ACT 2131 (PJJ) TUTORIAL 6

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1 ACT 2131 (PJJ) TUTORIAL 6 1. Describe the relationship that unit standards have with flexible budgeting. 2. Why is historical experience often a poor basis for establishing standards? 3. What are ideal standards? Currently attainable standards? Of the two, which is usually adopted? Why? 4. Discuss the differences among actual costing, normal costing, and standards costing. 5. When should a standard cost variance be investigated? 6. Explain why the materials price variance is often computed at the point of purchase rather than at the point of issuance? 7. Associated Media Graphics (AMG) is a rapidly expanding company involved in the mass reproduction of instructional materials. Ralph Boston, owner and manager of AMG, has made a concerted effort to provide a quality product at a fair price with delivery on the promised due date. Expanding sales have been attributed to this philosophy. As the business grows, however, Ralph is finding it increasingly difficult to personally supervise the operations of AMG. As a result, he is beginning to institute an organizational structure that would facilitate management control. One recent change was to designate the operating departments as cost centers, with control over departmental operations transferred from Ralph to each departmental manager. However, quality control stills reports directly to Ralph, as do the finance and accounting functions. A materials manager was hired to purchase all materials and oversee inventory handling (receiving, storage, and so on) and record keeping. The materials manager is also responsible for maintaining an adequate inventory based upon planned production levels. The loss of personal control over the operations of AMG caused Ralph to look for a method to evaluate performance efficiently. Dave Cress, a new cost accountant, proposed the use of a standard costing system. Variances for materials, labor and overhead could then be calculated and reported directly to Ralph.

2 1. Assume that AMG is going to implement a standard costing system and establish standards for materials, labor, and overhead. a. Who should be involved in setting the standards for each cost component? b. What factors should be considered in establishing the standards for each cost component? 2. Describe the basis for assignment of responsibility under a standard costing system. (CMA adapted). 8. Seasonal Confections, Inc., a manufacturer of candies for various seasons of the year, wants to set up a standards costing system. The controller decided to set up a standards cost card for one product line. He chose the chocolate bunny line, which operates from February through April of each year. The chocolate bunnies are 8 tall dark chocolate molded rabbits. They are very popular each Easter season. Last year, Seasonal Confections produced 40,000 dark chocolate bunnies with the following total cost: Direct materials (340,000 $0.30) $102,000 Direct labor (10,000 $9) 90, Compute the direct materials allowed per bunny in ounces. 2. Compute the direct labor hours allowed per bunny in hours. 3. Set up a standards cost card for the prime cost of one chocolate bunny. 9. Guerin Corporation produces leather purses. The company uses a standards costing system and has set the following standards for materials and labor: Leather (5 $7) $35 Direct labor 21 Total prime cost $56

3 During the year, Guerin produced 34,000 leather purses. Actual leather purchased was 173,500 strips at $6.82 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 50,900 hours at $13.50 per hour. 1. Compute the costs of leather and direct labor that should have been incurred for the production of 34,000 leather purses. 2. Compute the total budget variance for materials and labor. 3. Break down the total variance for materials into a price variance and a usage variance. 4. Break down the total variance for labor into a rate variance and an efficiency variance. 10. Zawatsky Products produces instructional aids. Among the company s products are whiteboards, which use colored markers instead of chalk. They are particularly popular for conference rooms in educational institutions and executive offices of large corporations. The standard cost of materials and labor for this product follow: Direct materials 11 $7.95 Direct labor 4 $9.40 During the first month of the year, 20,100 boards were produced. Information concerning actual costs and usage of materials and labor follows: Materials purchased 222,500 $8.05 Materials used 220,400 lbs. Direct labor 79,900 hrs,; total cost: $759, Compute the materials price and usage variances. 2. Compute the labor rate and efficiency variances. 3. Prepare journal entries for all activity relating to materials and labor for the month.

4 11. Chef s-best Company is planning to produce 800,000 electric mixers for the coming year. Each mixer requires one-half standard hour of labor for completion. The company uses direct labor hours to assign overhead to products. The total overhead budgeted for the year coming is $1,120,000, and the standard fixed overhead rate is $0.55 per unit produced. Actual results for the year follow: Actual production (units) 786,000 Actual direct labor hours 390,000 Actual variable overhead $695,000 Actual fixed overhead $430, Compute the applied fixed overhead. 2. Compute the fixed overhead spending and volume variances. 3. Compute the applied variable overhead. 4. Compute the variable overhead spending and efficiency variances. 12. Mediamet Company produces one product and uses a standard costing system. The direct labor standard indicates that three labor hours should be used for every unit produced. The normal production volume is 120,000 units of this product. The budgeted overhead for the coming year follows: Fixed overhead $864,000* Variable overhead 1,440,000 *at normal volume Mediamet applies overhead on the basis of direct labor hours. During the year, Mediamet produced 120,600 units, worked 361,800 direct labor hours, and incurred actual fixed overhead costs of $940,320 and actual variable overhead cost of $1,443, Calculate the standard fixed overhead rate and the standard variable overhead rate. 2. Compute the applied fixed overhead and the applied variable overhead. What is the total fixed overhead variance? Total variable overhead variance?

