SOLUTION
Requirement 1
ROOT RECLINERS
Flexible Budget
Budget
Amounts
per Unit
Actual Units (Recliners)
980
Sales
Variable Manufacturing Costs:
Direct Materials
Direct Labor
Variable Overhead
Fixed Manufacturing Costs:
Fixed Overhead
Total Cost of Goods Sold
Gross Profit
(a)
$ 52,200
/
1,000 recliners
=
(b)
$ 90,000
/
1,000 recliners
=
$ 90.00 per recliner
(c)
$ 30,000
/
1,000 recliners
=
$ 30.00 per recliner
(d)
$ 505.00 per recliner
×
980 recliners
=
$ 494,900
(e)
$ 52.20 per recliner
×
980 recliners
=
$ 51,156
$ 90.00 per recliner
×
980 recliners
=
$ 88,200
(g)
$ 30.00 per recliner
×
980 recliners
=
$ 29,400
Requirement 2
Direct Materials Cost Variance
=
(AC ̶ SC)
×
AQ
=
($8.50 per yard – $8.70 per yard)
×
6,143 yards
=
$1,229 F
Direct Materials Efficiency Variance
=
×
=
×
$8.70 per yard
=
$2,288 U
Direct Labor Cost Variance
=
×
AQ
=
($9.10 per DLHr – $9.00 per DLHr)
×
9,600 DLHr
=
$960 U
P23-31B, cont.
Requirement 2, cont.
Direct Labor Efficiency Variance
=
(AQ ̶ SQ)
×
SC
=
(9,600 DLHr – 9,800 DLHr(b))
×
$9.00 per DLHr
=
$1,800 F
=
×
=
×
6,143 yards
=
$8,600 U
=
×
=
$1,315 U
FOH Cost Variance
=
Actual FOH
̶
Budgeted FOH
=
$62,000
̶
$60,000
=
$2,000 U
=
̶
Allocated FOH
=
$60,000
̶
=
$1,200 U
1,000 recliners
=
6 yards per recliner
Thus:
×
980 recliners
=
5,880 yards
10,000 DLHr
1,000 recliners
=
10 DLHr per recliner
Thus:
10 DLHr per recliner
×
980 recliners
=
9,800 DLHr
6,000 yards
=
$10.00 per yard
Thus:
×
5,880 yards
=
$58,800
P23-31B, cont.
Requirement 3
The $1,229 favorable direct materials cost variance indicates that Root’s managers did a good job
keeping actual direct materials cost per yard within standard. The $8.50 actual cost per yard was less
than the $8.70 standard cost per yard.
The $8,600 unfavorable variable overhead cost variance indicates that Root’s managers did not do a
good job keeping actual variable overhead cost per yard within standard. The $6.40 actual cost per yard
was greater than the $5.00 standard cost per yard (the standard variable overhead allocation rate per
yard).
The $2,000 unfavorable fixed overhead cost variance indicates that Root’s managers did not do a good
job keeping actual total fixed cost within budget. The $62,000 actual total fixed overhead cost was
greater than the $60,000 budgeted total fixed overhead cost.
P23-31B, cont.
Requirement 4
Root’s managers can benefit from the standard costing system in the following ways:
• Preparing the master budget.
P23-32B Computing standard cost variances and reporting to management
Learning Objectives 3, 4, 5
1. DM Eff. Var. $300 F
Smart Sets manufactures headphone cases. During September 2016, the company produced 108,000
cases and recorded the following cost data:
Standard Cost Information
Actual Information
Requirements
1. Compute the cost and efficiency variances for direct materials and direct labor.
2. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the
fixed overhead cost and volume variances.
3. Smart Sets’s management used better-quality materials during September. Discuss the trade-off
between the two direct material variances.
SOLUTION
Requirement 1
Direct Materials Cost Variance
=
(AC ̶ SC)
×
AQ
=
($0.20 per part – $0.15 per part)
×
214,000 parts
=
$10,700 U
=
×
=
$300 F
=
×
=
$166 U
=
×
$8.00 per DLHr
=
$4,000 F
×
108,000 cases
=
216,000 parts
0.02 DLHr per case
×
108,000 cases
=
2,160 DLHr
P23-32B, cont.
