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CHAPTER 7
STANDARD COSTING AND VARIANCE ANALYSIS
QUESTIONS
1. The three primary uses of a standard cost system are to (1) assign per unit costs to
production to value inventory, (2) control overhead spending, and (3) measure and
overhead costs.
In a business that routinely manufactures the same products or performs the same
clerical costs.
2. The process of management by exception refers to a manager only investigating
significant deviations from the standard. Both upper and lower limits of acceptabil-
correct (if necessary) the situation.
A standard cost system is a useful tool in a management by exception environ-
al areas in need of attention.
3. A standard cost card summarizes the direct material, direct labor, and overhead
standard quantities and prices needed to complete one unit of output. The bill of
essary operations to make a unit of output or summarizes the time to make one
unit of output. Time details are used to develop standard labor cost and time and
4. Material standards must be based on both quality and quantity of materials. The
quality standard is based on a consideration of trade-offs between higher quality
age allowances.
Chapter 7 179
sary the most efficient) quantities allowed for production.
5. Each total variance can be broken down into a price component and a usage com-
ponent. Price variances measure the difference between what was actually spent
For material, the two variances are the price and quantity variances. The price var-
iance is generally related to the quantity of material purchased; the quantity vari-
the usage variance is called the volume (or noncontrollable) variance.
6. The term standard hours refers the standard amount of input time it should take to
achieved in the period.
7. Domino’s dropped the campaign because some company drivers began ignoring
traffic laws to make on-time deliveries. Two lawsuits that cost Domino’s $82+
in effect for medical operations. In the airline industry, people would probably
agree that setting a “turnaround” time standard is a good thing, but guaranteeing it
might create safety hazards.
8. Management is expected to control input costs and input quantities in the short run
and, therefore, the reference is made to “controllable.” Overhead spending and ef-
the point of incurrence rather than during production.
rate and the standard hours allowed for the production achieved, any ability by
production personnel to control this variance is minimal. Only to the extent that
180 Chapter 7
9. In a standard cost system, both actual costs and standard costs are recorded. How-
ever, only standard costs are accounted for within the inventory accounts. Differ-
10. At the end of a period, monetarily insignificant variances are closed directly to
Cost of Goods Sold (CGS). Monetarily significant variances are prorated among
all of the accounts that are influenced by the variance. Thus, a significant material
The difference in treatment between insignificant and significant variances is created
because standard costs can be used for financial statement purposes only if they are
substantially equivalent to actual costs. Closing insignificant variances to Cost of
11. Managers view capacity utilization as a measure of productivity. In addition, ca-
pacity utilization may focus on the need for fewer or additional resources to be
additional investment in facilities.
When they control utilization, managers are not controlling costs; these are separate
12. Ideal standards should result in lower production costs because the standards
those—which, in turn, would reduce or eliminate some costs.
13. Adjusting standards within a period would be reasonable if significant changes
far from actual costs that the standard costs could not be used for financial report-
ing purposes.
14. (Appendix) When material and labor categories can be substituted for one another,
mix and yield variances should be calculated. These variances capture the effects
Chapter 7 181
varying from the standard amount.
182 Chapter 7
EXERCISES
16. a. The actual-to-budget comparison is totally inappropriate since the levels of ac-
tivity are different. Palate should compare actual costs to standard costs at the
same activity level as follows:
Actual
Budget at Act. Qty.
Variance
Direct material
$161,000
(7,000 × $22.00) =
$154,000
$7,000 U
Direct labor
84,600
(7,000 × $12.00) =
84,000
600 U
Variable OH
Ind. material
28,000
(7,000 × $ 4.20) =
29,400
Ind. labor
13,300
(7,000 × $ 1.75) =
12,250
1,050 U
Utilities
7,700
(7,000 × $ 1.00) =
7,000
700 U
Fixed OH
Sup. salaries
82,000
80,000
2,000 U
Depreciation
30,000
30,000
0
Insurance
17,600
19,280
1,680 F
Totals
$424,200
$415,930
$8,270 U
better next year.
17. Each student will have a different answer; no solution is provided. For (c), how-
quired, possibly go from floor to floor, etc. Ask the students if they can
18. a. If the overtime premium could be associated with specific jobs or work, it could
be included in direct labor; otherwise it will be included in variable overhead.
In either case, the base pay amount for overtime hours will be included with di-
b. Many workers may find themselves working overtime in jobs that were accept-
ed based on the premise of (for example) a 40-hour work-week. When employ-
ees are forced to work beyond the basic work-week, time is taken away from
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accessible website, in whole or in part.
The important consideration is whether the employer routinely asks employees
to work overtime against their will and schedules regular production for over-
time hours; or alternatively, if the employer only occasionally asks employees
to work overtime due to unforeseen circumstances or seasonality considera-
c. Arguments can be made on both sides of the question. Assuming employers ask
their most productive employees to work overtime, one might expect that the
overtime hours are at least as productive (in terms of efficiency and effective-
d. Government’s costs are driven up by the use of overtime due to the additional
social programs that must be offered to the substantial number of individuals
who are unemployed. However, government revenues may be enhanced due to
time.
It is argued that high unemployment in the United States is partly due to the
very high costs of fringe benefits, especially health care coverage. Within a giv-
en class of labor, these costs tend to vary more with the number of employees
time as an obstacle to employment and, as such, would prefer that limits exist.
