Chapter 10 Standard Costs and Variances
standard quantity per unit (used to set VMOH cost)
(DLH or MH) amount needed per finished unit plus allowance for waste/spoilage/rejects
Suver Corporation has a standard costing system. The following data are available for June:* Actual quantity of direct materials purchased 24,000pounds Standard price of direct materials $6.00per pound Material price variance $6,000Unfavorable Material quantity variance $2,400Favorable The actual price per pound of direct materials purchased in June was: A) $6.10 per pound B) $5.90 per pound C) $6.25 per pound D) $6.30 per pound
C) $6.25 per pound Explanation: Materials price variance = AQ × (AP - SP) $6,000 U = 24,000 pounds × (AP - $6.00 per pound) $6,000 = 24,000 pounds × (AP - $6.00 per pound) AP - $6.00 per pound = $6,000 ÷ 24,000 pounds AP - $6.00 per pound = $0.25 per pound AP = $6.00 per pound + $0.25 per pound AP = $6.25 per pound
Piper Corporation's standards call for 1,000 direct labor-hours to produce 250 units of product. During October the company worked 1,250 direct labor-hours and produced 300 units. The standard hours allowed for October would be:* A) 1,250 hours B) 1,000 hours C) 1,200 hours D) 1,300 hours
C) 1,200 hours Explanation: Standard hours per unit of output = 1,000 direct labor-hours ÷ 250 units = 4 direct labor-hours per unit Standard hours allowed = 300 units × 4 direct labor-hours per unit = 1,200 hours
Poorly trained workers could have an unfavorable effect on which of the following variances?* Labor Rate Variance Materials Quantity Variance A)YesYes B)YesNo C)NoYes D)NoNo
C)NoYes
Which of the followingstatements concerning idealstandards is incorrect? A. Ideal standards generally do notprovide the best motivation forworkers. B. Ideal standards do not makeallowances for waste, spoilage, andmachine breakdowns. C. Ideal standards are better suitedfor cash budgeting than practicalstandards. D. Ideal standards may be betterthan practical standards whenmanagers seek continualimprovement
C. Ideal standards are better suited for cash budgetingthan practical standards Practical standards provide better forecasts of cash flowsfor cash budgeting than practical standards.
When computing standard cost variances, the difference between actual and standard price multiplied by actual quantity yields a(n): A. combined price and quantity variance. B. efficiency variance. C. price variance. D. quantity variance
C. price variance. Materials price variance = AQ (AP - SP)
Todco planned to produce3,000 units of its single product,Teragram, during November. Thestandard specifications for one unitof Teragram include six pounds ofmaterial at $0.30 per pound. Actualproduction in November was 3,100units of Teragram. The accountantcomputed a favorable materialspurchase price variance of $380and an unfavorable materialsquantity variance of $120. Based onthese variances, one couldconclude that: A. more materials were purchasedthan were used. B. more materials were used thanwere purchased. C. the actual cost of materials wasless than the standard cost. D. the actual usage of materialswas less than the standard allowed
C. the actual cost of materials was less than the standardcost. Materials price variance = AQ (AP - SP) A favorable materials price variance can only occur if theactual price of materials was less than the standard price.
A favorable labor rate variance indicates that- A) actual hours exceed standard hours. B) standard hours exceed actual hours. C) the actual rate exceeds the standard rate. D) the standard rate exceeds the actual rate.
D) the standard rate exceeds the actual rate.
Which department shouldusually be held responsible for anunfavorable materials pricevariance? A. Production. B. Materials Handling. C. Engineering. D. Purchasing
D. Purchasing. The purchasing department should ordinarily be heldresponsible for an unfavorable materials price variancebecause that department ordinarily has most control overthe price.
