Solution manual cost management measuring monitoring and motivating performance 1st by wolcott ch11

If the price and efficiency variances are combined, it is impossible to separate the causes of the variance into potential changes in prices of direct materials or the labor hourly wage

Chapter 11 Standard Costs and Variance Analysis

LEARNING OBJECTIVES

Chapter 11 addresses the following questions:

Q1 How are standard costs established?

Q2 What is variance analysis, and how is it performed?

Q3 How are direct cost variances calculated?

Q4 How is direct cost variance information analyzed and used?

Q5 How are variable and fixed overhead variances calculated?

Q6 How is overhead variance information analyzed and used?

Q7 How are manufacturing cost variances closed?

Q8 Which profit-related variances are commonly analyzed? (Appendix 11A)

These learning questions (Q1 through Q8) are cross-referenced in the textbook to individual exercises and problems

COMPLEXITY SYMBOLS

The textbook uses a coding system to identify the complexity of individual requirements in the exercises and problems

Questions Having a Single Correct Answer:

No Symbol This question requires students to recall or apply knowledge as shown in the

textbook

e This question requires students to extend knowledge beyond the applications

shown in the textbook

Open-ended questions are coded according to the skills described in Steps for Better Thinking (Exhibit 1.10):

 Step 1 skills (Identifying)

 Step 2 skills (Exploring)

 Step 3 skills (Prioritizing)

 Step 4 skills (Envisioning)

QUESTIONS

11.1 Managers need information about the costs of direct materials and direct labor as well as

whether direct materials and labor have been used efficiently If the price and efficiency variances are combined, it is impossible to separate the causes of the variance into

potential changes in prices of direct materials (or the labor hourly wage) and changes in the amount of materials (or labor hours) used to manufacture the product Managers need specific information to better monitor operations and investigate changes

11.2 Utilities are considered fixed costs These include phone service, natural gas, and

electricity The use of natural gas and electricity is affected by weather patterns

Because weather patterns change, these costs cannot be perfectly predicted There may

be unanticipated price changes in the cost of utilities In addition, employees could be careless in their use of electricity or telephones Therefore, variances occur regularly

11.3 GAAP requires that revenues and expenses be matched Revenues from the sales of units

must be matched to the costs of producing those same units When a standard cost

system is used, production costs are recorded at standard rather than at actual costs At the end of the accounting period adjusting entries are made to close the variance accounts and to distribute the amounts to inventory and cost of goods sold These entries

simultaneously close the variance accounts and adjust inventory and cost of goods sold to reflect actual costs for the period

11.4 For a simple but meaningful variance report for costs, the following variances should be

calculated

Price and efficiency variances for direct materials and direct labor provide

information about price changes, purchasing efficiencies and the use of materials Managers can correct some of these problems to insure cost-effective production

The variable overhead spending variance and the fixed overhead budget variance provide information about whether costs are being kept under control

The efficiency variance for variable overhead and production volume variances

do not provide any incremental information about whether inputs were purchased

or used efficiently

11.5 At the end of the accounting period, the following variances need to be recorded: direct

materials and direct labor price and efficiency variances, variable overhead spending variance, fixed overhead budget variance, variable overhead efficiency variance, and production volume variance If the sum of these is immaterial, it is closed to cost of goods sold If the sum is material, it is prorated across inventory and COGS

11.6 Managers monitor variances that are large and unexpected Sometimes a minimum dollar

amount is set as a criteria so that only variances greater than that amount are investigated Managers make trade-offs between the costs of investigating and the benefit from

improving the process or standard Trends in variances also may affect whether a

variance is investigated If accountants know a variance is increasing over time, they may decide to investigate to identify ways to reverse a negative trend or to modify future standards for a positive trend

11.7 The cost categories that are measured and monitored in a given organization depend on

several factors, including the following:

