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1 Standard Costing By Dr. Michael Constas Page 1 9 Standard Costing: A Functional-Based Control Approach Companies prepare cost budgets as part of their planning process. These budgets assume a given level of activity (e.g., financial statements assume that 10,000 units will be produced and sold). Budgets that are tied to a specificc level of activity are referred to as Static Budgets. Firms will compare their budgeted costss to their actual costs in order to control costs, evaluate employee performance, and evaluate the budgeting process.. This comparison is done by computing Budget Variances. A variance is the dollar difference between a budgeted cost and the actual cost. Unfortunatel ly, the actual activity level is very likely to be different from the budgeted activity level (e.g., firm actually produced 9,000 units). When dealing with Variable Costs, in order to have a meaningful comparison, the budgeted and actual costs must relate to the same activity level (e.g., comparing your actual labor costs [when you produce 9,0000 units to your labor cost budget (that is based on 10,000 units)]. Consider the following analogous situation, assume that your employer asks you to: (i) produce a spectacular commercial, and (ii) reserve a 30-second spot during the Super Bowl in whichh you will showcase the commercial. You are given a $10 million budget for this project. Instead of producing and running the commercial, you contract with PBS to take over thee sponsorship of Masterpiece Theatre from Exxon Mobil for $9 million. Coming $1 million under budget is not very impressive, when the activity that you did (Masterpiece Theatre) is significantly different than the activity assumed in the budget (Super Bowl). In order to have a valid comparison for Variable Costs, we use Flexiblee Budgets when computing Budget Variances. A Flexible Budget is a cost function that produces a different budgeted cost for different activity levels (e.g., Flexible Budget says that your labor cost is equal to $30 for each unit produced) ). Using a Flexible Budget, you can compare: (i) the actual cost, with (ii) a budgeted cost for the work that you actually did (actual activity level). Budgets and Variances As noted above, Budget Variances are important tools used in evaluating your operations. When comparing actual results to a Flexible Budget, there can be two different reasons for a Budget Variance. For example, if your Direct Labor Costs on a particula project exceeded the amount budgeted for that project, it can be due to: (i)

2 Standard Costing By Dr. Michael Constas Page 2 paying your workers a higher rate per hour than you budgeted (Reason 1), and/or (ii) your workers spending more time doing the project than you expected (Reason 2). It is important for you to know which of the reasons is true. If the Budget Variance was due to the first reason, then you need to talk to your HRM department (or whoever hires and sets compensation). If the variance was due to the second reason, then you need to speak to the person supervising the project. We subdivide Budget Variances in order to identify which of the reasons is applicable to our situation. The total difference between the actual cost and the Flexible Budget is called the Budget Variance. We calculate a Budget Variance for each component of cost. The Budget Variance is divided into a Price Variance and a Quantity Variance. The Price Variance quantifies how much of the Budget Variance is due to a company having paid an actual price for a cost component that is different than the budgeted price (Reason 1). The Quantity Variance quantifies how much of the Budget Variance is due to a firm using an actual amount of a cost component that is different than the budgeted amount (Reason 2). Standards As part of the budgeting process, firms develop standards: Standard Price (SP) is the estimated price per unit of the cost component (not a unit of product) that will be paid for that cost component (e.g., $10 per hour for Direct Labor Costs). Standard Quantity (SQ) is the estimated amount of the cost component that is expected to be used to make one unit of product (e.g., 3 Direct Labor Hours to produce one computer). When calculating Quantity Variances, the term, Standard Quantity, is used to describe the amount of a cost component that is expected to be used to make all of the units of product actually produced in a given period. (e.g., we expect it to take 3 Direct Labor Hours to make a computer; we made 1,000 computers this month; we therefore think it should take 3,000 Direct Labor Hours to make those 1,000 computers). Because the Standard Quantity is linked to the actual number of units of product produced, it creates the Flexible Budget for a cost when it is multiplied by the Standard Price ($10 x 3 DLHs x 1,000 units = $30,000). Companies develop these standards using a variety of sources (e.g., historical experience, engineering studies, and input from operating personnel). Standards can either be attainable or ideal. If they are ideal, you run the risk of debasing the value of the standard cost because your workers know that it is unlikely that the standards will be met.

3 Standard Costing By Dr. Michael Constas Page 3 Calculation When calculating Budget Variances, we also need to know the following information about our actual costs: Actual Price (AP) is the actual price that the firm paid for a unit of a cost component (e.g., $11 per Direct Labor Hour). Actual Quantity (AQ) is the actual amount of a cost component that was used to make all of the units of the product produced (e.g., 3,300 Direct Labor Hours to make 1,000 computers). For a given component of cost: (i) the actual costs are calculated by multiplying the Actual Price by the Actual Quantity; and (ii) the Flexible Budget is calculated by multiplying the Standard Price by the Standard Quantity. In the following table, we set up two columns to reflect the actual cost of a cost component (left column) and the Flexible Budget for that cost component (right column). The difference between the totals of each of these columns is the Budget Variance for the cost component in question: Actual Cost AP X AQ Flexible Budget SP X SQ In a Standard Costing system, which we will discuss shortly, the standard cost to produce a unit is treated as the cost of each unit produced, and this amount is added to Work In Process. The cost applied to Work In Process is the amount that appears in the Flexible Budget column, and the difference between the two columns represents the variance that appears in the accounting system. This is similar to the Manufacturing Overhead Variance that we discussed previously, where the difference between the actual overhead and the amount applied to Work In Process constituted the amount of the variance.

