CHAPTER 2
4
STANDARD COST SYSTEM
S
Brief Learning
Exercises Topic Objectives Skills
B. Ex. 24.1 Variances and normal capacity 24-1, 24-2, 24-
5
Analysis, judgment
B. Ex. 24.2 Standard cost applied to production 24-3 Analysis
B. Ex. 24.3 Expected volume variance 24-4 Analysis
B. Ex. 24.4 Volume and spending variances 24-4, 24-5 Analysis
B. Ex. 24.5 Normal vs. ideal standard costs 24-2, 24-5 Analysis, communication,
judgment
B. Ex. 24.6 Computing labor cost variances 24-1, 24-3, 24-
5
Analysis, judgment
B. Ex. 24.7 Journal entry for direct labor 24-3 Analysis
B. Ex. 24.8 Computing materials cost variances 24-3 Analysis
B. Ex. 24.9 Journal entry for direct materials 24-3 Analysis
B. Ex. 24.10 Overhead cost variances 24-4 Analysis, communication
Learning
Exercises Topic Objectives Skills
24.1 Accounting terminology 24-1–24-5 Analysis
24.2 Relationships among standard costs, actual
costs, and cost variances 24-3, 24-4 Analysis
24.3 Understanding materials cost variances 24-3, 24-5 Analysis, judgment
24.4 Computing materials cost variances and
volume variance 24-3–24-5 Analysis, judgment
24.5 Manufacturing overhead variances 24-4, 24-5 Analysis, judgment
24.6 Computing labor cost variances 24-1, 24-3,
24-5 Analysis, communication,
judgment
24.7 Elements of materials cost variances 24-3 Analysis
24.8 Interpreting variances 24-5 Analysis, communication,
judgment
24.9 Computing overhead cost variances 24-4 Analysis
24.10 Overhead journal entries 24-4 Analysis
24.11 Overhead cost variances 24-4, 24-5 Analysis
24.12 Understanding overhead variances 24-4 Analysis, communication,
judgment
24.13 Computing materials and labor variances 24-3 Analysis
24.14 Causes of cost variances 24-1, 24-3,
24-5 Analysis, communication,
judgment
24.15 Real World: Standards for Home Depot 24-1, 24-5 Analysis, communication,
judgment, research
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Problems Learning
Sets A, B Topic Objectives Skills
24.1 A,B Understanding materials cost variances and
volume variance 24-3–24-5 Analysis, judgment,
communication
24.2 A,B Computing and journalizing cost variances 24-3, 24-4 Analysis
24.3 A,B Computing and journalizing cost variances 24-3, 24-4 Analysis
24.4 A,B Computing and journalizing cost variances 24-3, 24-4 Analysis
24.5 A,B Computing and journalizing cost variances 24-3, 24-4 Analysis
24.6 A,B Computing and journalizing cost variances 24-3, 24-4 Analysis
24.7 A,B Computing, journalizing, and analyzing cost
variances 24-3–24-5 Analysis, communication,
judgment
24.8 A,B Understanding cost variances: solving for
missing data 24-1, 24-3,
24-4 Analysis, judgment
24.9 A,B Understanding variance calculations 24-3, 24-4 Analysis
Critical Thinking Cases
24.1 It’s not my fault 24-1, 24-3 –
24-5 Analysis, communication,
judgment
24.2 Determination and use of standard costs 24-1, 24-3 –
24-5 Analysis, communication,
judgment
24.3 Real World: Travelocity.com 24-2, 24-5 Analysis, communication,
(Internet) Standards for travel costs judgment, research,
technology
24. 4 Standard cost systems and inventory
misstatement 24-4 Analysis, communication,
judgment, research,
(Ethics, fraud and corporate governance) technology
DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES
24.1 A,B Bradle
y
/Undem 25 Strong
Materials variances must be computed with missing data. The problem
requires an understanding of relationships among variances, including a
volume variance.
24.2 A,B A
g
riChem Industries/D
y
elot Industries 30 Medium
Compute cost variances for direct materials, direct labor, and overhead,
and prepare journal entries to record manufacturing costs in a standard
cost system.
24.3 A,B American Hardwood Products/Latin Silk Products 25 Medium
Prepare journal entries to record cost variances and the costs incurred in
the Work in Process account. Also record cost of units completed and
cost of units sold. Compute fixed manufacturing overhead.
24.4 A,B Sven Enter
p
rises/Hans Enter
p
rises 45 Strong
A comprehensive problem requiring knowledge of all variances and
corresponding journal entries.
24.5 A,B Slick Cor
p
oration/Smooth Cor
p
oration 45 Strong
A comprehensive problem requiring knowledge of all variances and
corresponding journal entries.
24.6 A,B Pol
yg
laze, Inc./Mono
g
lut, Inc. 40 Strong
Compute cost variances and prepare journal entries to record the flow of
manufacturing costs through a standard cost accounting system.