Tower Company planned to produce 3,000 units of its single product, Titactium, during November. The standards for one unit of Titactium specify six pound sof materials at $0.30 per pound. Actual production in November was 3,100 units of Titactium. There was an unfavorable materials price variance of $380 and a favorable materials quantity variance of $120.Based on these variances, one could conclude that: A. more materials were purchased than were used. B. more materials were used than were purchased. C. the actual cost per pound for materials was less than the standard cost per pound. D. the actual usage of materials was less than the standard allowed
D. the actual usage of materials was less than the standard allowed. Materials quantity variance = (AQ - SQ) SP A favorable materials quantity variance occurs only if the actual usage of materials was less than the standard allowed, i.e., if AQ < SQ.
standard rate per unit (used to set VMOH cost)
equals the variable portion of the predetermined overhead rate
A materials price variance is favorable if the actual price exceeds the standard price. True False
false
All cost variances should be considered exceptions that require the attention of management
false
An unfavorable materials quantity variance occurs when the actual quantity used in production is less than the standard quantity allowed for the actual output of the period
false
From a standpoint of cost control, the most effective time to recognize materials price variances is when the materials are placed into production
false
Ideal standards should be used for forecasting and planning. True False
false
In general, the production manager is responsible for the materials price variance.
false
In standard costing, the standard quantity allowed refers to the output that should have been achieved based on the planned inputs for the period T/F
false
Purchase of poor quality materials will generally result in a favorable materials price variance and an unfavorable labor rate variance. T/F
false
Standard costs greatly increase the complexity of the bookkeeping process. True False
false
Standard costs greatly increase the complexity of the bookkeeping process T/F
false
Standard costs should generally be based on the actual costs of prior periods. True False
false
The Standard Labor Rate should not include fringe benefits T/F
false
The materials price variance is computed by multiplying the difference between the actual price and the standard price by the actual quantity of materials used in production. True False
false
The materials quantity variance is computed based on the amount of materials purchased during the period
false
The production manager is usually held responsible for the labor efficiency variance
false
The standard quantity per unit for direct materials should not include an allowance for waste. True False
false
Waste on production line will result in an unfavorable materials price variance
false
When more hours of labor time are necessary to complete a job than the standard allows, the labor rate variance is unfavorable. True False
false
standard cost card
shows the standard quantity (or hours) and standard price (or rate) of the inputs required to produce a unit of a specific product
The general model for calculating a quantity variance is:
standard price x (actual quantity of inputs used-standard quantity allowed for output)
If variable overhead is applied on the basis of direct labor-hours and the variable overhead rate variance is favorable, then:
standard variable overhead rate exceeded the actual rate.
Todco planned to produce 3,000 units of its single product, Teragram, during November. The standard specifications for one unit of Teragram include six pounds of material at $0.30 per pound. Actual production in November was 3,100 units of Teragram. The accountant computed a favorable materials purchase price variance of $380 and an unfavorable materials quantity variance of $120. Based on these variances, one could conclude that:
the actual cost of materials was less than the standard cost.
Capricorn Company reported a favorable materials price variance and an unfavorable materials quantity variance. Based on these variances, you can conclude that:
the actual cost per unit of materials was less than the standard cost per unit.
Capricorn Company reported a favorable materials price variance and an unfavorable materials quantity variance. Based on these variances, you can conclude that:
the actual cost per unit of materials was less than the standard cost per unit.
The terms "standard quantity allowed" or "standard hours allowed" means:*
the actual output in units multiplied by the standard input allowed.
standard rate per hour (used for setting DL standard cost)
the labor rate that should be incurred per hour of labor time, including employment taxes and fringe benefits
A favorable materials price variance coupled with an unfavorable material usage variance would most likely result from:
the purchase and use of lower than standard quality material.
A favorable materials price variance coupled with an unfavorable material usage variance would MOST likely result from:
the purchase of low quality materials.
A labor efficiency variance resulting from the use of poor quality materials should be charged to
the purchasing agent.
A favorable labor rate variance indicates that
the standard rate exceeds the actual rate
A favorable labor rate variance indicates that
the standard rate exceeds the actual rate.
The materials price variance should be computed:
when materials are purchased
The materials price variance should be computed:
when materials are purchased.