4 Standard Costing By Dr. Michael Constas Page 4 In order to divide the Budget Variance into a Price Variance and a Quantity Variance, we will introduce a middle column that consists of the product of the Standard Price multiplied by Actual Quantity. Once you have the totals of the three columns, you then subtract the middle column from the left column in order to get the Price Variance. You also subtract the right column from the middle column in order to get the Quantity Variance: Price Variance Quantity Variance AQ (AP SP) SP (AQ SQ) Subtracting the middle column from the left column produces the following result: (AP x AQ) - (SP x AQ) When you factor out the common Actual Quantity, you get the formula used to calculate the Price Variance: AQ (AP - SP) As the equation indicates, when we subtract the columns, we are holding the Actual Quantity constant and comparing the Standard Price (budget) of a cost component to the Actual Price paid. This comparison gives us the Price Variance. Subtracting the right column from the middle column produces the following result: (SP x AQ) - (SP x SQ) When you factor out the common Standard Price, you get the formula used to calculate the Quantity Variance: SP (AQ - SQ) As the equation indicates, by subtracting the right column from the middle column, we are holding the Standard Price constant and comparing the Standard Quantity (budget) of the cost component to the Actual Quantity used. This comparison gives you the Quantity Variance. Notice that you are always subtracting the budget (standard) from the actual. If you are over budget, then the actual will be greater than the standard and you have a positive number. Because we do not want to be over budget, this is referred to as an unfavorable variance. If you are under budget, then the standard is greater than the

5 Standard Costing By Dr. Michael Constas Page 5 actual, and you have a negative number. Becausee we want to be under budget, this is referred to as a favorable variance. Favorable Variance Negative Number Unfavorable Variance Positive Number Variance Example Assume that Ralph, Inc., a clothing and fragrance manufacturer, wishes to begin production of a new line of shirtss with really big logos (for people who are nearsighted). Ralph estimates that every new shirt will cost $6 in Direct Materials using the following standards: $ 2.00 a yard for the material; and 3 yards of material used in each shirt. During its first month of operations, Ralph, Inc. produced 1,000 shirts at a Direct Materials cost of $5,880. Ralph paid $2.10 a yard for materials and it used 2,800 yards of material to produce the shirts. You would calculate the Direct Materials Price and Quantity Variances as follows: Actual Cost Mixed Flexible Budget AP X AQ SP X AQ SP X SQ $2.10 x 2,800 yds $2.000 x 2,800 yds $2.00 x 3,000 yds $ 5,880 $5,600 $6,000 Price Variance Quantity Variance $5,880 - $ 5,600 = $280 U $5,600 - $6,000 = - $400 F Budget Variance $5,880 - $ $6,000 = -$120 F The $120 favorable Direct Materials Budget Variance ($ $ $6000=-$120) is subdivided into the Price Variance and the Quantityy Variance [$280 + (-$ 400) = -$120]. Use of Variances These variances are used in the evaluating the performance of workers, as well as, the validity of the standards used. In the Ralph, Inc. example, the Price Variance gives us information on the job performance of Ralph s materials buyer. Ralph should ask the buyer to explain why he or she paid $2.10 per yard for Direct Materials when Ralph s Standard Price is $2.00 per yard. This difference cost Ralph $280 (the Price Variance).

6 Standard Costing By Dr. Michael Constas Page 6 It is possible that the standard is too low. It is also possible that there may have been an unforeseeable event that caused material prices to change. A poor job performance by the purchaser is another possible explanation. The Quantity Variance tells us that Ralph s production supervisor used $400 less Direct Materials than Ralph expected. Ralph should examine the supervisor s performance in order to determine whether the favorable variance is due to the Production Department s superior performance (e.g., there was less waste than is usually the case), or whether it is likely to be repeated (e.g., due to instituting new techniques, or the standard was too low to begin with). If the performance is likely to be repeated, then Ralph should consider revising its Standard Quantity per unit. Variance Names The procedure described above (along with the formulas) can be used to calculate variances for each of the Variable Costs of production: Direct Labor, Direct Materials, and Variable Manufacturing Overhead. A number of different names are given to these variances. Common variance names used for Variable Costs include: Input Type Variance Name Direct Materials: Price: Materials Price Variance Quantity: Materials Usage, Efficiency or Quantity Variance Direct Labor: Price: Labor Rate or Price Variance Quantity: Labor Efficiency Variance Variable Overhead: Price: Variable OH Spending or Price Variance Quantity: Variable Efficiency Variance Special Rule For Materials Price Variance In the foregoing example, we assumed that the firm bought the same amount of Direct Materials that it used in the production process. If we buy an amount of Direct Materials that is different from the amount used, then, contrary to the suggestion made in your book, most firms calculate the Material Price Variance using the Actual Quantity purchased rather than the Actual Quantity used. There are two reasons for using the amount purchased in the calculation of the Materials Price Variance: First, if the Actual Quantity used is included in the calculation, then there would be a delay in the evaluation of the material buyer s job performance. The job performance occurs when materials are purchased. The evaluation occurs when the variance is calculated. Depending on the firm, the time between the purchase of materials and their use in the production process could be lengthy. Most firms want timely performance evaluations, and calculating the variance at the time that the materials are purchased accomplishes this.

7 Standard Costing By Dr. Michael Constas Page 7 Second, when using the Standard Costing system (which we will discuss shortly), a company only knows the amount purchased at the time that the Materials Price Variance is calculated. Continuing with the Ralph, Inc. example, if Ralph bought 5,000 yards of Direct Materials for the period in question, and it calculated the Materials Price Variance at the time of purchase, then you would calculate the Direct Materials Variances as described below: AP X AQ SP X AQ SP X AQ SP X SQ $2.10 x 5,000 yds $2.00 x 5,000 yds $2.00 x 2,800 yds $2.00 x 3,000 yds $10,500 $10,000 $5,600 $6,000 Price Variance Quantity Variance $10,500 - $10,000 = $500 U $5,600 - $6,000 = - $400 F AQ is the quantity purchased in the Materials Price Variance, and AQ is the quantity used in the Materials Quantity Variance. Fixed Manufacturing Overhead The variances for Fixed Manufacturing Overhead are calculated differently than the variances for the Variable Costs that we discussed above. This difference is due to the fact that Fixed Manufacturing Overhead is a Fixed Cost, and a comparison of actual costs to the Static Budget (rather than a Flexible Budget) provides a meaningful Budget Variance. Having a budget change as the number of units produced changes is appropriate for Variable Costs (Flexible Budget). By definition, the total Variable Cost changes as the volume of the number of units changes. Fixed Manufacturing Overhead, however, is a Fixed Cost, and we expect that the total Fixed Cost will remain unchanged regardless of a change in the number of units produced (Static Budget). For example, if: (i) you believe that your Fixed Manufacturing Overhead will be $100,000, (ii) you apply Fixed Manufacturing Overhead as a function of units of product produced, and (iii) you estimate that you will produce 10,000 units, then your Standard Price will be $10 per unit ($100,000/10,000). If you only produce 9,000 units, your Flexible Budget will produce a cost of $90,000. Traditionally, Fixed Costs do not change if your activity level changes, and your budget for Fixed Manufacturing Overhead should still be $100,000 at this production level (not $90,000). The amount of Fixed Manufacturing Overhead that the Flexible Budget column

