Chapter 09 Standard Costing:A Functional-BasedControl Approach

CHAPTER 9Standard Costing: A Functional-Based Control Approach

LEARNING OBJECTIVESAfter studying this chapter, you should be able to:

1. Describe how unit input standards are developed, and explain why standard costing systems are adopted.

2. Explain the purpose of a standard cost sheet.3. Compute and journalize the direct materials and direct labor variances, and explain how they

are used for control.5. Compute overhead variances three different ways, and explain overhead accounting.6. Calculate mix and yield variances for direct materials and direct labor.

CHAPTER SUMMARYThis chapter examines the functional-based standard costing systems in managing costs, improv-ing planning and control, and facilitating decision making and product costing. It provides detailed discussion of cost variance analyses for all product cost elements and considers their behavioral implications. Mix and yield variance analyses are also presented when it is possible to make input substitutions.

CHAPTER REVIEWI. Developing Unit Input Standards

A. Decisions to Be Made

1. Price standards specify how much should be paid for the quantity of the input to be used.

2. Quantity standards specify how much of the input should be used per unit of out-put.

3. The unit standard cost for a particular input = Standard price × Standard quan-tity.

B. Establishing Standards

1. Potential sources of quantitative standards include historical experience, engineer-ing studies, and input from operating personnel.

187

Learning Objective #1

188 Chapter 9

a. Historical experience should be used with caution because it may perpetuate operating inefficiencies.

b. Engineering studies and input from operating personnel help determine the most efficient level of input quantities.

The use of an engineering study approach by itself may produce standards that are too rigorous.

2. Responsibilities for establishing price standards

a. Operations managers determine the quality of the inputs required.

b. Personnel and purchasing have the responsibility to acquire the input quality at the lowest price that is limited by market forces and trade unions. Note that:

Purchasing must consider discounts, freight, and quality.

Personnel must consider payroll taxes, fringe benefits, and qualifications.

c. Accounting is responsible for recording the price standards and for preparing reports.

C. Types of Standards

1. Ideal standards are standards that demand maximum efficiency.

Can only be achieved if everything operates perfectly.

2. Currently attainable standards can be achieved under efficient operating condi-tions.

a. These standards are demanding but achievable.

b. Allowance is made for normal breakdowns, interruptions, and differing skill lev-els.

c. They offer more behavioral benefits than ideal standards.

If standards are too tight, workers can become frustrated, and performance levels will decline.

3. Kaizen Standards are continuous improvement standards that reflect a planned improvement.

Kaizen standards are currently attainable and have a cost reduction focus.

4. Activity-based Costing uses standards to:

a. Facilitate cost assignment.

An activity’s cost is determined by the amount of resources consumed by each activity.

b. Enhance cost control and reduction.

Focus on eliminating or reducing nonvalue-added activities.

Identify the ideal output level of each value-added activity and reduce activ-ity production to that ideal level.

D. Usage of Standard Costing Systems

Standard costing systems are widely adopted for:

Standard Costing: A Functional-Based Control Approach 189

1. Managing costs.

Standards help managers understand what needs to be done to improve current and future performance.

Kaizen standards help firms implement continuous improvement and cost re-duction.

2. Improving planning and control.

a. Unit standards are a fundamental requirement for a flexible budgeting system.

b. Budgetary control systems compare actual costs with budgeted costs by com-puting variances.

(1) An overall variance can be decomposed into a price and a usage or effi-ciency variance.

(2) In principle, the use of efficiency variances enhances operational control.

Managers have more control over the usage of inputs than over their prices.

3. Facilitating decision making and product costing.

a. Standard costing systems use standards for material, labor, and overhead.

b. A normal costing system uses a predetermined rate for applying overhead but uses actual materials and labor costs.

c. An actual costing system uses actual costs for all three of the manufacturing in-puts.

d. Advantages of a standard costing system:

(1) Provides readily available unit cost information that can be used for pricing decisions.

(2) Simplifies process costing.

(a) No need to compute unit costs for materials, transferred-in, and conver-sion cost categories.

(b) No need to distinguish between FIFO and weighted average.

Equivalent units are calculated using FIFO.

