CHAPTER 9 STANDARD COSTING: A MANAGERIAL CONTROL TOOLQUESTIONS FOR WRITING AND DISCUSSION1. 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 output. 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 historical amounts may include more inefficiency than is desired. 5. Engineering studies can serve as an important input to standard setting. Many feel that this approach by itself may produce standards 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 motivate rather than frustrate. 7. Standard costing systems improve planning and control and facilitate product costing. 8. By identifying standards and assessing deviations from the standards, managers can locate areas where change or corrective behavior 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. 15. 11. Managers generally tend to have more control over the quantity of an input used rather than the price paid per unit of input. A standard cost variance should be investigated if the variance is material and if the benefit of investigating and correcting the deviation is greater than the cost. 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. The materials price variance is often computed at the point of purchase rather than issuance because it provides control information sooner. When this is done, the variance may be called the materials purchase price variance, and it is the responsibility of the purchasing manager rather than the production manager. 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. 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. Some possible causes of an unfavorable labor efficiency variance are inefficient labor, machine downtime, and poor quality materials. Part of a variable overhead spending variance can be caused by inefficient use of overhead resources. Agree. This variance, assuming that variable overhead costs increase as labor usage increases, is caused by the efficiency or inefficiency of labor usage. Also labor may not be a good driver for variable overhead.

12.

13.

14.

16.

17.

18.

19.

275

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

lume is different from the expected, then the company has either lost or earned a contribution margin. The volume variance signals this outcome, and if the variance is large, then the loss or gain is large since the volume variance understates the effect. 22. The spending variance is more important. This variance is computed by comparing actual expenditures with budgeted expenditures. The volume variance simply tells whether the actual volume is different from the expected volume.

21.

276

EXERCISES 911. d 2. e 3. d 4. c 5. e 6. a

921. a. The operating personnel of each cost center should be involved in setting standards. They are the primary source for quantity information. The materials manager and purchasing manager are a source of information for material 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 information about absolute efficiency is desired, industrial engineers can provide important input. b. Standards should be attainable; they should include an allowance for waste, breakdowns, etc. Market prices for materials as well as labor (unions) should be a consideration for setting standards. Labor prices should include fringe benefits, and material prices should include freight, taxes, etc. In principle, before formal responsibility is assigned, the causes of the variances 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: MUV: LRV: LEV: OH variances: Purchasing manager Production manager Production manager Production manager Departmental managers

2.

277

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

941. 2. 3. SQ direct materials per unit = 340,000/40,000 = 8.5 oz per bunny SH direct labor hours per unit = 10,000/40,000 = 0.25 hrs. per bunny Standard Cost for Dark Chocolate Bunny: Standard Price Direct materials $0.30 Direct labor 9.00 Total standard unit prime cost

Standard Usage 8.50 oz. 0.25 hr.

Standard Cost $2.55 2.25 $4.80

951. 2. 3. SQ = 8.5 47,000 = 399,500 oz. SH = 0.25 47,000 = 11,750 hours Total standard prime cost = ($0.30 399,500) + ($9 11,750) = $225,600

961. 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.

278

971. 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 purchase of the higher-quality material normally used. Production engineering is responsible. If the relationship is expected to persist, then the new labor method should be adopted, and standards for materials and labor need to be revised.

3.

981. 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 LEV = (AR SR)AH = ($12.50 $12.00)2,000 = $1,000 U = (AH SH)SR = (2,000 1,976*)$12.00 = $288 U

* SH = 52,000 0.038 = 1,976

279

991. Variable overhead analysis: Actual VOH $160,000 $4,000 U Spending * SH for direct labor = 73,000 0.75 = 54,750 2. Fixed overhead analysis: Actual FOH $710,000 $10,000 U Spending Budgeted FOH $14 50,000 $66,500 U Volume Applied FOH $14 54,750 Budgeted VOH $3.00 52,000 $8,250 F Efficiency Applied VOH $3.00 54,750*

