CHAPTER 24
STANDARD COST SYSTEMS
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
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
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
24.2 Determination and use of standard costs
24-1, 24-3 –
24-5
24.3 Real World: Travelocity.com 24-2, 24-5 Analysis, communication,
(Internet) Standards for travel costs
24. 4
Standard cost systems and inventory
misstatement
24-4
(Ethics, fraud and corporate governance) technology
DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES
24.1 A,B
Bradley/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
AgriChem Industries/Dyelot 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 Enterprises/Hans Enterprises 45 Strong
A comprehensive problem requiring knowledge of all variances and
corresponding journal entries.
24.5 A,B
Slick Corporation/Smooth Corporation 45 Strong
A comprehensive problem requiring knowledge of all variances and
corresponding journal entries.
24.6 A,B
Polyglaze, Inc./Monoglut, 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
Heritage 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
Ripley Corporation/Foding Corporation 60 Strong
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 Company/Ninna Company 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 My Fault 25 Strong
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.
6.
7.
1.
Standard costs are predetermined estimates of what it should cost to produce a product or to
A basic principle in evaluating the performance of department managers is that managers should
be evaluated based only upon events under their control. An unfavorable volume variance results
A favorable labor efficiency variance indicates that the actual number of labor hours worked in
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,
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
8.
9.
10.
11.
12.
13.
14.
15.
Direct labor rates are typically tied to the skill and efficiency of the labor. Thus, higher paid
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
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
Unfavorable variances are recorded by debit entries because they represent costs in excess of
B. Ex. 24.1
B. Ex. 24.3
B. Ex. 24.4
Less budgeted overhead:
Fixed
Variable ($6 per unit)
Volume variance – favorable
SOLUTIONS TO BRIEF EXERCISES
Production = 780 units
The problem at Bramford Industries is a result of operating well above normal
Overhead applied to work in process
If Loring’s standards are reasonable, it appears that employees are not working as
efficiently as the company would like (they used 7,500 actual hours rather than 6,250
Managers using ideal standards would expect unfavorable variances on a regular
The normal or expected hours are higher than the actual hours billed. Furthermore,
the actual expenditures were less than expected. The actual, budgeted, and applied
overhead are:
B. Ex. 24.2
The standard direct labor applied to production was $102,000 (actual direct labor of
$100,000, less an unfavorable rate variance of $3,000, plus a favorable efficiency
B. Ex. 24.7 The direct labor journal entry for Loring Glassware in September is:
87,500
B. Ex. 24.9 The journal entry for Hearts and Flowers is:
Materials Price Variance …………………………………………
Materials Quantity Variance ……………………………………
Direct Materials Inventory ………………………………………………………………….
40,000
B. Ex. 24.10
Given that Ringo incurred actual overhead costs of $10,500, applied overhead
costs of $9,000, and reported a $2,000 unfavorable overhead spending variance
for the period, we can construct the diagram shown below:
Work in Process Inventory ………………………………………..
Work in Process Inventory ……………………………………….
Materials quantity variance = (20,000 lbs. – 20,800 lbs.) × $2/lb. = $1,600 unfav.
Labor Efficiency Variance …………………………………………
Labor Rate Variance ………………………………………………………..
Direct Labor Payable ……………………………………………………………
Ex. 24.2
Manufacturing overhead: Standard $500,000 cost, less the $9,000
Direct labor: Standard $200,000 cost, less the favorable $4,000 rate
Ex. 24.3 a. MPV =
Actual Quantity × (Standard Price – Actual Price)
150,000 grams × ($18/g – $18/g*)
$0
*Actual Price = $2,700,000 ÷ 150,000 grams = $18 per gram
b.
SOLUTIONS TO EXERCISES
Actual costs incurred:
Direct materials: Standard $90,000 cost, plus the $6,000 unfavorable
Given that Blue’s materials price variance equals its materials quantity
variance, both variances must equal zero. Thus, the standard quantity of
Ex. 24.1 a.
Materials price variance
Labor rate variance
Standard costs
Volume variance
Labor efficiency variance
Materials quantity variance
Spending variance
Ex. 24.4 a.
b.
1,000 units × 5 grams/unit = 5,000
d.
Ex. 24.6 a.
b.
