94638495 Solution Manual Managerial Accounting Hansen Mowen 8th Editions Ch 9

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CHAPTER 9 STANDARD COSTING:

A MANAGERIAL CONTROL TOOL

QUESTIONS FOR WRITING AND DISCUSSION

1. Standard costs are essentially budgeted amounts on a per-unit basis. Unit standards serve as inputs in building budgets.

2. Unit standards are used to build flexible budgets. Unit standards for variable costs are the variable cost component of a flexible budgeting formula.

3. The quantity decision is determining how much input should be used per unit of out-put. The pricing decision determines how much should be paid for the quantity of input used.

4. Historical experience is often a poor choice for establishing standards because the his-torical amounts may include more inefficien-cy than is desired.

5. Engineering studies can serve as an impor-tant input to standard setting. Many feel that this approach by itself may produce stan-dards that are too rigorous.

6. Ideal standards are perfection standards, representing the best possible outcomes. Currently attainable standards are standards that are challenging but allow some waste. Currently attainable standards are often chosen because many feel they tend to mo-tivate rather than frustrate.

7. Standard costing systems improve planning and control and facilitate product costing.

8. By identifying standards and assessing dev-iations from the standards, managers can locate areas where change or corrective be-havior is needed.

9. Actual costing assigns actual manufacturing costs to products. Normal costing assigns actual prime costs and estimated overhead costs to products. Standard costing assigns estimated manufacturing costs to products.

10. A standard cost sheet presents the standard amount of inputs and the price for each input and uses this information to calculate the unit standard cost.

11. Managers generally tend to have more con-trol over the quantity of an input used rather than the price paid per unit of input.

12. A standard cost variance should be investi-gated if the variance is material and if the benefit of investigating and correcting the deviation is greater than the cost.

13. Control limits indicate how large a variance must be before it is judged to be material and the process is out of control. Control limits are usually set by judgment although statistical approaches are occasionally used.

14. The materials price variance is often com-puted at the point of purchase rather than issuance because it provides control infor-mation sooner. When this is done, the va-riance may be called the materials purchase price variance, and it is the responsibility of the purchasing manager rather than the production manager.

15. Disagree. A materials usage variance can be caused by factors beyond the control of the production manager, e.g., purchase of a lower-quality material than normal.

16. Disagree. Using higher-priced workers to perform lower-skilled tasks is an example of an event that will create a rate variance that is controllable.

17. Some possible causes of an unfavorable labor efficiency variance are inefficient labor, machine downtime, and poor quality mate-rials.

18. Part of a variable overhead spending va-riance can be caused by inefficient use of overhead resources.

19. Agree. This variance, assuming that variable overhead costs increase as labor usage in-creases, is caused by the efficiency or ineffi-ciency of labor usage. Also labor may not be a good driver for variable overhead.

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20. Fixed overhead costs are either committed or discretionary. The committed costs will not differ by their very nature. Discretionary costs can vary, but the level the company wants to spend on these items is decided at the beginning and usually will be met unless there is a conscious decision to change the predetermined levels.

21. The volume variance is caused by the actual volume differing from the expected volume used to compute the predetermined stan-dard fixed overhead rate. If the actual vo-

lume is different from the expected, then the company has either lost or earned a contri-bution margin. The volume variance signals this outcome, and if the variance is large, then the loss or gain is large since the vo-lume variance understates the effect.

22. The spending variance is more important. This variance is computed by comparing ac-tual expenditures with budgeted expendi-tures. The volume variance simply tells whether the actual volume is different from the expected volume.

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EXERCISES

91

1. d 2. e 3. d

4. c 5. e 6. a

92

1. a. The operating personnel of each cost center should be involved in setting standards. They are the primary source for quantity information. The mate-rials manager and purchasing manager are a source of information for ma-terial prices, and personnel are knowledgeable on wage information. The Accounting Department should be involved in overhead standards and should provide information about past prices and usage. Finally, if infor-mation about absolute efficiency is desired, industrial engineers can pro-vide important input.

b. Standards should be attainable; they should include an allowance for waste, breakdowns, etc. Market prices for materials as well as labor (un-ions) should be a consideration for setting standards. Labor prices should include fringe benefits, and material prices should include freight, taxes, etc.

2. In principle, before formal responsibility is assigned, the causes of the va-

riances must be known. To be responsible, a manager must have the ability to control or influence the variance. The following assignments of responsibility are general in nature and have exceptions:

MPV: Purchasing manager MUV: Production manager LRV: Production manager LEV: Production manager OH variances: Departmental managers

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93

1. SH = 1.5 1,700 = 2,550 hours 2. SQ = 4 1,700 = 6,800 components 94

1. SQ direct materials per unit = 340,000/40,000 = 8.5 oz per bunny 2. SH direct labor hours per unit = 10,000/40,000 = 0.25 hrs. per bunny 3. Standard Cost for Dark Chocolate Bunny: Standard Standard Standard Price Usage Cost Direct materials $0.30 8.50 oz. $2.55 Direct labor 9.00 0.25 hr. 2.25 Total standard unit prime cost $4.80 95

1. SQ = 8.5 47,000 = 399,500 oz. 2. SH = 0.25 47,000 = 11,750 hours 3. Total standard prime cost = ($0.30 399,500) + ($9 11,750) = $225,600 96

1. Cases needing investigation:

Week 1: Exceeds the 2,100 rule and the 5% rule.

Week 4: Exceeds the $2,100 rule and the 5% rule. 2. The installation and repair manager. If the new workers are now properly

trained, no corrective action is required. If they are not, further training will be required to return to the direct labor hours normally used.

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97

1. Cases needing investigation:

Week 2: Exceeds the 10% rule.

Week 4: Exceeds the $8,000 rule and the 10% rule.

Week 5: Exceeds the 10% rule. 2. The purchasing agent. Corrective action would require a return to the pur-

chase of the higher-quality material normally used. 3. Production engineering is responsible. If the relationship is expected to pers-

ist, then the new labor method should be adopted, and standards for mate-rials and labor need to be revised.