Nature of goods or services: Manufacturers monitor input prices and efficiency

of labor and materials, whereas service organizations monitor cost per service provided, which may not include materials All organizations monitor fixed costs, although the type of fixed costs varies widely with the type of business

Cost accounting system used: The cost categories will be more precise with more

complex cost accounting systems An organization with an ABC system that separates costs into flexible and committed categories could develop standards and measure variances for every activity performed Alternatively, only broad categories may be tracked, such as the traditional direct materials and direct labor categories

Costs that managers consider important: Overhead costs are often aggregated

together and include indirect costs such as oil for machine maintenance While these costs may not be individually important, they are often monitored as part of the larger category of overhead costs

Cost/benefit trade-off for monitoring individual costs: For those costs already

reported by the accounting system, such as direct labor in a job costing system, the cost to develop standards and monitor variances is probably low, and the benefit could be relatively high if such monitoring encourages labor to be more efficient However, other costs, indirect materials used during set-ups, may be expensive to track The benefit from tracking these costs may be low if only very small amounts of materials are used per set-up These costs are likely to be aggregated into overhead

11.8 Standard costs are often set using the most recent year’s data Historical trends may be

analyzed and used Sometimes industrial engineers develop standards by analyzing the manufacturing or service delivery process

11.9 Recurring favorable variances may indicate that some process has improved These

should be investigated so that standard production practices reflect the process

improvements Variances may also reflect opportunities to examine the manufacturing process and quality of materials to determine improvements Sometimes the standard is wrong, and the monitoring process is improved by changing the standard to reflect

current operations

11.10 The contribution margin variance calculates the effects of changes in contribution

margins, given the actual level of sales The contribution margin sales volume variance calculates the effects of changes in units sold, given the standard contribution margins This information helps managers focus on the reason that the contribution margin is

changing Managers may want to focus on the underlying variable costs, or pricing, or consider product emphasis These variances help determine whether it’s a change in the volume of sales, or change in the price or variable cost that causes the variance When sales are slow, prices could be lowered, which would be reflected in the contribution margin variance These types of changes should be investigated

11.11 The sales price variance reflects the difference between standard and actual selling prices

for the volume of units actually sold This variance is favorable if the actual selling price exceeds the standard price, and it is unfavorable if the reverse is true The revenue sales quantity variance reflects the difference between the standard and actual quantity of units sold at the standard selling price This variance will be favorable when actual quantities exceed standard quantities, and it will be unfavorable otherwise These variances help managers determine whether changes in revenues are driven by changes in selling price

or changes in quantities sold To remedy any problems, this information is quite useful

11.12 When the direct materials price variance is large and favorable while direct materials

efficiency variance is large and unfavorable, it is possible that lower quality materials are being purchased This could have a negative effect on the efficiency variance if defective materials are being discarded Both purchasing and production personnel should be asked whether there has been a change in the quality of materials purchased Production personnel should also be asked to explain the unfavorable efficiency variances

11.13 If the direct material price variance is recorded at the time of purchase, direct materials

are recorded in inventory at standard cost and do not need to be tracked by purchase date and purchase price This reduces bookkeeping time and effort and simplifies inventory control It also clarifies that the price variance occurs at the time of purchase rather than

at the time direct materials are used

EXERCISES

11.14 Kitchen Tile Company

A This question requires a missing piece of information: the actual number of hours

worked However, because the labor efficiency variance is given, the variance formula can be used to solve for actual labor hours as follows:

Labor efficiency variance = (Standard hours – Actual hours)* Standard price

The variance amount is given as $6,720 Favorable, and the standard labor price is given

as $24.00 per hour The number of standard labor hours is calculated as follows:

Actual production = 18,000 tiles Standard efficiency is 6 tiles per labor hour Standard number of labor hours for 18,000 tiles:

= 18,000 tiles/6 tiles per hour

= 3,000 hours Now solve for actual labor hours using the variance formula:

$6,720 = $24.00 * (3,000 hours – Actual hours)