280

9101. Materials: $35 34,000 = $1,190,000 Labor: $21 34,000 = $714,000 Actual Cost* $1,183,270 687,150 Budgeted Cost $1,190,000 714,000 Variance $ 6,730 F 26,850 F

2. Materials Labor

*$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 $6.82 173,500 $31,230 F Price 4. LRV LEV = (AR SR)AH = ($13.50 $14.00)50,900 = $25,450 F = (AH SH)SR = (50,900 51,000)$14 = $1,400 F SR AH $14 50,900 $25,450 F Rate $1,400 F Efficiency SR SH $14 51,000 SP AQ $7 173,500 $24,500 U Usage SP SQ $7 170,000

AR AH $13.50 50,900

281

9111. 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 $9.50 79,900 $7,990 U Rate 3. Materials Inventorya .................................. MPV ............................................................ Accounts Payableb .............................. Work in Processc ....................................... MUV ....................................................... Materials Inventoryd ............................ Work in Processe ....................................... LRV ............................................................. LEV ........................................................ Accrued Payrollf ..................................a

SR AH $9.40 79,900 $4,700 F Efficiency 1,768,875 22,250

SR SH $9.40 80,400

1,791,125 1,757,745 5,565 1,752,180 755,760 7,990 4,700 759,050

$7.95 222,500 =1,768,875 $8.05 222,500 =1,791,125 $7.95 222,500 = 1,768,875 $7.95 221,100 =1,757,745 $9.40 80,400 = 755,760

b c

d e f

$9.50 79,900 = 759,050

282

9121. 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 $430,300 $9,700 F Spending Budgeted FOH $1.10 400,000* $7,700 U Volume Applied FOH $1.10 393,000

*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 Variable overhead analysis: Actual VOH $695,000 $32,000 U Spending Budgeted VOH $1.70 390,000 $5,100 F Efficiency Applied VOH $1.70 393,000

4.

283

9131. 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 = $72,000 U = $940,320 $868,320

Total VOH variance = $1,447,200 $1,443,500 = $3,700 F 3. Fixed overhead analysis: Actual FOH $940,320 $76,320 U Spending Budgeted FOH $864,000 $4,320 F Volume Applied FOH $868,320

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 $1,443,500 $3,700 F Spending Budgeted VOH $4 361,800 $0 Efficiency Applied VOH $1,447,200

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 attributable to the efficiency of labor usage.

284

9141. 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 purchased 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 $18.10 515,000 $51,500 U Rate 3. Fixed overhead analysis: Actual FOH $4,140,200 $7,000 F Spending Budgeted FOH $8 518,400 $115,200 U Volume Applied FOH $8 504,000 SR AH $18 515,000 $198,000 U Efficiency SR SH $18 504,000

Note: Practical volume in hours = 1.8 288,000 = 518,400 hours 4. Variable overhead analysis: Actual VOH $872,000 $99,500 U Spending Budgeted VOH $1.50 515,000 $16,500 U Efficiency Applied VOH $1.50 504,000

285

9151. Materials Inventory ................................... MPV ............................................................ Accounts Payable ................................ 2. Work in Process ........................................ MUV ............................................................ Materials Inventory .............................. 3. Work in Process ........................................ LRV ............................................................. LEV ............................................................. Accrued Payroll ................................... 4. Work in Process ........................................ Fixed Overhead Control ...................... Variable Overhead Control ................. 5. Materials and labor: Cost of Goods Sold ................................... MPV ....................................................... MUV ....................................................... LRV........................................................ LEV ........................................................ Overhead disposition: Cost of Goods Sold ................................... Fixed Overhead Control ...................... Cost of Goods Sold ................................... Variable Overhead Control ................. 108,200 108,200 116,000 116,000 612,040 336,940 25,600 51,500 198,000 10,782,080 336,940 11,119,020 10,752,000 25,600 10,777,600 9,072,000 51,500 198,000 9,321,500 4,788,000 4,032,000 756,000

286

9161. 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 purchasing agent to search for sources that will supply the quantity and quality of material desired at the lowest price. It sounds like the price standard may be out of date. Revising the price standard and implementing a policy concerning quantity purchases would likely prevent this behavior from reoccurring. 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 reward system of the company. Probably, he should be retained with some additional training concerning the goals of the company and a change in emphasis and policy to help encourage the desired behavior.