98

1. MPV = (AP SP)AQ = ($0.047 $0.046)6,420,000 = $6,420 U

MUV = (AQ SQ)SP = (6,420,000 6,656,000*)$0.046 = $10,856 F * SQ = 52,000 128 = 6,656,000 2. LRV = (AR SR)AH = ($12.50 $12.00)2,000 = $1,000 U

LEV = (AH SH)SR = (2,000 1,976*)$12.00 = $288 U * SH = 52,000 0.038 = 1,976

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99

1. Variable overhead analysis:

Actual VOH Budgeted VOH Applied VOH $160,000 $3.00 52,000 $3.00 54,750* $4,000 U $8,250 F

Spending Efficiency * SH for direct labor = 73,000 0.75 = 54,750 2. Fixed overhead analysis:

Actual FOH Budgeted FOH Applied FOH $710,000 $14 50,000 $14 54,750 $10,000 U $66,500 U

Spending Volume

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910

1. Materials: $35 34,000 = $1,190,000 Labor: $21 34,000 = $714,000 2. Actual Cost* Budgeted Cost Variance Materials $1,183,270 $1,190,000 $ 6,730 F Labor 687,150 714,000 26,850 F

*$173,500 $6.82; 50,900 $13.50 3. MPV = (AP SP)AQ = ($6.82 $7.00)173,500 = $31,230 F

MUV = (AQ SQ)SP = (173,500 170,000)$7 = $24,500 U

AP AQ SP AQ SP SQ $6.82 173,500 $7 173,500 $7 170,000

$31,230 F $24,500 U Price Usage

4. LRV = (AR SR)AH = ($13.50 $14.00)50,900 = $25,450 F

LEV = (AH SH)SR = (50,900 51,000)$14 = $1,400 F

AR AH SR AH SR SH $13.50 50,900 $14 50,900 $14 51,000

$25,450 F $1,400 F Rate Efficiency

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911

1. MPV = (AP SP)AQ = ($8.05 $7.95)222,500 = $22,250 U

MUV = (AQ SQ)SP = [220,400 (20,100 11)]$7.95 = $5,565 F

(A three-pronged variance diagram is not shown because MPV is for materials purchased and not materials used.)

2. LRV = (AR SR)AH = ($9.50 $9.40)79,900 = $7,990 U

Note: AR = $759,050/79,900 = $9.50

LEV = (AH SH)SR = [79,900 (20,100 4)]$9.40 = $4,700 F

AR AH SR AH SR SH $9.50 79,900 $9.40 79,900 $9.40 80,400 $7,990 U $4,700 F

Rate Efficiency 3. Materials Inventorya .................................. 1,768,875 MPV ............................................................ 22,250 Accounts Payableb .............................. 1,791,125

Work in Processc ....................................... 1,757,745 MUV ....................................................... 5,565 Materials Inventoryd ............................ 1,752,180

Work in Processe ....................................... 755,760 LRV ............................................................. 7,990 LEV ........................................................ 4,700 Accrued Payrollf .................................. 759,050 a$7.95 222,500 =1,768,875 b$8.05 222,500 =1,791,125 c$7.95 221,100 =1,757,745 d$7.95 222,500 = 1,768,875 e$9.40 80,400 = 755,760 f$9.50 79,900 = 759,050

228833

912

1. Fixed overhead rate = $0.55/(1/2 hr. per unit) = $1.10 per DLH

SH = 786,000 0.5 = 393,000 Applied FOH = $1.10 393,000 = $432,300 2. Fixed overhead analysis:

Actual FOH Budgeted FOH Applied FOH $430,300 $1.10 400,000* $1.10 393,000 $9,700 F $7,700 U

Spending Volume *400,000 expected hours = 0.5 hour 800,000 units) 3. Variable OH rate = ($1,120,000 $440,000)/400,000 = $1.70 per DLH 4. Variable overhead analysis:

Actual VOH Budgeted VOH Applied VOH $695,000 $1.70 390,000 $1.70 393,000 $32,000 U $5,100 F

Spending Efficiency

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913

1. Standard fixed overhead rate = $864,000/(120,000 3) = $2.40 per DLH

Standard variable overhead rate = $1,440,000/360,000 = $4.00 per DLH 2. Fixed: 120,600 3 $2.40 = $868,320 Variable: 120,600 3 $4.00 = $1,447,200

Total FOH variance = $940,320 $868,320 = $72,000 U

Total VOH variance = $1,447,200 $1,443,500 = $3,700 F

3. Fixed overhead analysis:

Actual FOH Budgeted FOH Applied FOH $940,320 $864,000 $868,320 $76,320 U $4,320 F

Spending Volume The spending variance is the difference between planned and actual costs.

Each items variance should be analyzed to see if these costs can be reduced. The volume variance is the incorrect prediction of volume, or alternatively, it is a signal of the loss or gain that occurred because of producing at a level different from the expected level.

4. Variable overhead analysis:

Actual VOH Budgeted VOH Applied VOH $1,443,500 $4 361,800 $1,447,200

$3,700 F $0 Spending Efficiency

The variable overhead spending variance is the difference between the actual

variable overhead costs and the budgeted costs for the actual hours used. The variable overhead efficiency variance is the savings or extra cost attri-butable to the efficiency of labor usage.

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914

1. MPV = (AP SP)AQ = ($6.60 $6.40)1,684,700 = $336,940 U

MUV = (AQ SQ)SP = (1,684,000 1,680,000)$6.40 = $25,600 U

Note: There is no three-pronged analysis for materials because materials pur-chased is different from the materials used. (MPV uses materials purchased and MUV uses materials used.)