Taurus Company, a clothing manufacturer, uses a standard costing system. Each unit of a finished product contains 2 yards of cloth. However, there is unavoidable waste of 25%, calculated on input quantities, when the cloth is cut for assembly. The cost of the cloth is $6 per yard. The standard direct material cost for cloth per unit of finished product is:
$15.00
Aquarius Company employs a standard cost system in which direct materials inventory is carried at standard cost. The company has established the following standard for the material costs of one unit of product: Direct materials6.0 pounds $ 7.00/pound $42.00 During June, the company purchased 165,000 pounds of direct material at a total cost of $1,171,500. The company manufactured 25,000 units of product during June using 151,000 pounds of direct materials. The price variance for the direct materials acquired by the company during June is:
$16,500 unfavorable. Standard Quantity Standard Price Standard Cost
The Porter Company has a standard cost system. In July the company purchased and used 22,500 pounds of direct material at an actual cost of $53,000; the materials quantity variance was $1,875 Unfavorable; and the standard quantity of materials allowed for July production was 21,750 pounds. The materials price variance for July was:
$3,250 F
Pisces Company employs astandard cost system in whichdirect materials inventory is carriedat standard cost. The company hasestablished the following standardfor the direct labor costs of oneunit of product: Standard Quantity StandardPrice Standard Cost Direct labor 1.3hours$22.00/hour$28.60 The total factory wages for Junewere $800,000, 90 percent ofwhich were for direct labor. Thecompany manufactured 25,000units of product during June using32,000 direct labor hours. (Notethat this is the same data that wasprovided for the previousquestion.) The direct laborefficiency variance for June is:
11000 favorable
Pisces Company employs astandard cost system in whichdirect materials inventory is carriedat standard cost. The company hasestablished the following standardfor the direct labor costs of oneunit of product: Direct labor 1.3hours$22.00/hour$28.60 The total factory wages for Junewere $800,000, 90 percent ofwhich were for direct labor. Thecompany manufactured 25,000units of product during June using32,000 direct labor hours. Thedirect labor rate variance for Juneis:
16,000 unfavorable. Standard Quantity StandardPrice Standard Cost
Roscoe Company maintainswarehouses that stock itemscarried by its e-retailer clients.When one of Roscoe's clientsreceives an order from an onlinecustomer, the order is forwarded toRoscoe. Roscoe then pulls the itemfrom the warehouse, packs it andships it to the customer. Roscoeuses a predetermined variableoverhead rate based on directlabor-hours. According to thecompany's records, 0.04 directlabor-hours are required to fulfill anorder for one item and the variableoverhead rate is $6.50 per direct-labor hour. During July, Roscoeshipped 240,000 orders using 9,200direct labor-hours. The companyincurred a total of $58,880 invariable overhead costs. Thevariable overhead spendingvariance during July was:
2,600 favorable
Aquarius Company employs astandard cost system in whichdirect materials inventory is carriedat standard cost. The company hasestablished the following standardfor the material costs of one unit ofproduct: Direct materials 6.0 pounds$7.00/pound$42.00 During June, the companypurchased 165,000 pounds ofdirect material at a total cost of$1,171,500. The companymanufactured 25,000 units ofproduct during June using 151,000pounds of direct materials. (Notethat this is the same data that wasprovided for the previousquestion.) The direct materialquantity variance for June is:
7000 unfavorable Standard Quantity Standard Price Standard Cost
What is the result when the actual rate paid for labor is less than the standard rate?
A favorable labor price variance
What is the result when the quantity of materials used is less than the standard quantity?
A favorable materials usage variance
Which of the following statements is correct?
A favorable variance may indicate the existence of unfavorable conditions.
An unfavorable materials quantity variance indicates that: A) actual usage of material exceeds the standard material allowed for output.* B) standard material allowed for output exceeds the actual usage of material. C) actual material price exceeds standard price. D) standard material price exceeds actual price.
A) actual usage of material exceeds the standard material allowed for output.
Variable manufacturing overhead is applied to products on the basis of standard direct labor-hours. If the labor efficiency variance is favorable, the variable overhead efficiency variance will be:* A) favorable. B) unfavorable. C) zero. D) either favorable or unfavorable.
A) favorable.
If the labor efficiency variance is unfavorable, then A. actual hours exceeded standard hours allowed for the actual output. B. standard hours allowed for the actual output exceeded actual hours. C. the standard rate exceeded the actual rate. D. the actual rate exceeded the standard rate
A. actual hours exceeded standard hours allowed for the actual output Labor efficiency variance = (AH - SH) SR. An unfavorable variance occurs if AH > SH.