$6,720/$24 = 3,000 – Actual hours

280 = 3,000 – Actual hours Actual hours = 3,000 – 280 = 2,720

Quicker approach: The efficiency variance represents the amount by which actual hours

exceed standard hours, times the standard price This means that the efficiency variance represents 280 hours ($6,720/$24) Because the variance was favorable, 280 fewer hours were used than the standard required For 18,000 tiles, standard labor hours are 3,000 (18,000/6) Therefore, actual hours are 3,000 – 280 = 2,720 hours

B The direct labor price variance is calculated using the following formula:

Actual labor hours * (Standard price – Actual price)

11.15 Nakatani Enterprises

A Standard costs for actual output of 15,342 units:

Direct materials (15,342 units x 0.8 lbs x $2.00/lb.) $24,547.20 Direct labor (15,342 units x 0.2 hrs x $17.00/hour) 52,162.80

B Direct materials price variance

Standard cost for actual purchases ($2.00/lb x 11,000 lbs.) $22,000

C Direct materials efficiency variance

Standard quantity of materials for actual output (15,342 x 0.8 lbs.) 12,273.6 lbs

D Direct labor price variance

Standard cost for actual labor hours ($17 x 2,730 hours) $46,410

E Direct labor efficiency variance

Standard labor hours for actual output (15,342 x 0.2 hours) 3,068.4

adverse change in quality, so managers might want to change the labor quantity standard

11.16 Nell Company

A

Direct material price variance [($0.20 - $0.17) x 100,000] $3,000 F Direct material efficiency variance [(5 * 10,000 - 60,000) x $0.20] 2,000 U Direct labor price variance [($7.00 - $7.20) x 3,900] 780 U

Direct labor efficiency variance [(0.4 * 10,000 - 3,900) x $7.00] 700 F

B Journal entries:

Raw materials inventory (100,000 lbs at $0.20/lb.) $20,000

Work in process inventory (5*10,000*$0.20) $10,000

Work in process inventory (0.4*10,000*$7.00) $28,000

11.17 Derf Company

Standard fixed overhead is $135,000 x 0.20 = $27,000

Standard variable overhead is $135,000 x 0.80 = $108,000

The standard fixed overhead allocation rate is $27,000/(9,000 x 2) = $1.50 per hour

The standard variable overhead allocation rate is $108,000/(9,000 x 2) = $6.00 per hour

A The variable overhead spending variance is:

E Journal entries

Variable overhead cost control (actual cost) $108,500

Work in Process inventory (8,500 x 2 hrs x $6/hr) 102,000

a

The total variance of $9,000 would be prorated based on the ending balances in work-in-process inventory, finished goods inventory, and cost of goods sold

11.18 Mitchellville Products Company

A Revenue budget variance = $60,000 – $53,200 = $6,800 Unfavorable

B Sales price variance:

Standard unit price = $60,000/4,000 = $15 Actual unit price = $14

Sales price variance = ($15 - $14) x 3,800 = $3,800 Unfavorable

C Revenue sales quantity variance = (4,000 – 3,800) x $15 = $3,000 Unfavorable

D The standard contribution margin is

A The contribution margin budget variance is the difference between the standard

contribution margin and the actual contribution margin

First, calculate the contribution margin at budget:

$26,500 The average contribution margin per sale is $26,500/35 = $757.14 The actual contribution margin is

B The contribution margin variance reflects the effects of the change in contribution

margin, given the actual level of sales

First calculate what the contribution margin would have been at actual sales and standard contribution margin:

Contribution margin variance = $21,900 - $17,325 = $4,575 U

The contribution margin sales volume variance is the difference between the standard volume, mix, and contribution margin and the actual mix and volume at standard

contribution margin or

$21,900 - $26,500 = $4,600 U Check: The two variances should equal the contribution margin budget variance

