Jiambalvo Managerial Accounting
11–16
c. Variance Summary
Material price variance ($14,800) favorable
Material quantity variance 3,125 unfavorable
P8. [LO 1]
a. Attorneys – Business Incorporations
= AH × (AR – SR)
Labor rate variance =
)
Labor efficiency variance
= SR × (AH – SH)
Standard hours =
Labor efficiency variance =
)
Labor rate variance
b. Attorneys—Will
Preparation
Labor rate variance
= AH × (AR – SR)
Labor rate variance =
)
Labor efficiency variance
= SR × (AH – SH)
Labor efficiency variance =
)
c. Paralegals — Business
Incorporations
Labor rate variance
= AH × (AR – SR)
Chapter 11 Standard Costs and Variance Analysis
11–17
Labor efficiency variance
d. Paralegals — Will Preparation
Labor rate variance
= AH × (AR – SR)
Labor rate variance =
)
Labor rate variance =
Labor efficiency variance
= SR × (AH – SH)
Standard hours =
Labor efficiency variance =
)
Labor efficiency variance =
P9. [ LO 1, 2]
a. Material Price Variance (Material A)
= (AP – SP) AQP
Material Price Variance (Material B)
= (AP – SP) AQP
Material Quantity Variance (Material A)
Material Quantity Variance (Material B)
= (AQU – SQ) SP
= SR × (AH – SH)
Standard hours =
Labor efficiency variance =
)
Labor efficiency variance =
Jiambalvo Managerial Accounting
11–18
Labor Rate Variance
= (AR – SR) AH
Labor Efficiency Variance
Overhead Volume Variance
= Flex budget level of overhead for actual prod – Overhead applied to
production
b. Variance Summary
Material quantity variance (B)
unfavorable
Labor rate variance
unfavorable
Labor efficiency variance
unfavorable
Controllable overhead variance
(2,000)
favorable
Overhead volume variance
unfavorable
Total
$ 232
Material price variance (A)
$(4,500)
favorable
Material price variance (B)
(960)
favorable
Material quantity variance (A)
1,365
unfavorable
P10. [LO 1, 2, 3]
a. Standard cost per unit
Material (3 pounds $2.50 per pound) $7.50
Material Quantity Variance
= (AQU – SQ) SP
Labor Rate Variance
= (AR – SR) AH
Labor Efficiency Variance
= (AH – SH) SR
Jiambalvo Managerial Accounting
11–20
Overhead Volume Variance
= Flex budget level of overhead for actual prod – Overhead applied to
production
b. Variance Summary
Labor rate variance
47,541
unfavorable
Labor efficiency variance
unfavorable
Overhead volume variance
5,000
unfavorable
Total
P11. [LO 1]
Labor Rate Variance
= (AR – SR) AH
= ($52 – $40) 425
Labor Efficiency Variance
= (AH – SH) SR
= (425 – 417) $40
Although the labor rate variance is relatively large, its cause is fairly obvious. It is
not surprising that the company would need to pay a relatively high wage rate to a
Material price variance
$13,650
unfavorable
Material quantity variance
125,000
unfavorable
P12. [LO 1]
1. Students may have various answers. Some possible answers are:
Department
Possible Standards
Grinding Department
Pounds processed per hour; Rate standards for
employees
Extrusion Department
employees; Raw material required per pound of
extruded plastic
Sales Department
Number of sales calls per sales person; Amount of sales
per person
Accounting Department
Standard time required for processing transactions
Administration Department
Standard time required per order; Standard hourly rate
for employees
Purchasing Department
Standard time required per purchase order; Standard
price per pound of raw materials purchased
Pounds extruded per hour; Rate standards for
2. Standard costing systems offer many potential benefits. Tighter control can be
exercised over operations. By giving employees a clearly defined goal, they
may strive harder to achieve it than when they are just “doing their best.” Also,
P13. [LO 3]
a. Will should not act according to his initial instinct—the causes of the variances
Jiambalvo Managerial Accounting
11–22
P14. [LO 1, 2]
a. Labor rate variance = (AR − SR) AH
b. Controllable overhead variance = Actual overhead − Flexible budget level of
overhead for actual production
Chapter 11 Standard Costs and Variance Analysis
11–23
c.
