Idea Transcript
CHAPTER 22 (FIN MAN); CHAPTER 7 (MAN) PERFORMANCE EVALUATION USING VARIANCES FROM STANDARD COSTS DISCUSSION QUESTIONS 1.
Standards are performance goals. Manufacturing companies normally use standard cost for each of the three following product costs: a. Direct materials b. Direct labor c. Factory overhead Standard cost systems enable management to determine the following: a. How much a product should cost (standard cost) b. How much it does cost (actual cost)
2.
Reporting by the “principle of exceptions” is the reporting of only variances (or “exceptions”) between standard and actual costs to the individual responsible for cost control. This reporting allows management to focus on correcting cost variances.
3.
The two variances in direct materials cost are: a. Direct materials price b. Direct materials quantity
4.
The offsetting variances might have been caused by the purchase of low-priced, inferior materials. The low price of the materials would generate a favorable materials price variance, while the inferior quality of the materials would cause abnormal spoilage and waste, thus generating an unfavorable materials quantity variance.
5.
a.
The two variances in direct labor costs are: (1) Direct labor rate (2) Direct labor time
b.
The direct labor cost variance is usually under the control of the production supervisor.
6.
No. Even though the assembly workers are covered by union contracts, direct labor cost variances still might result. For example, direct labor rate variances could be caused by scheduling overtime to meet production demands or by assigning higher-paid workers to jobs normally performed by lower-paid workers. Likewise, direct labor time variances could result during the training of new workers or from a shortage of skilled employees.
7.
Standards can be very appropriate in repetitive service operations. Fast-food restaurants can use standards for evaluating the productivity of the counter and food preparation employees. In addition, standards could be used to plan staffing patterns around various times of the day (e.g., increasing staff during the lunch hour).
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
DISCUSSION QUESTIONS (Continued) 8.
9. 10.
a.
The variable factory overhead controllable variance results from incurring a total amount of variable factory overhead cost greater or less than the amount budgeted for the level of operations achieved. The fixed factory overhead volume variance results from operating at a level above or below 100% of normal capacity.
b.
The factory overhead cost variance report presents the standard factory overhead cost variance data, including the volume and controllable variances.
Net unfavorable direct materials price variance. Nonfinancial performance measures provide managers additional measures beyond the dollar impact of decisions. Nonfinancial considerations may help the organization include external customer perspectives about quality and service in performance measurements. These bring added perspectives in evaluating performance.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
PRACTICE EXERCISES PE 22–1A (FIN MAN); PE 7–1A (MAN) a.
Direct materials price variance (favorable)
b.
Direct materials quantity variance (unfavorable)
c.
Direct materials cost variance (unfavorable)
–$10,800 $13,600
$2,800
[($33.25 – $34.00) × 14,400 gal.] [(14,400 gal. – 14,000 gal.) × $34.00]
(–$10,800 + $13,600) or [($33.25 × 14,400 gal.) – ($34.00 × 14,000 gal.)] = $478,800 – $476,000
PE 22–1B (FIN MAN); PE 7–1B (MAN) a.
Direct materials price variance (unfavorable)
b.
Direct materials quantity variance (favorable)
c.
Direct materials cost variance (unfavorable)
$2,250 –$1,250
$1,000
[($3.00 – $2.50) × 4,500 lbs.] [(4,500 lbs. – 5,000 lbs.) × $2.50]
($2,250 – $1,250) or [($3.00 × 4,500 lbs.) – ($2.50 × 5,000 lbs.)] = $13,500 – $12,500
PE 22–2A (FIN MAN); PE 7–2A (MAN) a.
Direct labor rate variance (unfavorable)
$8,850
[($30.50 – $30.00) × 17,700 hrs.]
b.
Direct labor time variance (unfavorable)
$6,000
[(17,700 hrs. – 17,500 hrs.) × $30.00]
c.
Direct labor cost variance (unfavorable)
$14,850
($8,850 + $6,000) or [($30.50 × 17,700 hrs.) – ($30.00 × 17,500 hrs.)] = $539,850 – $525,000
PE 22–2B (FIN MAN); PE 7–2B (MAN) a.
Direct labor rate variance (favorable)
–$1,400
[($16.50 – $17.00) × 2,800 hrs.]
b.
Direct labor time variance (favorable)
–$3,400
[(2,800 hrs. – 3,000 hrs.) × $17.00]
c.
Direct labor cost variance (favorable)
–$4,800
(–$1,400 – $3,400) or [($16.50 × 2,800 hrs.) – ($17.00 × 3,000 hrs.)] = $46,200 – $51,000 22-3
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
PE 22–3A (FIN MAN); PE 7–3A (MAN) Variable Factory Overhead = $63,400 – [$3.50 × (3,500 units × 5 hrs.)] Controllable Variance Variable Factory Overhead = $63,400 – $61,250 Controllable Variance Variable Factory Overhead = $2,150 Unfavorable Controllable Variance
PE 22–3B (FIN MAN); PE 7–3B (MAN) Variable Factory Overhead = $4,000 – [$1.40 × (1,000 units × 3.0 hrs.)] Controllable Variance Variable Factory Overhead = $4,000 – $4,200 Controllable Variance Variable Factory Overhead = –$200 Favorable Controllable Variance
PE 22–4A (FIN MAN); PE 7–4A (MAN) –$900 favorable
$1.80 × [17,000 hrs. – (3,500 units × 5 hrs.)]
PE 22–4B (FIN MAN); PE 7–4B (MAN) $300 unfavorable
$0.60 × [3,500 hrs. – (1,000 units × 3 hrs.)]
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
PE 22–5A (FIN MAN); PE 7–5A (MAN) Work in Process (14,000* gal. × $34.00) Direct Materials Quantity Variance** Materials (14,400 gal. × $34.00)
476,000 13,600 489,600
* 3,500 units × 4 standard gal. per unit ** [(14,400 gal. – 14,000 gal.) × $34.00]
PE 22–5B (FIN MAN); PE 7–5B (MAN) Work in Process (5,000* lbs. × $2.50) Direct Materials Quantity Variance** Materials (4,500 lbs. × $2.50)
12,500 1,250 11,250
* 1,000 units × 5 standard lbs. per unit ** [(4,500 lbs. – 5,000 lbs.) × $2.50]
PE 22–6A (FIN MAN); PE 7–6A (MAN) GIOVANNI COMPANY Income Statement Through Gross Profit For the Year Ended December 31, 2014 Sales (3,500 units × $400) Cost of goods sold—at standard* Gross profit—at standard
$1,400,000 1,093,750 $ 306,250 Favorable
Less variances from standard cost: Direct materials price (PE22–1A; PE7–1A) Direct materials quantity (PE22–1A; PE7–1A) Direct labor rate (PE22–2A; PE7–2A) Direct labor time (PE22–2A; PE7–2A) Factory overhead controllable (PE22–3A; PE7–3A) Factory overhead volume (PE22–4A; PE7–4A) Gross profit
Unfavorable
$10,800 $13,600 8,850 6,000 2,150 900
* Direct materials (3,500 units × 4 gal. × $34.00)…………………………………………………… Direct labor (3,500 units × 5 hrs. × $30.00)………………………………………………………… Factory overhead [3,500 units × 5 hrs. × ($3.50 + $1.80)]………………………………………… Cost of goods sold at standard………………………………………………………………………
(18,900) $ 287,350 $ 476,000 525,000 92,750 $1,093,750
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
PE 22–6B (FIN MAN); PE 7–6B (MAN) DVORAK COMPANY Income Statement Through Gross Profit For the Year Ended December 31, 2014 Sales (1,000 units × $90) Cost of goods sold—at standard* Gross profit—at standard
$90,000 69,500 $20,500 Favorable
Less variances from standard cost: Direct materials price (PE22–1B; PE7–1B) Direct materials quantity (PE22–1B; PE7–1B) Direct labor rate (PE22–2B; PE7–2B) Direct labor time (PE22–2B; PE7–2B) Factory overhead controllable (PE23–3B; PE7–3B) Factory overhead volume (PE23–4B; PE7–4B)
Unfavorable
$2,250 $1,250 1,400 3,400 200 300
Gross profit * Direct materials (1,000 units × 5 lbs. × $2.50)………………………………………………………… Direct labor (1,000 units × 3 hrs. × $17.00)…………………………………………………………… Factory overhead [1,000 units × 3 hrs. × ($1.40 + $0.60)]…………………………………………… Cost of goods sold at standard………………………………………………………………………..
3,700 $24,200 $12,500 51,000 6,000 $69,500
PE 22–7A (FIN MAN); PE 7–7A (MAN) Number of employee errors…………………………………………………………………Input Number of times paper supply runs out…………………………………………………Input Copy machine downtime (broken)…………………………………………………………Input Number of pages copied per hour…………………………………………………………Output Number of customer complaints………………………………………………………… Output Percent jobs done on time…………………………..………………………………………Output
PE 22–7B (FIN MAN); PE 7–7B (MAN) Number of times ingredients are missing……………………………………………… Input Number of customer complaints………………………………………………………… Output Number of hours kitchen equipment is down for repairs…………………………… Input Number of server order mistakes…………………………………………………………Input Percent of meals prepared on time……………………………………………………… Output Number of unexpected cook absences…………………………………………………… Input
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
EXERCISES Ex. 22–1 (FIN MAN); Ex. 7–1 (MAN) Ingredient
Cocoa Sugar Milk Total cost
Quantity
×
Price
650 lbs. 200 lbs. 150 gals.
×
$0.90 per lb. $1.50 per lb. $2.10 per gal.
× ×
Total
$ 585 300 315 $1,200
Standard direct materials cost per bar of chocolate: $1,200 per batch 4,800 bars
= $0.25 per bar
Ex. 22–2 (FIN MAN); Ex. 7–2 (MAN) a.
b.
Direct labor…………………………………………… $18.00 Direct materials……………………………………… $15.00 Variable factory overhead………………………… $2.75 Fixed factory overhead…………………………… $1.25 Total cost per unit………………………………
× 2.0 hrs. × 20 bd. ft. × 2.0 hrs. × 2.0 hrs.
$ 36.00 300.00 5.50 2.50 $344.00
A standard cost system provides Wood Designs’ management a cost control tool using the principle of management by exception. Using this principle, costs that deviate significantly from standards can be investigated and corrected. The standard cost system also can be used to motivate employees to work efficiently with their time, use of materials, and other factory overhead resources.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–3 (FIN MAN); Ex. 7–3 (MAN) TIME IN A BOTTLE COMPANY Manufacturing Cost Budget For the Month Ended May 31, 2014
a.
