Chapter 11 Standard Costs and Variances
Copyright © 2015 Pearson Education, Inc.
11-1
Chapter 11
Standard Costs and Variances
Quick Check
Answers:
QC-1. a
QC-3. a
QC-5. c
QC-7. d
QC-9. a
QC-2. b
QC-4. d
QC-6. b
QC-8. c
QC-10. d
(5 min.) S11-1
Quantity
Price
Sugar per cup
7
$ 0.17
Chocolate chips per ounce
23
$ 0.18
Butter per ounce
16
$ 0.11
Evaporated milk per ounce
18
$ 0.14
Std DM cost per batch
(5 min.) S11-2
0.26 hours x $17.50 = $4.55 standard direct labor cost per batch
(5 min.) S11-3
Actual direct material cost per unit
$ 1.92
Standard direct material cost per unit
$ 2.00
Difference between actual and standard cost per unit
$ 0.08
Multiply by: Actual direct material purchased and used
78,125
Direct material price variance
$ 6,250 F
Actual direct material purchased and used
78,125
Standard direct material usage
75,000
Difference between actual and standard material usage
3,125
Multiply by: Standard direct material cost per unit
$ 2.00
Direct material quantity variance
$ 6,250 U
Chapter 11 Standard Costs and Variances
(5-10 min.) S11-7
Req. 1
Actual machine hours used
1,550 hrs.
Standard total hours (3,000 x 0.25)
1,500 hrs
Difference
50 hrs.
Multiply by: Standard rate per hour
Variable MOH efficiency variance
$900 U
(5-10 min.) S11-9
Req. 1
Total overhead variance:
Actual fixed overhead cost
$1,270,000
Standard fixed overhead allocated to production
$1,220,000
Total fixed overhead variance
$50,000 U
The variance tells managers that Harris underallocated fixed manufacturing overhead by this amount.
Req. 2
Overhead flexible budget variance:
Actual fixed overhead cost
$1,270,000
Budgeted fixed overhead for actual outputs
$1,285,000
Fixed overhead budget variance
$ 15,000 F
The variance tells managers that the company actually incurred less for fixed manufacturing overhead than it would
have expected for the actual volume produced during the year.
Req. 3
Fixed overhead volume variance:
Budgeted fixed overhead for actual outputs
$1,285,000
Standard fixed overhead allocation to production
$1,220,000
Fixed overhead volume variance
$65,000 U
Managers can tell from the variance amount that the total fixed overhead variance arose because the company
produced less flutes than originally expected. It is unfavorable because the company used its plant capacity less
efficiently than originally anticipated.
Actual rate per hour
$17.00
Standard rate per hour
$18.00
Difference
$1.00
Multiply by: Actual machine hours used
1,550 hrs.
Variable MOH rate variance
$1,550 F
Chapter 11 Standard Costs and Variances
(10 min.) S11-12
Req. 1
Journal Entry
Date
Accounts
Debit
Credit
Raw Material Inventory
10,200
Direct Materials Price Variance
1,200
Accounts Payable
11,400
Work in Process Inventory
9,384
Direct Materials Efficiency Variance
Raw Materials Inventory
10,149
Journal Entry
Accounts
Debit
Credit
Work in Process Inventory ($12.05 x 2,300)
27,715
Direct Labor Rate Variance
Direct Labor Efficiency Variance
Wages Payable ($12.40 x 2,100)
26,040
Managerial Accounting 4e Solutions Manual
(5 – 10 min.) S11-14
1.
Sarabeth, an accountant at Warren Industries, and Jay,
an accountant at Sorenia Manufacturing, exchanged
cost and other production data so that they would have
benchmarks to use for their company reports.
Confidentiality – Keep information confidential
except when disclosure is authorized or legally
required.
2.
When Sandra prepares variance reports, only favorable
variances are listed. Unfavorable variances are only
provided if someone specifically asks.
Credibility – Disclose all relevant information
that could reasonably be expected to influence
an intended user’s understanding of the
reports, analyses, or recommendations.
3.
Preston is the chief accountant at Long Industries. Each
month, he prepares variance reports that are given to
all department managers. The variance reports are
frequently late and usually contain a few errors.
Competence – Provide decision support
information and recommendations that are
accurate, clear, concise, and timely.
4.
Devin accepts an all-expenses paid trip to Las Vegas
from a major supplier.
Integrity – Mitigate actual conflicts of interest,
regularly communicate with business associates
to avoid apparent conflicts of interest. Advise all
parties of any potential conflicts.
5.
Milton has just started to work at Brady Lake Supply. In
his first week, he is asked to fill in for a senior
accountant who is out of the office for six weeks on
maternity leave. He is asked to prepare the standard
costing journal entries. Milton does not know how to
do this work, but he decides to guess because he does
not want to appear stupid by asking for help.
