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SOLUTION
(30 min.) Price and efficiency variances, journal entries.
1. Direct materials and direct manufacturing labor are analyzed in turn:
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
Actual Input Qty.
× Budgeted Price
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
Direct
Materials
(100,000 × $4.65a)
$465,000
Purchases Usage
(100,000 × $4.50) (98,055 × $4.50)
$450,000 $441,248
(9,850 × 10 × $4.50)
$443,250
2. Direct Materials Control 450,000
Direct Materials Price Variance 15,000
Accounts Payable or Cash Control 465,000
3. Some students’ comments will be immersed in conjecture about higher prices for
materials, better quality materials, higher grade labor, better efficiency in use of materials, and so
forth. A possibility is that approximately the same labor force, paid somewhat more, is taking
slightly less time with better materials and causing less waste and spoilage.
4. The purchasing point is where responsibility for price variances is found most often. The
production point is where responsibility for efficiency variances is found most often. The
7-30 Materials and manufacturing labor variances, standard costs. Dawson, Inc., is a pri-
vately held furniture manufacturer. For August 2017, Dawson had the following standards for one
of its products, a wicker chair:
Standards per Chair
Direct materials 3 square yards of input at $5.50 per square
yard
Direct manufacturing labor 0.5 hour of input at $10.50 per hour
The following data were compiled regarding actual performance: actual output units (chairs) pro-
duced, 2,200; square yards of input purchased and used, 6,200; price per square yard, $5.70; direct
manufacturing labor costs, $9,844; actual hours of input, 920; labor price per hour, $10.70.
1. Show computations of price and efficiency variances for direct materials and direct manufac-
turing labor. Give a plausible explanation of why each variance occurred.
2. Suppose 8,700 square yards of materials were purchased (at $5.70 per square yard), even
though only 6,200 square yards were used. Suppose further that variances are identified at
their most timely control point; accordingly, direct materials price variances are isolated and
traced at the time of purchase to the purchasing department rather than to the production de-
partment. Compute the price and efficiency variances under this approach.
SOLUTION
(2030 min.) Materials and manufacturing labor variances, standard costs.
1. Direct Materials
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
Actual Input Qty.
× Budgeted Price
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(6,200 sq. yds. × $5.70)
$35,340
(6,200 sq. yds. × $5.50)
$34,100
(2,200 × 3 × $5.50)
(6,600 sq. yds. × $5.50)
$36,300
The unfavorable materials price variance may be unrelated to the favorable materials
efficiency variance. For example, (a) the purchasing officer may be less skillful than assumed in
the budget, or (b) there was an unexpected increase in materials price per square yard due to
Direct Manufacturing Labor
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
Actual Input Qty.
× Budgeted Price
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(920 hrs. × $10.70)
$9,844
(920 hrs. × $10.50)
$9,660
(2,200 × 0.5 × $10.50)
(1,100 hrs. × $10.50)
$11,550
The unfavorable labor price variance may be due to, say, (a) an increase in labor rates due
to a booming economy, or (b) the standard being set without detailed analysis of labor
2.
Control
Point
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
Actual Input Qty.
× Budgeted Price
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted
Price)
Purchasing (8,700 sq. yds.× $5.70)
$49,590
(8,700 sq. yds. × $5.50)
$47,850
$1,740 U
7-31 Journal entries and T-accounts (continuation of 7-30). Prepare journal
entries and post them to T-accounts for all transactions in Exercise 7-30, including requirement 2.
Summarize how these journal entries differ from the normal-costing entries described in Chapter 4,
pages 120–123.
SOLUTION
(2025 min.) Journal entries and T-accounts (continuation of 7-30).
For requirement 1 from Exercise 7-30:
a. Direct Materials Control 34,100
b. Work-in-Process Control 36,300
c. Work-in-Process Control 11,550
Direct Manufacturing Labor Price Variance 184
Direct
Materials Control
Direct Materials
Price Variance
Direct Materials
Efficiency Variance
Work-in-Process Control
Direct Manufacturing
Labor Price Variance
Direct Manuf. Labor
Efficiency Variance
(c) 11,550
Wages Payable Control Accounts Payable Control
For requirement 2 from Exercise 7-30:
The following journal entries pertain to the measurement of price and efficiency variances when
8,700 sq. yds. of direct materials are purchased:
To record direct materials purchased.
To record direct materials used.