2.

3.

917Materials: AP AQ $38,295 $3,105 F Price Labor: AR AH $57,226 $1,426 U Rate SR AH $9 6,200 = $55,800 SR SH $9 6,195 = $55,755 $45 U Efficiency SP AQ $2.00 20,700 $100 U Usage SP SQ $2.00 20,650

287

9181. Materials Inventory ................................... MPV ....................................................... Accounts Payable ................................ 2. Work in Process ........................................ MUV ............................................................ Materials Inventory .............................. 3. Work in Process ........................................ LRV........................................................ LEV ........................................................ Accrued Payroll ................................... 4. Cost of Goods Sold ................................... MUV ....................................................... MPV ............................................................ LRV ............................................................. LEV ............................................................. Cost of Goods Sold ............................. 41,400 3,105 38,295 41,300 100 41,400 55,755 1,426 45 57,226 100 100 3,105 1,426 45 4,576

288

9191. VOH efficiency variance = (AH SH)SVOR $8,000 = (1.2SH SH)$2 $8,000 = $0.4SH SH = 20,000 AH = 1.2SH = 24,000 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

2.

289

PROBLEMS 9201. Materials: AP AQ $1.72 38,500 $770 U Price SP AQ $1.70 38,500 $2,550 F Usage SP SQ $1.70 40,000

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

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

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 materials savings of $80 plus labor savings of $1,600.

290

9211. 2. 3. 4. 5. 6. 7. 8. e h k n d g o b 9. 10. 11. 12. 13. 14. 15. m l j c a i f

9221. 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) Pads (4 @ $0.05) Labor (0.49 hr. @ $8.00) Unit cost $4.50 0.20 3.92 $8.62

291

9222.

Concluded

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. 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 determine the standard direct labor time for a unit of product. They also can determine how much material is needed for the product. c. The cost accountant has historical information as well as current information from the purchasing agent, industrial engineers, and operating personnel. He or she can compile this information to obtain an achievable standard.

3.

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

292

9231. 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. 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. Direct materials Direct labor Variable overhead Fixed overhead Standard cost per unit *Rounded 4. There would be unfavorable efficiency variances for the first 320 units because 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). Std. Price $ 4 15 8 12 Std. Usage 25.000 0.768 0.768 0.768 Std. Cost $100.00 11.52 6.14 9.22* $126.88*

2.

9241. 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. Responsibility for the variance in this case likely would be assigned to purchasing. The lower-quality materials are probably the cause of the extra usage.

293

9242.

Continued

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

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 $1,470,000 $30,000 F Spending 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 Budgeted VOH $10 150,000 $100,000 U Efficiency Applied VOH $10 140,000

294

9244.

Continued

Fixed overhead variances: Actual FOH $913,000 $13,000 U Spending Budgeted FOH $6 2 75,000 $60,000 U Volume Applied FOH $6 2 70,000

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 .................................. MPV ....................................................... Accounts Payableb .............................. Work in Processc ....................................... MUV ............................................................ Materials Inventoryd ............................ 2,790,000 93,000 2,697,000 2,940,000 8,400 2,948,400

a

465,000 $6 = $2,790,000 465,000 $5.80 = $2,697,000

b c

490,000 $6 = $2,940,000 (465,000 + 26,400) $6 = $2,948,400

d

295

924

Concluded1,680,000 150,000 120,000 1,950,000 278,400 8,400 150,000 120,000 93,000 93,000 1,470,000 1,470,000 913,000 913,000 1,400,000 1,400,000 840,000 840,000 20,000 20,000 73,000 73,000