Requirement 2
VOH Cost Variance
=
Actual VOH
−
(SC × AQ)
=
$14,000
−
($9 per DLHr × 1,660 DLHr)
=
$940 F
=
×
=
$4,500 F
=
$ 5,360 F
=
$ 3,200 F
×
2,160 DLHr
=
$34,560
Requirement 3
There may be trade-offs between the direct materials cost variance and the direct materials efficiency
variance. Decisions made by the purchasing manager may affect the direct materials efficiency variance
for the production manager. Perhaps Smart Sets used better quality direct materials, indicated by the fact
P23-33B Computing and journalizing standard cost variances
Learning Objectives 3, 4, 5, 6
3. VOH Cost Var. $2,985 F
Smith manufactures coffee mugs that it sells to other companies for customizing with their own logos.
Smith prepares flexible budgets and uses a standard cost system to control manufacturing costs. The
standard unit cost of a coffee mug is based on static budget volume of 59,900 coffee mugs per month:
Actual cost and production information for July 2016 follows:
a. Actual production and sales were 62,600 coffee mugs.
b. Actual direct materials usage was 10,000 lbs. at an actual cost of $0.17 per lb.
c. Actual direct labor usage of 199,000 minutes at a cost of $27,860.
d. Actual overhead cost was $8,955 variable and $31,945 fixed.
e. Selling and administrative costs were $95,000.
Requirements
1. Compute the cost and efficiency variances for direct materials and direct labor.
2. Journalize the purchase and usage of direct materials and the assignment of direct labor, including
the related variances.
3. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the
fixed overhead cost and volume variances.
4. Journalize the actual manufacturing overhead and the allocated manufacturing overhead. Journalize
the movement of all production from Work-in-Process Inventory. Journalize the adjusting of the
Manufacturing Overhead account.
5. Smith intentionally hired more highly skilled workers during July. How did this decision affect the
cost variances? Overall, was the decision wise?
SOLUTION
Requirement 1
Direct Materials Cost Variance
=
(AC ̶ SC)
×
AQ
=
($0.17 per lb. – $0.25 per lb.)
×
10,000 lbs.
=
$800 F
=
×
$0.25 per lb.
=
$630 F
=
×
=
$5,970 U
=
×
=
$1,232 U
×
62,600 mugs
=
12,520 lbs.
$27,860 total cost
199,000 minutes
=
$0.14 cost per minute
3 minutes per mug
×
62,600 mugs
=
187,800 minutes
P23-33B, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Raw Materials Inventory ($0.25/lb. × 10,000 lbs.)
2,500
Direct Materials Cost Variance (from Req. 1)
800
Accounts Payable ($0.17/lb. × 10,000 lbs.)
1,700
Purchased direct materials.
3,130
Direct Materials Efficiency Variance (from Req. 1)
630
Raw Materials Inventory ($0.25/lb. × 10,000 lbs.)
2,500
Used direct materials.
Direct Labor Cost Variance (from Req.1 )
5,970
Direct Labor Efficiency Variance (from Req. 1)
1,232
Wages Payable ($0.14/min × 199,000 min.)
Direct labor costs incurred.
Requirement 3
VOH Cost Variance
=
Actual VOH
−
(SC × AQ)
=
$8,955
−
($0.06 per min. × 199,000 min.)
=
$2,985 F
=
×
=
$672 U
=
$ 8,584 U
=
$ 1,053 F
×
=
$23,361
×
×
=
$24,414
P23-33B, cont.
Requirement 4
Date
Accounts and Explanation
Debit
Credit
Manufacturing Overhead ($8,955 + $31,945)
40,900
Various Accounts
40,900
Manufacturing overhead costs incurred.
35,682
Manufacturing Overhead
35,682
Manufacturing overhead costs allocated.
Finished Goods Inventory ($3,130 + $20,658 + $35,682)
59,470
59,470
Completed goods transferred.
Variable Overhead Efficiency Variance (from Req. 3)
Fixed Overhead Cost Variance (from Req. 3)
To adjust Manufacturing Overhead.
Requirement 5
Because Smith hired more skilled workers, the $0.14 actual direct labor cost per minute was greater than
the $0.11 direct labor standard cost per minute. Therefore, the direct labor cost variance was $5,970
unfavorable for the 62,600 mugs actually produced. Hiring more skilled direct labor workers could be
Note: Problem P23-33B must be completed before attempting Problem P23-34B.
P23-34B Preparing a standard cost income statement
Learning Objective 6
COGS at actual $70,460
Review your results from Problem P23-33B. Smith’s actual and standard sales price per mug is $5.