Variable overhead costs applied to products equaled the amount budgeted
Gumchara’s materials price variance is computed as follows:
Gumchara’s materials quantity variance is computed as follows:
Marlo’s labor rate variance is computed as follows:
Marlo’s labor efficiency variance is computed as follows:
Ex. 24.6
(continued)
c.
Ex. 24.7 a.
b.
c.
d.
Ex. 24.8 a.
Extended hours worked during the period may have resulted in an
increased average wage rate due to overtime wage premiums. This may
explain Marlo’s unfavorable labor rate variance. The standard time
Standard price, $6.80 per pound
Standard price, $6.80 per pound
A favorable direct materials price variance means that the purchase price
of materials was lower than budgeted. Reasons for favorable price
Actual quantity of materials used, 4,000 pounds
Materials quantity variance, $2,720 favorable
Ex. 24.8
(continued)
b.
Ex. 24.9
$ 360,000
Ex. 24.10 375,000
Manufacturing Overhead …………………………………………………
Overhead Volume Variance ………………………………………..
Overhead Spending Variance …………………………………………….
Ex. 24.11 a.
($60,000/10,000 hrs. × 2 hours per unit × 4,500 units) ………………………..
Variable overhead allowed
Fixed overhead allowed …………………………………………………………..
One explanation of the variances is that higher skilled workers were hired at
wages greater than the budgeted rate. The higher skilled workers may have
Overhead spending variance:
Fixed …………………………………………………………….
Overhead budgeted for actual production (25,000 units):
Overhead Spending Variance = Standard Overhead Allowed
at Actual Production Level – Actual Overhead Costs
Work in Process Inventory …………………………………………
75,000
Overhead per flexible budget ……………………………………………………
Variable ($3 per unit × 25,000 units) …………………………………..
Actual overhead …………………………………………………………………….
Overhead applied to Work in Process Inventory
Less: Budgeted overhead for 25,000 unit production level ……………………………..
c.
Ex. 24.12
Although the overall overhead variance is unfavorable, it is mostly due to an
unfavorable volume variance, reflecting that actual production was less than
budgeted production. The overhead spending variance was favorable, due to fixed
The entry to close McGill’s unfavorable overhead spending variance required that the
variance account be credited for $600. Given that the Cost of Goods Sold account was
Ex. 24.14 a.
A favorable materials price variance results from the purchasing department being
able to acquire direct materials at a price below standard cost. This may result from
b.
An unfavorable labor rate variance may result from incurring unexpected overtime
c.
A favorable volume variance results from producing more units during the period
d.
An unfavorable materials quantity variance means that more than the standard
quantity of materials was used in the manufacture of the units produced. Causes
Ex. 24.15
•
Standard number of customer transactions per employee — a variance showing
more actual customer transactions than the standard allowed per employee, might
Several items from the Store Sales and Other Data section of Home Depot’s 5-Year
Summary could be used to create direct labor standards. For example, weighted average
sales per store per employee, number of customer transactions per employee, and
average ticket price per employee are three that seem obvious. Below are suggestions or
examples about how a store manager could use these standards to help manage a Home
Depot Store:
25 Minutes, Strong PROBLEM 24.1A
b.
c. 8,100
Direct Materials Inventory (600 pounds × $18 per pound) ……………………………..
Materials Price Variance (unfavorable) ………………………………………..
SOLUTIONS TO PROBLEMS SET A
The materials quantity variance (MQV) is first used to find the standard quantity of
material allowed for producing 450 units (MQP is exactly half of MPV):
BRADLEY
Work in Process Inventory (540 pounds × $15 per pound) ……………………
PROBLEM 24.2A
AGRICHEM INDUSTRIES
a.
-$1,500 (or $1,500 Unfavorable)
$0.60/lb. × [(500 lbs. × 200 batches) – 102,500 lbs.]
Standard Price × (Standard Quantity – Actual Quantity)
$0.60/lb. × -2,500 lbs.
4,750 hrs. × ($7.00/hr. – $6.80/hr.)
Actual Hours × (Standard Hourly Rate – Actual Hourly Rate)
$950 Favorable
4,750 hrs. × $0.20/hr.
Overhead variances are computed on the following page.
$1,750 Favorable
$7.00/hr. × [(25 hrs. × 200 batches) – 4,750 hrs.]
$7.00/hr. × 250 hrs.