$9,175U = $4,575 U + $4,600 U

C The contribution margin sales quantity variance is the difference in actual quantity sold and the standard quantity, given the standard sales mix and standard contribution margin The average contribution margin at standard sales mix and standard contribution margin was calculated above in part A

(35 - 38) * $757.14 = $2,271.42 F

The contribution margin sales mix variance is the difference between the standard sales mix and the actual sales mix given actual sales at standard contribution margin This can

be calculated two different ways The actual units and actual sales mix at standard

contribution margin total is $21,900 The actual units at standard sales mix and standard contribution margin is $757.14 * 38 = $28,771.32 So the total variance = $21,900 -

$28,771 = $6,871.32 U Alternatively, the averages from above can be used as follows

Contribution margin sales mix variance = ($757.14 - $576.32)*38 = $6,871.16 U These two variances should sum to the contribution margin sales volume variance of

$4,600, and they do ($6,871 - $2,271 = $4,600)

D No, management would not be pleased It appears that the bonus induced the salespeople

to put more effort into selling the low margin economy cars at the expense of the higher markup lines Further, the price variance implies that the salespeople also accepted lower prices on the already narrow markups for the economy cars

11.20 Plush Pet Toys

[Note: This problem requires knowledge of decision making from Chapter 4.]

A Direct materials variances

Direct material price variance

= ($2.00 per yard*30,000 yards) - $62,000

= $60,000 - $62,000

= $2,000 unfavorable because the company paid more than standard

Direct material efficiency standard

= 15 yards per lot * 2,400 lots – 34,000 yards)*$2.00 per yard

= (36,000 yards – 34,000 yards)*$2.00 per yard

= $4,000 favorable because the company used fewer yards than at standard Direct labor variances:

Direct labor price variance

= $10 per hours x 4,200 hours - $39,000)

= $42,000 - $39,000

= $3,000 favorable Direct labor efficiency variance

= (2 hrs per lot * 2,400 lots – 4,200 hours)*$10 per hour

= (4,800 hours – 4,200 hours)*$10

= $6,000 favorable because the company used fewer hours than at standard

Variable overhead spending variance

= ($5 per lot*2,400 lots - $12,000)

= $12,000 - $12,000 = $0 There is no spending variance for variable overhead

Fixed overhead budget variance

= $24,000 - $24,920

= $920 unfavorable because the company spent more than standard

The preceding are the commonly used variances for cost control Some organizations also compute and monitor the following variances:

Variable overhead efficiency variance

= [(1,000 lots – 2,400 lots)*$2]

= $2,800 unfavorable because the company allocated more overhead than

at standard

Production volume variance

Given that fixed overhead is allocated using the following rate:

Reduction in labor hours (2.0 hours – 1.5 hours) 0.5 hours per lot

2

Cost savings per month = (1,000 lots * $5.00 per lot) = $5,000

Cost savings over 5 years = ($5,000 per month * 60 months) = $300,000

The maximum price the company would be willing to pay for the new equipment is

$300,000 This is equal to the expected labor cost savings over 5 years (ignoring the time value of money)

11.21 Fine Products Manufacturing Company

A Total variances = $7,900 unfavorable Because anything greater than $5,000 is

considered material, the total variance amount is material

B Total WIP, FG, and COGS = $32,000

Each inventory and COGS account gets a portion of the variance:

Work in Process ($2,000/$32,000 x $7,900) $ 494

Cost of goods sold ($24,000/$32,000 x $7,900) 5,925

Journal Entry:

11.22 Pet Toys, Inc

A

Plush toys 40,000 x $3 120,000 40,000 x $2.00 80,000

Revenue budget variance ($450,000 - $409,500) =$40,500 U

Revenue sales quantity variance ($450,000 - $405,000) = $45,000 U

Sales price variance ($409,500 - $405,000) = $ 4,500 F

B

Standard units sold

At standard sales mix

$198,750

Actual units sold at actual sales mix and actual CM (95,000x$1.55+40,000x$1.40)