19. a. A hospital administrator would have mixed feelings about such programs. On
the one hand, the existence of the program provides opportunities to improve
bottom-line performance by carefully managing the length of patient stays. Al-
ternatively, the administrator would be forced to bear pressures that would be
b. In the long term, all of society will benefit if hospital stays are neither too short
nor too long. Any policy that rigidly determines that a particular type of surgery
warrants a hospital stay of a fixed number of days will create substantial prob-
184 Chapter 7
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less harmful to them.
c. Favorable length-of-stay variances could easily be related to low quality care. If
a hospital merely established a policy of early dismissal, the hospital would
21. a. Direct material
Raspberries (7.5 qts.* × $0.80 per qt.)
$6.00
Other ingredients (10 gal. × $0.45 per gal.)
4.50
$10.50
Direct labor
Sorting [(3 min. × 6 qts.) ÷ 60 min.) × $9.00]
$2.70
Blending [(12 min. ÷ 60) × $9.00 per hr.]
1.80
4.50
Packaging (40 qts.** × $0.38 per qt.)
15.20
Standard cost per 10-gallon batch
$30.20
*6 qts. × (5/4) = 7.5 qts. required to obtain six acceptable quarts
**4 qts. per gallon × 10 gallons = 40 quarts
b. In general, the purchasing manager is held responsible for unfavorable material
price variances. Causes of these variances include the following:
c. In general, the production manager or foreperson is held responsible for unfa-
vorable labor efficiency variances. Causes of these variances include the fol-
lowing:
(CMA adapted)
22. a. Total purchases = AP × AQp = $0.13 × 115,000 = $14,950
b. Material price variance
= (AP × AQp) – (SP × AQp)
= $14,950 – ($0.14 × 115,000)
= $14,950 – $16,100
= $1,150 F
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c. Material quantity variance
= (SP × AQu) – (SP × SQ)
= ($0.14 × 100,000) – ($0.14 × 97,900)
= $14,000 – $13,706
= $294 U
23. a. $10,080 ÷ 4,200 = $2.40 per quart
SQ = 1,000 units × 4 quarts = 4,000
AQ × AP
AQ × SP
SQ × SP
4,200 × $2.40
4,200 × $2.50
4,000 × $2.50
$10,080
$10,500
$10,000
$420 F
$500 U
Material Price Variance
Material Usage Variance
does not change.
AQp × AP
AQp × SP
6,000 × $2.40
6,000 × $2.50
$14,400
$15,000
$600 F
Material Price Variance
c. Raw Material Inventory 15,000
Material Price Variance 600
(CPA adapted)
24. a. Material purchase price variance = ($2.10 – $1.40) = $0.70 F variance per
pound; $0.70 × 100,000 lbs. = $70,000 F
b. June 3,000 × 5 = 15,000 SQ; $2.10 × (16,400 – 15,000) = $2,940 U
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25. a. & b.
Purchasing agent’s responsibility:
Material price variance = (AP × AQp) – (SP × AQp)
Production supervisor’s responsibility:
Standard quantity of materials = 600 × 35 lbs. = 21,000
latter is the case, it could have influenced the excessive material usage and
waste. Alternatively, the quantity variance could be just inefficiency in the pro-
duction process.
26. a. Standard hours = 5 × 670 = 3,350
b. Wage rate per hour = $60,407.50 ÷ 3,310 = $18.25
c.
AP × AQ
SP × AQ
SP × SQ
$18 × 3,310
$18 × 3,350
$60,407.50
$59,580
$60,300
$827.50 U
$720 F
Labor Rate Variance
Labor Efficiency Variance
$107.50 U
Total Labor Variance
27. a. Since the labor rate variance is favorable, the actual cost of direct labor is less
(by $5,500) than the standard cost. The standard cost is $80,500.
AP × AQ
SP × AQ
$7.50 × 10,000
SP × 10,000
$75,000
$80,500
$5,500 F
Labor Rate Variance
$80,500 ÷ 10,000 actual direct labor hours equals a standard rate of $8.05.
Chapter 7 187
b. Since the actual hours are 1,000 less than the standard, the efficiency variance
is 1,000 hours × $8.05 = $8,050 U.
AP × AQ
SP × AQ
SP × SQ
$7.50 × 10,000
$8.05 × 10,000
$8.05 × 9,000
$75,000
$80,500
$72,450
$5,500 F
$8,050 U
Labor Rate Variance
Labor Efficiency Variance
c. Work in Process Inventory
72,450
Labor Efficiency Variance
8,050
Labor Rate Variance
5,500
Wages Payable
75,000
(CPA adapted)
28. a. Actual cost = Standard cost + Total unfavorable variance
= ($250 × 350) + $3,500
= ($250 × 330) – ($250 × 350)
c. Rate variance + Efficiency variance = Total variance
Rate variance + (–$5,000 F) = $3,500 U
d. Work in Process Inventory
87,500
Labor Rate Variance
8,500
Wages Payable
91,000
Labor Efficiency Variance
5,000
specific conclusions can be reached.
29.
Case A
Case B
Case C
Case D
Units produced
1,000
1,000
240
1,500
Standard hours per unit
3.5
0.9
2.5
3.0
Standard hours
3,500
900
600
4,500
Standard rate per hour
$7.25
$10.20
$10.50
$7.00
Actual hours worked
3,400
975
560
4,900
Actual labor cost
$23,800
$8,970
$6,180
$31,850
Labor rate variance
$850 F
$975 F
300 U
$2,450 F
Labor efficiency variance
725 F
$765 U
$420 F
$2,800 U