Solution manual cost accounting 14e by carter ch19

When standard costs are not incorporated, they may be used for the purposes of pricing, budgeting, and controlling cost; but if they are not used for inventory costing, the advan-tages

CHAPTER 19

DISCUSSION QUESTIONS

19-1

Q19-1 When standard costs are not incorporated,

they may be used for the purposes of pricing,

budgeting, and controlling cost; but if they are

not used for inventory costing, the

advan-tages from the saving of clerical effort in

accounting cannot be obtained.

Q19-2 With actual cost methods, it is first necessary

to select a cost flow method—lifo, fifo,

aver-age, etc It is then necessary to keep detailed

records of quantities and prices and to make

fairly complex calculations of inventory costs.

With a standard costing system, only

quanti-ties, not prices, must be taken into account,

facilitating both record keeping and

calcula-tions Standard costs also provide cost control.

Q19-3 The number of variance accounts is

deter-mined by (a) the number and type of

vari-ances that are to appear in statements for

management use, and (b) the need for easy

disposal of variances at the end of the fiscal

period, particularly when the variances are

not treated uniformly in financial statements

and for analyses.

Q19-4 (a) The standard cost of products completed

and products sold can be determined

immediately without waiting for the actual

cost to be calculated With standard

costs, monthly statements can be

pre-pared more quickly.

(b) A firm producing a great many different

products finds it practically impossible to

determine the actual cost of each

prod-uct The use of standard costs will

facili-tate the preparation of income sfacili-tatements

by product lines.

(c) Keeping finished goods stock records in

quantities only will result in clerical

sav-ing, since this eliminates the necessity for

recording the actual unit cost of each

receipt and issue or shipment.

Q19-5 The standard costing of inventories depends

on (a) the types of standards employed, (b)

the degree of success that the company has

in keeping overall actual costs in line with

standard costs, and (c) the concept held with

regard to the most suitable kind of cost.

Q19-6 (a) Deferral of variances is supported on the

grounds that, if the standards in use are based on normal price, efficiency, and output levels, positive and negative vari- ances can be expected to offset one another in the long run Because variance account balances at any given point in time are due to recurring seasonal and business cycle fluctuations, and because periodic reporting requirements result in arbitrary cutoff dates, variance account balances at a particular cutoff date are not assignable to operating results of the period then ended They will cancel out over time and therefore should be carried

to the balance sheet.

(b) Variances appearing as charges or its on the income statement are regarded

cred-as appropriate charges or credits in the period in which they arise They are con- sidered the result of favorable or unfavor- able departures from normal (standard) conditions and are disclosed separately from cost of goods sold at standard This provides management with unobscured information for immediate corrective action.

Inventory costs and cost of goods sold should not be distorted by variances that represent abnormal efficiencies or inefficiencies The standard cost repre- sents that amount which is reasonably necessary to produce finished products and should therefore be considered the best measure of the cost of goods manu- factured and inventory cost, as long as the underlying operating conditions remain unchanged.

(c) The argument for allocating variances between inventories and cost of goods sold is that standard costs are a useful tool for purposes of managerial control, but should not be substitutes for actual historical costs in the financial state- ments Only actual historical costs should

be used for financial reporting, even

though they are greater or less than

standard costs, and without regard to the

reasons for their differences from

stan-dard costs Stanstan-dard cost variances are

not gains or losses but costs (or

reduc-tions therein) of goods manufactured

and should be allocated between

inven-tories and cost of goods sold To treat

them as gains or losses in the period in

which they arise distorts both the tory and gross profit figures This distor- tion will be even greater if the standards are lacking in accuracy or reliability Further, to substitute standard costs for actual historical costs in the financial statements represents an unwarranted sacrifice of objectivity.