Prepare the standard cost income statement for July 2016.
SOLUTION
SMITH
Standard Cost Income Statement
For the Month Ended July 31, 2016
Continuing Problem
P23-35 Calculating materials and labor variances and preparing journal entries
This continues the Daniels Consulting situation from Problem P22-57 of Chapter 22. Assume Daniels
has created a standard cost card for each job. Standard direct materials per job include 10 software
packages at a cost of $900 per package. Standard direct labor costs per job include 105 hours at $100 per
hour. Daniels plans on completing 12 jobs during March 2018.
Actual direct materials costs for March included 90 software packages at a total cost of $81,450. Actual
direct labor costs included 110 hours per job at an average rate of $107 per hour. Daniels completed all
12 jobs in March.
Requirements
1. Calculate direct materials cost and efficiency variances.
2. Calculate direct labor cost and efficiency variances.
3. Prepare journal entries to record the use of both materials and labor for March for the company.
SOLUTION
Requirement 1
Direct Materials Cost Variance
=
(AC ̶ SC)
×
AQ
=
($905 per package(a) – $900 per package)
×
90 packages
=
$450 U
=
×
=
×
=
$27,000 F
$81,450 total DM cost
/
90 packages
=
$905 DM cost per package
10 packages per job
×
12 jobs
=
120 packages
Requirement 2
Direct Labor Cost Variance
=
(AC ̶ SC)
×
AQ
=
($107 per DLHr – $100 per DLHr)
×
1,320 DLHr(a)
=
$9,240 U
Direct Labor Efficiency Variance
=
×
=
×
=
$6,000 U
P23-36, cont.
Requirement 3
Date
Accounts and Explanation
Debit
Credit
Work-in-Process Inventory ($900/pkg. × 120 pkgs.)
108,000
Direct Materials Efficiency Variance (from Req. 1)
27,000
Raw Materials Inventory ($900/pkg. × 90 pkgs.)
81,000
Used direct materials.
Work-in-Process Inventory ($100/DLHr × 1,260 DLHr)
126,000
Direct Labor Cost Variance (from Req. 2)
Direct Labor Efficiency Variance (from Req. 2)
Wages Payable ($107/DLHr × 110 DLHr/job × 12 jobs)
141,240
Direct labor costs incurred.
Decision Case 23-1
Suppose you manage the local Scoopy’s ice cream parlor. In addition to selling ice cream cones, you
make large batches of a few flavors of milk shakes to sell throughout the day. Your parlor is chosen to
test the company’s “Made-for-You” system. This new system enables patrons to customize their milk
shakes by choosing different flavors.
Customers like the new system and your staff appears to be adapting, but you wonder whether this
new made-to-order system is as efficient as the old system in which you just made a few large batches.
Efficiency is a special concern because your performance is evaluated in part on the restaurant’s
efficient use of materials and labor. Your superiors consider efficiency variances greater than 5% to be
unacceptable.
You decide to look at your sales for a typical day. You find that the parlor used 390 pounds of ice
cream and 72 hours of direct labor to produce and sell 2,000 shakes. The standard quantity allowed for a
shake is 0.2 pound of ice cream and 0.03 hour of direct labor. The standard costs are $1.50 per pound for
ice cream and $8 per hour for labor.
Requirements
1. Compute the efficiency variances for direct labor and direct materials.
2. Provide likely explanations for the variances. Do you have reason to be concerned about your
performance evaluation? Explain.
3. Write a memo to Scoopy’s national office explaining your concern and suggesting a remedy.
SOLUTION
Requirement 1
Direct Labor Efficiency Variance
=
(AQ ̶ SQ)
×
SC
=
(72 DLHr – 60 DLHr(a))
×
$8 per DLHr
=
$96 U
=
×
=
(390 pounds – 400 pounds(b))
×
=
$15 F
0.03 DLHr per shake
×
2,000 shakes
=
60 DLHr
×
2,000 shakes
=
400 pounds
Requirement 2
The $15 favorable direct materials efficiency variance indicates that actual usage of direct materials (ice
cream) was kept within standard. The 390 pounds of ice cream actually used was less than the 400
pounds allowed to produce 2,000 shakes. Although favorable, the variance is relatively small—only
2.5% under the $600 total direct materials standard allowed to produce 2,000 shakes(a).
×
$1.50 per pound
=
$600
Thus:
$600
=
2.5%
60 DLHr
×
$8 per DLHr
=
$480
Thus:
$480
=
20%
Decision Case 23-1, cont.