Standard Cost at Planned Volume (600,000 Bottles)
Manufacturing costs: Direct labor Direct materials Factory overhead Total
$10,800 49,500 3,000 $63,300
$1.80 × (600,000 ÷ 100) = $10,800 $8.25 × (600,000 ÷ 100) = $49,500 $0.50 × (600,000 ÷ 100) = $3,000 Note: The cost standards are expressed as “per 100 bottles.” b.
TIME IN A BOTTLE COMPANY Manufacturing Costs—Budget Performance Report For the Month Ended May 31, 2014 Actual Costs
Manufacturing costs: Direct labor Direct materials Factory overhead Total manufacturing cost
$ 9,890 48,450 3,460 $61,800
Standard Cost at
Cost Variance—
Actual Volume (610,000 Bottles)
(Favorable) Unfavorable
$10,980 50,325 3,050 $64,355
$(1,090) (1,875) 410 $(2,555)
$1.80 × (610,000 ÷ 100) = $10,980 $8.25 × (610,000 ÷ 100) = $50,325 $0.50 × (610,000 ÷ 100) = $3,050 c.
Time in a Bottle Company’s actual costs were $2,555 less than budgeted. Favorable direct labor and direct material cost variances more than offset a small unfavorable factory overhead cost variance.
Note to Instructors: The budget prepared in part (a) at the beginning of the month should not be used in the budget performance report because actual volumes were greater than planned (610,000 vs. 600,000).
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–4 (FIN MAN); Ex. 7–4 (MAN) a.
Price variance: Direct Materials = (Actual Price – Standard Price) × Actual Quantity Price Variance Direct Materials = ($2.60 per lb. – $2.50 per lb.) × 53,500 lbs. Price Variance Direct Materials = $5,350 Unfavorable Price Variance
Quantity variance: Direct Materials = (Actual Quantity – Standard Quantity) × Standard Price Quantity Variance Direct Materials = (53,500 lbs. – 55,120 lbs.) × $2.50 per lb. Quantity Variance Direct Materials = –$4,050 Favorable Quantity Variance
Total direct materials cost variance: Direct Materials Price Variance + Direct Materials = Direct Materials Quantity Variance Cost Variance Direct Materials = $5,350 – $4,050 Cost Variance Direct Materials = $1,300 Unfavorable Cost Variance
b.
The direct materials price variance should normally be reported to the Purchasing Department, which may or may not be able to control this variance. If materials of the same quality were purchased from another supplier at a price higher than the standard price, the variance was controllable. However, if the variance resulted from a market-wide price increase, the variance was not subject to control. The direct materials quantity variance should be reported to the proper level of operating management. For example, if lower amounts of direct materials had been used because of production efficiencies, the variance would be reported to the production supervisor. However, if the favorable use of raw materials had been caused by the purchase of higher-quality raw materials, the variance should be reported to the Purchasing Department. The total materials cost variance should be reported to senior plant management, such as the plant manager or materials manager.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–5 (FIN MAN); Ex. 7–5 (MAN) Price variance: Direct Materials = (Actual Price – Standard Price) × Actual Quantity Price Variance Direct Materials = ($6.50 per unit* – $6.90 per unit) × 450 Price Variance Direct Materials = –$180 Favorable Price Variance
* $2,925 ÷ 450 units = $6.50 per unit Quantity variance: Direct Materials = (Actual Quantity – Standard Quantity) × Standard Price Quantity Variance Direct Materials = (450 units – 430 units) × $6.90 per unit Quantity Variance Direct Materials = $138 Unfavorable Quantity Variance
Total direct materials cost variance: Direct Materials Direct Materials Price Variance + = Direct Materials Quantity Variance Cost Variance Direct Materials = –$180 + $138 Cost Variance Direct Materials = –$42 Favorable Cost Variance
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–6 (FIN MAN); Ex. 7–6 (MAN) Product finished………………………………………………………… Standard finished product for direct materials used (3,000 lbs. ÷ 2 lbs.)……………………………………………………… Deficiency of finished product for materials used…………… Standard cost for direct materials: Quantity variance divided by deficiency of product for materials used ($1,000 ÷ 100 units)…………………………
1,400 units 1,500 (100) units
$10.00 per unit
Alternate solution: Price variance, unfavorable………………………………………… $1,500 Materials used………………………………………………………… ÷ 3,000 lbs. Price variance per lb.………………………………………………… $ 0.50 Unit price of direct materials……………………………………… Less price variance (unfavorable) per lb (from above).……… Standard price per lb.……………………………………………… × Pounds per unit of product……………………………………… Standard direct materials cost per unit of product……………
$ 5.50 (0.50) $ 5.00 2 $10.00
Proof: Direct Materials Price Variance
= (Actual Price – Standard Price) × Actual Quantity = ($5.50 – $5.00) × 3,000 = $1,500 Unfavorable
Direct Materials Quantity Variance
= (Actual Quantity – Standard Quantity) × Standard Price = (3,000 lbs. – 2,800 lbs.) × $5.00 = $1,000 Unfavorable
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–7 (FIN MAN); Ex. 7–7 (MAN) a. Standard Quantity Whole tomatoes… Vinegar…………… Corn syrup……… Salt…………………
3,360 220 20 80
×
lbs. gal. gal. lbs.
Standard Price $ 0.50 3.00 12.00 3.00
=
per lb. per gal. per gal. per lb.
Standard Cost per Batch $1,680 660 240 240
$2,820 ÷ Pounds per batch…………………………………………… 1,880 lbs. $ 1.50 per lb. b.
Actual Standard Quantity for Quantity per = Batch K-54 – Batch 3,556 230 18 75
lbs. gal. gal. lbs.
3,360 220 20 80
lbs. gal. gal. lbs.
Quantity Difference 196 10 (2) (5)
lbs. gal. gal. lbs.
×
Standard Price $ 0.50 3.00 12.00 3.00
per lb. per gal. per gal. per lb.
=
Materials Quantity Variance $98 30 –24 –15 $89
U U F F U
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–8 (FIN MAN); Ex. 7–8 (MAN) Rate variance:
a.
Direct Labor (Actual Rate per Hour – Standard Rate per Hour) = Rate Variance × Actual Hours Direct Labor = ($20.00 – $20.40) × 4,050 hours Rate Variance Direct Labor = –$1,620 Favorable Rate Variance
Time variance: Direct Labor (Actual Direct Labor Hours – Standard Direct Labor Hours) = Time Variance × Standard Rate per Hour Direct Labor = (4,050 hrs. – 4,000 hrs.) × $20.40 per hour Time Variance Direct Labor = $1,020 Unfavorable Time Variance
Total direct labor cost variance: Direct Labor = Direct Labor Rate Variance + Direct Labor Time Variance Cost Variance Direct Labor = –$1,620 Favorable + $1,020 Unfavorable Cost Variance Direct Labor = –$600 Favorable Cost Variance
b.
The employees may have been less experienced workers who were paid less than more experienced workers, or poorly trained, thereby resulting in a lower labor rate than planned. The lower level of experience or training may have resulted in less efficient performance. Thus, the actual time required was more than standard. Fortunately, the lost efficiency is more than offset by the lower labor rate.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–9 (FIN MAN); Ex. 7–9 (MAN) a.
Rate variance: Direct Labor (Actual Rate per Hour – Standard Rate per Hour) = Rate Variance × Actual Hours Direct Labor = ($15.60 – $16.00) × 850 hrs. Rate Variance Direct Labor = –$340 Favorable Rate Variance
Time variance: Direct Labor (Actual Direct Labor Hours – Standard Direct Labor Hours) = Time Variance × Standard Rate per Hour Direct Labor = (850 hrs. – 800 hrs.*) × $16.00 per hour Time Variance Direct Labor = $800 Unfavorable Time Variance
* 2.00 hrs. × 400 units Total direct labor cost variance: Direct Labor = Direct Labor Rate Variance + Direct Labor Time Variance Cost Variance Direct Labor = –$340 Favorable + $800 Unfavorable Cost Variance Direct Labor = $460 Unfavorable Cost Variance
b.
Debit to Work in Process: $12,800 Standard hours at actual production……………………………………… × Standard rate……………………………………………………………… Standard direct labor cost…………………………………………………
800 $ 16.00 $12,800
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–10 (FIN MAN); Ex. 7–10 (MAN) a.
(1) Cutting Department Rate variance: Direct Labor (Actual Rate per Hour – Standard Rate per Hour) = Rate Variance × Actual Hours Direct Labor = ($10.90 – $11.00) × 6,380 hours Rate Variance Direct Labor = –$638 Favorable Rate Variance
Time variance: Direct Labor (Actual Direct Labor Hours – Standard Direct Labor Hours) = Time Variance × Standard Rate per Hour Direct Labor = (6,380 hrs. – 6,250 hrs.*) × $11.00 per hour Time Variance Direct Labor = $1,430 Unfavorable Time Variance
* 0.25 hr. × 25,000 units Total direct labor cost variance: Direct Labor = Direct Labor Rate Variance + Direct Labor Time Variance Cost Variance Direct Labor = –$638 Favorable + $1,430 Unfavorable Cost Variance Direct Labor = $792 Unfavorable Cost Variance
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–10 (FIN MAN); Ex. 7–10 (MAN) (Concluded) (2) Sewing Department Rate variance: Direct Labor (Actual Rate per Hour – Standard Rate per Hour) = Rate Variance × Actual Hours Direct Labor = ($11.12 – $11.00) × 9,875 hours Rate Variance Direct Labor = $1,185 Unfavorable Rate Variance
Time variance: Direct Labor (Actual Direct Labor Hours – Standard Direct Labor Hours) = Time Variance × Standard Rate per Hour Direct Labor = (9,875 hrs. – 10,000 hrs.*) × $11.00 per hour Time Variance Direct Labor = –$1,375 Favorable Time Variance
* 0.40 hr. × 25,000 units Total direct labor cost variance: Direct Labor = Direct Labor Rate Variance + Direct Labor Time Variance Cost Variance Direct Labor = $1,185 Unfavorable – $1,375 Favorable Cost Variance Direct Labor = –$190 Favorable Cost Variance
b.
The two departments have opposite results. The Cutting Department has a favorable rate and an unfavorable time variance, resulting in a total unfavorable cost variance of $792. In contrast, the Sewing Department has an unfavorable rate variance but has a favorable time variance, resulting in a total favorable cost variance of $190. The causes of this disparity are worthy of investigation. There are many possible causes including tight or loose standards, inferior or superior operating methods, and inappropriate or appropriate use of overtime. Combining both departments, the overall operation shows an unfavorable cost variance of $602 ($792 – $190), as a result of the weak performance in the Cutting Department.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–11 (FIN MAN); Ex. 7–11 (MAN) a.