Standard Hourly Rate × (Standard Hours – Actual Hours)
30 Minutes, Medium
Computation of materials price variance (MPV):
Computation of materials quantity variance (MQV):
Computation of labor rate variance (LRV):
Computation of labor efficiency variance (LEV):
Actual Quantity Used × (Standard Price – Actual Price)
102,500 lbs. × ($0.60/lb. – $0.57/lb.)
102,500 lbs. × $0.03/lb.
$3,075 Favorable
PROBLEM 24.2A
AGRICHEM INDUSTRIES (concluded)
a. (continued)
Computation of overhead spending variance:
Overhead budgeted for 200 batches:
Fixed 50,000$
Variable (200 batches × $25 per batch) 5,000
Total budgeted overhead 55,000$
Less: Actual overhead for the month 54,525
b.
General Journal
Jan. 31 Work in Process Inventory (at standard) 60,000
Materials Quantity Variance 1,500
Materials Price Variance 3,075
Direct Materials Inventory (actual) 58,425
To record direct materials used in January.
Standard cost (200 batches × $300) = $60,000
Actual cost = $58,425
31 Work in Process Inventory (at standard) 35,000
Labor Rate Variance 950
Labor Efficiency Variance 1,750
Direct Labor (actual) 32,300
To record direct labor cost applicable to January
production:
Standard cost (200 batches × $175) = $35,000
Actual cost = $32,300
31 Work in Process Inventory (at standard) 45,000
Volume Variance 10,000
Overhead Spending Variance 475
Manufacturing Overhead (actual) 54,525
Standard cost (200 batches × $225) = $45,000
Actual cost = $54,525
Overhead spending variance (favorable) 475$
Computation of volume variance:
Overhead applied at standard cost ($225 × 200 batches) 45,000$
Less: Budgeted overhead (above) 55,000
Volume variance (unfavorable) (10,000)$
25 Minutes, Medium PROBLEM 24.3A
AMERICAN HARDWOOD PRODUCTS
General Journal
a. (1) Work in Process (standard cost) 45,000
Materials Quantity Variance 4,200
Materials Price Variance 1,200
Direct Materials Inventory (actual cost) 48,000
To record materials used.
(3) Work in Process (standard cost) 57,750
Overhead Spending Variance 1,620
Overhead Volume Variance 2,250
Manufacturing Overhead (actual cost) 61,620
To record manufacturing overhead assigned to
production, and to record overhead variances.
a. =
=
*Standard Hours Allowed = 147 batches × 14 hours/batch = 2,058 hours
Labor Efficiency Variance
Standard Hourly Rate × (Standard Hours – Actual
45 Minutes, Strong
Materials Price Variance
Actual Quantity Used × (Standard Price – Actual Price)
PROBLEM 24.4A
SVEN ENTERPRISES
Standard Price × (Standard Quantity – Actual
$4.20 per pound × (149,940 pounds* – 148,450 pounds)
c.
Overhead
Costs Applied
d.
629,748 *
e.
Work in Process Inventory (at standard cost) …………………………………
17,493 *
1,207
*147 actual batches × 14 hours allowed per batch × $8.50 per hour = $17,493
To record the cost of direct labor charged to production.
Labor Rate Variance (favorable) …………………………………………………….
Direct Labor (at actual cost) ………………………………………………………..
Labor Efficiency Variance (unfavorable) ………………………………….
f.
4,263
To apply overhead to production.
Overhead Volume Variance (favorable) …………………………………………..
Manufacturing Overhead (at actual cost) ……………………………………………
Overhead Spending Variance (favorable) ……………………………………………
Direct Materials Inventory (at actual cost) ……………………………………..
Materials Price Variance (favorable) …………………………………………..
Materials Quantity Variance (favorable) …………………………………………
To record the cost of direct materials charged to production.
Entry to charge materials to production:
Work in Process Inventory (at standard cost) ………………………………..
Entry to charge direct labor to production:
Problem 24.4A
SVEN ENTERPRISES (continued)
Overhead variances:
Standard Overhead
Entry to charge overhead to production:
Work in Process Inventory (at standard cost) ………………………
Costs Allowed
Actual Overhead
Costs Incurred
*Standard Variable Overhead Allowed = $9.00/batch × 147 batches = $1,323
$2,450
$3,625
1,175