2. LRV = (AR SR)AH = ($18.10 $18.00)515,000 = $51,500 U

LEV = (AH SH)SR = [515,000 (1.8 280,000 units)]$18.00 = $198,000 U

AR AH SR AH SR SH $18.10 515,000 $18 515,000 $18 504,000

$51,500 U $198,000 U Rate Efficiency

3. Fixed overhead analysis:

Actual FOH Budgeted FOH Applied FOH $4,140,200 $8 518,400 $8 504,000

$7,000 F $115,200 U Spending Volume

Note: Practical volume in hours = 1.8 288,000 = 518,400 hours 4. Variable overhead analysis:

Actual VOH Budgeted VOH Applied VOH $872,000 $1.50 515,000 $1.50 504,000 $99,500 U $16,500 U

Spending Efficiency

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915

1. Materials Inventory ................................... 10,782,080 MPV ............................................................ 336,940 Accounts Payable ................................ 11,119,020 2. Work in Process ........................................ 10,752,000 MUV ............................................................ 25,600 Materials Inventory .............................. 10,777,600 3. Work in Process ........................................ 9,072,000 LRV ............................................................. 51,500 LEV ............................................................. 198,000 Accrued Payroll ................................... 9,321,500 4. Work in Process ........................................ 4,788,000 Fixed Overhead Control ...................... 4,032,000 Variable Overhead Control ................. 756,000 5. Materials and labor:

Cost of Goods Sold ................................... 612,040 MPV ....................................................... 336,940 MUV ....................................................... 25,600 LRV ........................................................ 51,500 LEV ........................................................ 198,000

Overhead disposition:

Cost of Goods Sold ................................... 108,200 Fixed Overhead Control ...................... 108,200

Cost of Goods Sold ................................... 116,000 Variable Overhead Control ................. 116,000

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916

1. Tom purchased the large quantity to obtain a lower price so that the price standard could be met. In all likelihood, given the reaction of Jackie Iverson, encouraging the use of quantity discounts was not an objective of setting price standards. Usually, material price standards are to encourage the pur-chasing agent to search for sources that will supply the quantity and quality of material desired at the lowest price.

2. It sounds like the price standard may be out of date. Revising the price stan-

dard and implementing a policy concerning quantity purchases would likely prevent this behavior from reoccurring.

3. Tom apparently acted in his own self-interest when making the purchase. He

surely must have known that the quantity approach was not the objective. Yet, the reward structure suggests that there is considerable emphasis placed on meeting standards. His behavior, in part, was induced by the re-ward system of the company. Probably, he should be retained with some ad-ditional training concerning the goals of the company and a change in em-phasis and policy to help encourage the desired behavior.

917

Materials:

AP AQ SP AQ SP SQ $38,295 $2.00 20,700 $2.00 20,650 $3,105 F $100 U

Price Usage Labor:

AR AH SR AH SR SH $57,226 $9 6,200 = $55,800 $9 6,195 = $55,755 $1,426 U $45 U

Rate Efficiency

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918

1. Materials Inventory ................................... 41,400 MPV ....................................................... 3,105 Accounts Payable ................................ 38,295 2. Work in Process ........................................ 41,300 MUV ............................................................ 100 Materials Inventory .............................. 41,400 3. Work in Process ........................................ 55,755 LRV ........................................................ 1,426 LEV ........................................................ 45 Accrued Payroll ................................... 57,226 4. Cost of Goods Sold ................................... 100 MUV ....................................................... 100

MPV ............................................................ 3,105 LRV ............................................................. 1,426 LEV ............................................................. 45 Cost of Goods Sold ............................. 4,576

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919

1. VOH efficiency variance = (AH SH)SVOR $8,000 = (1.2SH SH)$2 $8,000 = $0.4SH SH = 20,000 AH = 1.2SH = 24,000 2. LEV = (AH SH)SR $20,000 = (24,000 20,000)SR $20,000 = 4,000SR SR = $5

LRV= (AR SR)AH $6,000= (AR $5)24,000 $0.25= AR $5 AR= $5.25 3. SH = 4 Units produced 20,000 = 4 Units produced Units produced = 5,000

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PROBLEMS

920

1. Materials:

AP AQ SP AQ SP SQ $1.72 38,500 $1.70 38,500 $1.70 40,000 $770 U $2,550 F

Price Usage The new process saves 0.25 4,000 $1.70 = $1,700. Thus, the net savings

attributable to the higher-quality material are (2,550 $1,700) $770 = $80. Keep the higher-quality material.

2. Labor for new process:

AR AH SR AH SR SH $26,500 $10 2,500 $10 2,400 $1,500 U $1,000 U

Rate Efficiency The new process gains $80 in materials (see Requirement 1) but loses $2,500

from the labor effect, giving a net loss of $2,420. If this pattern is expected to persist, then the new process should be abandoned.

3. Labor for new process, one week later:

AR AH SR AH SR SH $22,400 $10 2,200 $10 2,400 $400 U $2,000 F

Rate Efficiency If this is the pattern, then the new process should be continued. It will save

$87,360 per year ($1,680 52 weeks). The weekly savings of $1,680 is the ma-terials savings of $80 plus labor savings of $1,600.

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921

1. e 2. h 3. k 4. n 5. d 6. g 7. o 8. b

9. m 10. l 11. j 12. c 13. a 14. i 15. f

922

1. Material quantity standards: 1.25 feet per cutting board 6 7.50 feet for five good cutting boards Unit standard for lumber = 7.50/5 = 1.50 feet Unit standard for foot pads = 4.0 Material price standards: Lumber: $3.00 per foot Pads: $0.05 per pad Labor quantity standards: Cutting: 0.2 hrs. 6/5 = 0.24 hours per good unit Attachment: 0.25 hours per good unit Unit labor standard 0.49 hours per good unit Labor rate standard: $8.00 per hour Standard prime cost per unit: Lumber (1.50 ft. @ $3.00) $4.50 Pads (4 @ $0.05) 0.20 Labor (0.49 hr. @ $8.00) 3.92 Unit cost $8.62

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922 Concluded

2. Standards allow managers to compare planned and actual performance. The difference can be broken down into price and efficiency variances to identify the cause of a variance. With this feedback, managers are able to improve productivity as they attempt to produce without cost overruns.