8 Standard Costing By Dr. Michael Constas Page 8 produces will only coincide with your true budget for Fixed Manufacturing Overhead when you produce 10,000 units. Because the right column does not really reflect your budget for Fixed Manufacturing overhead, it is a misnomer to label that column as the Flexible Budget. Instead, we will call it the Standard Cost. This is a major problem with Fixed Manufacturing Overhead. As we saw in our discussion of Normal Costing, we estimate our Fixed Manufacturing Overhead and then divide it by our estimated Cost Driver. We then apply the overhead as a function of the Cost Driver despite the fact that a Fixed Cost has no relationship with its Cost Driver. At the end of the year, it is likely that you will have applied an amount of Fixed Manufacturing Overhead that is different than your actual Fixed Manufacturing Overhead cost because: (i) your estimate of your Fixed Manufacturing Overhead is wrong (Reason A); and/or (ii) your estimate of your Cost Driver is wrong (Reason B). We create two Fixed Manufacturing Overhead variances in order to quantify how much of the Fixed Manufacturing Overhead Budget Variance is due to each reason: (i) the Fixed Overhead Spending Variance (Reason A), and (ii) the Fixed Overhead Volume Variance (Reason B). In order to calculate these two variances, we replace the middle (Mixed) column with a new middle column, which contains the true budget for Fixed Manufacturing Overhead (Static Budget). Actual Cost Static Budget Standard Amount AP X AQ Spending Variance The Fixed Overhead Budget SP X SQ Volume Variance If you have not been given the Static Budget for Fixed Manufacturing Overhead, you can calculate it. Remember that the Predetermined Fixed Overhead Rate is the Standard Price (SP): Fixed Overhead Budget / Estimated Number of Units Fixed Overhead Budget = SP = SP x Estimated Number of Units In order to calculate the Static Budget, you need to be given the estimated number of units (or other Cost Driver) that was used in calculating the Standard Price for Fixed Manufacturing Overhead. The Estimated Number of Units is sometimes referred to as the firm s Normal Capacity. The Fixed Overhead Volume Variance compares: (i) the Static Budget, and (ii) the Standard Cost for Fixed Manufacturing Overhead. It is called the Volume Variance because the reason that the variance exists is the fact that the number of units (volume) that you assumed when calculating the Standard Price is different than the actual number of units produced. An unfavorable Volume Variance indicates that you

9 Standard Costing By Dr. Michael Constas Page 9 produced fewer units than you estimated. It is considered unfavorable because you are under-utilizing your factory. A favorable Volume Variance indicates that you produced more units than you estimated. It is considered favorable because you are utilizing your factory at a rate that is higher than expected. Some authorities describe an unfavorable Volume Variance is the cost incurred to obtain factory capacity that you did not use. This interpretation of the Volume Variance is not accurate. If your budget for Fixed Manufacturing Overhead at the actual level of production is the same as your budget at the estimated level of production, then there was no additional cost incurred in order to obtain the unused capacity. The truth is that you just guessed wrong on the activity level when you calculated the Standard Price. The Fixed Overhead Spending Variance compares: (i) what you spent on Fixed Manufacturing Overhead (actual), to (ii) your true budget for Fixed Manufacturing Overhead. There is no need to divide the variance into a Price Variance and a Quantity Variance, becausee Fixed Costs are a function of price alone. In theory, quantity does not affect Fixed Costs. Standard Costing As we have mentioned previously, when you use actual amounts as the cost components that you record in your accounting system, it is referred too as an Actual Costing System. A Normal Costing System uses the actual cost of Direct Materials and Direct Labor, but usess the Standard Price and Actual Quantity for its Manufacturing Overhead. This is the system that we learned under Job-Order Costing. With a Standard Costing System, you use the Standard Price and the Standard Quantity for all of the cost components. If a Standard Costing System, the Flexible Budget Column (and the Standard Amount Column) in our table becomes the cost of the units that is transferred to Work In Process. With a Standard Costing System, all of the Budget Variances that we learned above are recordedd in the accounting system. When a cost iss incurred, the actual cost is recorded in the accounting system, when the cost is applied to the Work In Process Account, it is applied using the Standard Price and the Standard Quantity. The difference between these costs is recorded in the appropriate variancee account. At the end of the year, all of thesee variances are closed to Cost of Goods Sold (or Cost of Goods Sold, Finished Goods, and Work In Process) ).