Review textbook Exhibit 9-1, which summarizes and compares the cost assignment approaches of actual costing, normal costing, and standard costing systems.

II. Standard Cost Sheets

A. Standard costing systems can be used in both manufacturing and service organiza-tions. For example, consider the standard costing in a hospital,

1. A relative value unit (RVU) is used to measure the relative amount of time re-quired to perform a procedure.


190 Chapter 9

2. A standard cost per RVU is computed by dividing the variable direct labor costs of a hospital department by the number of RVUs performed by that department.

3. A standard direct labor cost for a given procedure can be computed by multiplying the RVUs of the procedure by the standard cost per RVU.

B. The standard cost sheet provides the standard costs and standard quantities of ma-terials, labor, and overhead that should be applied to a single product or service, in -cluding:

1. A standard cost per unit is the per-unit cost that should be achieved given mate-rials, labor, and overhead standards. It can be computed as follows:

Standard cost per unit = Standard price × Standard usage

2. The quantity of each input that should be used to produce one unit of output is shown.

a. Standard quantity of materials allowed (SQ) is computed as follows:

SQ = Unit quantity standard × Actual output

b. Standard hours allowed (SH) is computed as follows:

SH = Unit quantity standard × Actual output

Review textbook Exhibit 9-2, which provides an example of a standard cost sheet.

III. Variance Analysis and Accounting: Direct Materials and Direct LaborA. Compute the Total Budget Variance.

1. The total budget variance is the difference between the actual cost of the input and its planned cost.

a. The planned input cost (flexible budget amount) is SP × SQ,

where SP = Standard unit price of an inputSQ = Standard quantity of inputs allowed for the actual output

b. The actual input cost is AQ × AP,

where AP = Actual price per unit of the inputAQ = Actual quantity of input used

thus,Total budget variance = (AP × AQ ) – (SP × SQ )

B. Calculate Direct Materials Price and Usage Variances

1. The total budget variance can be broken down into price and usage variances.

a. Price (rate) variance is the difference between the actual and standard unit price of an input multiplied by the number of inputs used.

b. Usage (efficiency) variance is the difference between the actual and standard quantity of inputs multiplied by the standard unit price of the input.

c. Unfavorable (U) variances occur whenever the actual prices or usage are greater than the standard.



d. Favorable (F) variances occur whenever the actual prices or usage are less than the standard.

Review textbook Exhibit 9-4, which illustrates the three-pronged approach to analyzing the direct materials price and usage variances.

2. Using formulas to compute direct materials price and usage variances.

a. The direct materials price variance (MPV) measures the difference between what should have been paid for raw materials and what was actually paid.

MPV = (AP × AQ ) – (SP × AQ )or

MPV = (AP – SP ) × AQ

b. The direct materials usage variance (MUV) measures the difference be-tween the direct materials actually used and the direct materials that should have been used for the actual output.

MUV = (SP × AQ ) – (SP × SQ )or

MUV = (AQ – SQ ) × SP

3. Timing of the direct materials price variance computation.

a. The direct materials price variance can be calculated at one of two points:

(1) When the raw materials are purchased.

(2) When the raw materials are issued for usage.

b. Computing the price variance at the point of purchase is preferable because it provides more timely the information that proper managerial action can be taken.

c. If the direct materials price variance is computed at the point of purchase, the formulas will be revised as follows:

MPV = (AP × AQ Purchased ) – (SP × AQ Purchased )or

MPV = (AP – SP ) × AQ Purchased

4. Timing of the computation of direct materials usage variance.

a. The materials usage variance should be computed as materials are issued for production using the following three forms.

(1) The standard bill of materials identifies the quantity of materials that should be used to produce a predetermined quantity of output. It acts as a requisition form.

(2) The color-coded excess usage form is used to provide immediate feedback to the production manager that excess direct materials are being used.

(3) The color-coded returned-materials form is used when the production man-ager returns leftover direct materials.

5. Accounting for direct materials price and usage variances.

192 Chapter 9

a. In a standard costing system, all inventories are carried at standard.

b. In recording variances,

(1) Unfavorable variances are always debits.