Work in Processe ....................................... LRV ............................................................. LEV ............................................................. Accrued Payroll ................................... Cost of Goods Sold ................................... MUV ....................................................... LRV........................................................ LEV ........................................................ MPV ............................................................ Cost of Goods Sold ............................. VOH Control ............................................... Various Credits .................................... FOH Control ............................................... Various Credits .................................... Work in Processf ....................................... VOH Control ......................................... Work in Processg....................................... FOH Control ......................................... Cost of Goods Sold ................................... VOH Control ......................................... Cost of Goods Sold ................................... FOH Control .........................................

e f

2 $12 70,000 = $1,680,000

2 $10 70,000 = $1,400,000 2 $6 70,000 = $840,000

g

296

9251. 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 $2,500,000 $100,000 U Spending Athens plant: Actual FOH $2,500,000 $100,000 U Spending Budgeted FOH $2,400,000 $0 Volume Applied FOH $4 600,000 Budgeted FOH $2,400,000 $480,000 U Volume Applied FOH $4 480,000

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 budgeted. Changing the terms on a 10-year lease in the first year would be unusual (unless there is some sort of special clause permitting increased payments 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.

297

9253.

Concluded

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 production 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). 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 practical 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.

4.

298

9261. Normal Patient Day: Direct materials Direct labor Variable overhead Fixed overhead Unit cost Cesarean Patient Day: Direct materials Direct labor Variable overhead Fixed overhead Unit cost 2. Standard Price $10.00 16.00 30.00 40.00 Standard Usage 20.00 lb. 4 hr. 4 hr. 4 hr. Standard Cost $200.00 64.00 120.00 160.00 $544.00 Standard Price $10.00 16.00 30.00 40.00 Standard Usage 8.00 lb. 2 hr. 2 hr. 2 hr. Standard Cost $ 80.00 32.00 60.00 80.00 $252.00

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 ..................................................... MPV ....................................................... Accounts Payable ................................ Work in Process ........................................ MUV ............................................................ Materials ............................................... MPV ............................................................ MUV ............................................................ Cost of Services Sold .......................... 1,720,000 86,000 1,634,000 1,680,000 40,000 1,720,000 86,000 40,000 46,000

299

9263.

Continued

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 ........................................ LEV ............................................................. LRV........................................................ Accrued Payroll ................................... *[(2 3,500) + (4 7,000)] $16 = $560,000 Cost of Services Sold ............................... LRV ............................................................. LEV ........................................................ 20,350 3,650 24,000 560,000* 24,000 3,650 580,350

4.

Variable overhead variances: Actual VOH $1,215,000 $245,000 F Spending Fixed overhead variances: Actual FOH $700,000 $20,000 F Spending Note: SH = (2 3,500) + (4 7,000) = 35,000 Budgeted FOH $720,000 $330,000 F Volume Applied FOH $30 35,000 Budgeted VOH $40 36,500 $60,000 U Efficiency Applied VOH $40 35,000

300

926

Concluded1,400,000 1,400,000 1,050,000 1,050,000 1,215,000 1,215,000 700,000 700,000 185,000 185,000 350,000 350,000

Work in Process ........................................ Variable Overhead Control ................. Work in Process ........................................ Fixed Overhead Control ...................... Variable Overhead Control ....................... Various Credits .................................... Fixed Overhead Control ........................... Various Credits .................................... Variable Overhead Control ....................... Cost of Services Sold .......................... Fixed Overhead Control ........................... Cost of Goods Sold ............................. 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

9271. 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

301

9272.

Concluded

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

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

302

9281. 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.

303

9283.

Concluded

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

Fixed overhead variances: Actual FOH $50,500 $500 U Spending Budgeted FOH $50,000 $0 Volume Applied FOH $1 50,000

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.