The general model forcalculating a price variance is: A. actual quantity of inputs × (actualprice - standard price). B. standard price × (actual quantityof inputs - standard quantityallowed for output). C. (actual quantity of inputs atactual price) - (standard quantityallowed for output at standardprice). D. actual price × (actual quantity ofinputs - standard quantity allowedfor output)
A. actual quantity of inputs × (actual price - standardprice). Materials price variance = AQ (AP - SP)
An unfavorable direct laborefficiency variance could becaused by: A. an unfavorable materialsquantity variance. B. an unfavorable variableoverhead rate variance. C. a favorable materials quantityvariance. D. a favorable variable overheadrate variance
A. an unfavorable materials quantity variance. An unfavorable quantity variance could be caused by lowquality materials, which in turn could cause an unfavorablelabor efficiency variance.
Variable key for Variance Formulas:
A=actual S=Standard Q=quantity (of materials used or purchased) P=price (of materials) R=rate (of labor) H=hours (of labor) AQsubu=actual quantity used AQsubp=actual amount of material purchased
standard cost per unit
ALL 3 VARIABLE MANUFACTURING COSTS ARE COMPUTED THE SAME WAY. The standard quantity (or hours) per unit is multiplied by the standard price (or rate) per unit to obtain the standard cost per unit. Quantity Standard x Price Standard
Which of the following statements is true? An unfavorable materials price variance could have resulted from actions taken by the purchasing agent. An unfavorable materials usage variance could have resulted from actions taken by the production supervisor. An unfavorable labor usage variance could have resulted from actions taken by the personnel department. All of the above answers are correct.
All of the above answers are correct.
The following materials standards have been established for a particular product:* Standard quantity per unit of output 4.6grams Standard price $15.05per gram The following data pertain to operations concerning the product for the last month: Actual materials purchased 3,100grams Actual cost of materials purchased $44,020 Actual materials used in production 2,400grams Actual output 300units What is the materials quantity variance for the month? A) $9,940 U B) $15,351 U C) $14,484 U D) $10,535 U
B) $15,351 U Explanation: SQ = 4.6 grams per unit × 300 units = 1,380 grams Materials quantity variance = (AQ - SQ) × SP = (2,400 grams - 1,380 grams) × $15.05 per gram = (1,020 grams) × $15.05 per gram = $15,351 U
The general model for calculating a quantity variance is:* A) Actual quantity of inputs used × (Actual price − Standard price). B) Standard price × (Actual quantity of inputs used − Standard quantity allowed for output). C) (Actual quantity of inputs used × Actual price) − (Standard quantity allowed for output × Standard price). D) Actual price × (Actual quantity of inputs used − Standard quantity allowed for output).
B) Standard price × (Actual quantity of inputs used − Standard quantity allowed for output).
The production department should generally be responsible for materials price variances that resulted from:* A) purchases made in uneconomical lot-sizes. B) rush orders arising from poor scheduling. C) purchase of the wrong grade of materials. D) changes in the market prices of raw materials.
B) rush orders arising from poor scheduling.
If variable manufacturing overhead is applied on the basis of direct labor-hours and the variable overhead rate variance is favorable, then:* A) the actual variable overhead rate exceeded the standard rate. B) the standard variable overhead rate exceeded the actual rate. C) the actual direct labor-hours exceeded the standard direct labor-hours allowed for the actual output. D) the standard direct labor-hours allowed for the actual output exceeded the actual hours.
B) the standard variable overhead rate exceeded the actual rate.
The materials quantity varianceshould be computed: A. when materials are purchased. B. based upon the amount ofmaterials used in production. C. based upon the differencebetween the actual and standardprices per unit times the actualquantity used. D. only when there is a differencebetween standard and actual costper unit for the materials.