Actual weekly expenditure: 4 people × $15.00 per hour × 40 hrs. per week = $2,400
b.
Standard time used for the volume of admissions: Unscheduled
Number of admissions…… × Standard time…………… Total…………………………… c.
140 30 min. 4,200 min.
Scheduled
350 15 min. 5,250 min.
Actual productive minutes available (4 employees × 40 hrs. × 60 min.)………………………… Less standard minutes used at actual volume………… Time difference from standard…………………………… × Standard rate per minute1………………………………… Direct labor time variance—unfavorable………………… or [(4 × 40 hours) – 157.50 hours] × $15 per hour = $37.50 or $2,400 [from (a)] – $2,362.502 = $37.50 1
Total
9,450 min. or (157.5 hrs ÷ 60 min.)
9,600 minutes 9,450 minutes 150 minutes $ 0.25 $37.50
Standard direct labor rate: $15 ÷ 60 min. = $0.25 per min.
2
Standard labor cost at actual volume: Productive time (9,450 ÷ 60) × $15 = $2,362.50
The Admissions Department was less efficient than standard by 150 minutes, or 2.5 hours. This is equal to $37.50 at the standard rate of $15 per hour.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–12 (FIN MAN); Ex. 7–12 (MAN) a.
Standard Sorts per Hour Standard Sorts per Minute × = (per employee) Standard Minutes per Hour 120 sorts per min. × 60 min. per hr. = 7,200 standard sorts per hr. Pieces of Mail ÷ = Number of Hours Planned Standard Sorts per Hour 41,472,000 letters ÷ 7,200 sorts per hr. = 5,760 hrs. planned Number of Hours Planned ÷ = Number of Hires Hours per Temporary Employee per Month 5,760 hrs. ÷ 160 hrs. = 36 temporary hires for December
b.
Actual pieces sorted = 41,220,000 Standard Number of Hours Actual Pieces of Mail Sorted ÷ = for Actual Production Standard Sorts per Hour 41,220,000 ÷ 7,200 standard sorts per hr. =
5,725 standard hrs. for actual production
Actual hours staffed……………………………………………………………… Standard hours for actual production………………………………………… Excess of actual over standard hours………………………………………… × Standard hourly rate…………………………………………………………… Direct labor time variance—unfavorable………………………………………
5,760 5,725 35 $ 15 $ 525
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–13 (FIN MAN); Ex. 7–13 (MAN) Step 1: Determine the standard direct materials and direct labor per unit. Standard direct materials quantity per unit: Direct materials lbs. budgeted for June: $36,000 $1.25 per lb.
= 28,800 lbs.
Standard pounds per unit: 28,800 lbs. 19,200 units
= 1.5 standard lbs. per unit
Standard direct labor time per unit: Direct labor hrs. budgeted for June: $26,880 $14.00 per hr.
= 1,920 direct labor hrs.
Standard direct labor hrs. per unit: 1,920 hrs. 19,200 units
= 0.10 standard direct labor hr. per unit
Step 2: Using the standard quantity and time rates in step 1, determine the standard costs for the actual June production. Standard direct materials at actual volume: 18,000 units × 1.5 lbs. per unit × $1.25…………………………………………… Standard direct labor at actual volume: 18,000 units × 0.10 direct labor hr. per unit × $14.00………………………… Total…………………………………………………………………………………………
$33,750 25,200 $58,950
Step 3: Determine the direct materials quantity and direct labor time variances, assuming no direct materials price or direct labor rate variances. Actual direct materials used in production………………………………………… Standard direct materials (step 2)…………………………………………………… Direct materials quantity variance—unfavorable*…………………………………
$34,500 33,750 $ 750
* (27,600 lbs. – 27,000 lbs.) × $1.25 = 750 U $34,500 ÷ $1.25 = 27,600 lbs. $33,750 ÷ $1.25 = 27,000 lbs.
$24,500 Actual direct labor……………………………………………………………………… 25,200 Standard direct labor (step 2)………………………………………………………… Direct labor time variance—favorable**……………………………………………… $ (700) ** 18,000 units × 0.10 hr. = 1,800 standard hrs. $24,500 ÷ $14.00 = 1,750 actual hrs. (1,750 hrs. – 1,800 hrs.) × $14.00 = –$700 F
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–14 (FIN MAN); Ex. 7–14 (MAN) LENO MANUFACTURING COMPANY Factory Overhead Cost Budget—Press Department For the Month Ended November 30, 2014 Direct labor hours Variable overhead cost: Indirect factory labor Power and light Indirect materials Total variable factory overhead Fixed factory overhead cost: Supervisory salaries Depreciation of plant and equipment Insurance and property taxes Total fixed factory overhead Total factory overhead 1 2 3
18,000
20,000
22,000
$162,000 1 10,800 2 57,600 3 $230,400
$180,000 12,000 64,000 $256,000
$198,000 13,200 70,400 $281,600
$ 80,000 50,000 32,000 $162,000 $392,400
$ 80,000 50,000 32,000 $162,000 $418,000
$ 80,000 50,000 32,000 $162,000 $443,600
18,000 × ($180,000 ÷ 20,000) 18,000 × ($12,000 ÷ 20,000) 18,000 × ($64,000 ÷ 20,000)
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–15 (FIN MAN); Ex. 7–15 (MAN) a.
WIKI WIKI COMPANY Monthly Factory Overhead Cost Budget—Fabrication Department Direct labor hours Variable factory overhead cost Fixed factory overhead cost Total factory overhead
b.
9,000
10,000
11,000
$ 40,500 60,000 $100,500
$ 45,000 60,000 $105,000
$ 49,500 60,000 $109,500
Overhead applied at actual production: Actual hours…………………………………………………………………………… × Overhead application rate*……………………………………………………… Factory overhead applied……………………………………………………………
9,000 $ 10.50 $94,500
* Total factory overhead rate to be applied to production: Variable factory overhead………………………………………………… $ 4.50 Fixed factory overhead**…………………………………………………… 6.00 Total…………………………………………………………………………… $10.50
**
Fixed factory overhead rate:
$60,000 10,000 hrs.
= $6.00 per hr.
Note: The fixed factory overhead rate is determined at normal production.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–16 (FIN MAN); Ex. 7–16 (MAN) Variable factory overhead controllable variance: Actual variable factory overhead cost incurred……………… $262,000 Budgeted variable factory overhead for 14,000 hrs. [14,000 × ($25.00 – $6.00)]……………………………………… 266,000 Variance—favorable……………………………………………
$(4,000)
Fixed factory overhead volume variance: Productive capacity at 100%…………………………………… Standard for amount produced………………………………… Productive capacity not used…………………………………… × Standard fixed factory overhead rate……………………… Variance—unfavorable……………………………………… Total factory overhead cost variance—unfavorable*……………
15,000 hrs. 14,000 hrs. 1,000 hrs. $6.00 6,000 $ 2,000
* Actual Overhead – Applied Overhead = Total Overhead Variance: ($262,000 + $90,000) – $350,000 = $2,000
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–16 (FIN MAN); Ex. 7–16 (MAN) (Concluded) Alternative Computation of Overhead Variances Actual costs Balance (underapplied)
Factory Overhead 352,000 Applied costs
350,000
2,000
Actual
Budgeted Factory
Applied
Factory
Overhead for Amount
Factory
Overhead
Produced
Overhead
$352,000
Variable cost [14,000 × ($25.00 – $6.00)]……… $266,000 90,000
$350,000
Fixed cost…………………………………………… Total…………………………………………………
$356,000
–$4,000 F
$6,000 U
Controllable
Volume
Variance
Variance $2,000 U Total Factory Overhead Cost Variance
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–17 (FIN MAN); Ex. 7–17 (MAN) a.
Controllable variance: Actual variable factory overhead ($782,000 – $240,000)………………………… Standard variable factory overhead at actual production: Standard hours at actual production…… × Variable factory overhead rate1……… Standard variable factory overhead……… Controllable variance—favorable………………
b.
$542,000
92,500 $6.00 555,000 $(13,000)
Volume variance: 100,000 Volume at 100% of normal capacity………………………… 92,500 Less standard hours…………………………………………… 7,500 Idle capacity……………………………………………………… $2.40 × Fixed overhead rate2………………………………………… Volume variance—unfavorable……………………………… Total factory overhead cost variance—unfavorable………………………………………… 1
2
3
Variable factory overhead rate:
Fixed factory overhead rate:
$540,000 90,000 hrs. $240,000 100,000 hrs.
18,000 $ 5,000
= $6.00 per hour
= $2.40 per hour
Actual Overhead – Applied Overhead = Total Overhead Variance: $782,000 – [($6.00 + $2.40) × 92,500 hrs.] = $5,000
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3
CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–17 (FIN MAN); Ex. 7–17 (MAN) (Concluded) Alternative Computation of Overhead Variances Factory Overhead Actual costs Balance (underapplied)
782,000
Applied costs
777,000 *
5,000
Actual
Budgeted Factory
Applied
Factory
Overhead for Amount
Factory
Overhead
Produced
Overhead
$782,000
Variable cost (92,500 × $6.00)…………
$555,000 240,000
$777,000 *
Fixed cost………………………………… Total………………………………………… $795,000 –$13,000 F
$18,000 U
Controllable
Volume
Variance
Variance $5,000 U Total Factory Overhead Cost Variance
* [($6.00 + $2.40) × 92,500]
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–18 (FIN MAN); Ex. 7–18 (MAN) In determining the volume variance, the productive capacity overemployed (2,000 hours) should be multiplied by the standard fixed factory overhead rate of $3.80 ($7.30 – $3.50) to yield a favorable variance of $7,600. The variance analysis provided by the chief cost accountant incorrectly multiplied the 2,000 hours by the total factory overhead rate of $7.30 per hour and reported it as unfavorable. A correct determination of the factory overhead cost variances is as follows: Variable factory overhead controllable variance: Actual variable factory overhead cost incurred…………………… $458,000 Budgeted variable factory overhead for 132,000 hours (132,000 × $3.50)………………………………………………… 462,000 Variance—favorable…………………………………………………
$ (4,000)
Fixed factory overhead volume variance: Productive capacity at 100%…………………………………………… 130,000 hrs. Standard for amount produced………………………………………… 132,000 hrs. (2,000) hrs. Productive capacity overemployed…………………………………… × $3.80 × Standard fixed factory overhead rate……………………………… (7,600) Variance—favorable………………………………………………… $(11,600) Total factory overhead cost variance—favorable………………………
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–18 (FIN MAN); Ex. 7–18 (MAN) (Concluded) Alternative Computation of Overhead Variances
Actual costs ($458,000 + $494,000)
Factory Overhead 952,000 Applied costs
963,600
[($3.50 + $3.80) × 132,000] Balance (overapplied) 11,600
Actual
Budgeted Factory
Factory
Overhead for Amount
Factory
Overhead
Produced
Overhead
Applied
$462,000 Fixed cost…………………………………… 494,000 Total………………………………………… $956,000
$952,000
Variable cost (132,000 × $3.50)…………
$4,000 F
$7,600 F
Controllable
Volume
Variance
Variance
$963,600
$11,600 F Total Factory Overhead Cost Variance
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–19 (FIN MAN); Ex. 7–19 (MAN) TANNIN PRODUCTS INC. Factory Overhead Cost Variance Report—Trim Department For the Month Ended July 31, 2014 Productive capacity for the month
25,000 hrs.
