Standard Cost System Practice Problems

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Amos Bridges
6 years ago
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1 When setting up a standard cost system, the concepts of standards in material, labor, and overhead must be explored in a simple manner to start the process. Practice Standard Cost Variances: Simple Example Scenario A: Fred Freestone manufactures beds. The following is the standard cost card information for a unit of product: Standard Cost Card Per Unit of Product Direct materials: 4 posts at $1 each $ 4 Direct labor: 1.0 hours at $10 per hour 10 Fixed overhead: 200% of 1 direct labor hour at $20 per hour 20 Standard cost per unit $34 The following information is available for the year just finished: The Fred Freestone Corporation manufactured 1,000 beds during the year. The number of posts that were purchased during the year, at a cost of 90 cents per post, was 4,000. All of the material was used to manufacture 1,000 beds. There was no beginning or ending inventory. The material was purchased on January 15, 20XX. The Fred Freestone Corporation incurred 1,000 direct-labor hours at $19 per hour. During the year, 1 production order was issued on February 15, 20XX: Order number 21 for 1,000 beds. The predetermined overhead rate was $20 per direct labor hour. Actual fixed overhead was $20,500. Question 1: Compute the material price variance for Jan 15, 20XX. Answer: The material price variance is calculated on entry 01/15/20XX. It is calculated by taking the actual quantity multiplied by the difference between the actual price that is paid and the standard price for the material. AQ (AP SP) = 4,000 posts ( ) Material price variance = 4,000 (0.10) MPV= $400 Favorable Question 2: Provide the accounting entry for the material price variance. 1

2 Answer: The entry will be for the complete price of the products that are purchased. The entry to record this fact is a debit beginning inventory post of $3,600, a credit material price variance of $400, and a credit accounts payable of $3,600. The following is the entry for the price variance: Beginning inventory steel $4,000 Material price variance 400 Accounts payable 3,600 Question 3: Compute the labor rate and efficiency variances. Answer: The labor rate and efficiency variance is calculated on entry 02/15/20XX. You will take the actual quantity multiplied by the difference between the actual price that is paid and the standard price for the material. The following is the breakdown: AH (AR SR) = 1,000 hours ($19.00 $10.00) Labor rate variance = 1,000 x 9 = $9,000 Labor rate variance = $9,000 unfavorable SR (AH SH) = $10 (1,000 1,000) Labor efficiency variance = $0 Question 4: Provide the accounting entry for the labor rate and labor efficiency variances. Answer: The entry will be for the production order number 21. The following is the breakdown: Work in process $10,000 Labor efficiency variance 9,000 Labor rate variance 0 Wages payable 19,000 Question 5: Provide the entry for the manufacturing overhead applied. Answer: The following is the entry for the manufacturing overhead applied: Work in process: Applied $20,000 Unabsorbed overhead 500 Manufacturing overhead account $20,500 Question 6: Provide the entry for the actual overhead expenses. 2

3 Answer: The following is the entry for the actual overhead expenses: Manufacturing overhead $20,500 Accounts payable $20,500 Practice Standard Cost Variances: Hard Example This example provides for more complexity in manufacturing overhead accounts and material costs. Scenario B: Hard Stone manufactures metal caskets. The following is the standard cost card information for one unit of product: Standard Cost Card Per Unit of Product Direct materials: 2 pounds at $10 each $20 Direct labor: 2 direct labor hours at $10 per hour 20 Variable overhead: 200% of direct labor cost per hour 40 Fixed overhead: 300% of direct labor cost per hour 60 Standard cost per unit 140 The following information is available for the year just finished: The Hard Stone Corporation manufactured 5,000 caskets during the year. The total purchase of metal for the year was 11,000 pounds at a cost of $11 per pound. All of the material was used to manufacture the 5,000 caskets. There was no beginning or ending inventory. The material was purchased on January 15, 20XX. The Hard Stone Corporation incurred 11,000 direct labor hours at $19 per hour. During the year, one production order was issued in February 15, 20XX: Order number 45 for 5,000 caskets. The fixed, predetermined overhead rate was $30 per direct labor hour. The variable manufacturing overhead rate was $20 per direct labor hour. Total variable manufacturing overhead costs were $240,000. Actual fixed overhead was $305,000. Question 1: Compute the material price variance for Jan 15, 20XX. Answer: The material price variance is calculated on entry 01/15/20XX. It is 3

4 calculated by taking the actual quantity multiplied by the difference between the actual price that is paid and the standard price for the material. The following is the breakdown: AQ (AP SP) = 11,000 pounds ( ) Material price variance = 11,000 (1.00) Material price variance = $11,000 unfavorable Question 2: Provide the accounting entry for the material price variance. Answer: The entry will be for the complete price of product purchased. Raw material standard $110,000 Purchase price variance (unfavorable) 10,000 Accounts payable 121,0000 Question 3: Compute the labor rate and labor efficiency variances. Answer: The labor rate and efficiency variance are calculated on entry 02/15/20XX. They are calculated by taking the actual quantity multiplied by the difference between the actual price that is paid and the standard price for the material. The following is the breakdown: AH (AR SR) = 11,000 hours ($9 $10) = $99,000 unfavorable Labor rate variance = 11,000 ($1) = $11,000 favorable SR (AH SH) = $10 (11,000 10,000) = $10,000 unfavorable Labor efficiency variance = $20,000 unfavorable Question 4: Provide the accounting entry for the labor rate and labor efficiency variances. Answer: The entry will be for production order number 45. Work in process $200,000 Labor efficiency variance 20,000 Labor rate variance $11,000 Wages payable 209,000 Question 5: Compute the variable manufacturing overhead rate variance. Answer: The following is the variable manufacturing overhead rate variance: 4

5 AH (AR SR) = 11,000 (($240,000/11,000) $40) = 11,000 ($ $40.00) = 200,000 favorable SR = (AH SH) = $40 ( 11,000 10,000) SR = $40,000 unfavorable Question 6: Provide the accounting entry for actual variable overhead expenses. Answer: The following is the accounting entry for actual overhead expenses: Actual manufacturing variable overhead $240,000 Accounts payable $240,000 Question 7: Provide the accounting entry for the variable overhead rate and variable overhead efficiency variances. Answer: The following is the accounting entry for the overhead rate and overhead efficiency variances: Variable overhead efficiency variance = standard overhead rate (actual hours - standard hours) = $40 (11,000-10,000) = $40,000 unfavorable Work in process $400,000 Variable overhead efficiency variance 40,000 Manufacturing overhead 240,000 Variable overhead rate variance 200,000 5

Multiple Choice Questions

Multiple Choice Questions 1. The difference between the actual price and the standard price, multiplied by the actual quantity of materials purchased is the a) direct labor price variance b) direct labor