10 Standard Costing By Dr. Michael Constas Page 10 When you buy Direct Materials: Dr. Materials Inventory SP x AQ Materials Price Variance (Dr. or Cr.) AQ (AP SP) Cr. Accounts Payable AP x AQ As noted above, when using Standard Costing, the Materials Price Variance is calculated using the amount purchased as the Actual Quantity because the amount used is not known at this point. When you requisition Direct Materials: Dr. Work In Process SP x SQ Materials Usage Variance (Dr. or Cr.) SP (AQ SQ) Cr. Materials Inventory SP x AQ When you incur Direct Labor: Dr. Work In Process SP x SQ Labor Rate Variance (Dr. or Cr.) AQ (AP SP) Labor Efficiency Variance (Dr. or Cr.) SP (AQ SQ) Cr. Wages Payable AP x AQ In the Standard Costing system, you can divide your Manufacturing Overhead into two accounts, Variable Manufacturing Overhead and Fixed Manufacturing Overhead. As we saw in the Job-Order Costing discussion, the amounts remaining in the overhead accounts at the end of the period represent the amounts of the overhead variances. Debits are actual costs incurred and the credits are the Standard Costs applied: When you incur Variable Manufacturing Overhead (actual): Dr. Variable Manufacturing Overhead AP x AQ Cr. Accounts Payable AP x AQ When you apply Variable Manufacturing Overhead (standard): Dr. Work In Process SP x SQ Cr. Variable Manufacturing Overhead SP x SQ When you incur Fixed Manufacturing Overhead (actual): Dr. Fixed Manufacturing Overhead AP x AQ Cr. Accounts Payable AP x AQ

11 Standard Costing By Dr. Michael Constas Page 11 When you apply Fixed Manufacturing Overhead (standard): Dr. Work In Process SP x SQ Cr. Fixed Manufacturing Overhead SP x SQ At the end of the period, we close these accounts to the appropriate variance accounts. Whether accounts are debited or credited depends upon: (i) whether the overhead is over-applied or under applied, and (ii) whether the variance in question is favorable or unfavorable. For example, if the Fixed Manufacturing Overhead was under-applied (a debit balance remains in the Fixed Manufacturing Overhead account), and you had an unfavorable Fixed Overhead Spending Variance and an unfavorable Fixed Overhead Volume Variance: Dr. Fixed Overhead Spending Variance (AQxAP) Budget Fixed Overhead Volume Variance Budget (SPxSQ) Cr. Fixed Manufacturing Overhead (APxAQ)-(SPxSQ) If the Variable Manufacturing Overhead was over-applied (a credit balance remains in the Variable Manufacturing Overhead account), and you had a favorable Variable Overhead Spending Variance and a favorable Variable Overhead Efficiency Variance: Dr. Variable Manufacturing Overhead Cr. Variable Overhead Spending Variance Variable Overhead Efficiency Variance (APxAQ)-(SPxSQ) AQ (AP SP) SP (AQ SQ) Two- and Three Overhead Variance Analyses In a Standard Costing System that we discussed above, The Fixed and Variable Manufacturing Overhead was applied to production in separate, dual application rates. This information was used to calculate four overhead variances. If a company wanted to apply overhead in a single application rate, then it may not have sufficient information regarding the actual amount of Fixed and Variable Manufacturing Overhead to permit it to calculate the four overhead variances that we have discussed previously. In this case, a firm can calculate either two overhead variances or three overhead variances:

12 Standard Costing By Dr. Michael Constas Page 12 Two overhead variances are calculated as follows: Actual AP X AQ O/H Budget Variance Flexible Variable & Static Fixed Overhead Budget [SP(Variable Only) x SQ] + The Fixed Overhead Budget Standard Cost SP X SQ Volume Variance The middle column represents your true budget for Manufacturing Overhead. The fixed portion of the middle column is the Static Budget, and the variable portion is the Flexible Budget. The Budget Variance represents how much a firm s actual overhead exceeded the amount of overhead that a firm really estimated. Three overhead variances are calculated as follows: Actual AP X AQ O/H Spending Variance Mixed Variable + Static Fixed O/H [SP(Var. Only) x AQ] + Fixed O/H Budget Flexible Variable & Static Fixed Overhead Budget [SP(Variable Only) x SQ] + Fixed Overhead Budget Variable O/H Efficiency Variance Standard Cost SP X SQ Volume Variance The Spending Variance is a combined figure for both Fixed and Variable Manufacturing Overhead. PROBLEMS E-1. The Wright Company has a standard costing system. The following data are available for September: Actual quantity of direct materials purchased... Standard price of direct materials... Material price variance... 25,000 pounds $2 per pound $2,500 unfavorable The actual price per pound of direct materials purchased in September is: A) $1.85. B) $2.00. C) $2.10. D) $2.15.

13 Standard Costing By Dr. Michael Constas Page 13 E-2. The Cox Company uses standard costing. The following data are available for April: Actual quantity of direct materials used... Standard price of direct materials... Material quantity variance... 12,200 gallons $4 per gallon $2,000 unfavorable The standard quantity of material allowed for April production is: A) 14,200 gallons. B) 12,700 gallons. C) 11,700 gallons. D) 10,200 gallons. E-3. Palo Corp. manufactures one product with a standard direct labor cost of 2 hours at $6.00 per hour. During March, 500 units were produced using 1,050 hours at $6.10 per hour. The unfavorable direct labor efficiency variance is: A) $100. B) $105. C) $300. D) $305. E-4. The following labor standards have been established for a particular product: Standard labor hours per unit of output hours Standard labor rate... $15.10 per hour The following data pertain to operations concerning the product for the last month: Actual hours worked... 8,100 hours Actual total labor cost... $119,880 Actual output units What is the labor rate variance for the month? A) $11,160 F B) $13,320 U C) $11,160 U D) $2,430 F

14 Standard Costing By Dr. Michael Constas Page 14 E-5. The following standards for variable manufacturing overhead have been established for a company that makes only one product: Standard hours per unit of output hours Standard variable overhead rate... $15.20 per hour The following data pertain to operations for the last month: Actual hours... 3,800 hours Actual total variable overhead cost... $59,090 Actual output units What is the variable overhead efficiency variance for the month? A) $15,550 U B) $15,200 U C) $16,530 U D) $980 F E-6. The following standards for variable manufacturing overhead have been established for a company that makes only one product: Standard hours per unit of output... Standard variable overhead rate hours $19.80 per hour The following data pertain to operations for the last month: Actual hours... 2,100 hours Actual total variable overhead cost... $40,740 Actual output... 1,600 units What is the variable overhead spending variance for the month? A) $2,724 U B) $3,492 U C) $840 F D) $768 U

