Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
23 – 58
Solution 216 (40–45 min.)
Standard Costs and Balanced Scorecard
FOR INSTRUCTOR USE ONLY
23 – 59
Ex. 217
The standard cost of Product 245 manufactured by Albert Industries includes 2 pounds of direct
materials at $4.00 per pound. During September, 40,000 pounds of direct materials are
purchased at a cost of $3.85 per pound, and all of the direct materials are used to produce
19,000 units of Product 245.
Instructions
(a) Compute the materials price and quantity variances.
a(b) Journalize the purchase of the materials and the issuance of the materials, assuming a
standard cost system is used.
Ex. 218
Aztec, Inc.’s standard labor cost of producing one unit of product is 2 hours at the rate of $14.00
per hour. During February, 52,000 hours of labor are incurred at a cost of $13.80 per hour to
produce 25,000 units of product.
Instructions
(a) Compute the labor price and labor quantity variances.
a(b) Journalize the incurrence of the labor costs and the assignment of direct labor to production,
assuming a standard cost system is used.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
23 – 60
Solution 218 (15–20 min.)
Ex. 219
The following direct labor data pertain to the operations of Murray Industries for the month of
November:
Standard labor rate $15.00 per hr.
Actual hours incurred 9,000
The standard cost card shows that 2.5 hours are required to complete one unit of product. The
actual labor rate incurred exceeded the standard rate by 10%. Four thousand units were
manufactured in November.
Instructions
(a) Calculate the price, quantity, and total labor variances.
a(b) Journalize the entries to record the labor variances.
Standard Costs and Balanced Scorecard
FOR INSTRUCTOR USE ONLY
23 – 61
Solution 219(a) (15–20 min.)
aEx. 220
North Coast Manufacturing provided the following information about its standard costing system
for 2013:
Standard Data Actual Data
Labor 2 hrs. @ $21 per hr. Produced 9,000 units
Budgeted fixed overhead $100,000 Labor worked 17,000 hrs. costing $340,000
Budgeted variable overhead $30 per unit Actual overhead $375,000
Budgeted production 10,000 units
North Coast applies fixed overhead at $10 per unit produced.
Instructions
Determine the amounts of the overhead variances.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
23 – 62
aSolution 220 (8 min.)
Ex. 221
Caroline, Inc. planned to produce 20,000 units of product and work 100,000 direct labor hours in
2013. Manufacturing overhead at the 100,000 direct labor hours level of activity was estimated to
be:
Variable manufacturing overhead $ 700,000
Fixed manufacturing overhead 300,000
Total manufacturing overhead $1,000,000
At the end of 2013, 19,000 units of product were actually produced and 98,000 actual direct labor
hours were worked. Total actual overhead costs for 2013 were $935,000.
Instructions
(a) Compute the total overhead variance.
a(b) Compute the overhead controllable variance.
a(c) Compute the overhead volume variance.
Standard Costs and Balanced Scorecard
FOR INSTRUCTOR USE ONLY
23 – 63
aEx. 222
Jackson Manufacturing planned to produce 20,000 units of product and work at the 60,000 direct
labor hours level of activity for 2013. Manufacturing overhead at this level of activity and the
predetermined overhead rate are as follows:
Predetermined
Overhead Rate per
Direct Labor Hour
Variable manufacturing overhead $300,000 $5
Fixed manufacturing overhead 120,000 2
Total manufacturing overhead $420,000 $7
At the end of 2013, 21,000 units were actually produced and 61,500 direct labor hours were
actually worked. Total actual manufacturing overhead costs were $430,000.
Instructions
Using a two-variance analysis of manufacturing overhead, calculate the following variances and
indicate whether they are favorable or unfavorable:
(a) Overhead controllable variance.
(b) Overhead volume variance.
Ex. 223
Adam Corporation prepared the following variance report.
ADAM CORPORATION
Variance Report—Purchasing Department
for Week Ended January 9, 2013
Type of Quantity Actual Standard Price
Materials Purchased Price Price Variance Explanation
Brown ? lbs. $5.25 $5.00 $6,000 ? Price increase
Green 8,000 oz. ? 3.25 1,600 U Rush order
White 22,000 units $0.45 ? 660 F Bought larger quantity
Instructions
Fill in the appropriate amounts or letters for the question marks in the report.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
23 – 64
Solution 223 (15 min.)
Ex. 224
Pepper Industries uses a standard cost accounting system. During March, 2013, the company
reported the following manufacturing variances:
Materials price variance $1,600 F
Materials quantity variance 2,400 U
Labor price variance 600 U
Labor quantity variance 2,200 U
Overhead controllable 500 F
Overhead volume 3,000 U
In addition, 15,000 units of product were sold at $18 per unit. Each unit sold had a standard cost
of $14. Selling and administrative expenses for the month were $15,000.