Direct
Materials Control
Direct Materials
Price Variance
(a1) 47,850 (a2) 34,100 (a1) 1,740
Accounts Payable Control Work-in-Process Control
Direct Materials
Efficiency Variance
Standard Costs Normal Costs
Direct Costs Standard price(s)
× Standard input
Actual price(s)
× Actual input
These journal entries differ from the normal costing entries because Work-in-Process Control is
no longer carried at “actual” costs. Furthermore, Direct Materials Control is carried at standard
unit prices rather than actual unit prices. Finally, variances appear for direct materials and direct
manufacturing labor under standard costing but not under normal costing.
7-32 Price and efficiency variances, benchmarking. Nantucket Enterprises manufactures in-
sulated cold beverage cups printed with college and corporate logos, which it distributes nationally
in lots of 12 dozen cups. In June 2017, Nantucket produced 5,000 lots of its most popular line of
cups, the 24-ounce lidded tumbler, at each of its two plants, which are located in Providence and
Amherst. The production manager, Shannon Bryant, asks her assistant, Joel Hudson, to find out the
precise per-unit budgeted variable costs at the two plants and the variable costs of a competitor,
Beverage Mate, who offers similar-quality tumblers at cheaper prices. Hudson pulls together the fol-
lowing information for each lot:
Per lot Providence Plant Amherst Plant Beverage Mate
Direct materials 74 lbs. @ $3.20 per lb. 76.5 lbs. @ $3.10 per
lb.
70 lbs. @ $2.90 per lb.
Direct manufacturing
labor
2.5 hrs. @ $12.00 per
hr.
2.4 hrs. @ $12.20 per
hr.
2.4 hrs. @ $10.50 per hr.
Variable overhead $20 per lot $22 per lot $20 per lot
Required:
1. What is the budgeted variable cost per lot at the Providence Plant, the Amherst Plant, and at
Beverage Mate?
2. Using the Beverage Mate data as the standard, calculate the direct materials and direct manu-
facturing labor price and efficiency variances for the Providence and Amherst plants.
3. What advantage does Nantucket get by using Beverage Mate’s benchmark data as standards
in calculating its variances? Identify two issues that Bryant should keep in mind in using the
Beverage Mate data as the standards.
SOLUTION
(25 min.) Price and efficiency variances, benchmarking.
1.
Providence Plant
Prices and quantities Cost per lot
Direct materials 74.0 lbs @ $ 3.20 per lb $236.80
Direct labor 2.5 hrs @ $12.00 per hr 30.00
Amherst Plant
Prices and quantities Cost per lot
Direct materials 76.50 lbs @ $ 3.10 per lb $237.15
Beverage Mate
Prices and quantities Cost per lot
Direct materials 70.00 lbs @ $ 2.90 per lb $203.00
2. Providence Plant
Actual
Quantity
´
Actual Price Budgeted Efficiency
Results Variance Price Variance
(1) (2) = (1) – (3)
(4) = (3) – (5) (5)
Lots 5,000 5,000
Direct materials $1,184,000 $111,000 U $1,073,000b$58,000 U $1,015,000
´
´
Amherst Plant
Actual
Quantity
´
Actual Price Budgeted Efficiency Flexible
Results Variance Price Variance Budgeta
(1) (2) = (1) – (3)
(4) = (3) – (5) (5)
Lots 5,000 5,000
Direct Materials $1,185,750 $76,500 U $1,109,250b$8,800 U $1,015,000
´
´
3. Using an objective, external benchmark, like that of a competitor, will preempt the possibility
of any one plant feeling that the other is being favored. That this competitor, Beverage Mate, is
successful will also put positive pressure on the two plants to improve (note that all variances are
zero or unfavorable). Issues that Bryant should keep in mind include the following:
Ensure that Beverage Mate is indeed the best and most relevant standard (for exam-
ple, is there another competitor in the marketplace which should be considered?)
Ensure that the data is reliable
7-33 Static and flexible budgets, service sector. Student Finance (StuFi) is a start-up that aims
to use the power of social communities to transform the student loan market. It connects participants
through a dedicated lending pool, enabling current students to borrow from a school’s alumni com-
munity. StuFi’s revenue model is to take an upfront fee of 40 basis points (0.40%) each from the
alumni investor and the student borrower for every loan originated on its platform.
StuFi hopes to go public in the near future and is keen to ensure that its financial results are in
line with that ambition. StuFi’s budgeted and actual results for the third quarter of 2017 are presented
below.
Required:
1. Prepare StuFi’s static budget of operating income for the third quarter of 2017.
2. Prepare an analysis of variances for the third quarter of 2017 along the lines of Exhibit 7-2;
identify the sales volume and flexible budget variances for operating income.
3. Compute the professional labor price and efficiency variances for the third quarter of 2017.
4. What factors would you consider in evaluating the effectiveness of professional labor in the
third quarter of 2017?