15 Standard Costing By Dr. Michael Constas Page 15 Use the following to answer questions E-7 through E-11: Cox Engineering performs cement core tests in its laboratory. The following standards have been set for each core test performed: Standard Hours or Quantity During March, the laboratory performed 2,000 core tests. On March 1 no direct materials (sand) were on hand. Variable manufacturing overhead is assigned to core tests on the basis of direct labor hours. The following events occurred during March: - 8,600 pounds of sand were purchased at a cost of $7, ,200 pounds of sand were used for core tests actual direct labor hours were worked at a cost of $8, Actual variable manufacturing overhead incurred was $3,200. E-7. The materials price variance for March is: A) $860 unfavorable. B) $860 favorable. C) $281 unfavorable. D) $281 favorable. E-8. The materials quantity variance for March is: A) $ 900 favorable. B) $1,950 favorable. C) $1,950 unfavorable. D) $ 900 unfavorable. E-9. The labor rate variance for March is: A) $4,578 unfavorable. B) $1,470 unfavorable. C) $4,578 favorable. D) $1,470 favorable. E-10. The labor efficiency variance for March is: A) $480 favorable. B) $480 unfavorable. C) $192 favorable. D) $192 unfavorable. Standard Price or Rate Direct materials... 3 pounds $0.75 per pound Direct labor hours $12 per hour Variable manufacturing overhead. 0.4 hours $9 per hour

16 Standard Costing By Dr. Michael Constas Page 16 E-11. The variable overhead efficiency variance for March is: A) $320 unfavorable. B) $320 favorable. C) $360 unfavorable. D) $360 favorable. For the following question(s) refer to the information below. Actual direct labor-hours used 315 hours Standard materials price per pound $2.50 per lb. Actual direct labor rate per hour $3.00 Standard quantity of direct materials used 450 lbs. Standard direct labor-hours used 300 hours Actual direct materials price $2.52 per lb. Standard direct labor rate per $3.10 Actual quantity of direct materials purchased & used 445 lbs. E-12 What is the amount of the materials efficiency (quantity) variance? Indicate whether it is favorable or unfavorable. A. $12.60 B. $12.50 C. $ 9.10 D. $ 9.00 E-13 What is the amount of the materials price variance? Indicate whether it is favorable or unfavorable. A. $8.90 B. $8.00 C. $9.90 D. $9.00 E-14 If 450 pounds had been purchased, but only 445 pounds had been used, what would be the amount of the materials price variance? Indicate whether it is favorable or unfavorable. A. $8.90 B. $8.00 C. $9.90 D. $9.00 E-15 What is the amount of the labor rate (price) variance? A favorable B unfavorable C favorable D unfavorable

17 Standard Costing By Dr. Michael Constas Page 17 E-16 What is the amount of the labor efficiency (quantity) variance? A. $45.50 favorable B. $45.50 unfavorable C. $46.50 favorable D. $46.50 unfavorable For the following question(s) refer to the information below. The following information relates to the month of April for The Marilyn Manufacturing Company which uses a standard cost accounting system. Actual total direct labor cost $43,400 Actual direct hours labor used (DLH) 14,000 Standard hours allowed for actual output 15,000 Direct labor rate variance (unfavorable) $1,400 Actual variable overhead cost $22,000 Actual fixed overhead cost $10,000 Budgeted fixed overhead cost $9,000 "Normal" activity in hours 12,000 Total overhead application rate per standard DLH $2.25 E-17 What is the Marilyn s fixed overhead standard price? A. $ 1.00 B. $.75 C. $.60 D. $ 1.10 E-18 What was the amount of Marilyn's fixed overhead volume variance for April? (Indicate whether the variance was favorable or unfavorable.) A. $ 500 B. $1,000 C. $1,750 D. $2,250 E-19 What was the amount of Marilyn's fixed overhead spending variance for April? (Indicate whether the variance was favorable or unfavorable.) A. $ 500 B. $1,000 C. $1,750 D. $2,250

18 Standard Costing By Dr. Michael Constas Page 18 E-20 What is Marilyn s variable overhead standard price? A. $ 1.00 B. $ 1.25 C. $ 1.35 D. $ 1.50 E-21 What is the amount of the variable overhead spending variance? A. $1,000 favorable B. $1,000 unfavorable C. $1,500 favorable D. $1,500 unfavorable E-22 What is the amount of the variable overhead efficiency variance? A. $1,000 favorable B. $1,000 unfavorable C. $1,500 favorable D. $1,500 unfavorable P-1 The following actual and standard cost data for Direct Materials and Direct Labor relate to the production of 2,000 units of a product: Actual Costs Standard Costs Direct 4,200 $4.90 4,000 $5.20 Materials: Direct Labor : 5,700 $9.30 6,000 $9.50 Determine the following variances: a. Material Price Variance. b. Material Usage Variance. c. Labor Rate Variance. d. Labor Efficiency Variance. P-2 Marshfield Company considers 8,000 direct labor hours or 4,000 units of product its normal monthly capacity. Its standard Variable and Fixed Manufacturing Overhead rates are $4 and $7, respectively, per Direct Labor hour. During the current month, $31,500 of Variable Manufacturing Overhead cost and $51,600 Fixed Manufacturing Overhead cost were incurred in working 7,500 Direct Labor hours to produce 3,600 units of product. The Fixed Manufacturing Overhead budget was $56,000. Determine the following variances, and indicate whether each is favorable or unfavorable: a. Variable Overhead Spending Variance. b. Variable Overhead Efficiency Variance. c. Fixed Overhead Spending Variance. d. Fixed Overhead Volume Variance.