Competence – Recognize and communicate
professional limitations or other constraints
that would preclude responsible judgment or
successful performance of an activity.
Chapter 11 Standard Costs and Variances
(10-15 min.) S11-15
Term
Definition
1. Fixed overhead volume
variance
e. Measures the difference between the budgeted fixed MOH costs and the
standard allocated MOH costs
2. Direct labor efficiency variance
b. Tells managers how much of the total variance is due to using a greater or
lesser amount of time than anticipated
3. Practical standards
i. Also known as attainable standards
4. Standard cost
g. The budget for a single unit of product
5. Direct materials quantity
variance
c. Tells managers how much of the total variance is due to using a difference
quantity of direct materials than expected
6. Direct labor rate variance
a. Tells managers how much of the total variance is due to paying a different
hourly wage rate than anticipated
7. Variable overhead rate
variance
h. Also called the variable overhead spending variance
8. Fixed overhead budget
variance
k. Measures the difference between the actual fixed MOH costs incurred and
the budgeted fixed MOH costs
9. Ideal standards
j. Standards based on conditions that do not allow for any waste in the
production process
10. Direct materials price
variance
f. Tells managers how much of the total variance is due to paying a different
price than expected for direct materials
11. Variable overhead efficiency
variance
d. Tells managers how much of the total variable MOH variance is due to using
more or less hours of the allocation base than anticipated for the actual volume
of output
Copyright © 2015 Pearson Education, Inc.
11-8
(10-15 min.) E11-16A
Req. 1
Input
Quantity Standard
Price Standard
Standard Cost of
Input
Flour
3 cups
x
$0.12 per cup
=
$ 0.36
Pecans
½ cup
x
2.00 per cup
=
$ 1.00
Cocoa
¼ cup
x
1.24 per cup
=
$ 0.31
Sugar
2 cups
x
0.10 per cup
=
$ 0.20
Chocolate chips
½ cup
x
0.80 per cup
=
$ 0.40
Eggs
2
x
0.10 per egg
=
$ 0.20
Oil
1/3 cup
x
0.24 per cup
=
$ 0.08
Packaging
1 pkg.
x
0.60 per package
=
$ 0.60
Total direct materials
$ 3.15
Direct labor
1/4 hour
x
9.00 per hour
=
$ 2.25
Bakery overhead
½ hour
x
5.00 per hour
=
$ 2.50
Total
$ 7.90
Req. 2
The gross profit per pan of gourmet brownies is $6.10.
Req. 3
Jessica should reassess standard prices quite often, since the price of ingredients changes quite frequently. She should
also reassess her price standards if she finds cheaper suppliers for her ingredients.
However, they really won’t need to reassess her quantity standards for the direct materials unless she changes the
recipe. On the other hand, she should reassess her quantity standard for overhead if she decides to bake more than
one batch at a time in the oven.
(10-15 min.) E11-17A
Req. 1
Input
Quantity Standard
Price Standard
Standard Cost of
Input
Direct materials
8 lbs.
x
$6 per lbs.
=
$48
Direct labor
2 hrs.
x
$15 per hr.
=
$30
Variable MOH
2 hrs.
x
$4 per hr.
=
$8
Fixed MOH
2 hrs.
x
$8 per hr.
=
$16
Req. 2
Total
$ 102
Managerial Accounting 4e Solutions Manual
(10 min.) E11-20A
Req. 1
Actual wage rate paid = $34,580 / 2,470 = $14.00 per hour
Req. 2
Actual rate per hour
$ 14.00
Standard rate per hour
$ 13.50
Difference between actual and standard rate per hour
$ 0.50
Multiply by: Actual direct labor hours used
2,470
Direct labor rate variance
$ 1,235 U
Req. 3
Actual direct labor hours used
2,470
Standard total hours allowed
2,500
Difference
30
Multiply by: Standard rate per hour
$13.50
Direct labor efficiency variance
$ 405 F
Req. 4
The unfavorable direct labor rate variance might mean that Altieri Tax Services hired more qualified return preparers at
a higher pay rate. As a result, the return preparers were able to use fewer hours than the standard allows. This
accounts for the favorable efficiency variance.
(10-15 min.) E11-21A
Req. 1
(
Actual price per unit
– Stand. price per unit
)
x
Actual quantity of input
=
Price variance
( $0.70 – 0.80 )
x
101,000
=
$10,100 F
(
Actual quantity of input
– Stand. quantity of input
)
x
Standard price per input
unit
=
Efficiency value
( 101,000 – 98,000 )
x
$0.80
=
$2,400 U
Req. 2
One plausible explanation is that Heese Restaurant Group bought lower grade potatoes at a cheaper price, which
resulted in the favorable price variance. However, because the potatoes were lower grade, some of the potatoes were
bad, and could not be used in production. As a result, the manufacturing facility had to use more potatoes than
standards allow. This accounts for the unfavorable efficiency variance.