304

9291. Performance Report Actual Costs $ 775,000 590,000 310,000 180,000 $1,855,000 Budgeted Costs* $ 750,000 600,000 300,000 165,000 $1,815,000 Variance $25,000 U 10,000 F 10,000 U 15,000 U $40,000 U

Direct materials Direct labor Variable overhead Fixed overhead Total

*Uses the variable unit standard costs for materials, labor and variable overhead (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

305

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

306

9293. (a)

ConcludedMaterials 770,000 770,000 Work in Process 750,000 1,800,000 600,000 300,000 150,000 (g)

(b)

(b) (c) (d) (e)

(f)

(f)

Finished Goods 1,800,000 1,800,000

(a)

MPV 5,000 5,000

(h)

(b)

MUV 20,000 20,000

(i)

Accounts Payable 775,000 (a)

Accrued Payroll 590,000

(c)

(j)

LRV 40,000 40,000 (c)

LEV (c) 30,000 30,000 (k)

Variable Overhead Control 310,000 300,000 (d) 10,000 (l)

Fixed Overhead Control 180,000 150,000 (e) 30,000 (m)

Cost of Goods Sold (g) 1,800,000 40,000 (h) 5,000 (i) 20,000 (k) 30,000 (l) 10,000 (m) 30,000

(j)

307

9301. 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: Price standard: $7.50 36,000 = $270,000 UCL: 0.08 $270,000 = $21,600 LCL: ($21,600) Quantity standard: 0.4 90,000 $7.50 = $270,000 UCL: 0.08 $270,000 = $21,600 LCL: ($21,600) May Materials: Price standard: $0.25 870,000 = $217,500 UCL: 0.08 $217,500 = $17,400 LCL: ($17,400) Quantity standard: 8 100,000 $0.25 = $200,000 UCL: 0.08 $200,000 = $16,000 LCL: ($16,000) Labor: Price standard: $7.50 44,000 = $330,000 UCL: 0.08 $330,000 = $26,400 LCL: ($26,400) Quantity standard: 0.4 100,000 $7.50 = $300,000 UCL: 0.08 $300,000 = $24,000 LCL: ($24,000)

308

930

Continued

June Materials: Price standard: $0.25 885,000 = $221,250 UCL: 0.08 $221,250 = $17,700 LCL: ($17,700) Quantity standard: 8 110,000 $0.25 = $220,000 UCL: 0.08 $220,000 = $17,600 LCL: ($17,600) Labor: Price standard: $7.50 46,000 = $345,000 UCL: 0.08 $345,000 = $27,600 LCL: ($27,600) Quantity standard: 0.4 110,000 $7.50 = $330,000 UCL: 0.08 $330,000 = $26,400 LCL: ($26,400) 2. April MPV MUV LRV LEV May MPV MUV LRV LEV June MPV MUV LRV LEV Limit $ 14,460 14,400 21,600 21,600 17,400 16,000** 26,400 24,000** 17,700 17,600 27,600 26,400 Actual* 4.6% 0.4% 0.0 0.0 0.3% 8.8% (2.3%) 10.0% 4.0% 0.6% 4.5% 4.5%

= ($0.2614 $0.25)723,000 = $8,242 U = (723,000 720,000)$0.25 = $750 U = ($7.50 $7.50)36,000 = 0 = (36,000 36,000)$7.50 = 0 = ($0.2506 $0.25)870,000 = $522 U = (870,000 800,000)$0.25 = $17,500 U = ($7.341 $7.50)44,000 = $6,996 F = (44,000 40,000)$7.50 = $30,000 U = ($0.2599 $0.25)885,000 = $8,762 U = (885,000 880,000)$0.25 = $1,250 U = ($7.826 $7.50)46,000 = $14,996 U = (46,000 44,000)$7.50 = $15,000 U

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

309

9303.

