$13.00 per direct labor hour for the standard fixed overhead rate.
a. Using these production standards, compute the standard unit cost of direct materials per case of
Racy Red if it takes 0.2 gallon of castor oil, 0.5 pound of beeswax, 0.3 gallon of aloe vera, and 1
gallon of base compound to produce one case.
b. Using the standard unit cost of direct materials per case determined in (a) and the production
standards given for direct labor and overhead, compute the standard unit cost of one case of Racy Red
lipstick.
ANS:
0.2 gal $6.95/gal
0.5 lb $5.40/lb
0.3 gal $19.60/gal
0.4 gal $6.30/gal
0.2 gal $19.90/gal
1 gal $21.00/gal
Standard cost of direct materials per case
Direct materials
Direct labor (4 hr $10.00)
Overhead:
Variable (4 hr $16.00)
Fixed (4 hr $12.00)
Total
4. Keerin, Inc., produces a complete line of women’s athletic apparel. Sweatsuits are very popular in the
northern states. During August, the company’s records revealed the following information about the
production of sweatsuits:
Standards:
Direct materials
5 yards @ $2.50 per yard
Direct labor
1 hour @ $9.50 per hour
Overhead:
Variable
$5.50 per direct labor hour
Fixed
$7 per direct labor hour
Compute the standard unit cost for a sweatsuit.
5. Sport Runner, Inc., produces a complete line of men’s running apparel. The nylon short set is a very
popular item in the southern states. During June, the company’s records revealed the following
information about the production of the nylon shorts set:
Standards:
Direct materials
4 yards @ $2.50 per yard
Direct labor
1.5 hour @ $9 per hour
Overhead:
Variable
$5.00 per direct labor hour
Fixed
$5.50 per direct labor hour
Compute the standard unit cost for a nylon shorts set.
6. Managers are constantly comparing the costs of what was expected to happen with the costs of what
did happen. By examining the differences, or variances, managers can learn much valuable
information. Identify and discuss the steps involved in variance analysis.
7. Prepare a flexible budget for 8,000, 9,000, and 10,000 units of output, given the following data:
Variable costs:
Budgeted fixed overhead
$90,000
Direct materials
$5
Direct labor
4
Overhead
8
8. During April 20xx, production is expected to be 30,000 units with the following costs: direct materials,
$195,000; direct labor, $300,000; variable overhead, $120,000; and fixed overhead, $150,000. Prepare
a flexible budget for 25,000 and 35,000 units.
9. The C.M. Landscaping Co. uses chicken manure to fortify the soil around trees bearing rare fruit. The
price standard used is $3.50 per 10 pound sack of chicken manure. During the current year, the actual
purchase price averaged $3.65 per sack, according to the company’s purchasing agent. The company
purchased and used 1,560 sacks of chicken manure during the year. Compute the direct materials price
variance. Be sure to indicate whether it is favorable or unfavorable.
10. The Silent Door Company manufactures soundproof doors. Each door requires two pieces of 16-gauge
sheet steel measuring 94 inches by 50 inches. The standard cost of each piece of steel is $150. During
the month of July, 2,040 doors were started and completed, and there were no beginning or ending
work in process inventories. Accounting records revealed that 4,200 pieces of sheet steel were
purchased during July at a cost of $623,700. All 4,200 pieces were used during the month. Compute
the direct materials price and direct materials quantity variances for July production, assuming the
price variance is isolated at the time of purchase. Note whether the variances are favorable or
unfavorable. Round to the nearest dollar.
11. The effective evaluation of managers’ performance depends on both human factors and company
policies. Using variances from standard costs in a manager’s performance report adds accuracy to the
evaluation process. To ensure effectiveness and fairness when setting up a performance evaluation
process, what actions should be taken?
12. Discuss the keys to preparing a performance report based on standard costs and related variances.
13. Golf Pro, Inc., makes wood drivers for the professional golfer. Because of the clientele of users, only
the finest materials can be used, and the quality of craftsmanship must be high. The following cost,
quantity, and time standards have been set for 20xx:
Direct materials: 2 board-feet of wood @ $20 per board-foot and 2 feet of leather strip @ $5 per
foot
Direct labor: Cutting Department, 0.6 hour per driver at $10 per hour; Shaping/Finishing
Department, 1.4 hours per driver at $15 per hour
Overhead: variable, $5 per direct labor hour; fixed, $8 per direct labor hour
The wood is added at the beginning of the cutting process and the leather strip at the beginning of
the shaping/finishing process.
