Chapter 10

Standard rate per direct labor-hour$2Standard direct labor-hours for each unit produced 3Units manufactured 1,000Actual direct labor-hours worked during the month 3,300Total actual variable manufacturing overhead$6,600 Knowledge Check 01 Assume that direct labor-hours is used as the overhead allocation base. What is the variable overhead efficiency variance?

The standard hours allowed for the actual output (SH) is the time that should have been taken to complete the period's output. SH = 1,000 units × 3 direct labor-hours per unit = 3,000 hours Variable overhead efficiency variance = SR × (AH − SH) Variable overhead efficiency variance = $2.00 × (3,300 − 3,000) = $600 U The actual labor-hours is greater than the standard hours allowed for the actual output; therefore, the variable overhead efficiency variance is unfavorable.

Poor supervision is one possible cause of an unfavorable _________ variance.

labor efficiency

The material variance terms price and quantity are replaced with the terms____________ and when computing___________ direct labor variances

rate, hours

Once the predetermined overhead rate has been established, it:

remains unchanged throughout the period

The standard rate per unit that a company expects to pay for variable overhead equals the:

variable portion of the predetermined overhead rate

Material requirements plus an allowance for normal inefficiencies are added together to determine the standard, quanity, of a direct material per unit of output.

standard, quantity,

The volume variance = the ___ component of the predetermined overhead rate x (Denominator hours - the ______ hours allowed for the actual output).

fixed standard

The materials price variance is the difference between the actual price of materials:

and the standard price for materials with the difference multiplied by the actual quantity of materials

The materials price variance is calculated using the:

standard price of the input actual quantity of the input purchased actual price of the input

To calculate a price variance, multiply the Blank 1Blank 1 actual, Correct Unavailable quantity times the actual price and compare it to the actual quantity times the Blank 2Blank 2 actual, Incorrect Unavailable pric

Blank 1: actual Blank 2: standard

The amount of direct-labor hours that should be used to produce one unit of finished goods is the __________hours per unit.

Standard

A quantity variance is:

calculated using the standard price of the input

The spending variance is:

(AQ x AP) - (SQ x SP)

Which of the following statements is true?

The variable part of manufacturing overhead is analyzed using the same basic formulas used for materials and labor.

The standard cost for ______ manufacturing overhead is computed the same way as the standard cost for direct labor.

variable

Calculate the predetermined overhead rate using machine-hours as the allocation base. Budgeted overhead $350,000 Budgeted production 28,000 units Total budgeted machine-hours 70,000 hours Actual production 20,000 units Standard machine-hours allowed for actual production 50,000 hours Actual machine-hours used for production 52,000 hours

$5.00 per machine-hour Reason: The predetermined overhead rate is total estimated overhead cost ($350,000) divided by the estimated total of the allocation base (70,000 hours).

Using the information provided, calculate the materials quantity variance. Standard price: $3.00 per pound Actual price: $3.20 per pound Actual quantity used: 5,200 pounds Standard quantity allowed: 5,000 pounds

$600 U Reason: SP(AQ-SQ) = $3.00(5,200 - 5,000) = $600 U

Advantages to using a standard cost system include:

standard costs can simplify bookkeeping standards can provide benchmarks for individuals to judge their own performance

Bittersweet Inc., started the year with $10,000 of retained earnings. The company reported $50,000 of net operating income and declared and paid $25,000 of dividends. What is the company's ending retained earnings?

Ending balance in retained earnings = Beginning balance in retained earnings + Net operating income − Dividends. Ending balance in retained earnings = $10,000 + $50,000 − $25,000 = $35,000

Which of the following statements are true?

When actual results depart significantly from the standard, the reasons why should be investigated. Standards provide information for measuring performance.

spending variance

The difference between actual results and the flexible budget amount is a

A planning budget called for 500 units to be produced and total direct labor cost of $7,500. Actual production was 600 units and actual direct labor cost was $9,300. The spending variance is:

$300 F Reason: $7,500/500 = $15 standard rate per unit x 600 = $9,000 flexible budget - $9,300 actual = $300 U

Use the following information to calculate the labor rate variance for Adkinson Company. Actual hours used 5,500 Standard hours allowed 5,800 Actual labor rate $14.75 per hour Standard labor rate $14.00 per hour

$4,125 Unfavorable Reason: The labor rate variance is: AH(AR-SR): 5,500 x ($14.75 - 14.00) = $4,125 Unfavorable

The standard price of materials is $4.10 per pound and the standard quantity allowed for actual output is 5,800 pounds. If the actual quantity purchased and used was 6,000 pounds, and the actual price per pound was $4.00, the direct materials price variance is:

$600 F Reason: 6,000 x ($4.00 - $4.10) = $600 F.

The standard price of materials is $3.50 per pound and the standard quantity allowed for actual output is 7,000 pounds. If the actual quantity purchased and used was 6,700 pounds, and the actual price per pound was $3.40, the direct materials quantity variance is $

1050 F

Which of the following are used to calculate the standard quantity per unit of direct materials?

Allowance for waste and spoilage Direct materials requirements per unit of finished product

Volume variance =

Budgeted fixed overhead - Fixed overhead applied to work in process

Which of the following statements are true?