3. a. The purchasing manager identifies suppliers and their respective prices

and quality of materials.

b. The industrial engineer often conducts time and motion studies to deter-mine the standard direct labor time for a unit of product. They also can de-termine how much material is needed for the product.

c. The cost accountant has historical information as well as current informa-tion from the purchasing agent, industrial engineers, and operating per-sonnel. He or she can compile this information to obtain an achievable standard.

4. Lumber:

MPV = (AP SP)AQ = ($3.10 $3.00)16,000 = $1,600 U

MUV = (AQ SQ)SP = (16,000 15,000)$3 = $3,000 U Rubber pads:

MPV = (AP SP)AQ = ($0.048 $0.05)51,000 = $102 F

MUV = (AQ SQ)SP = (51,000 40,000)$0.05 = $550 U Labor:

LRV = (AR SR)AH = ($8.05 $8.00)5,550 = $277.50 U

LEV = (AH SH)SR = (5,550 4,900)$8 = $5,200 U

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923

1. The cumulative average time per unit is an average. It includes the 2.5 hours per unit when 40 units are produced as well as the 1.024 hours per unit when 640 units are produced. As more units are produced, the cumulative average time per unit will decrease.

2. The standard should be 0.768 hour per unit as this is the average time taken

per unit once efficiency is achieved:

[(1.024 640) (1.28 320)]/(640 320) 3. Std. Price Std. Usage Std. Cost Direct materials $ 4 25.000 $100.00 Direct labor 15 0.768 11.52 Variable overhead 8 0.768 6.14 Fixed overhead 12 0.768 9.22* Standard cost per unit $126.88*

*Rounded 4. There would be unfavorable efficiency variances for the first 320 units be-

cause the standard hours are much lower than the actual hours at this level. Actual hours would be approximately 409.60 (320 1.28), and standard hours would be 245.76 (320 0.768).

924

1. MPV = (AP SP)AQ = ($5.80 $6.00)465,000 = $93,000 F

MUV = (AQ SQ)SP = (491,400* 490,000)$6 = $8,400 U * AQ = 26,400 + 465,000 0 = 491,400

The materials usage variance is viewed as the most controllable because prices for materials are often market-driven and thus not controllable. Re-sponsibility for the variance in this case likely would be assigned to purchas-ing. The lower-quality materials are probably the cause of the extra usage.

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924 Continued

2. LRV = (AR SR)AH = ($13 $12)150,000 = $150,000 U

LEV = (AH SH)SR = (150,000 140,000)$12 = $120,000 U

AR AH SR AH SR SH $13 150,000 $12 150,000 $12 140,000 $150,000 U $120,000 U

Rate Efficiency Production is usually responsible for labor efficiency. In this case, efficiency

may have been affected by the lower-quality materials, thus purchasing may have significant responsibility for the outcome. Other possible causes are less demand than expected, poor supervision, lack of proper training, and lack of experience.

3. Variable overhead variances:

Actual VOH Budgeted VOH Applied VOH $1,470,000 $10 150,000 $10 140,000

$30,000 F $100,000 U Spending Efficiency

Formula approach:

VOH spending variance = Actual VOH (SVOR AH) = $1,470,000 ($10 150,000) = $30,000 F

VOH efficiency variance = (AH SH)SVOR = (150,000 140,000)$10 = $100,000 U 10,000 $10 = $100,000

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924 Continued

4. Fixed overhead variances:

Actual FOH Budgeted FOH Applied FOH $913,000 $6 2 75,000 $6 2 70,000 $13,000 U $60,000 U

Spending Volume The volume variance is a measure of unused capacity. This cost is reduced

as production increases. Thus, selling more goods is the key to reducing this variance (at least in the short run).

5. Four variances are potentially affected by material quality: MPV $ 93,000 F MUV 8,400 U LEV 150,000 U VOH efficiency 100,000 U $ 165,400 U

If the variance outcomes are largely attributable to the lower-quality materials, then the company should discontinue using this material.

6. (Appendix required)

Materials Inventorya .................................. 2,790,000 MPV ....................................................... 93,000 Accounts Payableb .............................. 2,697,000

Work in Processc ....................................... 2,940,000 MUV ............................................................ 8,400 Materials Inventoryd ............................ 2,948,400 a465,000 $6 = $2,790,000 b465,000 $5.80 = $2,697,000 c490,000 $6 = $2,940,000 d(465,000 + 26,400) $6 = $2,948,400

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924 Concluded

Work in Processe ....................................... 1,680,000 LRV ............................................................. 150,000 LEV ............................................................. 120,000 Accrued Payroll ................................... 1,950,000

Cost of Goods Sold ................................... 278,400 MUV ....................................................... 8,400 LRV ........................................................ 150,000 LEV ........................................................ 120,000

MPV ............................................................ 93,000 Cost of Goods Sold ............................. 93,000

VOH Control ............................................... 1,470,000 Various Credits .................................... 1,470,000

FOH Control ............................................... 913,000 Various Credits .................................... 913,000

Work in Processf ....................................... 1,400,000 VOH Control ......................................... 1,400,000

Work in Processg ....................................... 840,000 FOH Control ......................................... 840,000

Cost of Goods Sold ................................... 20,000 VOH Control ......................................... 20,000

Cost of Goods Sold ................................... 73,000 FOH Control ......................................... 73,000 e2 $12 70,000 = $1,680,000 f2 $10 70,000 = $1,400,000 g2 $6 70,000 = $840,000

229977

925

1. Fixed overhead rate = $2,400,000/600,000 hours* = $4 per hour

*Standard hours allowed = 2 300,000 units 2. Little Rock plant:

Actual FOH Budgeted FOH Applied FOH $2,500,000 $2,400,000 $4 480,000

$100,000 U $480,000 U Spending Volume

Athens plant:

Actual FOH Budgeted FOH Applied FOH $2,500,000 $2,400,000 $4 600,000

$100,000 U $0 Spending Volume

The spending variance is almost certainly caused by supervisors salaries

(for example, an unexpected midyear increase due to union pressures). It is unlikely that the lease payments or depreciation would be greater than bud-geted. Changing the terms on a 10-year lease in the first year would be un-usual (unless there is some sort of special clause permitting increased pay-ments for something like unexpected inflation). Also, the depreciation should be on target (unless more equipment was purchased or the depreciation budget was set before the price of the equipment was known with certainty).