Actual productive capacity used for the month
22,000 hrs.
Budget (at actual production)
Variances Actual
Favorable
Unfavorable
1
Variable factory overhead costs: Indirect factory labor Power and light Indirect materials Total variable factory overhead cost
$ 50,600
$ 49,700
$ (900)
13,200 22,000
13,000 24,000
$ (200)
$ 85,800
$ 86,700
$ 54,500
$ 54,500
40,000 35,500
40,000 35,500
$130,000
$130,000
$215,800
$216,700
$ 2,000
Fixed factory overhead costs: Supervisory salaries Depreciation of plant and equipment Insurance and property taxes Total fixed factory overhead cost Total factory overhead cost Total controllable variances
$(1,100)
Net controllable variance—unfavorable
$ 2,000 $
900
Volume variance—unfavorable: Idle hours at the standard rate for fixed factory overhead2: (25,000 hrs. – 22,000 hrs.) × $5.20
15,600
Total factory overhead cost variance—unfavorable 1
$16,500
The budgeted variable factory overhead costs are determined by multiplying 22,000 hours by the variable factory overhead cost rate for each variable cost category. These rates are determined by dividing each budgeted amount (estimated at the beginning of the month) by the planned (budgeted) volume of 20,000 hours. Thus, for example: $50,600 = ($46,000 ÷ 20,000 hrs.) × 22,000 hrs. $13,200 = ($12,000 ÷ 20,000 hrs.) × 22,000 hrs. $22,000 = ($20,000 ÷ 20,000 hrs.) × 22,000 hrs.
2
Fixed factory overhead rate:
$130,000 25,000 hrs.
= $5.20 per hr.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–19 (FIN MAN); Ex. 7–19 (MAN) (Concluded) Alternative Computation of Overhead Variances Actual costs Balance (underapplied)
Factory Overhead 216,700 Applied costs 16,500
200,200
[22,000 × ($3.90* + $5.20)]
Actual
Budgeted Factory
Factory
Overhead for Amount
Factory
Overhead
Produced
Overhead
$216,700
Applied
Variable cost (22,000 × $3.90)…………… $ 85,800 Fixed cost…………………………………… 130,000
$200,200
$215,800
Total………………………………………… $900 U
$15,600 U
Controllable
Volume
Variance
Variance $16,500 U Total Factory Overhead Cost Variance
*$78,000 ÷ 20,000 hours budgeted at the beginning of the month
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–20 (FIN MAN); Ex. 7–20 (MAN) 1
Materials
a.
118,825 2
Direct Materials Price Variance
8,575
3
127,400
Accounts Payable 1 2 3
2,450 × $48.50 2,450 × $3.50 ($52.00 – $48.50) 2,450 × $52.00 1
Work in Process
b.
97,000 2
4,850
Direct Materials Quantity Variance Materials3 1 2 3
92,150
200 × 10 units × $48.50 (2,000 units – 1,900 units) × $48.50 1,900 × $48.50
Ex. 22–21 (FIN MAN); Ex. 7–21 (MAN) Mar.
1
31 Work in Process
198,000
Direct Labor Time Variance
9,000
Direct Labor Rate Variance
4,600
2
Wages Payable
202,400
1
5,000 × 2.20 hrs. × $18.00 Direct labor time variance: (11,500 – 11,000) × $18.00 = $9,000 U Direct labor rate variance: ($17.60 – $18.00) × 11,500 = $4,600 F
2
11,500 hours × $17.60 per hour
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–22 (FIN MAN); Ex. 7–22 (MAN) GRIGGS COMPANY Income Statement For the Month Ended December 31, 2014 Sales Cost of goods sold—at standard Gross profit—at standard
$868,000 550,000 $318,000 Favorable
Less variances from standard cost: Direct materials price Direct materials quantity Direct labor rate Direct labor time Variable factory overhead controllable Fixed factory overhead volume Gross profit Operating expenses: Selling expenses Administrative expenses Income from operations Other expense: Interest expense Income before income tax
$ — 560 1,120 — 210 —
Unfavorable $
1,680 — — 490 — 3,080
$125,000 100,800
3,360 $314,640
225,800 $ 88,840 2,940 $ 85,900
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–23 (FIN MAN); Ex. 7–23 (MAN) a. and b. Input Measure
Output Measure
Explanation
Average computer response time to customer “clicks”
X
A measure of the speed of the ordering process. If the speed is too slow, we may lose customers.
Dollar amount of returned goods
X
An important measure of customer satisfaction with the final product that was ordered.
Elapsed time between customer order and product delivery
X
An important overall measure of
Maintenance dollars divided by hardware investment
process responsiveness. If the company is too slow in providing product, we may lose customers. X
A driver of the ordering system’s reliability and downtime. The maintenance dollars should be divided by the amount of hardware in order to facilitate comparison across time.
Number of customer complaints divided by the number of orders
X
An extreme measure of customer dissatisfaction with the ordering process.
Number of misfilled orders divided by the number of orders
X
Incorrectly filled orders reduce the customer’s satisfaction with the order process. A measure of output quality of the process.
Number of orders per warehouse employee
X
This measure is related to the capacity of the warehouse relative to the demands placed upon it. This relationship will impact the delivery cycle time.
Number of page faults or errors due to software programming errors
X
The page errors will negatively impact the customer’s ordering experience. It’s a measure of process output quality.
Number of software fixes per week
X
Software bugs reduce the effectiveness of the order fulfillment system; thus, fixes are an input that will improve the performance of the order fulfillment system.
Server (computer) downtime
X
Training dollars per programmer
X
A measure of computer system reliability. Trained programmers should enhance the software’s responsiveness and reliability.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Ex. 22–24 (FIN MAN); Ex. 7–24 (MAN) a.
Possible Input Measures Registration staffing per student Technology investment per period for registration process Training hours per registration personnel Amount of faculty staffing Amount of technology capacity (size of computer, number of input lines) for registration process Maintenance dollars spent on the registration system Employee satisfaction score Number of hours per day registration is available Possible Output Measures Cycle time for a student to register for classes Number of times a course is unavailable Number of separate registration events or steps (log-ons or line waits) per student Number of times a replacement course was used by a student Number of registration errors Student satisfaction score with the registration process Number of student complaints about registration process Number of registration rework steps per student Cost of registration per student Number of personnel overtime hours during registration Labor time variance for registration process (standard hours less actual hours at standard labor rate) Number of computer registration failures
b.
Alpha University is interested in not only the efficiency of the process but also the quality of the process. This means that the process must meet multiple objectives. The college wants this process to meet the needs of students, which means it should not pose a burden to students. Students should be able to register for classes quickly, get the courses they want, and avoid registration errors, hassles, and problems. Thus, the nonfinancial measures are used to balance the need for a cost-efficient process with one that will meet the needs of the student.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
PROBLEMS Prob. 22–1A (FIN MAN); Prob. 7–1A (MAN) a.
Standard Materials and Labor Cost per Faucet
Direct materials ($22.00 × 2.6 lbs.)……………………………………………… Direct labor [$16.80 × (15 min. ÷ 60 min.)]………………………………………
b.
$57.20 4.20 $61.40
Direct Materials Cost Variance Price variance: Direct Materials = (Actual Price – Standard Price) × Actual Quantity Price Variance Direct Materials = ($21.85 per lb. – $22.00 per lb.) × 31,750 lbs. Price Variance Direct Materials = –$4,762.50 Favorable Price Variance
Quantity variance: Direct Materials = (Actual Quantity – Standard Quantity) × Standard Price Quantity Variance Direct Materials = (31,750 lbs. – 31,200 lbs.*) × $22.00 per lb. Quantity Variance Direct Materials = $12,100 Unfavorable Quantity Variance
* 12,000 units × 2.6 lbs. Total direct materials cost variance: Direct Materials Direct Materials Price Variance + = Cost Variance Direct Materials Quantity Variance Direct Materials = –$4,762.50 + $12,100.00 Cost Variance Direct Materials = $7,337.50 Unfavorable Cost Variance
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–1A (FIN MAN); Prob. 7–1A (MAN) (Concluded) Direct Labor Cost Variance
c. Rate variance:
Direct Labor (Actual Rate per Hour – Standard Rate per Hour) = Rate Variance × Actual Hours Direct Labor = ($17.00 – $16.80) × 3,200 hrs.* Rate Variance Direct Labor = $640 Unfavorable Rate Variance
* 80 employees × 40 hrs. Time variance: (Actual Direct Labor Hours – Standard Direct Labor Hours) Direct Labor = × Standard Rate per Hour Time Variance Direct Labor = (3,200 hrs.* – 3,000 hrs.**) × $16.80 per hour Time Variance Direct Labor = $3,360 Unfavorable Time Variance
* 80 employees × 40 hrs. ** 12,000 units × (15 min. ÷ 60 min.) Total direct labor cost variance: Direct Labor = Direct Labor Rate Variance + Direct Labor Time Variance Cost Variance Direct Labor = $640 + $3,360 Cost Variance Direct Labor = $4,000 Unfavorable Cost Variance
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–2A (FIN MAN); Prob. 7–2A (MAN) 1.
a.