B. based upon the amount of materials used in production. Materials quantity variance = (AQ - SQ)SP, where AQ is theactual quantity used
A labor efficiency varianceresulting from the use of poorquality materials should becharged to: A. the production manager. B. the purchasing agent. C. manufacturing overhead. D. the industrial engineeringdepartment
B. the purchasing agent. The purchasing manager is usually responsible for theacquisition of poor quality materials.
Variable manufacturingoverhead is applied to products onthe basis of standard direct labor-hours. If the direct labor efficiencyvariance is unfavorable, thevariable overhead efficiencyvariance will be: A. favorable. B. unfavorable. C. either favorable or unfavorable. D. zero.
B. unfavorable Labor efficiency variance = (AH - SH) SR Variable overhead efficiency variance = (AH - SH) SR If the labor efficiency variance is unfavorable, AH > SH. IfAH > SH, the variable overhead efficiency variance mustalso be unfavorable.
The materials price variance is computed using the actual quantity of materials used, and the materials usage variance is computed using the actual quantity of materials purchased
False No. The materials price variance is computed using the actual quantity of materials purchased, and the materials usage variance is computed using the actual quantity of materials used.
The direct materials price variance is computed based on the amount of direct materials used.
False, The materials price variance is computed based on the amount of direct materials purchased. The materials usage (or quantity) variance is computed based on the amount of direct materials used.
Hiring unskilled workers will generally result in a favorable direct labor rate variance and a favorable labor efficiency variance.
False, Unskilled workers are cheaper than skilled workers. Therefore, the labor rate variance will be favorable. However, unskilled workers will not be as efficient as skilled workers, which will result in an unfavorable labor efficiency variance.
An unfavorable materials price variance should be charged to the production manager.
False, the materials price variance should be charged to the purchasing agent as they are the responsible party for ordering direct materials. The production manager oversees production.
The direct labor efficiency variance will be unfavorable if the standard hours allowed for production is greater than the actual hours incurred.*
False, the efficiency variance will be unfavorable if the standard hours allowed are less than the actual hours incurred.
The purchasing agent of the Clampett Company ordered materials of lower quality in an effort to economize on price and in response to the demands of the production manager due to a mistake in production scheduling. The materials were shipped by airfreight at a rate higher than that ordinarily charged for shipment by truck, resulting in an unfavorable materials price variance. The lower quality material proved to be unsuitable on the production line and resulted in excessive waste. In this situation, who should be held responsible for the materials price and quantity variances?*
Materials Price Variance: Production Manager Materials Quantity Variance: Purchasing Agent
The difference between actual materials cost per unit and the standard materials cost per unit multiplied by actual quantity used is known as a:
Materials price variance
Materials Price Variance
Measures the difference between what is actually paid for a given quantity of DM & what should have been paid according to the standard. AQp (AP-SP)
Which manager is usually held responsible for labor price variances?
Production supervisor
Which manager is usually held responsible for materials price variances?
Purchasing agent
standard hours per unit (used for setting DL standard cost)
The amount of direct labor time that should be required to complete a single unit of product, including allowances for breaks, machine downtime, cleanup, rejects, and other normal inefficiencies.
Labor Rate Variance (LRV)
The difference between the actual hourly rate paid and the standard hourly rate multiplied by the actual hours worked. AH (AR-SR)
Materials Quantity Variance
The difference between the actual quantity of materials used in production and the standard quantity allowed for the actual output (the amount that should have been used), multiplied by the standard price per unit of materials. SP (AQu-SQ)
Variance Analysis
The process of investigating any differences between budgeted figures and actual figures. Price Variance - difference between actual price and standard price (Materials price variance, Labor rate variance, VMOH rate variance) Quantity Variance-difference between actual quantity and standard quantity (Materials quantity variance, Labor efficiency variance, VMOH efficiency variance)
Price and Quantity Standards are determined for two reasons:
The purchasing manager is responsible for raw material purchase prices and and the production manager is responsible for the quantity of raw materials. The buying and using activities occur at different times. Raw materials purchases may be held in inventory for a period of time before being used.
A favorable labor rate variance indicates that the standard labor rate is greater than the actual labor rate.