The volume variance is easy to explain. The Little Rock plant produced less than expected, and so there was an unused capacity cost: $4 120,000 hours = $480,000. The Athens plant had no unused capacity.

229988

925 Concluded

3. It appears that the 120,000 hours of unused capacity (60,000 subassemblies) is permanent for the Little Rock plant. This plant has 10 supervisors, each making $50,000. Supervision is a step-cost driven by the number of produc-tion lines. Unused capacity of 120,000 hours means that two lines can be shut down, saving the salaries of two supervisors ($100,000 at the original salary level). The equipment for the two lines is owned. If it could be sold, then the money could be reinvested, and the depreciation charge would be reduced by 20 percent (two lines shut down out of 10). There is no way to directly reduce the lease payments for the building. Perhaps the company could use the space to establish production lines for a different product. Or perhaps the space could be subleased. Another possibility is to keep the supervisors and equipment and try to fill the unused capacity with special ordersorders for the subassembly below the regular selling price from a market not normally served. If the selling price is sufficient to cover the variable costs and cover at least the salaries and depreciation for the two lines, then the special order option may be a possibility. This option, however, is fraught with risks, e.g., the risk of finding enough orders to justify keeping the supervisors and equipment, the risk of alienating regular customers who pay full price, and the risk of violating price discrimination laws. Note: You may wish to point out the value of the resource usage model in answering this question (see Chapter 3).

4. For each plant, the standard fixed overhead rate is $4 per direct labor hour.

Since each subassembly should use two hours, the fixed overhead cost per unit is $8, regardless of where they are produced. Should they differ? Some may argue that the rate for the Little Rock plant needs to be recalculated. For example, one possibility is to use expected actual capacity, instead of prac-tical capacity. In this case, the Little Rock plant would have a fixed overhead rate of $2,400,000/480,000 hours = $5 per hour and a cost per subassembly of $10. The question is: Should the subassemblies be charged for the cost of the unused capacity? ABC suggests a negative response. Products should be charged for the resources they use, and the cost of unused capacity should be reported as a separate itemto draw managements attention to the need to manage this unused capacity.

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926

1. Normal Patient Day: Standard Standard Standard Price Usage Cost Direct materials $10.00 8.00 lb. $ 80.00 Direct labor 16.00 2 hr. 32.00 Variable overhead 30.00 2 hr. 60.00 Fixed overhead 40.00 2 hr. 80.00 Unit cost $252.00 Cesarean Patient Day: Standard Standard Standard Price Usage Cost Direct materials $10.00 20.00 lb. $200.00 Direct labor 16.00 4 hr. 64.00 Variable overhead 30.00 4 hr. 120.00 Fixed overhead 40.00 4 hr. 160.00 Unit cost $544.00 2. MPV = (AP SP)AQ = ($9.50 $10.00)172,000 = $86,000 F

MUV = (AQ SQ)SP MUV (Normal) = [30,000 (8 3,500)]$10 = $20,000 U MUV (Cesarean) = [142,000 (20 7,000)]$10 = $20,000 U Materials ..................................................... 1,720,000 MPV ....................................................... 86,000 Accounts Payable ................................ 1,634,000

Work in Process ........................................ 1,680,000 MUV ............................................................ 40,000 Materials ............................................... 1,720,000

MPV ............................................................ 86,000 MUV ............................................................ 40,000 Cost of Services Sold .......................... 46,000

330000

926 Continued

3. LRV = (AR SR)AH = ($15.90 $16.00)36,500 = $3,650 F

LEV = (AH SH)SR LEV (Normal) = [7,200 (2 3,500)]$16 = $3,200 U LEV (Cesarean) = [29,300 (4 7,000)]$16 = $20,800 U Work in Process ........................................ 560,000* LEV ............................................................. 24,000 LRV ........................................................ 3,650 Accrued Payroll ................................... 580,350

*[(2 3,500) + (4 7,000)] $16 = $560,000 Cost of Services Sold ............................... 20,350 LRV ............................................................. 3,650 LEV ........................................................ 24,000 4. Variable overhead variances:

Actual VOH Budgeted VOH Applied VOH $1,215,000 $40 36,500 $40 35,000

$245,000 F $60,000 U Spending Efficiency

Fixed overhead variances:

Actual FOH Budgeted FOH Applied FOH $700,000 $720,000 $30 35,000 $20,000 F $330,000 F

Spending Volume

Note: SH = (2 3,500) + (4 7,000) = 35,000

330011

926 Concluded

Work in Process ........................................ 1,400,000 Variable Overhead Control ................. 1,400,000

Work in Process ........................................ 1,050,000 Fixed Overhead Control ...................... 1,050,000

Variable Overhead Control ....................... 1,215,000 Various Credits .................................... 1,215,000

Fixed Overhead Control ........................... 700,000 Various Credits .................................... 700,000

Variable Overhead Control ....................... 185,000 Cost of Services Sold .......................... 185,000

Fixed Overhead Control ........................... 350,000 Cost of Goods Sold ............................. 350,000 5. Yes. Computations are shown below:

MUV = (172,000 28,000 140,000)$10 = $40,000 F LEV = (36,500 35,000)$16 = $24,000 U

927

1. The budgeted overhead costs are broken down into fixed and variable costs by the high-low method:

Standard VOH rate = Change in cost/Change in activity = $288,000/24,000 = $12/hour

FOH rate = Total rate VOH rate = $18 $12 = $6

330022

927 Concluded

2. Budgeted fixed overhead = Y2 VX2 = $1,080,000 $12(60,000) = $360,000

FOH spending variance = Actual FOH Budgeted FOH = $380,000 $360,000 = $20,000 U 3. To find the VOH spending variance, we need to find the actual hours. To find

AH, we first need to find the standard hours, SH:

Fixed OH volume variance = Budgeted fixed overhead (Fixed overhead rate SH) $36,000 = $360,000 ($6.00 SH) $324,000 = $6.00 SH SH = 54,000

Next, the actual hours need to be found:

VOH efficiency variance = (AH SH)SVOR $24,000 = (AH 54,000)$12 2,000 = AH 54,000 AH = 52,000

VOH spending variance = Actual VOH (VOH rate AH) = $620,000 ($12 52,000) = $620,000 $624,000 = $4,000 F 4. 54,000 hours/100,000 units = 0.54 hour per unit 5. LEV = (AH SH)SR = (52,000 54,000)$13 = $26,000 F

330033

928

1. Liquid standard: 4.2 250,000 $0.25 = $262,500

Upper control limit (UCL): $288,750 or $282,500; lesser = $282,500 Lower control limit (LCL): $236,250 or $242,500; greater = $242,500

Bottle standard = 250,000 $0.05 = $12,500

UCL: $13,750 LCL: $11,250

Direct labor standard = 0.2 250,000 $12.50 = $625,000

UCL: $687,500 or $645,000; lesser = $645,000 LCL: $562,500 or $605,000; greater = $605,000

Variable overhead budgeted = 0.2 250,000 $4.70 = $235,000

UCL: $258,500 or $255,000; lesser = $255,000 LCL: $211,500 or $215,000; greater = $215,000

Fixed overhead budgeted = 0.2 250,000 $1 = $50,000

UCL: $55,000 or $70,000; lesser = $55,000 LCL: $45,000 or $30,000; greater = $45,000 2. Total liquid variance = $310,500 $262,500 = $48,000 U

MPV = ($0.27 $0.25)1,150,000 = $23,000 U MUV = (1,150,000 1,050,000)$0.25 = $25,000 U

The liquid variances would be investigated as the total variance exceeds $20,000, as does each individual variance.

Total bottle variance = $12,000 $12,500 = $500 F

MPV = ($0.048 $0.05)250,000 = $500 F MUV = (250,000 250,000)$0.05 = 0

The bottle variances would not be investigated as the total variance is within the accepted limits.

330044

928 Concluded

3. Total labor variance = $622,425 $625,000 = $2,575 F

LRV = ($12.90 $12.50)48,250 = $19,300 U LEV = (48,250 50,000)$12.50 = $21,875 F

The total variance is within the limits. However, the labor efficiency variance is greater than $20,000 and should be investigated.

4. Variable overhead variances:

Actual VOH Budgeted VOH Applied VOH $239,000 $4.70 48,250 $4.70 50,000 $12,225 U $8,225 F

Spending Efficiency Fixed overhead variances:

Actual FOH Budgeted FOH Applied FOH $50,500 $50,000 $1 50,000 $500 U $0

Spending Volume None of the overhead variances would be investigated as the total variances

are within the prescribed limits. Overhead variances are not as meaningful in total. Individual overhead items should be analyzed for significant variances.

330055

929

1. Performance Report

Actual Budgeted Costs Costs* Variance

Direct materials $ 775,000 $ 750,000 $25,000 U Direct labor 590,000 600,000 10,000 F Variable overhead 310,000 300,000 10,000 U Fixed overhead 180,000 165,000 15,000 U Total $1,855,000 $1,815,000 $40,000 U

*Uses the variable unit standard costs for materials, labor and variable over-head (e.g., DM = $15 50,000); fixed overhead = $3.00 55,000 (the FOH rate is based on expected production).

2. a. Total materials variance = MPV + MUV $25,000 U = $5,000 U + MUV MUV = $20,000 U b. LRV = (AR SR)AH

SH = 63,000/1.05 = 60,000 SR SH = $600,000 SR = $600,000/60,000 hours SR = $10.00 per hour

LRV = $590,000 ($10 63,000) = $40,000 F c. LEV = (AH SH)SR = (63,000 60,000)$10 = $30,000 U

330066

929 Continued

d. FOH variances:

Spending variance = Actual FOH Budgeted FOH = $180,000 $165,000 = $15,000 U

Volume variance = Budgeted FOH (FOH rate SH) = $165,000 ($2.50 60,000) = $15,000 U

Note: FOH rate is calculated as follows:

Hours allowed = 60,000 hours/50,000 units = 1.20 hours per unit

Standard FOH rate = $3.00 per unit/1.20 hours per unit = $2.50 per hour e. VOH variances:

Variable OH rate = $300,000/60,000 hours = $5.00 per hour

Spending variance = Actual VOH (SVOR AH) = $310,000 ($5.00 63,000)

= $5,000 F

Efficiency variance = (AH SH)SVOR = (63,000 60,000)$5.00 = $15,000 U

330077

929 Concluded

3. Materials Work in Process

(a) 770,000 770,000 (b) (b) 750,000 1,800,000 (f) (c) 600,000 (d) 300,000 (e) 150,000

Finished Goods (f) 1,800,000 1,800,000 (g)

MPV MUV Accounts Payable

(a) 5,000 5,000 (h) (b) 20,000 20,000 (i) 775,000 (a)

Accrued Payroll LRV LEV

590,000 (c) (j) 40,000 40,000 (c) (c) 30,000 30,000 (k)

Variable Overhead Control Fixed Overhead Control

310,000 300,000 (d) 180,000 150,000 (e) 10,000 (l) 30,000 (m)

Cost of Goods Sold (g) 1,800,000 40,000 (j) (h) 5,000 (i) 20,000 (k) 30,000

(l) 10,000

(m) 30,000

330088

930

1. April (UCL = Upper control limit, and LCL = Lower control limit)

Materials:

Price standard: $0.25 723,000 = $180,750 UCL: 0.08 $180,750 = $14,460 LCL: ($14,460)

Quantity standard: 8 90,000 $0.25 = $180,000 UCL: 0.08 $180,000 = $14,400 LCL: ($14,400)

Labor:


Quantity standard: 0.4 90,000 $7.50 = $270,000 UCL: 0.08 $270,000 = $21,600 LCL: ($21,600) May

Materials:



Labor:


Quantity standard: 0.4 100,000 $7.50 = $300,000 UCL: 0.08 $300,000 = $24,000 LCL: ($24,000)

330099

930 Continued

June

Materials:



Labor:


Quantity standard: 0.4 110,000 $7.50 = $330,000 UCL: 0.08 $330,000 = $26,400 LCL: ($26,400) 2. April Limit Actual* MPV = ($0.2614 $0.25)723,000 = $8,242 U $ 14,460 4.6% MUV = (723,000 720,000)$0.25 = $750 U 14,400 0.4% LRV = ($7.50 $7.50)36,000 = 0 21,600 0.0 LEV = (36,000 36,000)$7.50 = 0 21,600 0.0

May MPV = ($0.2506 $0.25)870,000 = $522 U 17,400 0.3% MUV = (870,000 800,000)$0.25 = $17,500 U 16,000** 8.8% LRV = ($7.341 $7.50)44,000 = $6,996 F 26,400 (2.3%) LEV = (44,000 40,000)$7.50 = $30,000 U 24,000** 10.0%

June MPV = ($0.2599 $0.25)885,000 = $8,762 U 17,700 4.0% MUV = (885,000 880,000)$0.25 = $1,250 U 17,600 0.6% LRV = ($7.826 $7.50)46,000 = $14,996 U 27,600 4.5% LEV = (46,000 44,000)$7.50 = $15,000 U 26,400 4.5%

*The actual deviation divided by the total price or quantity **Investigate Mays MUV and LEV

331100

930 Continued

3. Control charts allow us to see when the variances are outside an acceptable range. They may also show a pattern that may help in pinpointing when the problem began.

Control charts: To simplify the presentation, the variances are expressed as a percentage of the total quantity or price standard, and the Y-axis is used for variances. These percentages were calculated in Requirement 2.

MPV: %

10.0

8.0 x x

0.0 x

8.0 APRIL MAY JUNE

331111

930 Continued

MUV: %

10.0 x

8.0

0.0 x x

8.0 APRIL MAY JUNE

331122

x

930 Continued

LRV: %

10.0

8.0 x

0.0 x

8.0 APRIL MAY JUNE

331133

x

930 Concluded

LEV: %

10.0 x

8.0 x

0.0

8.0 APRIL MAY JUNE

931

1. Hepler Company must put 60,000 units of lower-quality material into produc-tion in order to produce 54,000 finished units:

Good units/(1 Rejection rate) = Units required 54,000/0.9 = 60,000 units 2. In order to produce 60,000 units (54,000 good units and 6,000 rejects), Hepler

Company must utilize the following labor:

New team = 8 Assembler A, 1 Assembler B, 1 Machinist

New team will work at 80 percent of the efficiency of the old team.

Assembler A: 8 hours (60,000/80) = 6,000 hours Assembler B: 1 hour (60,000/80) = 750 hours Machinist: 1 hour (60,000/80) = 750 hours

331144

931 Concluded

3. Hepler Company should include an additional $18,480 in its operating budget for the planned labor variance. This variance consists of $6,780 for the change in materials and $11,700 for the labor change caused by the reduced efficiency of the new team, calculated as follows:

Cost for new team to produce 80 units:

Assembler A (8 hrs. $10) $ 80 Assembler B (1 hr. $11) 11 Machinist (1 hr. $15) 15 Labor cost $ 106 Units 80 Labor cost per unit $ 1.325

Labor change due to reduced efficiency:

New labor cost = January units New labor cost = 60,000 $1.325 = $79,500

Old labor cost = January units Standard cost = 60,000 ($113/100) = $67,800

Labor change = $79,500 $67,800 = $11,700

Increased labor due to materials change:

Labor change = (New materials Standard materials) Standard cost = (60,000 54,000)($113/100) = $6,780

Total planned labor variance = $11,700 + $6,780 = $18,480

331155

932

1. Standard cost sheet:

Direct materials (0.6 lb. @ $5)* $3.00 Direct labor (0.20 hr. @ $8)** 1.60 Variable overhead (0.20 hr. @ $10)** 2.00 Fixed overhead (0.20 hr. @ $5.00)** 1.00 Unit cost $7.60

* (AP AQ) (AQ SP) = $1,000 $51,000 (10,000 SP) = $1,000 10,000 SP = $50,000 SP = $5.00

(AQ SQ)SP = ($10,000) (10,000 SQ)$5.00 = ($10,000) $50,000 $5.00SQ = ($10,000) $5.00SQ = $60,000 SQ = 12,000

SQ/unit = 12,000/20,000 = 0.6 lb. per unit

** Actual VOH (Standard VOH rate AH) = $2,000 $46,000 (Standard VOH rate 4,400) = $2,000 4,400(Standard VOH rate) = $44,000 Standard VOH rate = $10

(AH SH)Standard VOH rate = $4,000 (4,400 SH)$10 = $4,000 44,000 $10(SH) = $4,000 $10(SH) = $40,000 SH = 4,000

331166

932 Concluded

Standard hours per unit = 4,000/20,000 = 0.20 hours

(AH SH)SR = $3,200 (4,400 4,000)SR = $3,200 400(SR) = $3,200 SR = $8.00

Actual FOH (Standard FOH rate SH) = $3,000 $23,000 (Standard FOH rate 4,000) = $3,000 4,000 Standard FOH rate = $20,000 Standard FOH rate = $5.00

2. Budgeted FOH (Standard FOH rate SH) = $4,000 Budgeted FOH ($5.00 4,000) = $4,000 Budgeted FOH $20,000 = $4,000 Budgeted FOH = $24,000

FOH spending variance = Actual FOH Budgeted FOH = $23,000 $24,000 = $1,000 F 3. LRV = (AR SR)AH = ($7.80 $8.00)4,400 = $880 F 4. Standard FOH rate = Budgeted FOH/Expected activity $5.00 = $24,000/Expected activity Expected activity = $24,000/$5.00 = 4,800 hours

331177

MANAGERIAL DECISION CASES

933

1. The major advantages of using a standard costing system include:

Budgeting: Standard costs can be the building blocks for budget prepara-tion and allow the development of flexible budgeting.