(2) Favorable variances are always credits.

c. Journal entry associated with the purchase of direct materials (assuming an unfavorable MPV):

Materials SP × AQMaterials Price Variance (AP – SP) × AQ

Accounts Payable AP × AQ

d. Journal entry associated with the use of direct materials (assuming an unfavor-able MUV):

Work in Process SQ × SPMaterials Usage Variance (AQ – SQ) × SP

Materials AQ × SP

C. Calculating Direct Labor Variances

1. Using formulas to compute direct labor rate and efficiency variances.

a. The labor rate variance measures the difference between what was paid to direct laborers and what should have been paid.

LRV = (AR × AH) – (SR × AH)or

LRV = (AR – SR) × AH

b. The labor efficiency variance measures the difference between the labor hours that were actually used and the labor hours that should have been used.

LEV = (AH × SR) – (SH × SR)or

LEV = (AH – SH) × SR

Review textbook Exhibit 9-6, which illustrates the three-pronged approach to analyzing direct labor rate and efficiency variances.

2. Accounting for direct labor rate and efficiency variances.

a. The journal entry for both variances is recorded simultaneously. (It assumes a favorable direct labor rate variance and an unfavorable direct labor efficiency variance.)

Work in Process SH × SRLabor Efficiency Variance (AH – SH) × SR

Labor Rate Variance (AR – SR) × AHPayroll AH × AR

b. Notice that only standard hours and standard rates are used to assign direct labor costs to Work in Process because all inventories are carried at standard.


c. If the variance is unfavorable, it will be a debit; if it is favorable, it will be a credit.

D. Decision Criteria for Investigating Variances

1. An investigation should be undertaken only if:

a. The variance is material, i.e., it falls outside an acceptable range.

b. The anticipated benefits are greater than the expected costs.

2. An acceptable range is the standard, plus or minus an allowable deviation. Control limits indicate how large a variance must be before it is judged to be material. They are the top and bottom measures of the allowable range as follows:

The upper control limit is the standard plus the allowable deviation.

The lower control limit is the standard minus the allowable deviation.

3. Control limits can be expressed both as a percentage of the standard and as an absolute dollar amount.

E. Determining Responsibility for the Direct Materials Variances

1. The responsibility for controlling the materials price variance is usually the pur-chasing agent’s because he/she can influence controllable factors such as quality, quantity discounts, distance of the source from the plant, etc.

2. The production manager is generally responsible for direct materials usage be-cause he/she can minimize scrap, waste, rework and other ways to ensure that the standard is met.

F. Determining Responsibility for the Direct Labor Variances

1. The direct labor rate variances occur when:

a. An average wage rate is used for the rate standard.

b. More skilled and more highly paid workers are used for less skilled tasks.

2. The production managers are responsible for the productive use of direct labor and, thus, responsible for the direct labor rate variance and efficiency variance.

G. Limitations of Using Variances to Evaluate Performance

1. The cause of the variance may be attributable to other departments.

Frequent breakdown of machinery may cause interruptions and nonproductive use of direct labor. But these breakdowns are attributable to faulty maintenance by the maintenance department, not production departments.

2. Note that too much emphasis on meeting standards can lead to dysfunctional behavior/outcomes.

a. Focusing on the price variance for performance evaluation may cause

Poor quality goods to be purchased.

Too many goods to be purchased in order to obtain quantity discounts.

b. Focusing on the direct material usage variance and/or direct labor variances to evaluate performance can tempt the manager to allow defective units to be transferred to avoid using additional materials and/or hours because of rework.

194 Chapter 9

These defective units may create customer-relation problems once a customer gets stuck with the bad product.

H. Disposition of Materials and Labor Variances

1. Most companies dispose of variances at the end of the year.

2. If the variances are not material, they simply are closed out to Cost of Goods Sold.

3. If the variances are material, they are prorated to Work in Process, Finished Goods, and Cost of Goods Sold.

a. GAAP requires that inventories be reported at actual costs.

b. But it is hard to justify carrying costs of inefficiency as an asset.

IV. Variance Analysis: Overhead Costs

A. The total overhead variance is the difference between the actual and the applied overhead. The four-variance method breaks down the total overhead variance into

1. Variable overhead variances including

a. the variable overhead spending variance, and

b. the variable overhead efficiency variance.