5 3. Break down the total fixed overhead variance into a spending variance and a volume variance. Discuss the significance of each. 4. Compute the variable overhead spending and efficiency variances. Discuss the significance of each. 13. At the beginning of 2008, Krayler Company had the following standard cost sheet for one of its chemical product: Direct materials (6 $6.40) $38.40 Direct labor (1.8 $18.00) Fixed overhead (1.8 $8.00) Variable overhead (1.8 $1.50) 2.70 Standard cost per unit $87.90 Kayler computes its overhead rates using practical volume, which is 288,000 units. The actual results for 2008 are: a. Unit produced: 280,000 b. Materials purchased: 1,684,700 pounds at $6.60 c. Materials used: 1,684,000 pounds d. Direct labor: 515,000 hours at $18.10 e. Fixed overhead: $4,140,200 f. Variable overhead: $872, Compute price and usage variances for materials 2. Compute the labor rate and labor efficiency variances 3. Compute the fixed overhead spending and volume variances 4. Compute the variable overhead spending and efficiency variances.

6 Solution: (1) Unit standards are used to build flexible budgets. Unit standards for variable costs are the variable cost component of a flexible budgeting formula. (2) Historical experience is often a poor choice for establishing standards because the his- torical amounts may include more ineffi- ciency than is desired (3) 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. (4) 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. (5) 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. (6) 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 vari- ance may be called the materials purchase price variance, and it is the responsibility of the purchasing manager rather than the production manager. (7) 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 vari- ances 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 (8) 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 $ oz. $2.55 Direct labor hr Total standard unit prime cost $4.80

7 (9) 1. Materials: $35 34,000 = $1,190,000 Labor: $21 34,000 = $714, Actual Cost* Budgeted Cost Variance Materials $1,183,270 $1,190,000 $ 6,730 F Labor 687, ,000 26,850 F *$173,500 $6.82; 50,900 $ MPV = (AP SP)AQ= ($6.82 $7.00)173,500 = $31,230 F MUV = (AQ SQ)SP= (173, ,000)$7 = $24,500 U AP AQ SP AQ SP SQ $ ,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 $ ,900 $14 50,900 $14 51,000 $25,450 F $1,400 F Rate (10) 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 $ ,900 $ ,900 $ ,400 $7,990 U $4,700 F Rate

8 3. Materials Inventory a... 1,768,875 MPV... 22,250 Accounts Payable b... 1,791,125 Work in Process c... 1,757,745 MUV... 5,565 Materials Inventory d... 1,752,180 Work in Process e ,760 LRV... 7,990 LEV... 4,700 Accrued Payroll f ,050 a $ ,500 =1,768,875 b $ ,500 =1,791,125 c $ ,100 =1,757,745 d $ ,500 = 1,768,875 e $ ,400 = 755,760 f $ ,900 = 759,050 (11) 1. Fixed overhead rate = $0.55/(1/2 hr. per unit) = $1.10 per DLH SH = 786, = 393,000 Applied FOH = $ ,000 = $432,300 (12) 2. Fixed overhead analysis: Actual FOH Budgeted FOH Applied FOH $430,300 $ ,000* $ ,000 $9,700 F $7,700 U 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 $ ,000 $ ,000 $32,000 U $5,100 F 1. Standard fixed overhead rate = $864,000/(120,000 3) = $2.40per DLH Standard variable overhead rate = $1,440,000/360,000= $4.00 per DLH

9 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 Volume The spending variance is the difference between planned and actual costs. Each item s 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 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. (13) 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 ( ,000 units)]$18.00= $198,000 U AR AH SR AH SR SH $ ,000 $18 515,000 $18 504,000 $51,500 U $198,000 U Rate 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 Volume Note: Practical volume in hours = ,000 = 518,400 hours 4. Variable overhead analysis: Actual VOH Budgeted VOH Applied VOH $872,000 $ ,000 $ ,000 $99,500 U $16,500 U

Standard Costs and Variances

10-1 Standard Costs and Variances Chapter 10 10-2 Standard Costs Standards are benchmarks or norms for measuring performance. In managerial accounting, two types of standards are commonly used. Quantity