Possible Causes of Variances
Favorable Rate Variance: Additional workers were hired at a lower rate than
current workers.
P15. [LO 3]
b. Favorable variance could occur because of good performance if:
P16. [LO 3]
a. The favorable material price variance is due to the purchase of inferior
Jiambalvo Managerial Accounting
11–24
P17. [LO 2]
Due to the strike, 700,000 Road Guardian batteries were not produced and
sold. How did this affect profit? The batteries sell for $44 per unit and the
variable cost (assuming that overhead is essentially fixed due to the high level
P18. [LO 1, 2]
a. Material Price Variance
= (AP – SP) AQP
Chapter 11 Standard Costs and Variance Analysis
11–25
b. Material Quantity Variance
= (AQU – SQ) SP
Work in Process Inventory
Material Quantity Variance
Raw Material Inventory
c. Labor Rate Variance
= (AR – SR) AH
Labor Efficiency Variance
= (AH – SH) SR
Work in Process Inventory
1,041,350
Labor Rate Variance
(To record direct labor)
d. Controllable Overhead Variance
= Actual overhead – Flexible budget level of overhead for actual
Overhead Volume Variance
= Flexible budget level of overhead for actual production – Overhead
Jiambalvo Managerial Accounting
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e.
Work in Process Inventory
119,000
Manufacturing Overhead
119,000
(To record overhead applied to production)
Manufacturing Overhead
90,000
Various Accounts
90,000
(To record actual overhead)
Manufacturing Overhead
29,000
Controllable Overhead Variance
25,250
Overhead Volume Variance
3,750
Cost of Goods Sold
42,360
Labor Efficiency Variance
78,750
Controllable Overhead Variance
25,250
Overhead Volume Variance
Material Price Variance
54,960
Material Quantity Variance
57,750
Labor Rate Variance
37,400
(To close variance accounts to Cost of Goods Sold)
Case 11-1. [LO 3]
JACKSON SOUND
Summary
Work in process inventory is building up at Jackson Sound even though the company
has a JIT system. The culprit is the standard cost system which is encouraging
overproduction.
Questions to ask students
1. What is the situation facing Jackson Sound?
2. Why does the circuit department have an incentive to overproduce?
Discussion
What is the situation facing Jackson Sound? The chief financial officer has noted a large
amount of in-process inventory even though the company is supposed to be using a JIT
approach. His assistant believes the problem is related to process improvements in the
circuit department and the fact that bonuses are tied to standard cost performance.
Why does the circuit department have an incentive to overproduce? Perhaps the best
Jiambalvo Managerial Accounting
11–28
Case 11-2. [LO 1, 2, 3]
CHAMPION INDUSTRIES
Summary
A purchasing manager is considering a material that costs more, but has a number of
desirable properties. Since standards are not adjusted on a timely basis, purchase of
the material will generate an unfavorable material price variance.
Questions to ask students
1. What is the situation facing Champion Industries?
2. What is the cost savings associated with the new material?
3. What are the expected material and labor variances if standards are not updated on
a timely basis?
4. If the purchasing manager is evaluated in terms of price variances, will he be
motivated to suggest use of the new material?
Discussion
What is the situation facing Champion Industries? Stan Holbert, the purchasing
Chapter 11 Standard Costs and Variance Analysis
11–29
a. What is the cost savings associated with the new material?
Material cost, old material
(150,000 units 10 pounds $23) $34,500,000
b. What are the expected material and labor variances if standards are not updated
on a timely basis?
Material Price Variance (assuming 1,200,000 pounds purchased)
Jiambalvo Managerial Accounting
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c. If the purchasing manager is evaluated in terms of price variances, will he be
motivated to suggest use of the new material? As indicated above, there will be