2. Fixed overhead variances including

a. the fixed overhead spending variance, and

b. the fixed overhead volume variance.

B. Analyzing Variable Overhead Variances

1. The total variable overhead variance is the difference between the actual and the applied variable overhead.

Can be split into a spending and efficiency variance.

2. The variable overhead spending variance (VOSV) measures the aggregate effect of differences in the actual variable overhead rate and the standard variable over-head rate.

VOSV = (AVOR × AH) – (SVOR × AH)or

VOSV = (AVOR – SVOR) × AH

a. Variable overhead is not a homogeneous input and, thus, the standard vari-able overhead rate represents a weighted average for all of the variable over-head items.

b. A spending variance is affected by price changes and by how efficiently over-head is used.

Waste or inefficient use of variable overhead causes an unfavorable vari-able overhead spending variance.

c. To the extent that the consumption of variable overhead can be traced, re-sponsibility can be assigned.

Controllability is a prerequisite for assigning responsibility.



3. The variable overhead efficiency variance (VOEV) measures the change in vari-able overhead consumption that occurs because of efficient (or inefficient) usage of the activity.

VOEV = (AH – SH) × SVOR

a. The variable overhead efficiency variance is directly related to the direct labor efficiency variance if the variable overhead cost driver is direct labor hours.

b. The causes of variable overhead efficiency variance are generally the same as those for the direct labor usage variance.

Review textbook Exhibit 9-7, which summarizes the variable overhead spending and efficiency variance computations.

C. Analyzing Fixed Overhead Variances

1. The total fixed overhead variance is the difference between actual fixed overhead and applied fixed overhead.

Applied fixed overhead = Standard fixed overhead rate × Standard hours

2. The fixed overhead spending variance (FOSV) is the difference between the ac-tual fixed overhead (AFOH) and the budgeted fixed overhead (BFOH).

FOSV = AFOH – BFOH

3. The fixed overhead volume variance (FOVV) is the difference between bud-geted fixed overhead and applied fixed overhead.

FOVV = Budgeted fixed overhead – Applied fixed overheadFOVV = [Standard fixed overhead rate × SH(D) ] – (Standard fixed overhead rate × SH)

where SH(D) = Standard hours allowed for the denominator output volume used to compute the predetermined standard fixed overhead rate

SH = Standard hours allowed for the actual output volume achieved

4. The fixed overhead volume variance occurs whenever the actual output differs from the denominator output volume.

a. The volume variance measures the effect of the actual output differing from the output used to determine the standard fixed overhead rate.

b. The volume variance occurs because the actual output differs from the pre-dicted output volume. It may represent

(1) A prediction errora measure of inability of management to select the cor-rect volume over which to spread fixed overhead.

(2) A measure of capacity utilization

Review textbook Exhibit 9-10, which summarizes the fixed overhead spending and volume variance computations.

5. Accounting for overhead variances:

196 Chapter 9

a. To assign overhead to production:

Work in Process xxxVariable Overhead Control xxxFixed Overhead Control xxx

b. To recognize actual overhead:

Variable Overhead Control xxxFixed Overhead Control xxx

Miscellaneous Accounts xxx

c. Variances will be debited or credited as necessary to balance the variable and fixed overhead control accounts.

D. Two- and Three-Variance Analyses

1. These variances do not require knowledge of actual variable and actual fixed over-head.

a. They are simply combined into actual overhead.

b. These methods provide less detail and, thus, less useful information.

2. The two-variance analysis computes two variances: budget and volume.

a. The budget variance is the sum of the four-variance spending and efficiency variances.

b. The volume variance is the same as the fixed overhead volume variance of the four-variance method.

Review textbook Exhibit 9-13, which summarizes the two-variance method.

3. The three-variance analysis computes the spending variance, the efficiency vari-ance, and the volume variance.

a. The spending variance is the sum of the variable and fixed overhead spending variances.

b. The efficiency variance is the same as the variable overhead efficiency vari-ance of the four-variance method.

c. The volume variance is the same as the fixed overhead volume variance of the four-variance method.

Review textbook Exhibit 9-14, which summarizes the three-variance method.