Direct Materials Variance
Cocoa
Sugar
Total
Price variance: Actual price………………………………………
$
7.33 7.25
Standard price…………………………………… Variance…………………………………………… $
0.08 140,300
× Actual quantity………………………………… Direct materials price variance……………
$
$
1.35 1.40
$
11,224 U
(0.05) 188,000
$ (9,400) F
$1,824 U
Quantity variance: Actual quantity used…………………………… Standard quantity1………………………………
140,300
188,000
140,000
190,000
Variance……………………………………………
300 $7.25
× Standard price………………………………… Direct materials quantity variance………… $
2,175 U
(2,000) $1.40 $ (2,800) F
(625) F $1,199 U
Total direct materials cost variance……………… Alternatively, total direct materials cost variance: Actual cost 2………………………………………
$1,028,399
$253,800
1,015,000
266,000
3
Standard cost …………………………………… Total direct materials cost variance……… $ 1
13,399 U
$ (12,200) F
$1,199 U
140,000 = (12 lbs. × 5,000 actual production of dark chocolate) + (8 lbs. × 10,000 actual production of light chocolate) 190,000 = (10 lbs. × 5,000 actual production of dark chocolate) + (14 lbs. × 10,000 actual production of light chocolate)
2
$1,028,399 = $7.33 × 140,300 lbs. $253,800 = $1.35 × 188,000 lbs.
3
$1,015,000 = $7.25 × 140,000 lbs. $266,000 = $1.40 × 190,000 lbs.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–2A (FIN MAN); Prob. 7–2A (MAN) (Concluded) 1.
b.
Direct Labor Variance
Dark
Light
Chocolate
Chocolate
$ 15.25
$ 15.80
15.50
15.50
Total
Rate variance: Actual rate………………………………………… Standard rate…………………………………… Variance…………………………………………… × Actual time………………………………………
$ (0.25) × 2,360
$ 0.30 × 6,120
$
$ 1,836 U
Direct labor rate variance…………………
(590) F
$1,246 U
Time variance: Actual time……………………………………… Standard time 1…………………………………… Variance…………………………………………… × Standard rate………………………………… Direct labor time variance…………………
2,360
6,120
2,500
6,000
(140) $ 15.50
120 $ 15.50
$ (2,170) F
$ 1,860 U
(310) F $ 936 U
Total direct labor cost variance…………………… Alternatively, total direct labor cost variance: Actual cost 2……………………………………… 3
Standard cost ……………………………………
$96,696
38,750
93,000
$ (2,760) F
Total direct labor cost variance………… 1
$35,990
$ 3,696 U
$ 936 U
2,500 = 0.50 hr. × 5,000 actual production of dark chocolate 6,000 = 0.60 hr. × 10,000 actual production of dark chocolate
2
$35,990 = 2,360 hrs. × $15.25 $96,696 = 6,120 hrs. × $15.80
3
$38,750 = 2,500 hrs. × $15.50 $93,000 = 6,000 hrs. × $15.50
2.
The variance analyses should be based on the standard amounts at actual volumes. The budget must flex with the volume changes. If the actual volume is different from the planned volume, as it was in this case, then the budget used for performance evaluation should reflect the amount of direct materials and direct labor that will be required for the actual production. In this way, spending from volume changes can be separated from efficiency and price variances.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–3A (FIN MAN); Prob. 7–3A (MAN) Direct Materials Cost Variance
a. Price variance:
Direct Materials = (Actual Price – Standard Price) × Actual Quantity Price Variance Direct Materials = ($12.50 per lb. – $12.00 per lb.) × 3,500 lbs. Price Variance Direct Materials = $1,750 Unfavorable Price Variance
Quantity variance: Direct Materials = (Actual Quantity – Standard Quantity) × Standard Price Quantity Variance Direct Materials = (3,500 lbs. – 3,700 lbs.) × $12.00 per lb. Quantity Variance Direct Materials = –$2,400 Favorable Quantity Variance
Total direct materials cost variance: Direct Materials Direct Materials Price Variance + = Cost Variance Direct Materials Quantity Variance Direct Materials = $1,750 – $2,400 Cost Variance Direct Materials = –$650 Favorable Cost Variance
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–3A (FIN MAN); Prob. 7–3A (MAN) (Continued) Direct Labor Cost Variance
b. Rate variance:
Direct Labor (Actual Rate per Hour – Standard Rate per Hour) = Rate Variance × Actual Hours Direct Labor = ($20.40 – $20.00) × 4,200 hrs. Rate Variance Direct Labor = $1,680 Unfavorable Rate Variance
Time variance: Direct Labor (Actual Direct Labor Hours – Standard Direct Labor Hours) = Time Variance × Standard Rate per Hour Direct Labor = (4,200 hrs. – 4,300 hrs.) × $20.00 per hour Time Variance Direct Labor = –$2,000 Favorable Time Variance
Total direct labor cost variance: Direct Labor = Direct Labor Time Variance + Direct Labor Rate Variance Cost Variance Direct Labor = $1,680 – $2,000 Cost Variance Direct Labor = –$320 Favorable Cost Variance
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–3A (FIN MAN); Prob. 7–3A (MAN) (Continued) c.
Factory Overhead Cost Variance Variable factory overhead controllable variance: Actual variable factory overhead cost incurred………………………
$16,800 17,200 **
Budgeted variable factory overhead for 4,300 hrs.* …………………
$(400)
Variance—favorable…………………………………………………… Fixed factory overhead volume variance: 4,500 hrs. 4,300
Normal capacity at 100%………………………………………………… Standard for amount produced………………………………………… Productive capacity not used…………………………………………… × Standard fixed factory overhead cost rate…………………………
$
200 hrs. 3.00
Variance—unfavorable………………………………………………
600
Total factory overhead cost variance—unfavorable……………………
$ 200
* 10,750 units × 0.4 hour per unit ** 4,300 hrs. × $4.00
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–3A (FIN MAN); Prob. 7–3A (MAN) (Concluded) Alternative Computation of Overhead Variances Actual costs ($16,800 + $13,500) Balance (underapplied)
Factory Overhead 30,300 Applied costs
30,100
[4,300 × ($4.00 + $3.00)] 200
Actual
Budgeted Factory
Factory
Overhead for Amount
Factory
Overhead
Produced
Overhead
$30,300
Applied
Fixed cost……………………………………
$17,200 13,500
Total…………………………………………
$30,700
Variable cost (4,300 × $4.00)……………
–$400 F
$600 U
Controllable
Volume
Variance
Variance
$30,100
$200 U Total Factory Overhead Cost Variance
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–4A (FIN MAN); Prob. 7–4A (MAN) TIGER EQUIPMENT INC. Factory Overhead Cost Variance Report—Welding Department For the Month Ended May 31, 2014 Normal capacity for the month
8,400 hrs.
Actual production for the month
8,860 hrs.
Variances Budget
Variable costs:
Actual
Favorable
Unfavorable
1
Indirect factory wages
$ 31,896
$ 32,400
21,264 17,720
21,000 18,250
$ 70,880
$ 71,650
$ 20,000
$ 20,000
36,200 15,200
36,200 15,200
Total fixed cost
$ 71,400
$ 71,400
Total factory overhead cost
$142,280
$143,050
Power and light Indirect materials Total variable cost
$ 504 $(264) 530
Fixed costs: Supervisory salaries Depreciation of plant and equipment Insurance and property taxes
Total controllable variances
$(264)
$ 1,034 $
Net controllable variance—unfavorable
770
Volume variance—favorable: Excess hours used over normal at the standard rate for fixed factory overhead2: (8,400 hrs. – 8,860 hrs.) × $8.50
(3,910)
Total factory overhead cost variance—favorable 1
$(3,140)
The budgeted variable costs are determined by multiplying the 8,860 actual hours by the variable overhead rate (the May budget divided by 8,400 hours for each variable overhead cost). Thus, Indirect factory wages, $31,896 = 8,860 hrs. × ($30,240 ÷ 8,400 hrs.) Power and light, $21,264 = 8,860 hrs. × ($20,160 ÷ 8,400 hrs.) Indirect materials, $17,720 = 8,860 hrs. × ($16,800 ÷ 8,400 hrs.)
2
Fixed factory overhead rate:
$71,400 8,400 hrs.
= $8.50 per hr.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–4A (FIN MAN); Prob. 7–4A (MAN) (Concluded) Alternative Computation of Overhead Variances Actual costs
Factory Overhead 143,050 Applied costs* [8,860 × ($8.00 + $8.50)] Balance (overapplied)
146,190 3,140
Actual
Budgeted Factory
Applied
Factory
Overhead for Amount
Factory
Overhead
Produced
Overhead
$143,050
$ 70,880 71,400 Fixed cost…………………………………… Total………………………………………… $142,280 Variable cost (8,860 × $8.00)……………
$770 U
–$3,910 F
Controllable
Volume
Variance
Variance
$146,190
–$3,140 F Total Factory Overhead Cost Variance
*$67,200 ÷ 8,400 hrs. = $8.00 $71,400 ÷ 8,400 hrs. = $8.50
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–5A (FIN MAN); Prob. 7–5A (MAN) 1.
200 Actual hours provided (5 × 40 hrs.)………………………………………………… 186 Standard hours required for the original plan*…………………………………… Labor time difference………………………………………………………………… 14 $ 32 × Standard labor rate………………………………………………………………… × Direct labor time variance—unfavorable…………………………………………… $ 448 *
2.
= 186 hrs.
Actual hours provided (5 × 40 hrs.)………………………………………………… 200 226 Standard hours required for the actual results*………………………………… Labor time difference………………………………………………………………… (26) × Standard labor rate………………………………………………………………… × $ 32 $ (832) Direct labor time variance—favorable……………………………………………… *
3.
4,650 lines 25 lines per hr.
5,650 lines 25 lines per hr.
= 226 hrs.
Actual labor rate………………………………………………………………………… $ 40 32 Standard labor rate…………………………………………………………………… Difference………………………………………………………………………………… $ 8 200 × Actual hours provided (5 × 40 hrs.)……………………………………………… × $1,600 Direct labor rate variance—unfavorable…………………………………………… The labor cost variance is $768 unfavorable [–$832 favorable time variance + $1,600 unfavorable rate variance].
4.
The labor rate and time variances fail to consider the number of errors in the code from programmer fatigue. A program that has many errors will require significant time for debugging at a later date. In addition, hidden errors can cause possible field failures with customers. Thus, managers should consider not only the efficiency of doing the work, but also the quality of the work.
5.
Actual hours provided (6 × 40 hrs.)………………………………………………… Standard hours required for the actual results*………………………………… Labor time difference………………………………………………………………… × Standard labor rate………………………………………………………………… Direct labor time variance—unfavorable……………………………………………
240 226 14 × $32 $448
* From part (2) above 6.
