Solution manual managerial accounting concept and applications by cabrera chapter 16 answer

Cost control and cost reduction are not the same, but cost reduction does affect the standards which are used as basis for cost control.. Several factors other than the contractual rate

CHAPTER 16

STANDARD COSTS AND OPERATING

PERFORMANCE MEASURES

I Questions

1 Standard costs are superior to past data for comparison with actual costs because they ask the question “Is present performance better than the past?”

2 No Cost control and cost reduction are not the same, but cost reduction does affect the standards which are used as basis for cost control Cost reduction means finding ways to achieve a given result through improved design, better methods, new layouts and so forth Cost reduction results in setting new standards On the other hand, cost control is a process of maintaining performance at or as new existing standards as is possible

3 Managerial judgment is the basis for deciding whether a given variance

is large enough to warrant investigation For some items, a small amount of variance may spark scrutiny For some items, 5%, 10% or 25% variances from standard may call for follow-up Management may also derive the standard deviation based on past cost data

4 The techniques for overhead control differ because

1) The size of individual overhead costs usually does not justify elaborate individual control systems;

2) The behavior of individual overhead item is either impossible or difficult to trace to specific lots or operations; and

3) Various overhead items are the responsibility of different people

5 In the year-to-year planning of fixed costs, managers must consider: 1) the projected maximum and minimum levels of activity,

2) prices of cost factors, and

3) changes in facilities and organization

6 Four criteria for selecting a volume base are:

1) Cause of cost variability.

2) Adequacy of control over the base

3) Independence of activity unit

4) Ease of understanding

7 Non-volume factors which cause costs to vary are:

1) Changes in plant and equipment

2) Changes in products made, materials used, or methods of manufacturing

3) Changes in prices paid for cost factors

4) Changes in managerial policy toward costs

5) Lag between cost incurrence and measurement of volume

8 A budget is usually expressed in terms of total pesos, whereas a standard is expressed on a per unit basis A standard might be viewed

as the budgeted cost for one unit

9 Under management by exception, managers focus their attention on operating results that deviate from expectations It is assumed that results that meet expectations do not require investigation

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

11 The materials price variance is usually the responsibility of the purchasing manager The materials quantity variance is usually the responsibility of the production managers and supervisors The labor efficiency variance generally is also the responsibility of the production managers and supervisors

12 If used as punitive tools, standards can breed resentment in an organization and undermine morale Standards must never be used as

an excuse to conduct witch-hunts, or as a means of finding someone to blame for problems

13 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

14 Poor quality materials can unfavorably affect the labor efficiency variance If the 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

15 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

16 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

17 Chronic inability to meet a standard is likely to be demoralizing and may result in decreased productivity

18 A variance is the difference between what was planned or expected and what was actually accomplished A standard cost system has at least two types of variances A price variance focuses on the difference between the standard price and the actual price of an input A quantity variance is concerned with the difference between the standard quantity of the input allowed for the actual output and the actual amount of the input used

II Matching Type

III Exercises

Exercise 1 (Setting Standards; Preparing a Standard Cost Card)

Requirement 1

Cost per 2 kilogram container P6,000.00 Less: 2% cash discount 120.00 Net cost P5,880.00 Add freight cost per 2 kilogram container

(P1,000 ÷ 10 containers) 100.00 Total cost per 2 kilogram container (a) P5,980.00 Number of grams per container

(2 kilograms × 1000 grams per kilogram) (b) 2,000 Standard cost per gram purchased (a) ÷ (b) P 2.99

Requirement 2

Beta ML12 required per capsule as per bill of materials 6.00 grams Add allowance for material rejected as unsuitable

(6 grams ÷ 0.96 = 6.25 grams;

6.25 grams – 6.00 grams = 0.25 grams) 0.25 grams Total 6.25 grams Add allowance for rejected capsules

(6.25 grams ÷ 25 capsules) 0.25 grams Standard quantity of Beta ML12 per salable capsule 6.50 grams

Requirement 3

Item Standard Quantity per Capsule Standard Price per Gram Standard Cost per Capsule

Exercise 2 (Material Variances)

Requirement 1

Number of chopping blocks 4,000 Number of board feet per chopping block × 2.5 Standard board feet allowed 10,000

Standard cost per board foot P1.80× Total standard cost P18,000 Actual cost incurred P18,700 Standard cost above 18,000 Total variance—unfavorable P 700

Requirement 2

Actual Quantity of Inputs, at

Actual Price Actual Quantity of Inputs, at Standard Price Standard Quantity Allowed forOutput, at Standard Price (AQ × AP) (AQ × SP) (SQ × SP)