V. Mix and Yield Variances: Materials and LaborA. General Concept

1. If it is possible to substitute one direct material input for another or one type of di -rect labor for another, variances can occur.

a. A mix variance results whenever the actual mix of inputs differs from the stan-dard mix.



b. A yield variance results whenever the actual yield (output) differs from the stan-dard yield.

2. For direct materials, the sum of the mix and yield variances equals the material us-age variance; for direct labor, the sum is the labor efficiency variance.

B. Direct Materials Mix and Yield Variances

1. The direct materials mix variance is the difference between the standard cost of the actual mix of inputs used and the standard cost of the mix of inputs that should have been used.

Materials mix variance for each input = (AQ – SM ) × SPwhere SM = Standard mix proportion × Total actual input quantity

Standard mix quantity (SM) is the quantity of each input that should have been used given the total actual input quantity.

Thus, the materials mix variance for all input materials = (AQi – SMi) × Spi

2. The direct materials yield variance is the difference between the standard cost of the actual yield of output units and the standard cost of the yield of output that should have been produced. Steps to compute the yield variance are as follows:

a. Identify the total standard input units and the expected standard yield units. Use the standard input-output relationship to compute the standard yield ratio.

Standard yield ratio =

b. Compute the standard cost of yield per unit (SPy).

SPy =

c. Compute the standard yield.Standard yield = Standard yield ratio × Total actual input quantity

d. Compute the yield variance.Yield variance = (Standard yield – Actual yield) × SPy

C. Labor Mix and Yield Variances

Labor mix and yield variances are computed in the same way as those for the ma-terials mix and yield variances.

198 Chapter 9

KEY TERMS TESTFrom the list that follows, select the term that best completes each statement and write it in the space provided.

control limitcurrently attainable standarddirect labor efficiency variance (LEV)direct labor rate variance (LRV)direct materials price variance (MPV)direct materials usage variance (MUV)favorable (F) variancefixed overhead spending variancefixed overhead volume varianceideal standardkaizen standardsmix varianceprice standardprice (rate) variance

quantity standardrelative value unit (RVU)standard bill of materialsstandard cost per unitstandard cost sheetstandard hours allowedstandard quantity of materials allowedtotal budget varianceunfavorable (U) varianceunit standard costusage (efficiency) variancevariable overhead efficiency variancevariable overhead spending varianceyield variance

1. The difference between actual fixed overhead and budgeted fixed overhead is the ___________________________________________________.

2. The difference between what was paid and what should have been paid for actual inputs is called the ______________________ or the ______________________.

3. The difference between the direct materials actually used and the direct materials allowed for actual output multiplied by the standard price is the ________________________________.

4. A(n) _________________________________ is produced whenever the actual dollars spent are greater than the standard allowance.

5. The ____________________________ is the price that should have been paid per unit of input; the quantity of input allowed per unit of output is the _____________________________.

6. The difference between the actual payroll and what should have been paid for the actual hours worked is the _______________________________________.

7. The __________________________________________________ is a measure of capacity utilization.

8. The difference between the actual labor hours worked and the standard hours allowed multi-plied by the variable overhead rate is the _____________________________________________ ______________; the difference between what was spent and what should have been spent for variable overhead at actual


hours is the ____________________________ _______________________________.

9. The per-unit cost that should be achieved given materials, labor, and overhead standards is the _____________________________________ or_______________________________.

10. A listing of the standard costs and standard quantities of materials, labor, and overhead that should apply to a single product is the ________________________________.

11. The maximum allowable deviation from a standard is called the _____________________.

12. A(n) ________________________ reflects perfect operating conditions.

13. The difference between the actual cost of an input and its planned cost is the _________ _________________________.

14. The difference between standard quantities and actual quantities multiplied by the standard price is the _____________________________.

15. The difference between the standard material cost of the standard yield and the standard material cost of the actual yield is the _______________________.

16. The difference between the standard cost of the mix of actual material inputs and the standard cost of the material input mix that should have been used is the ______________________.

17. A(n) ______________________________________________ reflects an efficient operat-ing state.

18. A(n) ______________________________ is produced whenever the actual dollars spent are less than the standard allowances.

19. A detailed listing of the type and quantity of materials allowed for a given level of output is called the ________________________________.