Hiring an extra employee is less costly than the bonus by $320. The direct labor cost variance for paying the bonus was $768 unfavorable, which is the sum of the rate variance and the time variance (–$832 F + $1,600 U) shown in parts (2) and (3) above. The cost variance that would result from hiring another employee would have been $448 unfavorable, shown in part (5) above. Thus, the net benefit for hiring another employee over paying the bonus is $320 ($768 U – $448 U).
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–1B (FIN MAN); Prob. 7–1B (MAN) a.
Standard Materials and Labor Cost per Unit
Direct materials ($5.00 × 5.0 yds.)………………………………………………… Direct labor [$12.00 × (12 min. ÷ 60 min.)]………………………………………
b.
$25.00 2.40 $27.40
Direct Materials Cost Variance Price variance: Direct Materials = (Actual Price – Standard Price) × Actual Quantity Price Variance Direct Materials = ($5.10 per yd. – $5.00 per yd.) × 26,200 yds. Price Variance Direct Materials = $2,620 Unfavorable Price Variance
Quantity variance: Direct Materials = (Actual Quantity – Standard Quantity) × Standard Price Quantity Variance Direct Materials = (26,200 yds. – 26,100 yds.*) × $5.00 per yd. Quantity Variance Direct Materials = $500 Unfavorable Quantity Variance
* 5,220 units × 5.0 yds. Total direct materials cost variance: Direct Materials Direct Materials Price Variance + = Cost Variance Direct Materials Quantity Variance Direct Materials = $2,620 + $500 Cost Variance Direct Materials = $3,120 Unfavorable Cost Variance
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–1B (FIN MAN); Prob. 7–1B (MAN) (Concluded) c.
Direct Labor Cost Variance Rate variance: Direct Labor (Actual Rate per Hour – Standard Rate per Hour) = Rate Variance × Actual Hours Direct Labor = ($11.80 – $12.00) × 1,000 hrs.* Rate Variance Direct Labor = –$200 Favorable Rate Variance
* 25 employees × 40 hrs. Time variance: Direct Labor (Actual Direct Labor Hours – Standard Direct Labor Hours) = Time Variance × Standard Rate per Hour Direct Labor = (1,000 hrs. – 1,044 hrs.*) × $12.00 per hour Time Variance Direct Labor = –$528 Favorable Time Variance
* (12 min. ÷ 60 min.) × 5,220 Total direct labor cost variance: Direct Labor = Direct Labor Rate Variance + Direct Labor Time Variance Cost Variance Direct Labor = –$200 – $528 Cost Variance Direct Labor = –$728 Favorable Cost Variance
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–2B (FIN MAN); Prob. 7–2B (MAN) 1.
a.
Direct Materials Variance
Filler
Liner
Total
Price variance: $
Actual price……………………………………
1.90
$
8.20
2.00
Standard price……………………………… Variance……………………………………… × Actual quantity…………………………… Direct materials price variance………
8.00
$ (0.10) × 48,000
$ 0.20 × 85,100
$ (4,800) F
$ 17,020 U
$12,220 U
Quantity variance: Actual quantity used………………………… Standard quantity used 1…………………… Variance……………………………………… × Standard price…………………………… Direct materials quantity variance……
48,000
85,100
47,760
85,320
240 × $2.00
×
$
$ (1,760) F
480 U
(220) $8.00 (1,280) F $10,940 U
Total direct materials cost variance………… Alternatively total direct materials cost variance: Actual cost 2………………………………… 3
Standard cost ……………………………… Total direct materials cost variance… 1
$91,200
$697,820
95,520
682,560
$ (4,320) F
$ 15,260 U
$10,940 U
47,760 = (4.0 lbs. × 4,400 actual production of women's coats) + (5.2 lbs. × 5,800 actual production of of men’s coats) 85,320 = (7.0 yds. × 4,400 actual production of women's coats) + (9.4 yds. × 5,800 actual production of men’s coats)
2
$91,200 = $1.90 × 48,000 lbs. $697,820 = $8.20 × 85,100 yds.
3
$95,520 = $2.00 × 47,760 lbs. $682,560 = $8.00 × 85,320 yds.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–2B (FIN MAN); Prob. 7–2B (MAN) (Concluded) 1.
b. Women's
Men's
Coats
Coats
Actual rate……………………………………
$ 14.10
$ 13.30
Standard rate…………………………………
$ 14.00
$ 13.00
Variance………………………………………
$ 0.10 × 1,825
$ 0.30 × 2,800
$182.50 U
$
Direct Labor Variance
Total
Rate variance:
× Actual time………………………………… Direct labor rate variance………………
840 U
$1,022.50 U
Time variance: Actual time…………………………………… Standard time 1………………………………
1,825
2,800
1,760
2,900
Variance………………………………………
65 × $ 14.00
× Standard rate……………………………… Direct labor time variance………………
$
910 U
(100) × $ 13.00 (390) F
$ (1,300) F
$ 632.50 U
Total direct labor cost variance……………… Alternatively, total direct labor cost variance: Actual cost 2………………………………… 3
Standard cost ……………………………… Total direct labor cost variance……… 1
$25,732.50
$37,240
24,640
37,700
$ 1,092.50 U
$
(460) F
$ 632.50 U
1,760 = 0.40 hr. × 4,400 actual production of women’s coats 2,900 = 0.50 hr. × 5,800 actual production of men’s coats
2
$25,732.50 = 1,825 hrs. × $14.10 $37,240.00 = 2,800 hrs. × $13.30
3
$24,640.00 = 1,760 hrs. × $14.00 $37,700.00 = 2,900 hrs. × $13.00
2.
The variance analyses should be based on the standard amounts at actual volumes. The budget must flex with the volume changes. If the actual volume is different from the planned volume, as it was in this case, then the budget used for performance evaluation should reflect the change in direct materials and direct labor that will be required for the actual production. In this way, spending from volume changes can be isolated from efficiency and price variances.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–3B (FIN MAN); Prob. 7–3B (MAN) Direct Materials Cost Variance
a. Price variance:
Direct Materials = (Actual Price – Standard Price) × Actual Quantity Price Variance Direct Materials = ($6.50 per lb. – $6.40 per lb.) × 101,000 lbs. Price Variance Direct Materials = $10,100 Unfavorable Price Variance
Quantity variance: Direct Materials = (Actual Quantity – Standard Quantity) × Standard Price Quantity Variance Direct Materials = (101,000 lbs. – 100,000 lbs.) × $6.40 per lb. Quantity Variance Direct Materials = $6,400 Unfavorable Quantity Variance
Total direct materials cost variance: Direct Materials Direct Materials Price Variance + = Cost Variance Direct Materials Quantity Variance Direct Materials = $10,100 Unfavorable + $6,400 Unfavorable Cost Variance Direct Materials = $16,500 Unfavorable Cost Variance
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–3B (FIN MAN); Prob. 7–3B (MAN) (Continued) Direct Labor Cost Variance
b. Rate variance:
Direct Labor (Actual Rate per Hour – Standard Rate per Hour) = Rate Variance × Actual Hours Direct Labor = ($15.40 – $15.75) × 2,000 hrs. Rate Variance Direct Labor = –$700 Favorable Rate Variance
Time variance: Direct Labor (Actual Direct Labor Hours – Standard Direct Labor Hours) = Time Variance × Standard Rate per Hour Direct Labor = (2,000 hrs. – 2,080 hrs.) × $15.75 per hour Time Variance Direct Labor = –$1,260 Favorable Time Variance
Total direct labor cost variance: Direct Labor = Direct Labor Rate Variance + Direct Labor Time Variance Cost Variance Direct Labor = –$700 – $1,260 Cost Variance Direct Labor = –$1,960 Favorable Cost Variance
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–3B (FIN MAN); Prob. 7–3B (MAN) (Continued) c.
Factory Overhead Cost Variance Variable factory overhead controllable variance: Actual variable factory overhead cost incurred……………………… Budgeted variable factory overhead for 2,080 hrs.* …………………
$8,200 8,320 ** $(120)
Variance—favorable…………………………………………………… Fixed factory overhead volume variance: Normal capacity at 100%………………………………………………… Standard for amount produced………………………………………… Productive capacity not used…………………………………………… × Standard fixed factory overhead cost rate………………………… Variance—favorable…………………………………………………… Total factory overhead cost variance—favorable………………………
2,000 hrs. 2,080 (80) hrs. × $ 6.00 (480) $(600)
* 4,160 units × 0.5 hr. ** 2,080 hrs. × $4.00
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–3B (FIN MAN); Prob. 7–3B (MAN) (Concluded) Alternative Computation of Overhead Variances Factory Overhead Actual costs ($8,200 + $12,000)
20,200
Applied costs [2,080 × ($4.00 + $6.00)] Balance (overapplied)
20,800 (600)
Actual
Budgeted Factory
Applied
Factory
Overhead for Amount
Factory
Overhead
Produced
Overhead
$20,200
Fixed cost……………………………………
$ 8,320 12,000
Total…………………………………………
$20,320
Variable cost (2,080 × $4.00)……………
–$120 F
$20,800
–$480 F
Controllable
Volume
Variance
Variance –$600 F Total Factory Overhead Cost Variance
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–4B (FIN MAN); Prob. 7–4B (MAN) FEELING BETTER MEDICAL INC. Factory Overhead Cost Variance Report—Assembly Department For the Month Ended October 31, 2014 Normal capacity for the month
30,000 hrs.
Actual production for the month
28,500 hrs.
Variances Budget
Variable costs:
Actual
Favorable
Unfavorable
1
Indirect factory wages
$235,125
$234,000
$(1,125)
179,550 49,875
178,500 50,600
(1,050)
$464,550
$463,100
$126,000
$126,000
70,000 44,000
70,000 44,000
Total fixed cost
$240,000
$240,000
Total factory overhead cost
$704,550
$703,100
Power and light Indirect materials Total variable cost
$
725
$
725
Fixed costs: Supervisory salaries Depreciation of plant and equipment Insurance and property taxes
Total controllable variances
$(2,175)
$ (1,450)
Net controllable variance—favorable Volume variance—unfavorable: Idle hours at the standard rate for fixed factory overhead2— (30,000 hrs. – 28,500 hrs.) × $8.00
12,000
Total factory overhead cost variance—unfavorable 1
$10,550
The budgeted variable costs are determined by multiplying 28,500 actual hours by the variable overhead rate (the October budget divided by 30,000 hours for each variable overhead cost). Thus, Indirect factory wages, $235,125 = 28,500 hrs. × ($247,500 ÷ 30,000 hrs.) Power and light, $179,550 = 28,500 hrs. × ($189,000 ÷ 30,000 hrs.) Indirect materials, $49,875 = 28,500 hrs. × ($52,500 ÷ 30,000 hrs.)