Instructions
Prepare an income statement for management for the month ending March 31, 2013.
Standard Costs and Balanced Scorecard
FOR INSTRUCTOR USE ONLY
23 – 65
Solution 224 (15–20 min.)
aEx. 225
Howard, Inc. developed the following standards for 2013:
Howard, Inc.
Standard Cost Card
Cost Elements Standard Quantity × Standard Price = Standard Cost
Direct materials 5 pounds $ 5 $25
Direct labor 1 hour $18 18
Manufacturing overhead 1 hour $10 10
$53
The company planned to produce 120,000 units of product and work at the 120,000 direct labor
level of activity in 2013. The company uses a standard cost accounting system which records
standard costs in the accounts and recognizes variances in the accounts at the earliest
opportunity. During 2013, 116,000 actual units of product were produced.
Instructions
Prepare the journal entries to record the following transactions for Howard, Inc. during 2013.
(a) Purchased 588,000 pounds of raw materials for $4.90 per pound on account.
(b) Actual direct labor payroll amounted to $2,108,000 for 114,000 actual direct labor hours
worked. Factory labor cost is to be recorded and distributed to production.
(c) Direct materials issued for production amounted to 588,000 pounds which actually cost
$4.90 per pound.
(d) Actual manufacturing overhead costs incurred were $1,152,000 in 2013.
(e) Manufacturing overhead was applied when the 116,000 units were completed.
(f) Transferred the 116,000 completed units to finished goods.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
23 – 66
aSolution 225 (20–25 min.)
aEx. 226
Presented below is a flexible manufacturing budget for Ganem Manufacturing, which
manufactures fine timepieces:
Activity Index:
Standard direct labor hours 2,800 3,200 3,600 4,000
Variable costs
Indirect materials $ 5,600 $ 6,400 $ 7,200 $ 8,000
Indirect labor 3,220 3,680 4,140 4,600
Utilities 7,280 8,320 9,360 10,400
Total variable 16,100 18,400 20,700 23,000
Fixed costs
Supervisory salaries 1,000 1,000 1,000 1,000
Rent 3,000 3,000 3,000 3,000
Total fixed 4,000 4,000 4,000 4,000
Total costs $20,100 $22,400 $24,700 $27,000
Standard Costs and Balanced Scorecard
FOR INSTRUCTOR USE ONLY
23 – 67
aEx. 226 (Cont.)
The company applies the overhead on the basis of direct labor hours at $7.00 per direct labor
hour and the standard hours per timepiece is 1/2 hour each. The company’s actual production
was 5,400 timepieces with 2,700 actual hours of direct labor. Normal capacity is 3,200 hours.
Actual overhead was $20,200.
Instructions
(a) Compute the controllable and volume overhead variances.
a(b) Prepare the entries for manufacturing overhead during the period and the entry to recognize
the overhead variances at the end of the period.
Ex. 227
The following information was taken from the annual manufacturing overhead cost budget of
Cinnamon Manufacturing:
Variable manufacturing overhead costs $186,000
Fixed manufacturing overhead costs $124,000
Normal production level in direct labor hours 62,000
Normal production level in units 31,000
During the year, 30,000 units were produced, 64,000 hours were worked, and the actual
manufacturing overhead costs were $322,000. The actual fixed manufacturing overhead costs did
not deviate from the budgeted fixed manufacturing overhead costs. Overhead is applied on the
basis of direct labor hours.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
23 – 68
Ex. 227 (Cont.)
Instructions
(a) Compute the total, fixed, and variable predetermined manufacturing overhead rates.
a(b) Compute the total, controllable, and volume overhead variances.
Ex. 228
Monte Industries has a standard costing system. The following data are available for July:
a. Actual manufacturing overhead cost incurred: $22,000
b. Actual machine hours worked: 1,600
c. Overhead volume variance: $3,600 Unfavorable
d. Total overhead variance: $2,000 Unfavorable
e. Overhead is assigned to production on the basis of machine hours
Instructions
Determine the amount of (1) the controllable overhead variance and (2) the overhead applied.
Standard Costs and Balanced Scorecard
FOR INSTRUCTOR USE ONLY
23 – 69
COMPLETION STATEMENTS
229. A ________________ is expressed as a unit amount, whereas a _________________ is
expressed as a total amount.
230. Standards which represent optimum performance under perfect operating conditions are
called _______________ standards, but most companies use _________________
standards which are rigorous but attainable.
231. In developing a standard cost for direct materials used in making a product, consideration
should be given to two factors: (1) __________________ per unit of direct materials and
(2) the __________________ of direct materials to produce one unit of product.