20. The difference between what was paid for materials purchased and what should have been paid is the _____________________________________.

21. The direct labor hours that should have been used to produce the actual output is the _____________________________________; the quantity of materials that should have been used to produce the actual output is the _________________________________ ____________________________.

22. The difference between the actual direct labor hours used and the standard labor hours allowed multiplied by the standard hourly wage rate is the _______________________ ______________.

200 Chapter 9

23. Hospital standard costing systems often use a homogeneous work unit called a ________ _________________ to measure the relative amount of time required to perform a proce-dure.


MULTIPLE-CHOICE QUIZComplete each of the following statements by circling the letter of the best answer.

1. If more direct materials were used for production than were allowed for the output, then the:a. direct labor efficiency variance will be unfavorable.b. direct labor rate variance will be favorable.c. direct materials price variance will be favorable.d. direct materials usage variance will be unfavorable.e. overhead budget variance will be unfavorable.

2. The direct labor rate variance is computed as:a. (Actual labor hours worked – Standard labor hours allowed) × Actual labor rate.b. (Actual labor hours worked – Standard labor hours allowed) × Standard labor rate.c. (Actual labor rate – Standard labor rate) × Standard hours allowed.d. (Actual labor rate – Standard labor rate) × Actual hours worked.e. none of the above.

3. Which of the following variances would be least likely if the materials used were of much poorer quality than the standard?a. unfavorable direct materials price varianceb. unfavorable direct materials efficiency variancec. unfavorable direct labor efficiency varianced. unfavorable variable overhead efficiency variancee. All of the above would be equally likely to occur.

4. If the direct labor force is poorly trained, which of the following variances is most likely to oc-cur?a. unfavorable direct labor efficiency varianceb. unfavorable direct labor rate variancec. favorable direct materials efficiency varianced. favorable fixed overhead spending variancee. unfavorable variable overhead spending variance

5. Which of the following circumstances is least likely to cause a direct materials usage vari-ance?a. inexperienced workersb. lack of regular maintenance of automated production machineryc. materials of poorer than expected qualityd. price increases by supplierse. unanticipated changes in the design of the product

6. Which of the following would accompany an unfavorable direct labor efficiency variance?a. favorable direct materials usage varianceb. unfavorable direct materials price variancec. unfavorable direct labor rate varianced. unfavorable variable overhead efficiency variance

202 Chapter 9

e. unfavorable fixed overhead spending variance

7. The overhead spending variance computed using a three-variance analysis:a. consists only of fixed costs; no variable costs are included.b. consists only of variable costs; no fixed costs are included.c. consists of both variable and fixed costs.d. is favorable when the direct materials price variance is favorable.e. None of the above are true.

8. The overhead efficiency variance computed using a three-variance analysis:a. is (Flexible budget for actual hours worked – Flexible budget for standard hours allowed).b. consists only of variable costs; no fixed costs are included.c. is [(Actual hours worked – Standard hours allowed) × Standard variable overhead rate].d. is unfavorable when the direct labor efficiency is unfavorable.e. All of the above are true.

9. The direct materials standard for XYZ Company is 10 pounds of input at $4.00 per pound. XYZ purchased 25,000 pounds of material for $97,600. The company used 22,000 pounds of material to produce 2,250 units of output. The direct materials price variance is:a. $2,000 unfavorable.b. $2,400 favorable.c. $7,600 unfavorable.d. $9,600 unfavorable.e. none of the above.

10. Assume the same information as in Question 9 above. The direct materials usage variance is:a. $2,000 unfavorable.b. $2,400 favorable.c. $7,600 unfavorable.d. $9,600 unfavorable.e. none of the above.

11. The direct labor standard for XYZ Company is 2 hours per unit of output at a standard rate of $15 per hour. During August, 2,250 units were produced using 4,760 hours. Direct labor payroll totaled $73,675. The direct labor rate variance is:a. $2,275 favorable.b. $2,275 unfavorable.c. $3,900 favorable.d. $6,175 unfavorable.e. none of the above.

12. Assume the same information as in Question 11 above. The direct labor efficiency variance is:a. $2,275 favorable.b. $2,275 unfavorable.c. $3,900 favorable.


d. $6,175 unfavorable.e. none of the above.