Changes in activity have no impact on actual fixed costs within the relevant range. Treating fixed costs as if they are variable can lead to bad decisions. A fixed overhead volume variance results from treating fixed manufacturing costs as if they are variable.

Budgeted production (in units) 1,200Budgeted machine-hours or denominator activity 6,000Actual production 1,500Standard hours allowed for the actual output 7,500 Budgeted fixed manufacturing overhead$21,000Actual fixed manufacturing overhead$22,000 Knowledge Check 01 Assume that machine-hours is used as the overhead allocation base. What is the fixed component of the predetermined overhead rate?

Fixed component of the predetermined overhead rate = Budgeted fixed manufacturing overhead ÷ Budgeted machine-hours Fixed component of the predetermined overhead rate = $21,000 ÷ 6,000 machine-hours = $3.50 per machine hour

Which of the following statements are true?

Fixed costs are applied to work in process like they are variable costs. Treating fixed costs as variable is necessary for product costing.

Budgeted production (in units) 1,200Budgeted machine-hours or denominator activity 6,000Actual production 1,500Standard hours allowed for the actual output 7,500 Budgeted fixed manufacturing overhead$21,000Actual fixed manufacturing overhead$22,000 Knowledge Check 01 What is the volume variance?

Knowledge Check 01 Volume variance = Budgeted fixed overhead − Fixed overhead applied to work in process Volume variance = Budgeted fixed overhead − (Standard machine-hours allowed × Fixed component of the predetermined overhead rate) Volume variance = $21,000 − (7,500 units × $3.50 per machine hour) = $5,250 F Alternatively: Volume variance = Fixed component of the predetermined overhead rate × (Denominator hours − Standard hours allowed for the actual output) Volume variance = $3.50 per machine-hour × (6,000 machine-hours − 7,500 machine-hours) = $5,250 F The volume variance is often viewed as a measure of the utilization of facilities. The 7,500 standard hours allowed for the actual output was greater than the 6,000 denominator hours; this signals efficient usage of facilities. In other words, because the actual level of activity was greater than expected, the volume variance is favorable.

Spending variance = (AH × AR) − (SH × SR) Spending variance = (2,200 hours × $1.90) − (2,000 hours × $2.00) = $180 U The actual amount spent (AH × AR), $4,180, is greater than the standard amount allowed (SH × SR), $4,000, therefore the variance is unfavorable.

Labor rate variance = AH × (AR − SR) Labor rate variance = 2,200 × ($1.90 − $2.00) = $220 F The actual labor rate is less than the standard labor rate; therefore, the labor rate variance is favorable.

Zeta Corporation is a manufacturer of sports caps, which require soft fabric. The standards for each cap allow 2.00 yards of soft fabric, at a cost of $2.00 per yard. During the month of January, the company purchased 25,000 yards of soft fabric at $2.10 per yard, to produce 12,000 caps. What is Zeta Corporation's materials price variance for the month of January?

Price variance = AQ(AP − SP) = 25,000 yards ($2.10 per yard − $2.00 per yard) = $2,500 U Because the actual price is greater than the standard price, the materials price variance is unfavorable.

Lansing Inc.'s cost of goods sold at standard was $15,000. This represents the amount of cost of goods sold before considering the transaction that closes all variance accounts for the period. The company also reported the following in the related columns of its spreadsheet. Materials quantity variance$(100)Labor rate variance 20 Fixed overhead volume variance 50 What is the amount of the cost of goods sold (after adjustment for the variances) that will be reported on the company's income statement?

Recall that, in the Excel spreadsheet, all favorable variances are recorded without parentheses and all unfavorable variances are recorded with parentheses. Closing favorable variances to cost of goods sold will decrease cost of goods sold and closing unfavorable variance will increase cost of goods sold. Cost of goods sold = Cost of goods sold at standard − Favorable variances + Unfavorable variances Cost of goods sold = $15,000 − $20 − $50 + $100 = $15,030

XX Company Actual Hours of Inputat Actual Rate(AH × AR)Actual Hours of Inputat Standard Rate(AH × SR)Standard Hours of Inputat Standard Rate(SH × SR)= (2,200 hours × $1.90)= (2,200 hours × $2.00)= (2,000 hours × $2.00)

Spending variance = (AH × AR) − (SH × SR) Spending variance = (2,200 hours × $1.90) − (2,000 hours × $2.00) = $180 U The actual amount spent (AH × AR), $4,180, is greater than the standard amount allowed (SH × SR), $4,000, therefore the variance is unfavorable.

Which of the following statements are true?

Standard cost reports may be too outdated to be useful. Managers should not use standards to assign blame.

The variable overhead_______ variance measures activity differences and the variable overhead________ variance measures cost differences.

efficiency, rate

The materials price variance is generally calculated at the time materials are purchased because:

it allows materials to be carried in the inventory accounts at standard cost it simplifies bookkeeping management can generate more timely variance reports

The difference between the actual price paid for the material and what should have been paid according to the standard is reflected in the direct materials_______________ variance.

price

The difference between the amount of an input used and the amount that should have been used, all evaluated at the standard price for the input, is called a_________ variance

quantity

A price variance is the difference between the:

the actual price and the standard price multiplied by the actual amount of the input.