C

Standard units sold at standard

sales mix and standard CM

$225,000

Actual units sold at standard sales mix and standard CM [(130,000 x 67 x

$1.25)+(130,000 x 33 x $2)]

$194,675

Actual units at actual sales mix and standard CM (95,000x$1.25 + 40,000 x $2)

PROBLEMS

11.23 Raging Sage Coffee

A For a coffee cart business, workers are scheduled with more help available when the shop

is busy, such as in the morning Although each worker’s hours vary, the schedule

remains fairly fixed, so the cost structure includes a high proportion of fixed cost

B In this business, workers need to be at the cart regardless of the number of customers Therefore, the direct labor efficiency variance is meaningless and should not be

calculated because it would be measuring whether the clerks sold as many cups of coffee per labor hour as was expected Labor costs are fixed, so the computation would reflect a revenue variance, rather than a labor efficiency variance

C Price variance for coffee beans:

Standard cost of actual coffee beans purchased (240 lbs x $6.00 per lb) $1,440

Efficiency variance for coffee beans:

Coffee beans at standard lbs (0.04 lbs per cup x 8,260 cups) 330.4 lbs

0.05 hours per cup x 60 minutes per hour = 3 minutes per cup

In 60 minutes, 20 cups are expected to be made and sold Expected sales volume (600 clerk/brewer hours x 20 cups per hour) 12,000 cups

Difference between expected volume and actual volume (3,740) cups

E There is an unfavorable coffee bean price variance, a favorable coffee bean efficiency variance, and sales were off by about 32% (3,740 cups/12,000 cups) These variances might be related One possibility is that the higher cost of coffee beans caused the

clerks/brewers to reduce the quantity of coffee beans used per cup This would have resulted in weaker coffee, which might have caused customers to go elsewhere

The following are other possible explanations for the unfavorable sales volume variance:

* A competing coffee business opened nearby

* A nearby employer went out of business or launched a major lay-off of

employees

* There was employee turnover A clerk/brewer who was well-liked by customers left and was replaced by a clerk/brewer who was often impolite to customers

* There was road construction nearby, disrupting traffic to the shopping center

* Nearby competitors decreased their selling prices

F Instead of basing a bonus based on cost variance measures, give employees a bonus based on profitability This provides them motivation to encourage customers to return, increasing revenue, and also to contain costs

11.24 Sunglass Guys

A Standard overhead rate per direct labor hour:

Calculate total estimated overhead at normal production volume:

Estimated overhead = (4,300 x $8.15) + (1,400 x $12.32) + $235,707 = $288,000

Calculate estimated labor hours at normal production volume:

Estimated hours = 0.2 x 4,300 + 0.3 x 1,400 = 1,280 hours

Calculate standard rate by dividing estimated cost by estimated hours:

Rate = $288,000/1,280 = $225 per direct labor hour

B This method would be useless for monitoring and control because the fixed and variable overhead costs are not separated When the production volume variance is commingled with the fixed overhead budget variance and variable overhead spending variances, spending variances cannot be calculated, so no information is available about cost

control

C The recommendation is to separate fixed and variable overhead costs into separate standards Only the spending variances will be useful for monitoring and controlling overhead costs

Using normal monthly volume, the fixed overhead budget variance is:

Estimated fixed overhead cost (i.e., static budget)–Actual fixed overhead cost

= $235,707 - $237,859 = $2,152 U The variable overhead spending variance (using units of production as the allocation base):

Standard variable overhead for actual production–Actual variable overhead cost

= ($8.15 * 4,500 Regular units) + ($12.32 * 1,300 Deluxe units) - $54,238

= $36,675 + $16,016 - $54,238

= $1,547 U

D To calculate the production volume variance, first determine what the fixed overhead standard rate would have been if it had been calculated separately from the variable overhead standard rate: (See computation of normal labor hours in the solution to Part A.)

