CHAPTER 9

STANDARD COSTING:
A MANAGERIAL CONTROL TOOL
QUESTIONS FOR WRITING AND DISCUSSION
1. Standard costs are essentially budgeted
amounts on a per-unit basis. Unit standards
serve as inputs in building budgets.

11.

Managers generally tend to have more control over the quantity of an input used rather
than the price paid per unit of input.

2. Unit standards are used to build flexible

budgets. Unit standards for variable costs
are the variable cost component of a flexible
budgeting formula.

12.

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.

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.

13.

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.

4. Historical experience is often a poor choice

for establishing standards because the historical amounts may include more inefficiency than is desired.

14.

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.

15.

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.

16.

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.

17.

Some possible causes of an unfavorable

labor efficiency variance are inefficient labor,
machine downtime, and poor quality materials.

18.

Part of a variable overhead spending variance can be caused by inefficient use of

overhead resources.

19.

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.

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.

275

20.

21.

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-

276

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.

EXERCISES
91
1. d
2. e
3. d

4. c
5. e
6. a

92
1.

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.

2.

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

277

93
1.

SH = 1.5 1,700 = 2,550 hours

2.

SQ = 4 1,700 = 6,800 components

94
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
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

95
1.

SQ = 8.5 47,000 = 399,500 oz.

2.

SH = 0.25 47,000 = 11,750 hours

3.

Total standard prime cost = ($0.30 399,500) + ($9 11,750) = $225,600

96
1.

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

97
1.

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.

3.

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.

98
1.

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

= (AR SR)AH
= ($12.50 $12.00)2,000 = $1,000 U

LEV

= (AH SH)SR
= (2,000 1,976*)$12.00 = $288 U

* SH = 52,000 0.038 = 1,976

279

99
1.

Variable overhead analysis:

Actual VOH
$160,000

Budgeted VOH
$3.00 52,000
$4,000 U
Spending

Applied VOH
$3.00 54,750*
$8,250 F
Efficiency

* SH for direct labor = 73,000 0.75 = 54,750

2.

Fixed overhead analysis:

Actual FOH
$710,000

Budgeted FOH
$14 50,000
$10,000 U
Spending

Applied FOH
$14 54,750
$66,500 U
Volume

280

910
1.

Materials: $35 34,000 = $1,190,000

Labor:
$21 34,000 = $714,000

2.
Materials
Labor

Actual Cost*
$1,183,270
687,150

Budgeted Cost
$1,190,000
714,000

Variance
$ 6,730 F
26,850 F

*$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

SP AQ
$7 173,500
$31,230 F
Price

4.

$24,500 U
Usage

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
$13.50 50,900

SP SQ
$7 170,000

SR AH
$14 50,900
$25,450 F
Rate

SR SH
$14 51,000
$1,400 F
Efficiency

281

911
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
$9.50 79,900

SR AH
$9.40 79,900
$7,990 U
Rate

SR SH
$9.40 80,400
$4,700 F
Efficiency

3. Materials Inventorya ..................................

MPV ............................................................
Accounts Payableb ..............................

1,768,875
22,250

Work in Processc .......................................

MUV .......................................................
Materials Inventoryd ............................

1,757,745

Work in Processe .......................................

LRV .............................................................
LEV ........................................................
Accrued Payrollf ..................................

755,760
7,990

$7.95 222,500 =1,768,875

$8.05 222,500 =1,791,125

$7.95 221,100 =1,757,745

$7.95 222,500 = 1,768,875

e
f

$9.40 80,400 = 755,760

$9.50 79,900 = 759,050

282

1,791,125
5,565
1,752,180

4,700
759,050

912
1.

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

Budgeted FOH
$1.10 400,000*

Applied FOH
$1.10 393,000

$9,700 F
Spending

$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
$695,000

Budgeted VOH
$1.70 390,000
$32,000 U
Spending

Applied VOH
$1.70 393,000
$5,100 F
Efficiency

283

913
1.

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

Budgeted FOH
$864,000
$76,320 U
Spending

Applied FOH
$868,320
$4,320 F
Volume

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

Budgeted VOH
$4 361,800
$3,700 F
Spending

Applied VOH
$1,447,200
$0
Efficiency

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

914
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 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

SR AH
$18 515,000
$51,500 U
Rate

3.

SR SH
$18 504,000
$198,000 U
Efficiency

Fixed overhead analysis:

Actual FOH
$4,140,200

Budgeted FOH
$8 518,400
$7,000 F
Spending

Applied FOH
$8 504,000
$115,200 U
Volume

Note: Practical volume in hours = 1.8 288,000 = 518,400 hours

4. Variable overhead analysis:
Actual VOH
$872,000

Budgeted VOH
$1.50 515,000
$99,500 U
Spending

Applied VOH
$1.50 504,000
$16,500 U
Efficiency

285

915
1. Materials Inventory ...................................
MPV ............................................................
Accounts Payable ................................