204 Chapter 9

PRACTICE TEST

EXERCISE 1ABC Company produced 25,000 units of Product XP-1 during 2000. Each product required 6 pounds of material at $11 per pound and 2 hours of direct labor at $15 per hour. During 2003, 160,000 pounds of material were purchased and used for $1,750,000; payroll totaled $743,900 for 49,000 hours.

Required:

Calculate the direct materials price and usage variances and the direct labor rate and efficiency variances.

EXERCISE 2Acme Corp. applies overhead to production using a rate of $75 per machine hour ($35 variable, $40 fixed). Acme produced 15,000 units and incurred overhead of $3,710,000 (of which $1,495,000 was variable overhead) while using 43,500 machine hours. The overhead stan-dards assumed each product would use 3 machine hours. The practical capacity of 18,000 units was used as the denominator activity.

Required:

Calculate the overhead variances using a four-variance analysis.


EXERCISE 3XYZ Company produces a compound by mixing 3 gallons of AB-5 (costing $2.25 per gallon) and 4 gallons of CR-3 (costing $7.50 per gallon). The output is 5 gallons of the compound. During August, 21,000 gallons of AB-5, costing $46,500, were purchased and used; 26,000 gallons of CR-3, costing $198,000, were purchased and used. A total of 37,000 gallons of output were ob-tained.

Required:

1. Calculate the direct materials price and usage variances.

2. Calculate the direct materials mix and yield variances.

206 Chapter 9

EXERCISE 4Scooter Company has the following standard cost sheet using an expected capacity of 120,000 units:

Direct materials..................... 25 pounds @ $ 1.20 $ 30.00Direct labor............................ 2 hours @ 12.50 25.00Overhead:

Variable............................. 3 machine hours @ 8.00 24.00Fixed................................. 3 machine hours @ 12.00 36.00

Total...................................... $115.00

During the year, 125,000 units were produced. Actual costs included the following:

Direct materials..................... 3,200,000 pounds purchased for $3,725,000.3,110,000 pounds were used in production.

Direct labor............................ 260,000 hours worked; payroll totaled $3,320,000.Overhead.............................. Variable: $3,025,000

Fixed: $4,275,000Machine hours...................... 378,000 actually used

Required:

Calculate as many variances as possible.


“CAN YOU?” CHECKLIST Can you identify potential sources of quantitative standards and the personnel responsible for

establishing price standards?

Can you explain the difference between ideal standards and currently attainable standards?

Can you explain the difference between an actual costing system, a normal costing system, and a standard costing system?

Can you compute the price (rate) and usage (efficiency) variances for direct materials (direct labor)? Can you prepare the journal entries for these variances?

Can you prepare overhead variances using the two-variance, three-variance, and four-vari-ance methods?

Can you compute mix and yield variances for both direct materials and direct labor?

ANSWERS

KEY TERMS TEST1. fixed overhead spending variance2. price variance, rate variance3. direct materials usage variance4. unfavorable variance5. price standard, quantity standard6. direct labor rate variance7. fixed overhead volume variance8. variable overhead efficiency variance, variable

overhead spending variance9. standard cost per unit, unit standard cost

10. standard cost sheet11. control limit12. ideal standard

13. total budget variance14. usage variance15. yield variance16. mix variance17. currently attainable standard18. favorable variance19. standard bill of materials20. direct materials price variance21. standard hours allowed, standard quantity of

materials allowed22. direct labor efficiency variance23. relative value unit (RVU)

MULTIPLE-CHOICE QUIZ1. d2. d3. a4. a5. d6. d

7. c8. e9. b $97,600 – (25,000 × $4) = $97,600 – $100,000 = –$2,400 Favorable

10. e [22,000 – (2,250 × 10)] × $4 = (22,000 – 22,500) × $4 = –500 × $4 = –$2,000 Favorable11. b $73,675 – (4,760 × $15) = $73,675 – $71,400 = $2,275 Unfavorable12. e [4,760 – (2,250 × 2)] × $15 = (4,760 – 4,500) × $15 = 260 × $15 = $3,900 Unfavorable