232. The difference between actual hours times the actual pay rate and actual hours times the
standard pay rate is the labor _________________ variance.
233. The standard number of hours allowed times the predetermined overhead rate is the
amount of ________________ to the products produced.
234. The difference between actual quantity of materials times the standard price and standard
quantity times the standard price is the materials ________________ variance.
235. If the actual direct labor hours worked is greater than the standard hours, the labor
quantity variance will be ___________________, and the labor rate variance will be
____________________ if the standard rate of pay is greater than the actual rate of pay.
236. In using variance reports, top management normally looks for _________________
variances.
a237. A two-variance approach to analyzing overhead variances requires the calculation of the
overhead _________________ variance and the overhead ________________ variance.
a238. The overhead ______________ variance is the difference between normal capacity hours
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
23 – 70
Answers to Completion Statements
MATCHING
239. Match the items in the two columns below by entering the appropriate code letter in the
space provided.
A. Variances F. Materials price variance
B. Standard costs G. Labor quantity variance
C. Standard cost accounting system aH. Overhead controllable variance
D. Normal standards aI. Overhead volume variance
E. Ideal standards J. Standard hours allowed
____ 1. The difference between actual overhead incurred and overhead budgeted for the
standard hours allowed.
____ 2. The hours that should have been worked for the units produced.
____ 3. The difference between the actual quantity times the actual price and the actual
quantity times the standard price.
____ 4. The difference between total actual costs and total standard costs.
____ 5. The difference between actual hours times the standard rate and standard hours times
the standard rate.
____ 6. Predetermined unit costs that are measures of performance.
____ 7. The difference between normal capacity hours and standard hours allowed times the
fixed overhead rate.
____ 8. Standards based on an efficient level of performance that are attainable under
expected operating conditions.
____ 9. Standards based on the optimum level of performance under perfect operating
conditions.
____ 10. A double-entry system of accounting in which standard costs are used in making
entries and variances are recognized in the accounts.
Standard Costs and Balanced Scorecard
FOR INSTRUCTOR USE ONLY
23 – 71
SHORT-ANSWER ESSAY QUESTIONS
S-A E 240
(a) Explain the similarities and differences between standards and budgets.
(b) Contrast the accounting for standard and budgets.
S-A E 241
Star Industries computes variances as a basis for evaluating the performance of managers
responsible for controlling costs. For several months, the labor quantity variance has been
unfavorable. Briefly explain what could be causing the unfavorable labor quantity variance and
indicate what type of corrective action, if any, might be taken.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
23 – 72
S-A E 242
In reviewing the activities of the Mixing Department for the month of June, the manager of the
department notices that there was an unfavorable materials price variance for the month and
there was an unfavorable materials quantity variance. Under what circumstances, if any, can the
responsibility for each variance be placed on (a) the purchasing department and (b) the
production department?
S-A E 243
What are the four perspectives used in the balanced scorecard? Discuss the nature of each, and
how the perspectives are linked.
S-A E 244 (Ethics)
Fulmar Manufacturing Co. is the manufacturer of miniature models, especially of automobiles with
historical interest. The company is developing new standard costs. Patrick Webb suggests that
the new standards for materials should not include any waste for liquid plastics that spill out of the
molds. “After all,” he says, “we’re trying to be a world class company. When we build in waste, we
tell the workers it’s okay to waste some.” Sharon Berry, another manager, disagrees. “If we don’t
allow for some normal human error,” she says, “we’ll have a mighty unhappy work force. Also, I
think that these kinds of perfection standards exploit the workers. I certainly wouldn’t want to be
held up to perfection every day—what could I do but fail?”
Standard Costs and Balanced Scorecard
FOR INSTRUCTOR USE ONLY
23 – 73
S-A E 244 (Cont.)
The argument continued. Finally, the standards were prepared. All standards were prepared
according to normal expected performance, except that for materials, an ideal standard was
used. Sharon, still maintaining the unfairness of the system, refused to hold her workers
accountable for materials quantity variances.
Required:
1. Are ideal standards unethical? Explain briefly.
2. Is it unethical for Sharon to refuse to support the standards? Explain.
S-A E 245 (Communication)
Vincent Bassani has come to the accounting department for help in interpreting his variance
report. He says that he understands that last month was not a very good one for output, but he
really thought everyone put forth good effort, so he is confused about the existence of an
unfavorable labor efficiency variance. He cites as an example of the workers’ effort their
willingness to work extra hours to get full output, even when a whole week‘s worth of production
had to be scrapped. He knew that his materials costs would be higher, and that overtime would
make his rate variance unfavorable, but he certainly didn’t think his workers had been inefficient.
Required:
Write a short note to Vincent explaining the probable cause of the unfavorable labor efficiency
variance.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
23 – 74
Solution 245