Materials Quantity Variance (100 × $.42) 42

Materials (16,500 × $.42) 6,930 Materials recorded at actual cost when received, and price variance determined at the time materials are issued to production:

Materials (20,000 × $.44) 8,800

Accounts Payable 8,800 Work in Process (8,200 × 2 × $.42) 6,888

Materials Price Usage Variance (16,500 × $.02) 330

Materials Quantity Variance (100 × $.42) 42

Materials (16,500 × $.44) 7,260 Price variance determined when the materials are received, but not charged to produc- tion until the materials are actually placed in process:

Materials (20,000 × $.42) 8,400

Materials Purchase Price Variance (20,000 × $.02) 400

Accounts Payable (20,000 × $.44) 8,800 Work in Process (8,200 × 2 × $.42) 6,888

Materials Quantity Variance (100 × $.42) 42

Materials (16,500 × $.42) 6,930 Materials Price Usage Variance (16,500 × $.02) 330

Materials Purchase Price Variance 330 E19-2

(1) Materials (12,000 AQ purchased × $8 SP) 96,000

Materials Purchase Price Variance 960

Accounts Payable 96,960 Work in Process (12,800 SO × $8 SP) 102,400

Materials Quantity Variance 1,600

Materials (13,000 AQ issued × $8 SP) 104,000

Materials Quantity Variance ((13,000 – 12,800) × $8 SP) 1,600

Materials Price Usage Variance (13,000 AQ ×

($8.06 AP – $8 SP)) 780 Materials (13,000 AO × $8.06 AP) 104,780 (3) Fifo inventory

Work in Process (same as above) 102,400

Materials Quantity Variance (same as above) 1,600

Materials Price Usage Variance 760

Materials (($7.94 × 2,000 units) +

($8.08 × 11,000 units)) 104,760 (4) Lifo inventory

Work in Process (same as above) 102,400

Materials Quantity Variance (same as above) 1,600

Materials Price Usage Variance 900

Materials (($8.08 × 12,000 units) +

($7.94 × 1,000 units)) 104,900 E19-3

Payroll 18,144

Accrued Payroll 18,144 Work in Process (2,400 × 3/4 × $9.50) 17,100

Labor Efficiency Variance (120 × $9.50) 1,140

Labor Rate Variance (1,920 × $.05) 96 Payroll (1,920 × $9.45) 18,144

($2 SP × (20,000 SQ – 21,000 AQ)) 2,000 Materials (21,000 AQ × $2.02 AP) 42,420 Work in Process

(10,000 units × 1/4 SH per unit × $12 SR) 30,000 Labor Rate Variance

(($12.20 AR – $12 SR) × 2,425 AH) 485 Labor Efficiency Variance

($12 SR × (2,425 AH – 2,500 SH)) 900 Payroll (2,425 AH × $12.20 AR) 29,585 E19-5

(1) Work in Process ($7 FO rate × 12,000 SH) 84,000

Applied Factory Overhead 84,000 (2) Applied Factory Overhead 84,000

Factory Overhead Control 84,000 (3) Volume Variance

($4.50 fix rate × (15,000 BH – 12,000 SH)) 13,500 Controllable Variance 8,700 Factory Overhead Control

($88,800 actual – $84,000 applied) 4,800 E19-6

(1) Factory Overhead Control 55,900

Various Credits 55,900 (2) Work in Process (11,000 SH × $5 FO rate) 55,000

Applied Factory Overhead 55,000 (3) Applied Factory Overhead 55,000

Factory Overhead Control 55,000 (4) Controllable Variance 2,900

Volume Variance

($2 fix rate × (10,000 BH – 11,000 SH)) 2,000 Factory Overhead Control

($55,900 actual – $55,000 applied) 900

(1) Work in Process (4,800 SH × $16 FO rate) 76,800

Applied Factory Overhead 76,800 (2) Applied Factory Overhead 76,800

Factory Overhead Control 76,800 (3) Variable Efficiency Variance

($4 var rate × (5,200 AH – 4,800 SH)) 1,600 Volume Variance

($12 fix rate × (5,000 BH – 4800 SH)) 2,400 Spending Variance 3,000 Factory Overhead Control

($77,800 actual – $76,800 applied) 1,000 E19-8

(1) Work in Process (7,000 SH × $11 FO rate) 77,000

Applied Factory Overhead 77,000 (2) Applied Factory Overhead 77,000

Factory Overhead Control 77,000 (3) Variable Efficiency Variance

($8 var rate × (7,600 AH – 7,000 SH)) 4,800 Volume Variance

($3 fix rate × (8,000 OH – 7,000 SH)) 3,000 Spending Variance 3,100

Factory Overhead Control

($87,900 actual – $77,000 applied) 10,900

Finished Cost of

Balance at standard $171,000 $819,000 Current year’s labor variances allocation 10,400 41,600 Last year’s variances, all applicable to cost of goods

sold on a fifo flow assumption 5,800

E19-10

Percentage of units in inventories and cost of goods sold:

Direct Labor and

Work in Process 1,500 25% 500 10% Finished Goods 1,200 20% 1,200 24% Cost of Goods Sold 3,300 55% 3,300 66% Total 6,000 100% 5,000 100% Allocation of variances:

Cost of

Materials purchase price $ (150.00) $ (37.50) $ (30.00) $ (82.50) Materials quantity 500.00 125.00 100.00 275.00 Labor rate 600.00 60.00 144.00 396.00 Labor efficiency 1,200.00 120.00 288.00 792.00 Controllable 1,500.00 150.00 360.00 990.00 Volume (1,800.00) (180.00) (432.00) (1,188.00) Total $ 1,850.00 $ 237.50 $ 430.00 $ 1,182.50

E19-11 APPENDIX

Work in Process ($4 FO rate × 3,450 units × 1.5 SH per unit) 20,700

Applied Factory Overhead 20,700 Applied Factory Overhead 20,700

Efficiency Variance ($4 FO rate × (5,320 AH – 5,175 SH)) 580

Idle Capacity Variance ($3 fix rate × (6,000 OH – 5,320 AH)) 2,040

Spending Variance 2,920 Factory Overhead control 20,400 E19-12 APPENDIX

Work in Process ($20 FO rate × 9,400 SH) 188,000

Applied Factory Overhead 188,000 Applied Factory Overhead 188,000

Variable Efficiency Variance

($4.50 var × (10,600 AH – 9,400 SH)) 5,400

Fixed Efficiency Variance

($15.50 fix × (10,600 AH – 9,400 SH)) 18,600

Spending Variance 7,200 Idle Capacity Variance

($15.50 fix × (10,000 BH – 10,600 AH)) 9,300 Factory Overhead Control 195,500

P19-1

Materials (33,000 AQ purchased × $2 SP) 66,000

Materials Purchase Price Variance 1,980

Work in Process (6,000 equivalent units × 6 SQ × $2 SP) 72,000

Materials Quantity Variance 8,000

Materials (40,000 AQ issued × $2 SP) 80,000 Work in Process (5,800 equivalent units × 1/4 SH × $8 SR) 11,600

Labor Rate Variance (($8.20 AR – $8 SR) × 1,500 AH) 300

Labor Efficiency Variance ($8 SR × (1,500 AH – 1,450 SR)) 400

Payroll ($8.20 AR × 1,500 AH) 12,300 Factory Overhead Control 67,250

Various Credits 67,250 Work in Process

(5,500 equivalent units × 3/4 SH × $16 FO rate) 66,000

Applied Factory Overhead 66,000 Applied Factory Overhead 66,000

Controllable Variance 2,750

Factory Overhead Control 67,250 Finished Goods (5,200 units × $26 standard cost) 135,200

Work in Process 135,200 Accounts Receivable (5,500 units × $40 sales price) 220,000

Sales 220,000 Cost of Goods Sold (5,500 units × $26 standard cost) 143,000

Finished Goods 143,000

Units completed and transferred out this period 2,400 2,400 2,400 Less all units in beginning inventory 300 300 300 Equivalent units started and completed this

period 2,100 2,100 2,100 Add equivalent units required to complete

beginning inventory 0 100 150

Equivalent units of production this period 2,300 2,280 2,300 Multiply by standard quantity of input per unit

of product 5 units 3/4 DLH 2 MH Standard quantity of input allowed for work

produced during the period 11,500 1,710 4,600

Materials (11,000 AQ purchased × $6 SP) 66,000

Materials Purchase Price Variance 900

Accounts Payable 66,900 Work in Process ($6 SP × 11,500 SQ allowed) 69,000

Materials Quantity Variance 3,000

Materials ($6 SP × 12,000 AQ issued) 72,000 Work in Process ($12 SR × 1,710 SH allowed) 20,520

Labor Rate Variance ($12.10 AR – $12 SR) × 1,700 AH) 170

Labor Efficiency Variance

($12 SR × (1,700 AH – 1,710 SH)) 120 Payroll 20,570 Factory Overhead Control 67,700