True, Favorable Labor Rate Variance = Actual Rate < Budgeted Rate Unfavorable Labor Rate Variance = Actual Rate > Budgeted Rate
The Mama Pie Company specializes in gourmet apple pies. A devastating freeze destroyed over half of the apple trees in the U.S. The Mama Pie Company can expect an unfavorable direct materials price variance as a result of the freeze.
True, supply will decrease because half the trees have been destroyed. Therefore, price will increase.
If the actual labor hours worked exceed the standard labor hours allowed, what type of variance will occur?
Unfavorable labor efficiency variance.
When computing standard cost variances, the difference between actual and standard price multiplied by actual quantity yields a(n):
When computing standard cost variances, the difference between actual and standard price multiplied by actual quantity yields a(n):
If the labor efficiency variance is unfavorable, then*
actual hours exceeded standard hours allowed for the actual output
Unfavorable
actual price/quantity is greater than the standard
Favorable
actual price/quantity is less than or equal to the standard
The general model for calculating a price variance is:
actual quantity of inputs × (actual price - standard price).
An unfavorable materials quantity variance indicates that:*
actual usage of material exceeds the standard material allowed for output.
An unfavorable materials quantity variance indicates that:
actual usage of material exceeds the standard material allowed for output.
An unfavorable direct labor efficiency variance could be caused by:*
an unfavorable materials quantity variance.
The materials quantity variance should be computed:
based upon the amount of materials used in production
Standard costs should generally be based on the actual costs of prior periods. T/F
false Standard costs are usually associated with a manufacturing company's costs of direct material, direct labor, and manufacturing overhead. Rather than assigning the actual costs of direct material, direct labor, and manufacturing overhead to a product, many manufacturers assign the expected or standard cost.
The materials quantity variance is computed based on the amount of materials purchased during the period T/F
false - based on amount used not bought
Standard price per unit
final, delivered cost minus discounts (includes taxes, transportation, insurance, etc.
Labor Efficiency Variance (LEV)
measures the difference between the labor hours that were actually used and the labor hours that should have been used SR (AH-SH)
When computing standard cost variances, the difference between actual and standard price multiplied by actual quantity yields a(n):
price variance.
Which department should usually be held responsible for an unfavorable materials price variance?
purchasing
Efficiency and Rate Variances can be computed for VMOH
true
From a standpoint of cost control, the most effective time to recognize materials price variances is when the materials are placed into production T/F
true
Generally speaking, it is the responsibility of the production department to see that material usage is kept in line with standards T/F
true
Generally speaking, it is the responsibility of the production department to see that material usage is kept in line with standards. True False
true
If the labor efficiency variance is favorable then the variable overhead efficiency variance will be favorable.
true
In general, the purchasing agent is responsible for the materials price variance. True False
true
In general, the purchasing manager is responsible for the materials price variance. T/F
true
Management by exception means that a manager's attention is directed toward those parts of the organization where things are not proceeding according to plans
true
Material price variances are often isolated at the time materials are purchased, rather than when they are placed into production, to facilitate earlier recognition of variances.
true
Purchasing direct materials that are below the quality originally budgeted could result in a favorable materials price variance and an unfavorable materials usage variance.
true
Quantity standards indicate how much of an input should be used to manufacture a unit of product.
true
Rate and efficiency variances can be calculated for manufacturing overhead. T/F
true
The materials price variance is computed based on the amount of materials purchased during the period.
true
The standard price per unit for direct materials should reflect the final, delivered cost of the materials.
true
The standard rate for direct labor SHOULD include fringe benefits of the assembly line workers.
true
The variable overhead efficiency variance measures how efficiently variable resources were used
true
When the materials price variance is recorded at the time of purchase, raw materials are recorded as inventory at standard cost.
true
Whoever is responsible for the control of the denominator activity in the predetermined overhead rate should also be responsible for the variable overhead efficiency variance.
true
The standard cost per unit is computed by multiplying the standard quantity or hours by the standard price or rate. True False
trur
Variable manufacturing overhead is applied to products on the basis of standard direct labor-hours. If the direct labor efficiency variance is unfavorable, the variable overhead efficiency variance will be:
unfavorable
If actual labor hours worked exceed the standard labor hours allowed, what type of variance will occur?
unfavorable labor efficiency variance