Performance evaluation: Comparison of actual costs to standard costs fa-cilitates evaluation of the performance at the company, department, cost center, or individual level. Standards also allow employees to more clearly understand what is expected of them.

Decision making: Having predetermined costs facilitates and simplifies pricing decisions, make-or-buy decisions, etc.

2. The disadvantages that can result from using a standard costing system in-

clude the following:

Cost standards that are too tight can have negative implications which may cause demotivation.

Standards may ignore qualitative characteristics which may jeopardize product quality.

Variance analysis at the operational level may limit the emphasis on conti-nual improvement found in the new manufacturing environment.

3. A standard costing system must be supported by top management to be suc-

cessful. The parties who should participate in the standard-setting process include all levels of the organization, e.g., purchasing, engineering, produc-tion, and cost accounting.

4. Standard setting can be a participative process with those individuals most

familiar with the variables associated with standard setting available to pro-vide the most accurate information. Participation provides benefits such as helping establish the legitimacy of the standards, giving the participants a greater feeling of being part of the operation, and encouraging participants to internalize the standards as their own goals.

331188

933 Concluded

Standards that are set for routine activities, which can be identifiable and measurable, can be associated with specific cost factors of uniform products in long production runs.

Standards promote cost control through the use of variance analysis and per-formance reports.

5. There could be negative employee reaction as the employees did not partici-

pate in the standard-setting process.

There could be dissatisfaction if the standards contain cost elements that are not controllable by the production groups who are then held responsible for any unfavorable variances.

The outside firm may not fully understand the manufacturing process; this could result in poor management decisions based on faulty information.

934

1. By using a standard cost system, Sabroso Chips can increase control of its manufacturing inputs. By developing price and quantity standards for each input, management can compute price and usage variances for each input. Since a standard cost system provides more information, control is en-hanced. For example, since managers have the most control over usage of inputs, knowing the usage variances provides specific information about where action is needed. Moreover, by breaking out price variances which are not as controllable, performance evaluation is improved.

2. The engineering standards are ideal standards. The presidents concern is

probably reflecting doubt that the labor standards can be achieved. If pres-sure is applied to workers to achieve perfection standards, the outcome is likely to be unsatisfactory. Workers may become frustrated and lower their performance as a consequence. Many firms elect to use currently attainable standards in lieu of ideal standards. The standard suggested by the president is a good starting point. If experience indicates that his standard is too loose, then the standard can be adjusted later on.

331199

934 Concluded

3. Standard cost sheet (for one box of chips):

Direct materials Potatoes (15.9375 lbs. @ $0.238)* $3.7931 Cooking oil (49.5 ounces @ $0.04) 1.9800 Bags (15 @ $0.11) 1.6500 Boxes (1 @ $0.52) 0.5200 $ 7.9431 Direct labor** Potato inspection (0.006 hr. @ $15.20) $0.0912 Chip inspection (0.0225 hr. @ $10.30) 0.2318 Frying monitor (0.0118 hr. @ $14.00) 0.1652 Boxing (0.0311 hr. @ $11.00) 0.3421 Machine operators (0.0118 hr. @ $13.00) 0.1534 0.9837 Variable overhead ($0.9837 1.16) 1.1410 Fixed overhead ($0.9837 1.967)*** 1.9349 Cost per box $12.0027 Cost per bag ($12.0027/15) $ 0.8002

*Pounds per box = 15 4 4.25/16 = 15.9375 Price per pound = $0.245 less scrap value; scrap per box = 15 (17.0 ounces 16.3 ounces) = 10.5 ounces. Scrap value/ounce = $0.16/16 = $0.01 per ounce. Scrap savings per box is $0.01 10.5 = $0.105, and the savings per pound of potato is $0.105/15.9375 = $0.007. Thus, the standard price per pound of potato is $0.245 $0.007 = $0.238.

**Number of boxes/year = 8,800,000/15 = 586,667 Hours/box: Potato inspection: (3,200 1.1)/586,667 Chip inspection: (12,000 1.1)/586,667 Frying monitor: (6,300 1.1)/586,667 Boxing: (16,600 1.1)/586,667 Machine operators: (6,300 1.1)/586,667

***($1,135,216)/($0.9837 586,667) = Fixed OH rate based on labor dollars

4. MUV = (AQ SQ)SP = (9,500,000 9,350,000)$0.238 = $35,700 U

SQ = 15.9375 8,800,000/15 = 9,350,000

332200

935

1. Pats decision was wrong and not in the best interests of the company. His concern for his bonus and promotion was apparently more important than his companys reputation for a quality product. Unfortunately, his assessment of personal risk was probably a significant input to the decision to buy the infe-rior component. All too often, individuals decide to take an unethical course of action based on their assessment of their chances of getting caught. This obviously should not be a factor. What is right should be the driving concern for this type of decision.

2. The use of standards to evaluate performance and assess rewards apparently

was influential in Pats decision. He clearly had a desire to receive his annual bonus and wanted to present an impressive performance profile so that he could secure a position at division headquarters. Perhaps altering the factors used for evaluating and rewarding performance and increasing the tenure of managers may decrease this type of behavior. Or perhaps we ought to spend more time emphasizing ethical behaviormaybe the problem isnt so much the systems we use for evaluating and rewarding performance but rather the lack of commitment to ethical decision making.

3. Purchasing agents have ethical responsibilities similar to accountants. Integr-

ity is a universally desirable characteristic. Pat and other purchasing agents should refrain from engaging in any activity that would prejudice their abili-ties to carry out their duties ethically (III-2); and refrain from a conflict of in-terest, either actual or apparent (III-1). Organizations would be well advised to adopt a set of ethical standards. All employees should understand that cer-tain behaviors are unacceptable.

RESEARCH ASSIGNMENTS

936

Answers will vary.

937

Answers will vary.

Documents

94638495 Solution Manual Managerial Accounting Hansen Mowen 8th Editions Ch 9