Standard fixed overhead costs/Normal number of direct labor hours

Double-check the fixed overhead variance calculations in Parts C and D as follows:

Standard fixed overhead cost allocated to actual production:

Regular sunglasses: [($184.15*0.2) * 4,500] $ 165,735 Deluxe sunglasses: [($184.15*0.3) * 1,300] 71,819

Sum of individual variances: [$(2,152) U + $1,841 F] $ (311) U

Difference due to rounding

To calculate the variable overhead efficiency variance, the standard volume of allocation base for actual output is compared to the actual volume of allocation base Because variable overhead is allocated using actual units, an efficiency variance never arises (actual volume of units always equals actual volume of units) Therefore, the efficiency variance will be $0

E If labor hours and costs are fixed, they do not vary with production Therefore, labor hours provide a poor allocation base for variable overhead cost A better option would be

to allocate variable overhead using units produced because the variable overhead costs are more related to units than to labor

11.25 The Mighty Morphs

A Documentation price variance for MMMs:

Actual quantity x (standard price per unit – actual price per unit) = [1,005 books x ($3 - $2.95)] +[(825 books x ($5 - $4.75)]

= $50.25 F + $206.25 F = $256.50 F

B Efficiency variance for DVDs

(Standard quantity – actual quantity) x standard price

= [(1.03 books per unit x 1,000 units) – 1,005 books] x $3 + [(1.03 books per unit x 800 units) – 825 books] x $5

= (1,030 – 1,005) x $3 + (824 – 825) x $5

= $75 F + $5 U = $70 F

C Labor price variance for both games:

(Standard price – actual price) x actual labor hours

Labor efficiency variance for both games:

(Standard hours for actual output – actual hours) x standard price

= [(0.01 x 1,000) + (0.03 x 800) – 55] x $15

D If there were no waste, the company would incur costs for only one DVD and one

documentation book per game produced Thus, the cost of waste is equal to the number

of DVDs and documentation books used in excess of one per unit, valued at standard cost:

Waste for DVDs:

[Actual DVDs used – (1,000 + 800)] x $0.35

Waste for documentation books:

(Actual Power Puffs books used – 1,000) x $3 + (Actual MMM books used – 800) x $5

The company would have saved $218.75, although no information is given about the amount of investment required to save this amount

11.26 Baker Street Animal Clinic

A The technicians have argued that the cost variance was caused by the price increase Thus, the total variance can be separated into a price variance and an efficiency variance Normally, the price variance is calculated using the purchase quantity However, no information is given about the quantity purchased Also, the problem presents total cost for serum used of $2,270, which results in a $(270) total variance However, the serum for 2,000 injections costs $105 per 1,000cc Following are calculations for the price variance

Price variance for serum:

Standard quantity of serum for actual injections 20,000 cc Times amount of price increase per cc:

[($100/1,000 cc) – ($105/1,000 cc)]

Efficiency variance for serum:

The efficiency variance cannot be calculated using the usual method because the quantity of serum used is unknown However, the efficiency variance can be calculated by subtracting the price variance from the total serum cost variance

B The unfavorable efficiency variance represents the cost of wasted serum To see this, consider the formula for the efficiency variance:

Efficiency Variance = Standard cost * (Standard quantity – Actual quantity) The difference between the standard quantity and the actual quantity is the amount of serum wasted At a standard cost of $.10 per cc, the volume of wasted serum is estimated

to be 1,700 cc ($170 unfavorable efficiency variance/$.10 per cc)

Is this a significant amount of waste? This is a matter of judgment Below are several ways to quantity the significance

Waste, relative to standard quantity of serum:

Standard quantity of serum = 2,000 injections * 10 cc 20,000 Percent serum waste (1,700 cc/20,000 cc) 8.5%

Note: The waste could also have been calculated using percent of standard cost:

$170 efficiency variance/$2,000 standard cost = 8.5%

Number of additional injections that could have been given:

Waste of 1,700 cc / 10 cc per injection 170 injections