Management Accounting Chapter 10

What is a quantity standard? What is a price standard?

A quantity standard indicates how much of an input should be used to make a unit of output. A price standard indicates how much the input should cost.

Price Variance

A variance that is computed by taking the difference between the actual price and the standard price and multiplying the result by the actual quantity of the input.

Quantity Variance

A variance that is computed by taking the difference between the actual quantity of the input used and the amount of the input that should have been used for the actual level of output and multiplying the results by the standard price of the input.

Why can undue emphasis on labor efficiency variances lead to excess work in process inventories?

If labor is a fixed cost and standards are tight, then the only way to generate favorable labor efficiency variances is for every workstation to produce at capacity. However, the output of the entire system is limited by the capacity of the bottleneck. If workstations before the bottleneck in the production process produce at capacity, the bottleneck will be unable to process all of the work in process. In general, if every workstation is attempting to produce at capacity, then work in process inventory will build up in front of the workstations with the least capacity.

If variable manufacturing overhead is applied to production on the basis of direct labor-hours and the direct labor efficiency variance is unfavorable, will the variable overhead efficiency variance be favorable or unfavorable, or could it be either? Explain.

If overhead is applied on the basis of direct-labor hours, then the variable overhead efficiency variance and direct labor efficiency variance will alway be favorable or unfavorable together. Both variances are computed by comparing the number of direct labor-hours actually worked to the standard hours allowed. This is, in each case the formula is Efficiency Variance=SR(AH-SH)

What effect, if any, would you expect poor-quality materials to have on direct labor variances?

If poor quality material create production problems, a result could be excessive labor time and therefore an unfavorable labor efficiency variance. Poor quality materials would not ordinarily affect the labor rate variance.

Should standards be used to identify who to blame for problems?

If standards are used to find who to blame for problems, they can breed resentment and undermine morale. Standards should not be used to find someone to blame for problems.

Why are separate price and quantity variances computed?

Separating an overall variance into a price variance and a quantity variance provides more information. Moreover, price and quantity variances are usually the responsibilities of different managers.

"Our workers are all under labor contracts; therefore, our labor rate variance is bound to be zero." Discuss

Several factors other than the contractual rate paid to workers can cause a labor rate variance. For example, skilled workers with high hourly rates of pay can be given duties that require little skill and call for low hourly rates of pay, resulting in an unfavorable rate variance. Or unskilled or untrained workers can be assigned to tasks that should be filled by more skilled workers with higher rates of pay, resulting in a favorable rate variance. Unfavorable rate variances can also arise from overtime work at premium rates.

Standard Quantity Per Unit

The amount of an input that should be required to complete a single unit of product, including allowances for normal waste, spoilage, rejects, and other normal inefficiencies.

Standard Quantity Allowed

The amount of an input that should have been used to complete the period's actual output. It is computed by multiplying the actual number of units produced by the standard quantity per unit

Standard Hours Per Unit

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

The difference between the actual hourly labor rate and the standard rate, multiplied by the number of hours worked during the period.

Labor Efficiency Variance

The difference between the actual hours taken to complete a task and the standard hours allowed for the actual output, multiplied by the standard hourly labor rate.

Variable Overhead Efficiency Variance

The difference between the actual level of activity (direct labor-hours, machine-hours, or some other base) and the standard activity allowed, multiplied by the variable part of the predetermined overhead rate.

Materials Quantity Variance

The difference between the actual quantity of materials used in production and the standard quantity allowed for the actual output, multiplied by the standard price per unit of materials.

Materials Price Variance

The difference between the actual unit price paid for an item and the standard price, multiplied by the quantity purchased.

Variable Overhead Rate Variance

The difference between the actual variable overhead cost incurred during a period and the standard cost that should have been incurred based on the actual activity of the period.

Standard Rate Per Hour

The labor rate that should be incurred per hour of labor time, including employment taxes and fringe benefits.

The materials price variance can be computed at what two different points in time? Which point is better? Why?

The materials price variance can be computed either when materials are purchased or when they are placed into production. It is usually better to compute the variance when materials are purchased because that is when the purchasing manager, who has responsibility for this variance, has completed his or her work. In addition, recognizing the price variance when materials are purchased allows the company to carry its raw materials in the inventory accounts at standard cost, which greatly simplifies bookkeeping.

Who is generally responsible for the materials price variance? The materials quantity variance? The labor efficiency variance?

The materials price variance is usually the responsibility of the purchasing manager. The materials quantity and labor variances are usually the responsibility of production managers and supervisors.

Standard Price Per Unit

The price that should be paid for an input.

Standard Cost Per Unit

The standard quantity allowed of an input per unit of a specific product, multiplied by the standard price of the input.

Standard Hours Allowed

The time that should have been taken to complete the period's output. It is computed by multiplying the actual number of units produced by the standard hours per unit.

If the materials price variance is favorable but the materials quantity variance is unfavorable, what might this indicate?

This combination of variances may indicate that inferior quality materials were purchased at a discount price, but the low-quality materials created production problems.

Standard Cost Card

A detailed listing of the standard amounts of inputs and their costs that are required to produce one unit of a specific product.