Ch. 10 Standard Costs and Variances

What is a quality 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.

Who is generally responsible for the materials price variances? 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 efficiency variances are usually the responsibility of production managers and supervisors.

Why can undue emphasis on labor efficiency variances lead to excess work in progress 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 variance 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 the direct labor efficiency variance will always be favorable or unfavorable together. Both variances are computed by comparing the number of direct labor-hours actually worked to the standard hours allowed. That is, in each case the formula is: Efficiency variance = SR(AH - SH) Only the "SR" part of the formula, the standard rate, differs between the two variances.

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

If poor quality materials 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 that 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.

The materials price variance can be computer 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.

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 discounted price, but the low-quality materials created production problems.