19 Standard Costing By Dr. Michael Constas Page 19 P-3 The following summary data relate to the operations of Dobson Company for April, during which 9,000 finished units were produced. Normal monthly capacity was 20,000 Direct Labor hours and the Fixed Manufacturing Overhead budget for April was $50,000. Std. Unit Costs Determine the following variances and indicate whether each is favorable or unfavorable: a. Material Price and Usage Variances. b. Labor Rate and Efficiency Variances. c. Variable Overhead Spending and Efficiency Variances. d. Fixed Overhead Spending and Volume Variances. Actual Total Costs Direct Materials: Standard (4 $2.20/lb.) $8.80 Actual (38,000 $2.00/lb.) $76,000 Direct Labor:: Standard (2 $11.00/hr.) Actual (18,500 $11.30/hr.) 209,050 Variable Manufacturing Overhead: Standard (2 $3.00/hr.) 6.00 Actual 54,900 Fixed Manufacturing Overhead: Standard (2 $2.50/hr.) 5.00 Actual 52,000 Total $41.80 $391,000

20 Standard Costing By Dr. Michael Constas Page 20 P-4 The following summary data relate to the operations of Randolph Company for July, during which 4,500 finished units are produced: Std. Unit Costs Actual Total Costs Direct Materials: Standard (0.6 $9.00/lb.) $ 5.40 Actual (3,000 $9.40/lb.) $ 28,200 Direct Labor:: Standard (0.8 $12.80/hr.) Actual (3,800 $12.50/hr.) 47,500 Variable Manufacturing Overhead: Standard (0.8 $ 7.50/hr.) 6.00 Actual 30,100 Fixed Manufacturing Overhead*: Standard (0.8 $22.50/hr.) Actual 88,700 Total $39.64 $194,500 * Fixed overhead budget is $90,000 at normal monthly capacity of 4,000 direct labor hours. Determine the following variances and indicate whether each is favorable or unfavorable: a. Material Price and Usage Variances. b. Labor Rate and Efficiency Variances. c. Variable Overhead Spending and Efficiency Variances. d. Fixed Overhead Spending and Volume Variances.

21 Standard Costing By Dr. Michael Constas Page 21 P-5 The following summary data relate to the operations of Brown Company for May, during which 2,000 finished units were produced. Normal monthly capacity was 1,100 Direct Labor hours and the Fixed Manufacturing Overhead budget for April was $6,600. Std. Unit Costs Actual Total Costs Direct Materials: Standard (3 $2.00/lb.) $6.00 Actual (6,400 $2.20/lb.) $14,080 Direct Labor:: Standard (.5 $14.00/hr.) 7.00 Actual (950 $13.70/hr.) 13,015 Variable Manufacturing Overhead: Standard (.5 $4.00/hr.) 2.00 Actual 4,300 Fixed Manufacturing Overhead: Standard (.5 $6.00/hr.) 3.00 Actual 6,820 Total $18.00 $38,215 Determine the following variances and indicate whether each is favorable or unfavorable: a. Material Price and Usage Variances. b. Labor Rate and Efficiency Variances. c. Variable Overhead Spending and Efficiency Variances. d. Fixed Overhead Spending and Volume Variances.

22 Standard Costing By Dr. Michael Constas Page 22 P-6. Brown, Inc. considers 30,000 direct labor hours or 10,000 units of product its normal monthly capacity. Brown believes that it should take 8 pounds of materials to make one unit. Its standard variable and fixed factory overhead rates are $3 and $2, respectively, per direct labor hour. During the current month, $148,000 of direct materials, $293,800 of direct labor, $80,000 of variable overhead cost and $63,000 of fixed overhead cost were incurred to produce 9,000 finished units of product. Normal monthly capacity is 30,000 direct labor hours and the fixed overhead budget is $60,000. Brown spent $2 per pound on materials and $11.30 per hour for labor. Brown thought that it would spend $2.20 per pound on material and $11 per hour for labor. Overhead is applied using direct labor hours. Determine the following variances and indicate whether each is favorable or unfavorable: Material Price Variance: Material Efficiency (Usage or Quantity) Variance: Labor Price (Rate) Variance): Labor Efficiency (Quantity) Variance: Variable Overhead Price (Spending) Variance: Variable Overhead Efficiency (Quantity) Variance: Fixed Overhead Spending Variance: Fixed Overhead Volume Variance: $ $ $ $ $ $ $ $ P-7. ABC Company has the following information available for the current year: Standard: Material: Labor: Actual: Material: Labor: 3.5 feet per $2.60 per foot 5 direct labor per unit 95,625 feet used (100,000 feet $2.50 per foot) 122,400 direct labor hours incurred per $8.35 per hour 25,500 units were produced Compute the material purchase price and quantity/efficiency variances. Compute the labor rate and efficiency variances.

23 Standard Costing By Dr. Michael Constas Page 23 P-8. DEF Company has the following information available for the current year: Standard: Direct labor hours per unit: 5 Variable overhead per DLH: $.75 Fixed overhead per DLH: $1.90 Normal monthly capacity: 8900 Direct Labor Hours Actual: Units produced: 1800 Direct labor hours: 8900 Variable overhead: $6,400 Fixed overhead: $17,500 Compute the variable overhead spending variance. Compute the variable overhead efficiency variance. Compute the fixed overhead spending variance. Compute the fixed overhead volume variance. E-1 C is correct. SOLUTIONS AP X AQ SP X AQ SP X AQ SP X SQ $? x 25,000 lbs $2.00 x 25,000 lbs $? $50,000 Price Variance Quantity Variance $? - $50,000 = $2,500 U The actual cost has to be $52,500. The actual price is obtained by dividing $52,500/25,000 = $2.10.