10,782,080
336,940

2. Work in Process ........................................

MUV ............................................................
Materials Inventory ..............................

10,752,000
25,600

3. Work in Process ........................................

LRV .............................................................
LEV .............................................................
Accrued Payroll ...................................

9,072,000
51,500
198,000

4. Work in Process ........................................

Fixed Overhead Control ......................
Variable Overhead Control .................

4,788,000

11,119,020

10,777,600

9,321,500

4,032,000
756,000

5. Materials and labor:

Cost of Goods Sold ...................................
MPV .......................................................
MUV .......................................................
LRV........................................................
LEV ........................................................

612,040
336,940
25,600
51,500
198,000

Overhead disposition:
Cost of Goods Sold ...................................
Fixed Overhead Control ......................

108,200

Cost of Goods Sold ...................................

Variable Overhead Control .................

116,000

286

108,200
116,000

916
1.

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.

2.

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.

3.

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.

917
Materials:
AP AQ
$38,295

SP AQ
$2.00 20,700
$3,105 F
Price

SP SQ
$2.00 20,650
$100 U
Usage

Labor:
AR AH
$57,226

SR AH
$9 6,200 = $55,800
$1,426 U
Rate

SR SH
$9 6,195 = $55,755
$45 U
Efficiency

287

918
1. Materials Inventory ...................................
MPV .......................................................
Accounts Payable ................................

41,400

2. Work in Process ........................................

MUV ............................................................
Materials Inventory ..............................

41,300
100

3. Work in Process ........................................

LRV........................................................
LEV ........................................................
Accrued Payroll ...................................

55,755
1,426
45

4. Cost of Goods Sold ...................................

MUV .......................................................

100

MPV ............................................................
LRV .............................................................
LEV .............................................................
Cost of Goods Sold .............................

3,105
1,426
45

288

3,105
38,295

41,400

57,226

100

4,576

919
1.

VOH efficiency variance = (AH SH)SVOR

$8,000 = (1.2SH SH)$2
$8,000 = $0.4SH
SH = 20,000
AH = 1.2SH = 24,000

2.

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

289

PROBLEMS
920
1.

Materials:
AP AQ
$1.72 38,500

SP AQ
$1.70 38,500
$770 U
Price

SP SQ
$1.70 40,000
$2,550 F
Usage

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

SR AH
$10 2,500
$1,500 U
Rate

SR SH
$10 2,400
$1,000 U
Efficiency

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

SR AH
$10 2,200
$400 U
Rate

SR SH
$10 2,400
$2,000 F
Efficiency

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

921
1.
2.
3.
4.
5.
6.
7.
8.

9.
10.
11.
12.
13.
14.
15.

e
h
k
n
d
g
o
b

m
l
j
c
a
i
f

922
1.

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

922

Concluded

2.

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.

3.

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.

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

923
1.

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.

2.

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

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*

*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).

924
1.

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

924
2.

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

SR AH
$12 150,000
$150,000 U
Rate

SR SH
$12 140,000
$120,000 U
Efficiency

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

Budgeted VOH
$10 150,000
$30,000 F
Spending

Applied VOH
$10 140,000
$100,000 U
Efficiency

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

294

924
4.

Continued

Fixed overhead variances:

Actual FOH
$913,000

Budgeted FOH
$6 2 75,000
$13,000 U
Spending

Applied FOH
$6 2 70,000
$60,000 U
Volume

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 ..............................

2,790,000

Work in Processc .......................................

MUV ............................................................
Materials Inventoryd ............................

2,940,000
8,400

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

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

490,000 $6 = $2,940,000

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

295

93,000
2,697,000

2,948,400

924

Concluded

Work in Processe .......................................

LRV .............................................................
LEV .............................................................
Accrued Payroll ...................................

1,680,000
150,000
120,000

Cost of Goods Sold ...................................

MUV .......................................................
LRV........................................................
LEV ........................................................

278,400

MPV ............................................................
Cost of Goods Sold .............................

93,000

VOH Control ...............................................

Various Credits ....................................

1,470,000

FOH Control ...............................................

Various Credits ....................................

913,000

Work in Processf .......................................

VOH Control .........................................

1,400,000

Work in Processg.......................................
FOH Control .........................................

840,000

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

296

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

925
1.

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

Budgeted FOH
$2,400,000
$100,000 U
Spending

Applied FOH
$4 480,000
$480,000 U
Volume

Athens plant:
Actual FOH
$2,500,000

Budgeted FOH
$2,400,000
$100,000 U
Spending

Applied FOH
$4 600,000
$0
Volume

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

925

Concluded

3.

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).

4.

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.

298

926
1.