2
Fixed factory overhead rate:
$240,000 = $8.00 per hr. 30,000 hrs.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–4B (FIN MAN); Prob. 7–4B (MAN) (Concluded) Alternative Computation of Overhead Variances Factory Overhead Actual costs
703,100
Applied costs*
692,550
[28,500 × ($16.30 + $8.00)] Balance (underapplied)
10,550
Actual
Budgeted Factory
Applied
Factory
Overhead for Amount
Factory
Overhead
Produced
Overhead
$703,100
$464,550 Fixed cost…………………………………… 240,000 Total………………………………………… $704,550 Variable cost (28,500 × $16.30)…………
–$1,450 F
–$12,000 U
Controllable
Volume
Variance
Variance
$692,550
$10,550 U Total Factory Overhead Cost Variance
*$489,000 ÷ 30,000 hrs. = $16.30 $240,000 ÷ 30,000 hrs. = $8.00
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
Prob. 22–5B (FIN MAN); Prob. 7–5B (MAN) 1.
120 Actual hours provided (3 × 40 hrs.)………………………………………………… 117 Standard hours required for the original plan*…………………………………… Labor time difference………………………………………………………………… 3 × $ 23 × Standard labor rate………………………………………………………………… $ 69 Direct labor time variance—unfavorable…………………………………………… *
2.
= 117 hrs.
Actual hours provided (3 × 40 hrs.)………………………………………………… 120 127 Standard hours required for the actual results*………………………………… Labor time difference………………………………………………………………… (7) × $ 23 × Standard labor rate………………………………………………………………… $(161) Direct labor time variance—favorable……………………………………………… *
3.
81,900 lines 700 lines per hr.
88,900 lines 700 lines per hr.
= 127 hrs.
$ 30 Actual labor rate………………………………………………………………………… 23 Standard labor rate…………………………………………………………………… Difference………………………………………………………………………………… $ 7 120 × Actual hours provided (3 × 40 hrs.)……………………………………………… × $ 840 Direct labor rate variance—unfavorable…………………………………………… The labor cost variance is $679 unfavorable [–$161 favorable time variance + $840 unfavorable rate variance].
4.
Actual hours provided (4 × 40 hrs.)………………………………………………… 160 127 Standard hours required for the actual results…………………………………… Labor time difference………………………………………………………………… 33 × $ 23 × Standard labor rate………………………………………………………………… $ 759 Direct labor time variance—unfavorable……………………………………………
5.
The bonus is the better approach by $80. The direct labor cost variance for paying the bonus was $679 unfavorable which is the sum of the time variance and rate variance from parts (2) and (3) above (– $161 F + $840 U). The cost variance that would result from hiring another employee would have been $759 unfavorable from part (4) above. Thus, the net benefit for paying the bonus over hiring another employee is $80 ($679 U – $759 U).
6.
The labor rate and time variances fail to consider the number of errors in the report from typist fatigue. A report that has many errors will require significant time for correction at a later date. In addition, report errors can cause doctors to draw incorrect conclusions from the test analyses. Thus, managers should consider not only the efficiency of doing the work but also the quality of the work.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
COMPREHENSIVE PROBLEM 5 Part A 1.
Variable Cost per Unit =
Variable Cost per Unit =
Difference in Total Cost Difference in Production $740 – $600 = $0.20 per case 1,200 cases – 500 cases
Total Cost = (Variable Cost per Unit × Units of Production) + Fixed Cost
2.
3.
4.
At the high point:
At the low point:
$740 = ($0.20 × 1,200 units) + Fixed Cost
$600 = ($0.20 × 500 units) + Fixed Cost
Fixed Cost = $500
Fixed Cost = $500
Selling price……………………………………………………………… Less variable costs per case: Direct materials……………………………………………………… Direct labor…………………………………………………………… Utilities [see part (1)]………………………………………………… Selling expenses…………………………………………………… Total variable costs per case………………………………………… Contribution margin per case…………………………………………
$100.00 $17.00 7.20 0.20 20.00
Total fixed costs: Utilities [see part (1)]……………………………………………………………… Facility lease………………………………………………………………………… Equipment depreciation…………………………………………………………… Supplies………………………………………………………………………………
Break-Even Sales (units) = Break-Even Sales (units) =
44.40 $ 55.60
$ 500 14,000 4,300 660 $19,460
Fixed Costs Unit Contribution Margin $19,460 $55.60
= 350 cases
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
COMPREHENSIVE PROBLEM 5 (Continued) Part B GENUINE SPICE INC. Production Budget For the Month Ended August 31, 2014
5.
Cases
Expected cases to be sold Plus desired ending inventory Total Less estimated beginning inventory Total units to be produced
1,500 175 1,675 300 1,375
GENUINE SPICE INC. Direct Materials Purchases Budget For the Month Ended August 31, 2014
6.
Cream Base (ozs.) 1
Units required for production
137,500
Plus desired ending inventory Less estimated beginning inventory
1,000 (250)
Direct materials to be purchased × Unit price
2 3
Bottles (bottles) 2
41,250
360 (290)
16,500
Total
3
240 (600)
138,250 $0.02
41,320 $0.30
16,140 $0.50
$2,765
$12,396
$8,070
Total direct materials to be purchased 1
Natural Oils (ozs.)
$23,231
Cream base: 1,375 cases × 100 ozs. = 137,500 ozs. Natural oils: 1,375 cases × 30 ozs. = 41,250 ozs. Bottles: 1,375 cases × 12 bottles = 16,500 bottles
7.
GENUINE SPICE INC. Direct Labor Budget For the Month Ended August 31, 2014 Mixing
Filling
Total
Hours required for production of:
1 2
Hand and body lotion × Hourly rate
4581 $18.00
1152 $14.40
Total direct labor cost
$8,244
$1,656
$9,900
Mixing: (1,375 cases × 20.00 min.) ÷ 60 min. = 458 hrs. Filling: (1,375 cases × 5.00 min.) ÷ 60 min. = 115 hrs.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
COMPREHENSIVE PROBLEM 5 (Continued) 8.
GENUINE SPICE INC. Factory Overhead Budget For the Month Ended August 31, 2014 Fixed1
Factory overhead: Utilities Facility lease Equipment depreciation Supplies Total 1 2
$ 500 14,000 4,300 660 $19,460
Variable2
Total
$275
$
775 14,000 4,300 660 $19,735
$275
Fixed costs [from part (3)] Variable utility cost: $0.20 × 1,375 cases = $275
9.
GENUINE SPICE INC. Budgeted Income Statement For the Month Ended August 31, 2014 1
Sales Finished goods inventory, August 1 Direct materials inventory, August 12 Direct materials purchases [from part (6)] Less direct materials inventory, August 313 Cost of direct materials for production Direct labor [from part (7)] Factory overhead [from part (8)] Less finished goods inventory, August 31 Cost of goods sold Gross profit 4 Selling expenses
$150,000 $ 12,000 $ 392 23,231 248 $23,375 9,900 19,735
53,010 7,000
Income before income tax 1 2 3 4
58,010 $ 91,990 30,000 $ 61,990
Sales: 1,500 cases × $100 per case = $150,000 Direct materials inventory, August 1: (250 × $0.020) + (290 × $0.300) + (600 × $0.500) = $392 Direct materials inventory, August 31: (1,000 × $0.020) + (360 × $0.300) + (240 × $0.500) = $248 Selling expenses: 1,500 cases × $20 per case = $30,000
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
COMPREHENSIVE PROBLEM 5 (Continued) Part C 10. Direct Materials Price Variance: Cream
Natural
Base
Oils
Actual price……………………………… $ 0.016 0.020 Standard price…………………………… Difference………………………………… $ (0.004) 153,000 ozs. × Actual quantity (units)*……………… (612) F Direct materials price variance……… $
$ $
0.32 0.30
0.02 46,500 ozs. $ 930 U
Bottles
$
0.42 0.50
$ (0.08) 18,750 btls. $ (1,500) F
* Actual quantity: Cream base: 1,500 cases × 102 ozs. = 153,000 ozs. Natural oils: 1,500 cases × 31 ozs. = 46,500 ozs. Bottles: 1,500 cases × 12.5 bottles = 18,750 bottles
The fluctuation in market prices caused the direct material price variances. Prices increased for natural oils compared to standard and declined for cream base and bottles compared to standard.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
COMPREHENSIVE PROBLEM 5 (Continued) Direct Materials Quantity Variance: Cream
Natural
Base
Oils
1
Actual quantity ………………………… 153,000 ozs. 2 150,000 Standard quantity …………………… Difference……………………………… × Standard price……………………… Direct materials quantity variance…
3,000 ozs. $ 0.020 $ 60 U
Bottles
46,500 ozs. 45,000
18,750 btls. 18,000
1,500 ozs. $ 0.300 $ 450 U
750 btls. $ 0.500 $ 375 U
Note: All the direct materials quantity variances were unfavorable, indicating some material losses, scrap, and quality rejections. All the quantity variances were unfavorable because the standards were set at ideal quantity amounts. Thus, only unfavorable variances were possible. The standard quantities were ideal standards for 12 8-ounce bottles per case (96 ozs. total), as shown below. 1
2
Actual quantity: Cream base: 1,500 cases × 102 ozs. = 153,000 ozs. Natural oils: 1,500 cases × 31 ozs. = 46,500 ozs. Bottles: 1,500 cases × 12.5 bottles = 18,750 bottles Standard quantity: Cream base: 1,500 cases × 100 ozs. = 150,000 ozs. Natural oils: 1,500 cases × 30 ozs. = 45,000 ozs. Bottles: 1,500 cases × 12 bottles = 18,000 bottles
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
COMPREHENSIVE PROBLEM 5 (Continued) 11. Direct Labor Rate Variance:
Mixing
Filling
Department
Department
Actual rate……………………………………………………… $18.20 18.00 Standard rate………………………………………………… Difference……………………………………………………… $ 0.20 488 × Actual time (hours)1……………………………………… Direct labor rate variance…………………………………… $97.60 U
$ 14.00 14.40 $ (0.40) 140.00 $ (56.00) F
The Mixing Department has an unfavorable direct labor rate variance from using a higher classification of labor. The higher labor classification cost an additional $0.20 per hour. The Filling Department has a favorable direct labor rate variance due to using a lower classification of labor. The lower labor classification saved $0.40 per hour. Direct Labor Time Variance: 1
Actual time (hours) ………………………………………… 2
Standard time (hours) ……………………………………… Difference……………………………………………………… × Standard rate……………………………………………… Direct labor time variance…………………………………… 1
2
Mixing
Filling
Department
Department
488 500
140 125
(12) $ 18 $(216) F
15 $14.40 $216 U
Actual time: Mixing: (1,500 units × 19.50 min.) ÷ 60 min. = 488 hrs. Filling: (1,500 units × 5.60 min.) ÷ 60 min. = 140 hrs. Standard time: Mixing: (1,500 units × 20.00 min.) ÷ 60 min. = 500 hrs. Filling: (1,500 units × 5.00 min.) ÷ 60 min. = 125 hrs.