24 Standard Costing By Dr. Michael Constas Page 24 E-2 C is correct. $4.00 x 12,200 gals $4.00 x? gals $48,800 $? Price Variance Quantity Variance $48,800 - $? = $2,000 U The flexible budget must be $46,800. In order to get the standard quantity you need to divide $46,800/4.00 = 11,700 gallons E-3 C is correct. $6.00 x 1,050 hrs $6.00 x (2 x 500) hrs $6,300 $6,000 Rate Variance Efficiency Variance E-4 D is correct. $6,300 - $6,000 = $300 U $? x 8,100 hrs $15.10 x 8,100 hrs $119,880 $122,310 Rate Variance Efficiency Variance $119,800 $122,310 = -$2,430 F

25 Standard Costing By Dr. Michael Constas Page 25 E-5 B is correct. $15.20 x 3,800 hrs $15.20 x (3.5 x 800) hrs $57,760 $42,560 Spending Variance Efficiency Variance E-6 C is correct. $57,760 - $42,560 = $15,200 U $19.80 x 2,100 hrs $40,740 $41,580 Spending Variance $40,740 - $41,580 = -$840 F E-7 A is correct. Efficiency Variance AP X AQ SP X AQ SP X AQ SP X SQ $? x 8,600 lbs $.75 x 8,600 lbs $.75 x 7200 $.75 x (3 x 2000) $7,310 $6,450 $5,400 $4,500 Price Variance Quantity Variance $7,310 - $6,450 = $860 U $5,400 - $4,500 = $900 U E-8 D is correct. See above table.

26 Standard Costing By Dr. Michael Constas Page 26 E-9 D is correct. $12 x 840 hrs $12 x (.4 x 2000) hrs $8,610 $10,080 $9,600 Rate Variance Efficiency Variance $8,610 $10,080 = -$1,470 F $10,080 - $9,600 = $480 U E-10 B is correct. See above table. E-11 C is correct. $9 x 840 hrs $9 x (.4 x 2000) hrs $7,560 $7,200 Spending Variance E-12 Answer: B favorable Efficiency Variance $7,560 - $7,200 = $360 U AP x AQ SP x AQ SP x SQ $2.52 x 445 $2.50 x 445 $2.50 x = 8.9U = -12.5F Price Variance Quantity Variance E-13 Answer: A unfavorable (See table above)

27 Standard Costing By Dr. Michael Constas Page 27 E-14 Answer: D unfavorable E-15 Answer: A AP x AQ SP x AQ $2.52 x 450 $2.50 x = 9U Price Variance AP x AQ SP x AQ SP x SQ $3.00 x 315 $3.10 x 315 $3.10 x = -31.5F = 46.5U Price Variance Quantity Variance E-16 Answer: D See Above Chart. E-17 Answer B SP (FO/H) = Fixed O/H Budget/Normal Capacity SP (FO/H) = $9,000 / 12,000 = $ 0.75 E-18 Answer: D favorable AP x AQ FO/H Budget SP x SQ $.75 x 15,000 $10,000 $9,000 $11,250 $10K - $9K = $1KU $9K $11,250 = -$2,250F Spending Variance Volume Variance E-19 Answer: B unfavorable See above chart. E-20 Answer D SP (FO/H) = Fixed O/H Budget/Normal Capacity SP (FO/H) = $9,000 / 12,000 = $ 0.75 SP (VO/H) = Total Overhead Application Rate FO/H SP SP (VO/H) = $ $.75 = $1. 50 E-21 Answer: B AP x AQ SP x AQ SP x SQ $1.50 x 14,000 $1.50 x 15,000 $22,000 $21,000 $22,500 $22,000 $21,000 = $1,000 U $21,000 $22,500 = -$1,500 F Spending Variance Efficiency Variance E-22 Answer: C (See above chart.)

28 Standard Costing By Dr. Michael Constas Page 28 P-1 $4.90 X 4200 $5.20 X 4200 $5.20 X 4000 $20,580 $21,840 $20,800 Material Price Variance Material Usage Variance -$1,260 F $1,040 U $9.30 X 5700 $9.50 X 5700 $9.50 X 6000 $53,010 $54,150 $57,000 Labor Rate Variance Labor Efficiency Variance -$1,140 F -$2,850 F P-2 $4.00 X 7,500 $4.00 X 7,200 (2 x 3,600) $31,500 Variable Overhead Spending Variance $30,000 $28,800 Variable Overhead Efficiency Variance $1,500 U $1,200 U Actual Cost Fixed Overhead Static Budget Standard AP X AQ SP X SQ $7.00 X 7,200 (2 x 3,600) $51,600 $56,000 $50,400 Fixed Overhead Spending Variance Fixed Overhead Volume Variance -$4,400 F $5,600 U

29 Standard Costing By Dr. Michael Constas Page 29 P-3 a. Direct Materials variances: $2.00 X 38,000 $2.20 X 38,000 $2.20 X 36,000 (4x9000) $76,000 Material Price Variance b. Direct Labor variances: $83,600 $79,200 Material Usage Variance -$7,600 F $4,400 U $11.30 X 18,500 $11.00 X 18,500 $11.00 X 18,000 (2x9,000) $209,050 Labor Rate Variance $203,500 $198,000 Labor Efficiency Variance $5,550 U $5,500 U c. Variable Manufacturing Overhead variances: $3.00 X 18,500 $3.00 X 18,000 (2 x 9,000) $54,900 Variable Overhead Spending Variance $55,500 $54,000 Variable Overhead Efficiency Variance -$600 F $1,500 U

30 Standard Costing By Dr. Michael Constas Page 30 d. Fixed Manufacturing Overhead variances: Actual Cost Fixed Overhead Static Budget Standard AP X AQ SP X SQ $2.50 X 18,000 (2 x 9,000) $52,000 $50,000 $45,000 Fixed Overhead Spending Variance Fixed Overhead Volume Variance P-4 a. Direct Materials variances: $2,000 U $5,000 U $9.40 X 3,000 $9.00 X 3,000 $9.00 X 2,700 (.6x4,500) $28,200 Material Price Variance b. Direct Labor variances: $27,000 $24,300 Material Usage Variance $1,200 U $2,700 U $12.50 X 3,800 $12.80 X 3,800 $12.80 X 3,600 (.8x4,500) $47,500 Labor Rate Variance $48,640 $46,080 Labor Efficiency Variance -$1,140 F $2,560 U