Normal Patient Day:

Direct materials
Direct labor
Variable overhead
Fixed overhead
Unit cost

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

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

Cesarean Patient Day:

Direct materials
Direct labor
Variable overhead
Fixed overhead
Unit cost
2.

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 ................................

1,720,000

Work in Process ........................................

MUV ............................................................
Materials ...............................................

1,680,000
40,000

MPV ............................................................
MUV ............................................................
Cost of Services Sold ..........................

86,000

299

86,000
1,634,000

1,720,000
40,000
46,000

926
3.

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 ...................................

560,000*
24,000
3,650
580,350

*[(2 3,500) + (4 7,000)] $16 = $560,000

Cost of Services Sold ...............................
LRV .............................................................
LEV ........................................................
4.

20,350
3,650
24,000

Variable overhead variances:

Actual VOH
$1,215,000

Budgeted VOH
$40 36,500
$245,000 F
Spending

Applied VOH
$40 35,000
$60,000 U
Efficiency

Fixed overhead variances:

Actual FOH
$700,000

Budgeted FOH
$720,000
$20,000 F
Spending

Applied FOH
$30 35,000
$330,000 F
Volume

Note: SH = (2 3,500) + (4 7,000) = 35,000

300

926

5.

Concluded

Work in Process ........................................

Variable Overhead Control .................

1,400,000

Work in Process ........................................

Fixed Overhead Control ......................

1,050,000

Variable Overhead Control .......................

Various Credits ....................................

1,215,000

Fixed Overhead Control ...........................

Various Credits ....................................

700,000

Variable Overhead Control .......................

Cost of Services Sold ..........................

185,000

Fixed Overhead Control ...........................

Cost of Goods Sold .............................

350,000

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

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

927
1.

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

927
2.

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.

54,000 hours/100,000 units = 0.54 hour per unit

5.

LEV = (AH SH)SR

= (52,000 54,000)$13 = $26,000 F

302

928
1.

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

928
3.

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

Budgeted VOH
$4.70 48,250
$12,225 U
Spending

Applied VOH
$4.70 50,000
$8,225 F
Efficiency

Fixed overhead variances:

Actual FOH
$50,500

Budgeted FOH
$50,000
$500 U
Spending

Applied FOH
$1 50,000
$0
Volume

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

929
1.

Performance Report

Direct materials
Direct labor
Variable overhead
Fixed overhead
Total

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

*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

929

Concluded

3.
(a)

Materials
770,000 770,000

(b)

(a)

MPV
5,000 5,000

(h)

Accrued Payroll
590,000

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

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

(f)

MUV
20,000 20,000

(b)

(c)

Work in Process
750,000 1,800,000
600,000
300,000
150,000

(j)

(g)

Accounts Payable
775,000 (a)

(i)

LRV
40,000 40,000 (c)

Variable Overhead Control

310,000 300,000
(d)
10,000
(l)

(f)

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

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

307

(j)

930
1.

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

= ($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

May
MPV
MUV
LRV
LEV

= ($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

17,400
16,000**
26,400
24,000**

June
MPV
MUV
LRV
LEV

= ($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

17,700
17,600
27,600
26,400

Limit
$ 14,460
14,400
21,600
21,600

*The actual deviation divided by the total price or quantity

**Investigate Mays MUV and LEV

309

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%

930
3.

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

8.0
APRIL

MAY

310

JUNE

930

Continued

MUV:
%
10.0
x
8.0

0.0

8.0
APRIL

MAY

311

JUNE

930

Continued

LRV:
%
10.0
8.0
x

0.0

x
x

8.0
APRIL

MAY

312

JUNE

930

Concluded

LEV:
%
10.0

8.0
x

0.0

8.0
APRIL

MAY

JUNE

931
1.

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

931
3.

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

932
1.

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

$3.00
1.60
2.00
1.00
$7.60

= $1,000
= $1,000
= $50,000
= $5.00
= ($10,000)
= ($10,000)
= ($10,000)
= $60,000
= 12,000

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

= $2,000
= $2,000
= $44,000
= $10

(AH SH)Standard VOH rate

(4,400 SH)$10
44,000 $10(SH)
$10(SH)
SH

= $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

Actual FOH (Standard FOH rate SH)

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

= $3,000
= $3,000
= $20,000
= $5.00

2. Budgeted FOH (Standard FOH rate SH)

Budgeted FOH ($5.00 4,000)
Budgeted FOH $20,000
Budgeted FOH

= $4,000
= $4,000
= $4,000
= $24,000

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

4.

Standard FOH rate = Budgeted FOH/Expected activity

$5.00 = $24,000/Expected activity
Expected activity = $24,000/$5.00
= 4,800 hours

316

MANAGERIAL DECISION CASES

933
1.

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.

4.

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.

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.

934
1.

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.

2.

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.

318

934
3.

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

935
1.

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.

2.

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.

3.

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.

RESEARCH ASSIGNMENTS
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