Req. 3
Price variance (2,500 x ($12.25 – $12.10) =
$375 U
Efficiency variance ($12.10 x (2,500 – 2,400) =
$1,210 U
Req. 4
The unfavorable labor rate and efficiency variances could be tied to the material variances. For example, if the material
variances were the result of purchasing lower grade potatoes, then the factory would use more labor in sorting the
potatoes. As a result, they would have had to pay workers an overtime premium.
Managerial Accounting 4e Solutions Manual
(10-15 min.) E11-24A
Req. 1
Input
Quantity Standard
Price Standard
Standard Cost of
Input
Direct materials
220 kg
x
$6 per kg
=
$1,320
Direct labor
4 hrs.
x
$20 per hr
=
$80
Variable MOH
4 hrs.
x
$40 per hr.
($400,000 / 10,000)
=
$160
Standard cost
$1,560
Input
Quantity Standard
Price Standard
Standard Cost of
Input
Direct materials
165 kg
(220 x .75)
x
$6 per kg
=
$990
Direct labor
3.2 hrs.
(4 x .8)
x
$20 per hr
=
64
Variable MOH
3.2 hrs.
(4 x .8)
x
$47.50 per hr.
(($400,000 x .95)/
8,000*)
=
152
Standard cost
$1,206
(5-10 min.) E11-25B
a. STANDARD COSTING would probably be beneficial
Managerial Accounting 4e Solutions Manual
(10-15 min.) E11-27A
Req. 1
Standard price per unit
$ 6.00
Actual price per unit
$ 6.30
Difference
$ 0.30
Multiply by: Actual quantity purchased
9,950
DM price variance
$2,985 U
Standard direct materials quantity per unit (pounds)
8.00
Actual units produced
1,100
Standard direct materials quantity, in pounds
8,800
Actual direct materials used in production (pounds)
9,350
Standard direct materials allowed, in pounds
8,800
Difference between actual and standard quantity
550
Multiply by: Standard direct materials cost per pound
$ 6.00
DM quantity variance
$ 3,300 U
Req. 2
The total variance cannot be calculated due to the purchased quantity being different from the used quantity.
Req. 3
The direct materials price variance is the responsibility of the purchasing manager. The materials quantity variance is
the responsibility of the production manager.
Req. 4
The unfavorable price variance shows that more was paid for the raw material than was budgeted. The unfavorable
quantity variance shows that more of the raw material was used in production than was budgeted.
Managerial Accounting 4e Solutions Manual
(10-15 min.) E11-30A
Req. 1
Journal
DATE
ACCOUNTS
POST.
REF.
DEBIT
CREDIT
Raw Materials Inventory (9,950 lbs. × $6.00)
59,700
Direct Materials Price Variance
2,985
Accounts Payable (9,950 lbs. × $6.30)
62,685
To record the purchase of raw materials.
Work in Process Inventory ($6.00 x 8,800)
52,800
Direct Materials Efficiency Variance
3,300
Raw Materials Inventory ($6.00 x 9,350)
56,100
To record the use of raw materials.
Work in Process Inventory ($15.00 x 2,200)
33,000
DL Efficiency Variance
3,300
DL Rate Variance
2,420
Wages Payable ($14.00 x 2,240)
33,880
To record the use of direct labor
Journal
DATE
ACCOUNTS
POST.
REF.
DEBIT
CREDIT
Variable manufacturing overhead
10,406
Fixed manufacturing overhead
16,400
Various accounts
26,806
To record actual overhead costs incurred.
Work in Process Inventory
26,400
Variable manufacturing overhead ($4.00 x 2,200)
8,800
Fixed manufacturing overhead ($8.00 x 2,200)
17,600
To allocate manufacturing overhead.
Chapter 11 Standard Costs and Variances
(continued) E11-30A
Req. 3
Journal
DATE
ACCOUNTS
POST.
REF.
DEBIT
CREDIT
Finished Goods Inventory
112,200
Work in Process Inventory (52,800 + 33,000 + 26,400)
112,200
To record completion of 1,100 pots:
Cost of Goods Sold
112,200
Finished Goods Inventory
112,200
To record sale of 1,100 pots.
Accounts Receivable (1,100 × $450)
495,000
Sales Revenue
495,000
To record sales revenue for 1,100 pots.