Continued

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

310

930

Continued

MUV: % 10.0 x 8.0

0.0

x

x

8.0 APRIL MAY JUNE

311

930

Continued

LRV: % 10.0 8.0 x

0.0

x x

8.0 APRIL MAY JUNE

312

930

Concluded

LEV: % 10.0 8.0 x x

0.0

x

8.0 APRIL MAY JUNE

9311. Hepler Company must put 60,000 units of lower-quality material into production 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

313

9313.

Concluded

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) Assembler B (1 hr. $11) Machinist (1 hr. $15) Labor cost Units Labor cost per unit $ 80 11 15 $ 106 80 $ 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

314

9321. Standard cost sheet: Direct materials (0.6 lb. @ $5)* Direct labor (0.20 hr. @ $8)** Variable overhead (0.20 hr. @ $10)** Fixed overhead (0.20 hr. @ $5.00)** Unit cost * (AP AQ) (AQ SP) $51,000 (10,000 SP) 10,000 SP SP (AQ SQ)SP (10,000 SQ)$5.00 $50,000 $5.00SQ $5.00SQ SQ = $1,000 = $1,000 = $50,000 = $5.00 = ($10,000) = ($10,000) = ($10,000) = $60,000 = 12,000 $3.00 1.60 2.00 1.00 $7.60

SQ/unit = 12,000/20,000 = 0.6 lb. per unit **Actual VOH (Standard VOH rate AH) $46,000 (Standard VOH rate 4,400) 4,400(Standard VOH rate) Standard VOH rate (AH SH)Standard VOH rate (4,400 SH)$10 44,000 $10(SH) $10(SH) SH = $2,000 = $2,000 = $44,000 = $10 = $4,000 = $4,000 = $4,000 = $40,000 = 4,000

315

932

Concluded

Standard hours per unit = 4,000/20,000 = 0.20 hours (AH SH)SR (4,400 4,000)SR 400(SR) SR = $3,200 = $3,200 = $3,200 = $8.00 = $3,000 = $3,000 = $20,000 = $5.00 = $4,000 = $4,000 = $4,000 = $24,000

Actual FOH (Standard FOH rate SH) $23,000 (Standard FOH rate 4,000) 4,000 Standard FOH rate Standard FOH rate

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

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 Standard FOH rate = Budgeted FOH/Expected activity $5.00 = $24,000/Expected activity Expected activity = $24,000/$5.00 = 4,800 hours

4.

316

MANAGERIAL DECISION CASES 9331. The major advantages of using a standard costing system include: Budgeting: Standard costs can be the building blocks for budget preparation and allow the development of flexible budgeting. Performance evaluation: Comparison of actual costs to standard costs facilitates 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 include 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 continual improvement found in the new manufacturing environment. 3. A standard costing system must be supported by top management to be successful. The parties who should participate in the standard-setting process include all levels of the organization, e.g., purchasing, engineering, production, and cost accounting. Standard setting can be a participative process with those individuals most familiar with the variables associated with standard setting available to provide 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.

4.

317

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 performance reports. 5. There could be negative employee reaction as the employees did not participate 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.

9341. 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 enhanced. 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. The engineering standards are ideal standards. The presidents concern is probably reflecting doubt that the labor standards can be achieved. If pressure 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.

2.

318

9343.

Concluded

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

$ 7.9431

0.9837 1.1410 1.9349 $12.0027 $ 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

319

9351. 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 inferior 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. 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. Purchasing agents have ethical responsibilities similar to accountants. Integrity is a universally desirable characteristic. Pat and other purchasing agents should refrain from engaging in any activity that would prejudice their abilities to carry out their duties ethically (III-2); and refrain from a conflict of interest, either actual or apparent (III-1). Organizations would be well advised to adopt a set of ethical standards. All employees should understand that certain behaviors are unacceptable.

2.

3.

RESEARCH ASSIGNMENTS 936Answers will vary.

937Answers will vary.

320