Requirement 3
DATE:
TO: Scoopy’s National Office
FROM:
SUBJECT: “Made-for-You” System
The “Made-for-You” system test has yielded some benefits. Customers enjoy being able to customize
their shakes, employees appear to be adapting, and the direct materials efficiency variance is favorable.
However, employees are relatively less efficient under the new system. The unfavorable direct labor
efficiency variance is 20% over the current direct labor standard allowed for actual shakes produced.
Fraud Case 23–1
Drew Castello, general manager of Sunflower Manufacturing, was frustrated. He wanted the budgeted
results, and his staff was not getting them to him fast enough. Drew decided to pay a visit to the
accounting office, where Jeff Hollingsworth was supposed to be working on the reports. Jeff had
recently been hired to update the accounting system and speed up the reporting process.
After looking at the time records, Jeff pointed out that it was unusual that every employee in the
production area recorded exactly eight hours each day in direct labor. Did they not take breaks? Was no
one ever five minutes late getting back from lunch? What about clean-up time between jobs or at the end
of the day?
Drew began to observe the production laborers and noticed several disturbing items. One employee
was routinely late for work, but his time card always showed him clocked in on time. Another employee
took 10- to 15-minute breaks every hour, averaging about 1½ hours each day, but still reported eight
hours of direct labor each day. Yet another employee often took an extra 30 minutes for lunch, but his
time card showed him clocked in on time. No one in the production area ever reported any “down time”
when they were not working on a specific job, even though they all took breaks and completed other
tasks such as doing clean-up and attending department meetings.
Requirements
1. How might the observed behaviors cause an unfavorable direct labor efficiency variance?
2. How might an employee’s time card show the employee on the job and working when the employee
was not present?
3. Why would the employees’ activities be considered fraudulent?
SOLUTION
Requirement 1
The direct labor efficiency variance measures actual labor usage compared to standard labor usage. If
Requirement 2
An employee’s time card might show the employee on the job and working when not present if the
Requirement 3
The employees’ activities would be considered fraudulent because they are reporting that they worked
Team Project 23-1
Lynx Corp. manufactures windows and doors. Lynx has been using a standard cost system that bases
cost and efficiency standards on Lynx’s historical long–run average performance. Suppose Lynx’s
controller has engaged your team of management consultants to advise him or her whether Lynx should
use some basis other than historical performance for setting standards.
Requirements
1. List the types of variances you recommend that Lynx compute (for example, direct materials cost
variance for glass). For each variance, what specific standards would Lynx need to develop? In
addition to cost standards, do you recommend that Lynx develop any nonfinancial standards?
2. There are many approaches to setting standards other than simply using long-run average historical
costs and quantities.
a. List three alternative approaches that Lynx could use to set standards, and explain how Lynx
could implement each alternative.
b. Evaluate each alternative method of setting standards, including the pros and cons of each
method.
c. Write a memo to Lynx’s controller detailing your recommendations. First, should Lynx retain its
historical data-based standard cost approach? If not, which of the alternative approaches should it
adopt?
SOLUTION
Requirement 1
Lynx should compute cost variances and efficiency variances for each type of direct material (for
Requirement 2
Part a
Three alternative approaches that Lynx could use to set standards include the following:
(1) Engineering analysis/time-and-motion studies.
This approach reveals the minimum amount of direct materials, direct labor, and manufacturing
Team Project 23-1, cont.
Requirement 2, cont.
Part b
(1) Engineering analysis/time-and-motion studies.
This approach usually allows for unavoidable waste and spoilage, but it could result in tight, or difficult-
Team Project 23-1, cont.
Requirement 2, cont.
Part c
MEMO
DATE:
TO: Controller, Lynx Corporation
FROM: _______________, Management Consultants
SUBJECT: Standard Costs
However, we suggest that Lynx examine trade publications for relevant benchmark data, and explore the
possibilities of partnering with other manufacturers to obtain external benchmark data. If benchmark
data are too costly or impossible to obtain, then we recommend conducting time-and-motion studies in
order to set tight, but achievable, standards. In future years, these standards could form the baseline for
continuous improvement adjustments that would give employees incentives to increase efficiency.
Communication Activity 23-1
In 75 words or fewer, explain what a cost variance is and describe its potential causes.
SOLUTION
A cost variance measures how well a company keeps unit costs of production inputs within standards.