Variable MOH rate variance
726
Variable MOH efficiency variance
880
Variable manufacturing overhead
1,606
To close variable MOH
Fixed manufacturing overhead
1,200
Fixed MOH budget variance
200
Fixed MOH volume variance
1,000
To close fixed MOH
(15-20 min.) E11-31A
Sales revenue
$ 495,000
Cost of goods sold at standard cost
$112,200
Manufacturing cost variances:
Material price variance
$2,985 U
Materials quantity variance
$3,300 U
Labor rate variance
$(2,420) F
Labor efficiency variance
$3,300 U
Variable MOH rate variance
$726 U
Variable MOH efficiency variance
$880 U
Fixed overhead budget variance
$(200) F
Fixed overhead volume variance
$(1,000) F
$ 7,571 U
COGS
$ 119,771
Gross profit
$ 375,229
Marketing and administrative expenses
$ 8,000
Operating income (loss)
$ 367,229
Copyright © 2015 Pearson Education, Inc.
11–18
(10-15 min.) E11-32B
Req. 1
Input
Quality Standard
Price Standard
Standard Cost of
Input
Flour
2 cups
x
$0.14 per cup
=
$ 0.28
Pecans
½ cup
x
1.00 per cup
=
$ 0.50
Cocoa
¼ cup
x
1.60 per cup
=
$ 0.40
Sugar
1 cup
x
0.20 per cup
=
$ 0.20
Chocolate chips
½ cup
x
0.70 per cup
=
$ 0.35
Eggs
2
x
0.14 per egg
=
$ 0.28
Oil
1/3 cup
x
0.21 per cup
=
$ 0.07
Packaging
1 pkg.
x
0.60 per pkg.
=
$ 0.60
Total direct materials
$ 2.68
Direct labor
1/6 hour
x
9.00 per hour
=
$ 1.50
Bakery overhead
½ hour
x
5.00 per hour
=
$ 2.50
Total
$ 6.68
Req. 2
The gross profit per pan of gourmet bars is $6.32.
Req. 3
Rachel should reassess standard prices quite often, since the price of ingredients changes quite frequently. She should
also reassess her price standards if she finds cheaper suppliers for her ingredients.
However, she really won’t need to reassess her quantity standards for the direct materials unless she changes the
recipe. On the other hand, she should reassess her quantity standard for overhead if she decides to bake more than
one batch at a time in the oven.
(10-15 min.) E11-33B
Standard cost of one pot:
DM (15 lbs x $5.00)
$75.00
DL (2 hr x $13.00)
$26.00
Var MOH (2 hr x $6)
$12.00
Fix MOH (2 hr x $7)
$ 14.00
Standard cost
$127.00
Managerial Accounting 4e Solutions Manual
(10-15 min.) E11-37B
Req. 1
(
Actual price per unit
– Stand. price per unit
)
x
Actual quantity of input
=
Price variance
( $0.75 – 0.85 )
x
98,000
=
$9,800 F
(
Actual quantity of input
– Stand. quantity of input
)
x
Standard price per input
unit
=
Quantity
variance
( 98,000 – 94,000 )
x
$0.85
=
$3,400 U
Req. 2
One plausible explanation is that Roger bought lower grade potatoes at a cheaper price, which resulted in the
favorable price variance. However, because the potatoes were lower grade, some of the potatoes were bad, and could
not be used in production. As a result, the manufacturing facility had to use more potatoes than standards allow. This
accounts for the unfavorable efficiency variance.
Req. 3
Price variance (2,100 x ($12.35 – $12.15)) =
$420 U
Quantity variance ($12.15 x (2,100 – 2,000)) =
$1,215 U
Req. 4
The unfavorable labor rate and efficiency variances could be tied to the material variances. For example, if the material
variances were the result of purchasing lower grade potatoes, then the factory would use more labor in sorting the
potatoes. As a result, they would have had to pay workers an overtime premium.
(15-20 min.) E11-38B
(
Actual price per unit
– Stand. price per unit
)
x
Actual quantity of input
=
Price variance
DM
( $1.15 – 1.30 )
x
1,060,000
=
$159,000 F
DL
( $15.00 – 14.00 )
x
4,200
=
$4,200 U
(
Actual quantity of input
– Stand. quantity of input
)
x
Standard price per input
unit
=
Efficiency variance
DM
( 1,060,000 – 960,000 )
x
1.30
=
$130,000 U
DL
( 4,200 – 4,480 )
x
14.00
=
$3,920 F
The favorable direct materials price variance combined with the unfavorable direct labor efficiency variance suggests
that managers may have used lower quality materials. The net effect is favorable.
The unfavorable direct labor rate variance combined with the favorable direct labor efficiency variance suggests that
managers may have used higher paid workers who performed more efficiently. The net effect is unfavorable.