Various Credits 67,700 Work in Process ($14 FO rate × 4,600 SH allowed) 64,400

Applied Factory Overhead 64,400 Applied Factory Overhead 64,400

Variable Efficiency Variance

($2.80 var rate* × (4,900 AH – 4,600 SH)) 840

Volume Variance ($11.20 fix rate** × (5,000 SH – 4,600 SH)) 4,480

Spending Variance 2,020 Factory Overhead Control 67,700

*$14 FO rate × 20% variable = $2.80 variable rate

**$14 FO rate – $2.80 variable rate = $11.20 fixed rate

Conversion Materials Cost Units completed and transferred out this period 5,000 5,000

Less all units in beginning inventory 3,000 3,000

Equivalent units started and completed this period 2,000 2,000

Add equivalent units required to complete

beginning inventory 0 2,000

Add equivalent units in ending inventory 2,000 1,500

Equivalent units of production this period 4,000 5,500

Multiply by standard quantity of input per unit

of product 6 units 1/2 hour

Standard quantity of input allowed for work

produced during the period 24,000 2,750

Materials ($.50 SP × 30,000 AQ purchased) 15,000

Materials Purchase Price Variance 1,000

Accounts Payable 16,000 Work in Process ($.50 SP × 24,000 SQ allowed) 12,000

Materials Quantity Variance 250

Materials ($.50 SP × 24,500 AQ issued) 12,250 Work in Process ($10 SR × 2,750 SH allowed) 27,500

Labor Rate Variance (($10.75 AR – $10 SR) × 2,600 AH used) 1,950

Labor Efficiency Variance

($10 SR × (2,600 AH – 2,750 SH)) 1,500 Payroll ($10.75 AR × 2,600 AH used) 27,950 Work in Process ($12 FO rate × 2,750 SH allowed) 33,000

Applied Factory Overhead 33,000 Factory Overhead Control 31,000

Various Credits 31,000 Applied Factory Overhead 33,000

Controllable Variance 250

Factory Overhead Control 31,000

P19-3 (Concluded)

Finished Goods Inventory (5,000 units × $14 standard cost*) 70,000

Work in Process 70,000

*Materials (6 units @ $.50 each) $ 3.00

Labor (1/2 hour @ $10 per hour) 5.00

Overhead: Variable (1/2 hour @ $3 per hour) 1.50

Fixed (1/2 hour @ $9 per hour) 4.50 Total standard cost per unit of product $14.00

Cost of Goods Sold (5,100 units × $14 standard cost) 71,400

Finished Goods Inventory 71,400 Accounts Receivable (5,100 units × $22 sales price) 112,200

Sales 112,200

CGA-Canada (adapted) Reprint with permission P19-4

LEESVILLE CORPORATION Income Statement For Year Ended December 31, 20A Sales ((20,000 units + 110,000 units – 12,000 units) × $25) $2,950,000 Cost of goods sold at standard (118,000 units × 17.60) 2,076,800 Gross profit at standard $ 873,200 Add net manufacturing variance 90 1

Gross profit, adjusted to actual $ 873,290 Less marketing and administrative expenses 680,500 Operating income $ 192,790

Materials:

Purchase price $3,750 Quantity $15,000

Labor:

Rate 25,760

Efficiency 44,000 Factory overhead:

Controllable 8,000

Volume 1,100

$48,760 $48,850

48,760 Net favorable variance $ 90 fav.

Materials purchase price variance $ (3,750) fav.

Transferred into production (240,000 lbs × $1.50) $360,000

Standard quantity for 115,000* equivalent production

units (230,000 lbs × $1.50 per lb., or 115,000 units

× $3 per unit) 345,000

Materials quantity variance $ 15,000 unfav.

*Computation of equivalent production for materials:

Pound Unit Basis Basis

Transferred out of work in process 220,000 110,000

Beginning inventory (all completed) 20,000 10,000

Started and completed this period 200,000 100,000

Add ending inventory 30,000 15,000

Total 230,000 115,000

Labor:

Actual labor cost $1,313,760

Actual hours × standard labor rate (161,000 hours × $8) 1,288,000

Labor rate variance $25,760 unfav.

Actual hours × standard labor rate $1,288,000

Standard hours × standard labor rate (166,500 hrs.** ×

$8 per hour, or 111,000 units ** × $12 per unit) 1,332,000

Labor efficiency variance $ (44,000) fav.