208 Chapter 9

PRACTICE TESTEXERCISE 1 (ABC Company)

MPV: $1,750,000 – (160,000 × $11) = $1,750,000 – $1,760,000 = –$10,000 Favorable

MUV: (160,000 × $11) – (25,000 × 6 × $11) = $1,760,000 – $1,650,000 = $110,000 Unfavorable

LRV: $743,900 – (49,000 × $15) = $743,900 – $735,000 = $8,900 Unfavorable

LEV: (49,000 × $15) – (25,000 × 2 × $15) = $735,000 – $750,000 = –$15,000 Favorable

EXERCISE 2 (Acme Corp.)VOH spending: Actual VOH – Budgeted VOH

$1,495,000 – (43,500 × $35) = $1,495,000 – $1,522,500 = –$27,500 FavorableVOH efficiency: Budgeted VOH – Applied VOH

(43,500 × $35) – (15,000 × 3 × $35) = $1,522,500 – $1,575,000 = –$52,500 FavorableFOH spending: Actual FOH – Budgeted FOH

$2,215,000 – (18,000 × 3 × $40) = $2,215,000 – $2,160,000 = $55,000 UnfavorableFOH volume: Budgeted FOH – Applied FOH

$2,160,000 – (15,000 × 3 × $40) = $2,160,000 – $1,800,000 = $360,000 Unfavorable

EXERCISE 3 (XYZ Company)

1. MPV: AB-5: $46,500 – (21,000 × $2.25) = $46,500 – $47,250 = –$750 FavorableCR-3: $198,000 – (26,000 × $7.50) = $198,000 – $195,000 = $3,000 Unfavorable

MUV: Total standard input = Actual yield / Yield ratio = 37,000 / [5/(3 + 4)] = 37,000 / .714 = 51,800*SQ(AB-5) = 51,800 × 3/7 = 22,200SQ(CR-3) = 51,800 × 4/7 = 29,600

*roundedAQ SQ AQ – SQ (AQ – SQ)SP

21,000 22,200 –1,200 –$ 2,70026,000 29,600 –3,600 – 27,000

–$29,700 Favorable

2. Mix varianceAQ SQ AQ – SQ SP (AQ – SQ)SP

21,000 20,143 a 857 $2.25 $1,928.2526,000 26,857 b –857 $7.50 – 6,427.50

–$4,499.25 Favorablea (21,000 + 26,000) × 3/(3 + 4) = 20,143b (21,000 + 26,000) × 4/(3 + 4) = 26,857

Yield variance = (Standard yield – Actual yield) × SPy

= (33,571 – 37,000) × $7.35 = –3,429 × $7.35 = –$25,203.15 Favorablewhere Standard yield = (21,000 + 26,000) × 5/7 = 33,571

SPy = [(3 × $2.25) + (4 × $7.50)] / 5 gallons = $36.75 / 5 = $7.35

EXERCISE 4 (Scooter Company)

MPV: $3,725,000 – (3,200,000 × $1.20) = $3,725,000 – $3,840,000 = –$115,000 Favorable

MUV: [3,110,000 – (125,000 × 25)] × $1.20 = (3,110,000 – 3,125,000) × $1.20 = –15,000 × $1.20 = –$18,000 Favorable

LRV: $3,320,000 – (260,000 × $12.50) = $3,320,000 – $3,250,000 = $70,000 Unfavorable

LEV: [260,000 – (125,000 × 2)] × $12.50 = (260,000 – 250,000) × $12.50 = 10,000 × $12.50 = $125,000 Unfavor-able

VOSV: $3,025,000 – (378,000 × $8) = $3,025,000 – $3,024,000 = $1,000 Unfavorable

VOEV: [378,000 – (125,000 × 3)] × $8 = (378,000 – 375,000) × $8 = 3,000 × $8 = $24,000 Unfavorable

FOSV: $4,275,000 – (120,000 × $36) = $4,275,000 – $4,320,000 = –$45,000 Favorable


FOVV: $4,320,000 – (125,000 × $36) = $4,320,000 – $4,500,000 = –$180,000 Favorable

Documents

Chapter 09 Standard Costing:A Functional-BasedControl Approach