24.7 A,B Herita
g
e Furniture Co./Colonial Furniture Co. 40 Strong
A comprehensive standard cost problem. Requires computation of cost
variances, journal entries, and an analysis of the company’s strengths and
weaknesses.
24.8 A,B Ri
p
le
y
Cor
p
oration/Fodin
g
Cor
p
oration 60 Stron
g
This is a comprehensive problem with missing data. An analytical
approach is required. This would be an excellent problem to assign to
small groups or to teams of students.
24.9 A,B Anton Com
p
an
y
/Ninna Com
p
an
y
45 Medium
Below are brief descriptions of each problem and case. These descriptions are accompanied by the
estimated time (in minutes) required for completion and by a difficulty rating. The time estimates
assume use of the partially filled-in working papers.
Problems (Sets A and B)
Given budget items and a variance report, the student is asked to solve
for various actual amounts. Also, the meaning of favorable and
unfavorable variances must be applied. A good comprehensive review
problem well suited for a group assignment.
Critical Thinking Cases
24.1 It’s Not M
y
Fault 25 Stron
g
Cabinets, Inc.
In a company using standard costs and a responsibility cost accounting
system, who should be charged with the responsibility for unfavorable
labor rate variances incurred when the production department works
overtime to fill “rush” orders?
24.2 Armstrong Chemical 50 Strong
Evaluate arguments given by the president of a company against the
revision of standard costs and the value assigned to inventory. Assuming
that standards for the year just ended should be revised, determine the
value of ending inventory using revised standard costs.
24.3 Travelocity.com 30 Medium
Internet
Students are given a budgeted amount for travel to a given destination.
Using actual ticket prices obtained from travelocity.com they calculate a
current spending variance. Factors that might affect the reasonability of
the budgeted amount are also discussed.
24.4 Standard Cost Systems and Inventory Misstatements 30 Medium
Ethics, Fraud & Corporate Governance
Jams and Jellies, Inc.
The ethical problems created by inappropriate standards are explained.
Students visit the IMA website for this research.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
2.
3.
4.
5.
1. Standard costs are predetermined estimates of what it should cost to produce a product or to
perform a particular operation under normal conditions. The use of a standard cost helps
The statement is incorrect because job order and process are the names of cost accounting
Standard costs are developed from a set of assumptions about future (budgeted) prices, wages,
production methods, and normal production levels. If unexpected changes in prices, such as the
Variances from standard cost that are generally computed are:
The production manager exercises a degree of control over the quantities of materials used in the
production process and is therefore responsible for the materials quantity variance. However, the
8.
9.
10.
11.
12.
13.
Direct materials and direct labor are variable costs that are directly traceable to the product.
Immaterial standard variance account balances are added to (for unfavorable variances-debit) or
Overtime hours are normally paid at a higher rate than regular hours. Also, overtime hours are
When a company operates at 100% capacity, there is no margin for any errors. Thus, there are
no sick workers, no equipment down time, no late shipments of supplies or materials, etc. A
The selling price of the finished product includes a consideration of the quality of the direct
materials used to create the finished product. Of course the quality of the direct materials is
A plant accountant might want to consult with the manager or supervisor of the production line
B. Ex. 24.1
B. Ex. 24.2
B. Ex. 24.3
SOLUTIONS TO BRIEF EXERCISES
The standard direct labor applied to production was $92,100 (actual direct labor of
Production = 780 units
The problem at Bramford Industries is a result of operating well above normal capacity.
The standard rates and efficiencies were based on normal operations. Because
Overhead applied to work in process
B. Ex. 24.7 The direct labor journal entry for Loring Glassware in September is:
From the above diagram, we see the standard overhead costs allowed must be
Ex. 24.1 a.
b.
SOLUTIONS TO EXERCISES
Standard costs
Labor efficiency variance
Ex. 24.4 a.
Materials Price Variance =
b.
= Standard Price × (Standard Quantity
–
c.
Ex. 24.6 a.
Labor Rate Variance =
=
=
*Actual Rate per Hour
b.
= Standard Rate × (Standard Hours –
Actual Hours)
= $16 per hour × (4,500 hours* – 3,600
hours)
= $14,400 Favorable
= 9,000 units × 0.5 hours/unit = 4,500
hours
*Standard Hours Allowed
Marlo’s labor rate variance is computed as follows:
Labor Efficiency Variance
Marlo’s labor efficiency variance is computed as follows:
$64,800 ÷ 3,600 hours = $18/hour
Actual Labor Hours × (Standard Rate –
Actual Rate)
3,600 hrs. × ($16 – $18*)
-$7,200 (or $7,200 Unfavorable)
Gumchara’s overhead volume variance will be favorable because its actual
Gumchara’s materials price variance is computed as follows:
Actual Quantity Used × (Standard Price –
Gumchara’s materials quantity variance is computed as follows:
Materials Quantity Variance