31 Standard Costing By Dr. Michael Constas Page 31 c. Variable Manufacturing Overhead variances: $7.50 X 3,800 $7.50 X 3,600 (.8 x 4,500) $30,100 Variable Overhead Spending Variance $28,500 $27,000 Variable Overhead Efficiency Variance $1,600 U $1,500 U d. Fixed Manufacturing Overhead variances: Actual Cost Fixed Overhead Static Budget Standard AP X AQ SP X SQ $22.50 X 3,600 (.8 x 4,500) $88,700 $90,000 $81,000 Fixed Overhead Spending Variance Fixed Overhead Volume Variance 9-5 a. Direct Material variances: -$1,300 F $9,000 U $2.20 X 6,400 $2.00 X 6,400 $2.00 X 6,000 (3x2,000) $14,080 Material Price Variance $12,800 $12,000 Material Usage Variance $1,280 U $800 U

32 Standard Costing By Dr. Michael Constas Page 32 b. Direct Labor variances: $13.70 X 950 $14.00 X 950 $14.00 X 1,000 (.5x2,000) $13,015 Labor Rate Variance $13,300 $14,000 Labor Efficiency Variance -$285 F -$700 F c. Variable Manufacturing Overhead variances: $4.00 X 950 $4.00 X 1,000 (.5 x 2,000) $4,300 Variable Overhead Spending Variance $3,800 $4,000 Variable Overhead Efficiency Variance $500 U -$200 F d. Fixed Manufacturing Overhead variances: Actual Cost Fixed Overhead Static Budget Standard AP X AQ SP X SQ $6.00 X 1,000 (.5 x 2,000) $6,820 $6,600 $6,000 Fixed Overhead Spending Variance Fixed Overhead Volume Variance $220 U $600 U

33 Standard Costing By Dr. Michael Constas Page 33 P-6. Material Variances: We produced 9,000 units this month. Direct Materials: Actual Cost Mixed Cost Standard Cost (Budget/Applied) AP x AQ SP x AQ SP x SQ _$2.00 x 74,000*_ $2.20 x 74,000* $2.20 x (8 x 9,000 = 72,000 lbs) $148,000 $162,800 $158,400 $14,800 (favorable) $4,400 (unfavorable) Material Price Variance Material Quantity Variance *We spent $148,000 on materials this month, and we paid $2 per pound. Therefore, we bought 74,000 pounds (actual quantity) Labor Variances: The fact that normal monthly capacity is either 30,000 DLH or 10,000 units of product means that the two amounts represent the same amount of work. We, therefore, think (standard) that it takes 30,000 DLH to make 10,000 units of product. This means that it we think (standard) that it takes 3 DLHs to make one unit of product. That is the standard quantity of DLHs for one unit. Direct Labor: Actual Cost Mixed Cost Standard Cost (Budget/Applied) AP x AQ SP x AQ SP x SQ $11.30 x 26,000* $11 x 26,000* $11 x (3 x 9,000 = 27,000 DLHs) $293,800 $286,000 $297,000 $7,800 (unfavorable) $11,000 (favorable) Labor Rate Variance Labor Efficiency Variance Variable Overhead Variances: *We spent $293,800 on direct labor this month, and we paid $11.30 per hour. Therefore, we had 26,000 direct labor hours this month (actual quantity). Variable Overhead: Actual Cost Mixed Cost Standard Cost (Budget/Applied) AP x AQ SP x AQ SP x SQ? x 26,000* $3 x 26,000* $3 x (3 x 9,000 = 27,000* DLHs) $80,000 $78,000 $81,000 $2,000 (unfavorable) $3,000 (favorable) Variable Overhead Spending Variance Variable Overhead Efficiency Variance

34 Standard Costing By Dr. Michael Constas Page 34 *Got DLHs from Labor Variance calculations. Fixed Overhead: Actual Cost Fixed O/H Budget Standard Cost (Budget/Applied) AP x AQ SP x AQ SP x SQ $2 x 30,000* $2 x (3 x 9,000 = 27,000** DLHs) $63,000 $60,000 $54,000 $3,000 (unfavorable) $6,000 (unfavorable) Fixed Overhead Budget Variance Fixed Overhead Volume Variance * Normal Monthly capacity. ** From Labor Variances. P-7. We produced 25,500 units this month. Direct Materials: Actual Cost Mixed Cost Standard Cost (Budget/Applied) AP x AQ SP x AQ SP x SQ Purchased Used $2.50 x 100,000* $2.60 x100,000* $2.60 x 95,625** $2.60 x (3.5 x 25,500 = 89,250 ft) $250,000 $260,000 $248,625 $232,050 $10,000 (favorable) $16,575 (unfavorable) Material Price Variance Material Quantity Variance * Amount Purchased ** Amount Used Direct Labor: Actual Cost Mixed Cost Standard Cost (Budget/Applied) AP x AQ SP x AQ SP x SQ $8.35 x 122,400 $8.50 x 122,400 $8.50 x (5 x 25,500 = 127,500 DLHs) $1,022,040 $1,040,400 $1,083,750 $18,360 (favorable) $43,350 (favorable) Labor Rate Variance Labor Efficiency Variance

35 Standard Costing By Dr. Michael Constas Page 35 P-8. We produced 1800 units Variable Overhead: Actual Cost Mixed Cost Standard Cost (Budget/Applied) AP x AQ SP x AQ SP x SQ $.75 x 8,900 $.75 x (5 x 1,800 = 9,000 DLH) $6,400 $6,675 $6,750 $275 (favorable) $75 (favorable) Variable Overhead Spending Variance Variable Overhead Efficiency Variance Fixed Overhead: Actual Cost Fixed O/H Budget Standard Cost (Budget/Applied) AP x AQ SP x Normal Capacity SP x SQ $1.90 x 8,900 $1.90 x (5 x 1,800 = 9,000 DLHs) $17,500 $16,910 $17,100 $590 (unfavorable) $190 (favorable) Fixed Overhead Budget Variance Fixed Overhead Volume Variance