P18,700 11,000 board feet ×

P1.80 per board foot P1.80 per board foot10,000 board feet ×

Alternatively:

Materials Price Variance = AQ (AP – SP)

11,000 board feet (P1.70 per board foot* – P1.80 per board foot) =

P1,100 F

* P18,700 ÷ 11,000 board feet = P1.70 per board foot

Materials Quantity Variance = SP (AQ – SQ)

P1.80 per board foot (11,000 board feet – 10,000 board feet) = P1,800 U

Exercise 3 (Labor and Variable Overhead Variances)

Requirement 1

Number of units manufactured 20,000 Standard labor time per unit ×   0.4* Total standard hours of labor time allowed 8,000 Standard direct labor rate per hour ×   P6 Total standard direct labor cost P48,000

*24 minutes ÷ 60 minutes per hour = 0.4 hour

Price Variance, P1,100 F

Quantity Variance, P1,800 U Total Variance, P700 U

Actual direct labor cost P49,300 Standard direct labor cost 48,000 Total variance—unfavorable P  1,300

Requirement 2

Actual Hours of Input, at

the Actual Rate Actual Hour of Input, at Standard Rate Output, at the Standard RateStandard Hours Allowed for (AH × AR) (AH × SR) (SH × SR)

P49,300 8,500 hours × P6 per hour 8,000 hours* × P6 per hour

*20,000 units × 0.4 hour per unit = 8,000 hours

Alternative Solution:

Labor Rate Variance = AH (AR – SR)

8,500 hours (P5.80 per hour* – P6.00 per hour) = P1,700 F

*P49,300 ÷ 8,500 hours = P5.80 per hour

Labor Efficiency Variance = SR (AH – SH)

P6 per hour (8,500 hours – 8,000 hours) = P3,000 U

Requirement 3

Actual Hours of Input, at

the Actual Rate Actual Hour of Input, at Standard Rate Output, at the Standard RateStandard Hours Allowed for (AH × AR) (AH × SR) (SH × SR)

P39,100 8,500 hours × P4 per hour 8,000 hours × P4 per hour

Alternative Solution:

Rate Variance, P1,700 F

Efficiency Variance, P3,000 U Total Variance, P1,300 U

Spending Variance, P5,100 U

Efficiency Variance, P2,000 U Total Variance, P7,100 U

Variable Overhead Spending Variance = AH (AR – SR)

8,500 hours (P4.60 per hour* – P4.00 per hour) = P5,100 U

*P39,100 ÷ 8,500 hours = P4.60 per hour

Variable Overhead Efficiency Variance = SR (AH – SH)

P4 per hour (8,500 hours – 8,000 hours) = P2,000 U

Exercise 4 (Working Backwards from Labor Variances)

Requirement 1

If the total variance is P330 unfavorable, and if the rate variance is P150 favorable, then the efficiency variance must be P480 unfavorable, since the rate and efficiency variances taken together always equal the total variance

Knowing that the efficiency variance is P480 unfavorable, one approach to the solution would be:

Efficiency Variance = SR (AH – SH)

P6 per hour (AH – 420 hours*) = P480 U

P6 per hour × AH – P2,520 = P480**

P6 per hour × AH = P3,000

AH = 500 hours

* 168 batches × 2.5 hours per batch = 420 hours

** When used with the formula, unfavorable variances are positive and favorable variances are negative

Requirement 2

Knowing that 500 hours of labor time were used during the week, the actual rate of pay per hour can be computed as follows:

Rate Variance = AH (AR – SR)

500 hours (AR – P6 per hour) = P150 F

500 hours × AR – P3,000 = –P150*

500 hours × AR = P2,850

AR = P5.70 per hour

* When used with the formula, unfavorable variances are positive and favorable variances are negative

Exercise 5 (Direct Labor Variances)

1 Number of meals prepared 6,000

Standard direct labor-hours per meal × 0.20

Total direct labor-hours allowed 1,200

Standard direct labor cost per hour × P9.50

Total standard direct labor cost P11,400

Actual cost incurred P11,500

Total standard direct labor cost (above) 11,400

Total direct labor variance P 100 Unfavorable

2

Actual Hours of

Input, at the Actual Rate

Actual Hours of Input, at the Standard Rate

Standard Hours Allowed for Output, at the Standard Rate

1,150 hours ×

P10.00 per hour P9.50 per hour1,150 hours × P9.50 per hour1,200 hours ×

Rate Variance, P575 U Efficiency Variance, P475 F

Total Variance, P100 U

Alternatively, the variances can be computed using the formulas:

Labor rate variance = AH(AR – SR)

= 1,150 hours (P10.00 per hour – P9.50 per hour)