Compute the standard cost per driver.
14. Outdoors, Inc., manufactures steel hitches for camping trailers. The company’s direct labor rates have
been set by the terms of the current labor contract. Direct labor rate standards have been assigned for
each job classification. In May 20xx, a young apprentice was being trained during regular working
hours to become a machine operator on one of the turret lathes. A timekeeper determined that the
apprentice had spent a total of 48 hours as a novice machine operator in May. Standard time for the
same work output is 32 hours. The apprentice earned $6.25 per hour in May. The standard direct labor
rate for machine operators working on turret lathes is $10 per hour.
a. From the data provided, determine the direct labor efficiency variance and the direct labor rate
variance that resulted from the temporary substitution of the apprentice for the regular machine
operator. (Note that, according to the labor contract, the apprentice is not entitled to the same rate as a
regular machine operator during the training period.)
b. Did the company benefit financially from the situation? Why or why not? (Show calculations.)
15. Earth, Inc., is developing flexible budgets for each department as part of its plan to use standard costs.
Normal monthly volume in the Sifting Department is 50,000 direct labor hours. At normal volume,
department fixed costs include $70,000 for power and $40,000 for maintenance, and salaries of
$70,000 per month. Indirect variable labor is $120,000, which involves 15,000 hours of indirect labor
at $8 per hour. Other variable costs in the Sifting Department are as follows:
Tools and supplies
$3.00 per machine hour
Maintenance
2.50 per machine hour
Power
3.50 per machine hour
Depreciation
4.50 per machine hour
Actual hours
Less standard hours allowed
= Difference in Hours Standard Rate
= 16 (U) $10
Direct Labor Rate Variance:
Actual Rate
$ 6.25
Standard Rate
10.00
$ 3.75 (F)
= Difference in Rate Actual Hours
= $3.75 (F) 48 hr
32 hr $10/hr
48 hr $6.25/hr
Normal volume is 40,000 machine hours per month. The company uses a service (or usage) hours
method to depreciate its fixed assets.
a. Prepare a departmental flexible overhead budget for 30,000 machine hours and for 40,000 machine
hours.
b. Did you treat depreciation expense as a variable or a fixed cost? Defend your approach.
16. Camping for Fun, Inc., produces a variety of camping products on a year-round basis. The best-selling
item is a compact portable camping stove made from sheets of rust-free aluminum. Production of this
stove requires two main operations: cutting/assembly and coating. The basic direct materials used are
aluminum sheeting, a polyurethane base coating, and a gas jet assembly. Quantity, time, and cost
standards for the camping stove are as follows:
Direct materials consist of sheet aluminum (two 2–by-3-meter sheets per stove at $1.15 per sheet), 1.2
liters of coating materials per stove at $0.80 per liter, and a gas jet assembly purchased at $11.30.
Direct labor in the Cutting/Assembly Department is expected to produce 50 stoves per hour at $9.50
per hour. Direct labor in the Coating Department can handle 32 stoves per hour at $8 per hour. Normal
capacity is 126,000 stoves per year.
The firm actually produced 120,000 units during the year, and the production records contain the
following information:
For direct materials, the firm used 241,200 sheets of aluminum at $1.10 per sheet, 148,500 liters of
coating at $0.77 per liter, and 120,100 gas jet assemblies costing a total of $1,369,140. Direct labor in
the Cutting/Assembly Department amounted to 2,800 hours at $9.25 per hour; in the Coating
Department, it amounted to 3,560 hours at $7.50 per hour.
Using the information provided, determine the following (remember to indicate whether the variance
is favorable or unfavorable):
a. Standard hours allowed for the Cutting/Assembly and Coating Departments for the year (by
department)
b. Direct materials price variances (by material)
c. Direct materials quantity variances (by material)
d. Direct labor rate variances (by department)
e. Direct labor efficiency variances (by department)