The Mixing Department is producing at a labor time that is slightly better than standard, thus producing a favorable direct labor time variance. This may be the result of using a higher grade of labor. The net impact for the Mixing Department is favorable by $118.40 ($97.60 – $216). The Filling Department had an unfavorable direct labor time variance. This may be the result of using a lower grade of labor in the department. The net impact for the department is unfavorable by $160.00 ($216.00 – $56.00). Thus, the savings in the labor rate from using a lower grade classification of labor was insufficient to offset the loss of efficiency from such labor.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
COMPREHENSIVE PROBLEM 5 (Continued) 12. Factory Overhead Controllable Variance: $305 300 $ 5 U
Actual variable overhead……………………………………………………… Variable overhead at standard cost*……………………………………… Factory overhead controllable variance…………………………………… * Variance overhead (utility cost) at standard cost: $0.20 × 1,500 cases = $300 13. Factory Overhead Volume Variance: Normal volume (cases)………………………………………………………… Actual volume (cases)………………………………………………………… Difference………………………………………………………………………… × Fixed factory overhead rate*………………………………………………
1,600 1,500 100 $ 12.1625 $1,216.25 U
* Fixed factory overhead rate: $19,460** ÷ 1,600 cases = $12.16 per case ** Total fixed factory overhead shown in part (8) The unfavorable volume variance indicates the cost of underused capacity of 100 cases per month.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
COMPREHENSIVE PROBLEM 5 (Concluded) Alternative Computation of Overhead Variances Actual costs ($19,460 + $305) Balance (underapplied)
Factory Overhead 19,765.00 Applied costs
18,543.75
[1,500 × ($12.1625 + $0.20)] 1,221.25
Actual
Budgeted Factory
Applied
Factory
Overhead for Amount
Factory
Overhead
Produced
Overhead
$19,765.00
Variable cost (1,500 × $0.20)……………$ 300 Fixed cost………………………………… 19,460.00
$18,543.75
Total…………………………………………$19,760.00 $5 U
$1,216 U
Controllable
Volume
Variance
Variance $1,221.25 U Total Factory Overhead Cost Variance
14. The production volume of 1,375 cases determined in part (5) was planned at the beginning of August. The variances compare the actual cost and the standard cost of actual production for the month. Thus, the standard cost must be based on the 1,500 units of actual production. This amount is compared with an actual cost also based on 1,500 units. The variable costs of the budget must flex to the actual production volume so that variances are compared across the same production volume.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
CASES & PROJECTS CP 22–1 (FIN MAN); CP 7–1 (MAN) The use of ideal standards is a legitimate concern for Henry. It is likely that such standards are too tight and do not include the necessary fatigue factors that are likely in this type of operation. It seems as though Henry is arguing for practical standards that can be attained if the operation is running well. Maybe some standard in between is warranted, but that is not the issue. The issue is Dash’s method of operation. Dash has effectively agreed to have this dispute arbitrated with a senior official. However, Dash is trying to seal the fate of the argument behind the scenes, before the issue is discussed openly, as agreed. Moreover, Dash is attributing poor motives to Henry behind his back. Dash may have short-term success with this method of operation, but in the long term he will likely alienate himself within the organization. He may create a distrustful environment that would eventually hamper his ability to provide open, honest feedback. People may eventually avoid him and hide the truth from him.
CP 22–2 (FIN MAN); CP 7–2 (MAN) Although the Tungston Company performance measurement system uses both financial and nonfinancial measures, there may still be some serious performance omissions. The financial measures are good measures of financial performance. Likewise, employee satisfaction should be measured, since satisfied employees may lead to overall business success. There is, however, at least one major shortcoming to the proposed measures. None of the three measures has a customer orientation. The management of Tungston Company should also select a performance measure that reflects how well the business is performing from a customer’s perspective. Thus, measures about customer satisfaction, product quality, warranty experience, or on-time delivery would be excellent additions to the three measures already proposed.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
CP 22–3 (FIN MAN); CP 7–3 (MAN) This is a case where there is strong evidence that the poor performance that is occurring inside the Assembly Department may be the result of behaviors outside of the department. This is one of the classic problems with variance analysis. Often, the variances reflect causes outside of the responsibility center manager’s control. That is what appears to be happening here. The Assembly supervisor complains that both the purchased parts and incoming material from the Fabrication Department have been giving trouble. A review of performance reports reveals the following: (1) the materials price variance is very favorable; (2) the Fabrication Department’s labor time variance is also very favorable. A possible explanation is that the Purchasing Department found a low-price supplier. The low price translated into a favorable variance. Unfortunately, it appears the company is “getting what it paid for.” Specifically, it appears that the quality of the purchased parts has gone down, thus making assembly much more difficult in the Assembly Department. The Fabrication Department may be performing work faster than standard—again, resulting in a favorable labor time variance. It may be that the department is working too fast. Specifically, the speed is resulting in poor fabrication quality. Again, the Assembly Department is bearing the cost of poorly fabricated parts. The problem in both instances is that the variances measure only productivity and price savings but not quality. As a result, there are strong incentives to purchase from lowest bidders, work fast, cut corners, and push work on through. Unfortunately, the company is worse off, as a whole, due to this set of situations. The sum of the unfavorable variances in Assembly exceeds the favorable variances in the other departments. The analyst will need to confirm these suspicions. If they are supported, the company may wish to introduce quality measures in addition to the variance information in order to avoid the counterproductive behaviors in Purchasing and Fabrication.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
CP 22–4 (FIN MAN); CP 7–4 (MAN) The plant manager is placing pressure on the controller because the controllable variance is very unfavorable. The claim is that these costs are not really variable at all. This is a very difficult claim to accept. This is a small company, so it purchases its power from the outside. The power and light bill is variable to the amount of energy used in the plant. Energy usage is likely a function of the number of units produced except for the power required to keep the business open. Likewise, the supplies are likely variable to machine usage, which is also related to the number of units produced. However, these two costs are not where the problem lies. The problem is with the indirect factory wages. The indirect wages may not be completely variable. However, the variance is $8,500, or 28% higher than the standard. This is much greater than the 10% difference between the existing production volume and full capacity. In other words, even granting the plant manager’s position on the indirect wages still does not explain the overall size of the variance. More is being spent on indirect wages than would be implied by even 100% production. Something appears amiss. The controller should discuss these matters with the plant manager and attempt to discover why the indirect labor costs are so completely out of line with the standards. The plant manager has not complained about the standards yet but may do so in the future. It’s very common for the standards to be criticized as too tight.
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
CP 22–5 (FIN MAN); CP 7–5 (MAN) Use this activity to compare performance measures from different groups and their selected cities. The following are examples of performance measures from Worcester, Massachusetts: ECONOMIC DEVELOPMENT Indicator
Outcome Type
Measured As
Growth of commercial and residential tax base
Performance
Change in total assessed value over time
Job growth
Performance
Jobs created (and lost) by category
Amount of private investment
Performance
Total annual new construction, business expansion, and R&D investment
PUBLIC SAFETY Indicator
Outcome Type
Measured As
All measured both citywide and by neighborhood Level of crime
Performance
Crime rate and clearance rate by type of crime
Police community relations
Performance
Responses to annual citizen survey questions, performance of personnel on tests of courtesy, professionalism, and respect
Allegations of police misconduct
Performance
The annual number of complaints of excessive force received by the police department
Level of fire activity
Performance
# of structure fires; # of fire inspections performed; # of arson cases
Responses to fire calls
Performance
# of fire calls answered as a % of total calls for service, average response time, % of responses < 5 minutes
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
CP 22–5 (FIN MAN); CP 7–5 (MAN) (Continued) IMPROVED MUNICIPAL SERVICES Indicator Outcome Type
Measured As
Cleanliness of streets
Performance
Responses to questions on the annual citizen survey, objective resident ratings
Cleanliness of streets
Efficiency
Cost per mile of street swept
Snow clearance
Performance
Miles of road cleared to pavement within 6 hours of a snowstorm
Condition of streets and roads
Performance
Responses to questions on the annual citizen survey, Pavement Condition Index (PCI)
Effectiveness of recycling program Performance
% of trash recycled
Effectiveness of anti-graffiti program
Performance
# of graffiti incident responses, response time from call for service to cleanup
Cost effectiveness of solid waste collection
Efficiency
Cost per ton of waste collected
Library usage
Performance
Circulation per capita
Citizen involvement (citywide and by neighborhood)
Performance
% of eligible voters registered; % of registered voters voting
EDUCATION Indicator
Outcome Type
Measured As
Student and school achievement
Performance
MCAS test scores
Graduation rate
Performance
Percent graduating
Dropout rate
Performance
Percent dropouts
Employer satisfaction with graduates
Performance
Employer survey
Post-graduate plans Parent involvement in schools
Percent of graduates going to college; percent going to work Performance
Attendance at parent-teacher conferences; survey of parents, teachers, and principals
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CHAPTER 22
Performance Evaluation Using Variances from Standard Costs
CP 22–5 (FIN MAN); CP 7–5 (MAN) (Concluded) IMPROVED YOUTH SERVICES Indicator Outcome Type
Measured As
Presence of “at risk youth”
Performance
Responses to questions from the Youth Risk Behavior Survey (includes questions on drug and alcohol use and violent behavior) by high school
Extent of juvenile crime
Performance
Juvenile crime rate, citywide and by neighborhood
Teen pregnancies
Performance
Teen pregnancy rate
Infant mortality
Performance
Infant mortality rate
Teen youth services
Program availability
Number of programs and participation rates (by race, ethnicity, and gender) by neighborhood
Source: Benchmarking Municipal Performance: A Tool for Streamlining Municipal Government ; Michael D. Goodman and Roberta R. Schaefer, Worcester Municipal Research Bureau.
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