= P575 U Labor efficiency variance = SR(AH – SH)

= P9.50 per hour (1,150 hours – 1,200 hours)

= P475 F

Exercise 6 (Variable Overhead Variances)

1 Number of items shipped 140,000

Standard direct labor-hours per item × 0.04

Total direct labor-hours allowed 5,600

Standard variable overhead cost per hour × P2.80

Total standard variable overhead cost P15,680

Actual variable overhead cost incurred P15,950

Total standard variable overhead cost (above) 15,680

Total variable overhead variance P 270 Unfavorable 2

Actual Hours of

Input, at the Actual Rate Actual Hours of Input, at theStandard Rate

Standard Hours Allowed for Output, at the Standard Rate

5,800 hours ×

P2.75 per hour* P2.80 per hour 5,800 hours × P2.80 per hour 5,600 hours ×

Variable overhead spending variance, P290 F efficiency variance, P560 U Variable overhead

Total variance, P270 U

*P15,950÷ 5,800 hours =P2.75 per hour

Alternatively, the variances can be computed using the formulas:

Variable overhead spending variance:

AH(AR – SR) = 5,800 hours (P2.75 per hour – P2.80 per hour)

= P290 F Variable overhead efficiency variance:

SR(AH – SH) = P2.80 per hour (5,800 hours – 5,600 hours)

= P560 U

IV Problems

Problem 1 (Comprehensive Variance Analysis)

Requirement 1

a

Actual Quantity of Inputs, at

the Actual Price Actual Quantity of Inputs, at Standard Price Standard Quantity Allowed forOutput, at the Standard Price

(AQ × AP) (AQ × SP) (SQ × SP)

25,000 pounds x 25,000 pounds x 20,000 pounds* x

P2.95 per pound P2.50 per pound P2.50 per pound

* 5,000 metal molds × 4.0 pounds per metal mold = 20,000 pounds

Alternatively:

Materials Price Variance = AQ (AP – SP)

25,000 pounds (P2.95 per pound – P2.50 per pound) = P11,250 U

Materials Quantity Variance = SP (AQ – SQ)

P2.50 per pound (19,800 pounds – 20,000 pounds) = P500 F

b

Actual Hours of Input, at

the Actual Rate Actual Hours of Input, at the Standard Rate Output, at the Standard RateStandard Hours Allowed for (AH × AR) (AH × SR) (SH × SR)

3,600 hours x

P8.70 per hour P9.00 per hour3,600 hours x 3,000 hours* x P9.00 per hour

* 5,000 metal molds × 0.6 hour per metal mold = 3,000 hours

Alternatively:

Labor Rate Variance = AH (AR – SR)

3,600 hours (P8.70 per hour – P9.00 per hour) = P1,080 F

Labor Efficiency Variance = SR (AH – SH)

P9.00 per hour (3,600 hours – 3,000 hours) = P5,400 U

c

Actual Hours of Input, at

the Actual Rate

Actual Hours of Input, at the Standard Rate

Standard Hours Allowed for Output, at the Standard Rate

Price Variance, P11,250 U 19,800 pounds x P2.50 per

pound

= P49,500Quantity Variance,

P500 F

Rate Variance, P1,080 F

Efficiency Variance, P5,400 U Total Variance, P4,320 U

(AH × AR) (AH × SR) (SH × SR)

P4,320 1,800 hours × P2 per hour 1,500 hours* × P2 per hour

*5,000 metal molds × 0.3 hours per metal mold = 1,500 hours

Alternatively:

Variable Overhead Spending Variance = AH (AR – SR)

1,800 hours (P2.40 per hour* – P2.00 per hour) = P720 U

* P4,320 ÷ 1,800 hours = P2.40 per hour

Variable Overhead Efficiency Variance = SR (AH – SH)

P2.00 per hour (1,800 hours – 1,500 hours) = P600 U

Requirement 2

Summary of variances:

Material price variance P11,250 U Material quantity variance 500 F Labor rate variance 1,080 F Labor efficiency variance 5,400 U Variable overhead spending variance 720 U Variable overhead efficiency variance 600 U Net variance P16,390 U The net unfavorable variance of P16,390 for the month caused the plant’s variable cost of goods sold to increase from the budgeted level of P80,000

to P96,390:

Budgeted cost of goods sold at P16 per metal mold P80,000 Add the net unfavorable variance (as above) 16,390 Actual cost of goods sold P96,390 This P16,390 net unfavorable variance also accounts for the difference between the budgeted net operating income and the actual net loss for the month

Spending Variance, P720 U

Efficiency Variance, P600 U Total Variance, P1,320 U