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MANAGEMENT ACCOUNTING - Solutions Manual

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.
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Chapter 16 Standard Costs and Operating Performance Measures

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
16-2

Standard Costs and Operating Performance Measures Chapter 16

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
1. E
2. G

3. C
4. H

5. A
6. D

7. J
8. B

9. I
10. F

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
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Chapter 16 Standard Costs and Operating Performance Measures

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
Beta ML12

Standard Quantity
per Capsule
6.50 grams

Standard Price
per Gram
P2.99

Standard Cost
per Capsule
P19.435

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
16-4

Standard Costs and Operating Performance Measures Chapter 16

Standard cost above.................................................................................................


18,000
Total varianceunfavorable....................................................................................
P 700
Requirement 2
Actual Quantity of Inputs, at
Actual Price
(AQ AP)
P18,700

Actual Quantity of Inputs, at


Standard Price
(AQ SP)
11,000 board feet
P1.80 per board foot

= P19,800

Standard Quantity Allowed for


Output, at Standard Price
(SQ SP)
10,000 board feet
P1.80 per board foot

= P18,000

Quantity Variance,
P1,800 U

Price Variance,
P1,100 F

Total Variance, P700 U

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

0.4*
Standard labor time per unit....................................................................................
Total standard hours of labor time allowed..............................................................
8,000
P6
Standard direct labor rate per hour..........................................................................
Total standard direct labor cost................................................................................
P48,000
*24 minutes 60 minutes per hour = 0.4 hour
Actual direct labor cost............................................................................................
P49,300
Standard direct labor cost........................................................................................
48,000
P1,300
Total varianceunfavorable....................................................................................
16-5

Chapter 16 Standard Costs and Operating Performance Measures

Requirement 2
Actual Hours of Input, at
the Actual Rate
(AH AR)
P49,300

Actual Hour of Input, at


Standard Rate
(AH SR)
8,500 hours P6 per hour

Standard Hours Allowed for


Output, at the Standard Rate
(SH SR)
8,000 hours* P6 per hour

= P51,000

= P48,000
Efficiency Variance,
P3,000 U

Rate Variance,
P1,700 F

Total Variance, P1,300 U


*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
(AH AR)
P39,100

Actual Hour of Input, at


Standard Rate
(AH SR)
8,500 hours P4 per hour

Standard Hours Allowed for


Output, at the Standard Rate
(SH SR)
8,000 hours P4 per hour

= P34,000

= P32,000

Spending Variance,
P5,100 U

Efficiency Variance,
P2,000 U

Total Variance, P7,100 U

Alternative Solution:
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)
16-6

Standard Costs and Operating Performance Measures Chapter 16

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...................................................


Standard direct labor-hours per meal...................................
Total direct labor-hours allowed...........................................
Standard direct labor cost per hour......................................
Total standard direct labor cost............................................
16-7

6,000
0.20
1,200
P9.50
P11,400

Chapter 16 Standard Costs and Operating Performance Measures

Actual cost incurred.............................................................


Total standard direct labor cost (above)...............................
Total direct labor variance...................................................

P11,500
11,400
P 100 Unfavorable

2.
Actual Hours of
Input, at the Actual Rate
(AHA
R)
1,150 hours
P10.00 per hour
= P11,500

Actual Hours of Input, at the


Standard Rate
(AHSR)
1,150 hours
P9.50 per hour
= P10,925

Rate Variance,
P575 U

Standard Hours
Allowed for Output, at the
Standard Rate
(SHSR)
1,200 hours
P9.50 per hour
= P11,400

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.

2.

Number of items shipped..................................................................


Standard direct labor-hours per item.................................................
Total direct labor-hours allowed........................................................
Standard variable overhead cost per hour.........................................
Total standard variable overhead cost...............................................

140,000
0.04
5,600
P2.80
P15,680

Actual variable overhead cost incurred.............................................


Total standard variable overhead cost (above)..................................
Total variable overhead variance.......................................................

P15,950
15,680
P 270 Unfavorable

Actual Hours of
Input, at the Actual Rate

Actual Hours of Input, at the


Standard Rate
16-8

Standard Hours
Allowed for Output, at the

Standard Costs and Operating Performance Measures Chapter 16

(AHA
R)
5,800 hours
P2.75 per hour*
= P15,950

(AHSR)
5,800 hours
P2.80 per hour
= P16,240

Standard Rate
(SHSR)
5,600 hours
P2.80 per hour
= P15,680

Variable overhead spending


variance, P290 F

Variable overhead
efficiency variance, P560 U

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
(AQ AP)
25,000 pounds x
P2.95 per pound

Actual Quantity of Inputs, at


Standard Price
(AQ SP)
25,000 pounds x
P2.50 per pound

Standard Quantity Allowed for


Output, at the Standard Price
(SQ SP)
20,000 pounds* x
P2.50 per pound

= P73,750

= P62,500

= P50,000

Price Variance,
P11,250 U
19,800 pounds x P2.50 per pound
= P49,500
16-9

Quantity Variance,
P500 F

Chapter 16 Standard Costs and Operating Performance Measures

* 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
(AH AR)
3,600 hours x
P8.70 per hour

Actual Hours of Input, at


the Standard Rate
(AH SR)
3,600 hours x
P9.00 per hour

Standard Hours Allowed for


Output, at the Standard Rate
(SH SR)
3,000 hours* x
P9.00 per hour

= P31,320

= P32,400

= P27,000
Efficiency Variance,
P5,400 U

Rate Variance,
P1,080 F

Total Variance, P4,320 U


* 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
(AH AR)
P4,320

Actual Hours of Input, at


the Standard Rate
(AH SR)
1,800 hours P2 per hour

Standard Hours Allowed for


Output, at the Standard Rate
(SH SR)
1,500 hours* P2 per hour

= P3,600

= P3,000

Spending Variance,
P720 U

Efficiency Variance,
P600 U

Total Variance, P1,320 U


16-10

Standard Costs and Operating Performance Measures Chapter 16

*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 plants
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.
Budgeted net operating income................................................................................
P15,000
Deduct the net unfavorable variance added to cost of goods sold
for the month.......................................................................................................
16,390
Net operating loss....................................................................................................
P(1,390)

16-11

Chapter 16 Standard Costs and Operating Performance Measures

Requirement 3
The two most significant variances are the materials price variance and the
labor efficiency variance. Possible causes of the variances include:
Materials Price
Variance:

Outdated standards, uneconomical quantity


purchased, higher quality materials, highcost method of transport.

Labor Efficiency
Variance:

Poorly trained workers, poor quality materials,


faulty equipment, work interruptions,
inaccurate standards, insufficient demand.

Problem 2
1. 1,000 units
2. 25,000 lbs.
3. P2.01 per lb.

4. 14,900 lbs.
5. 3,100 hours
6. P3.98 per hour

Problem 3
Material mix variance:
Actual quantity x Standard price
Material A (8,000 x P0.30)
P2,400
Material B (2,400 x P0.20)
480
Material C (2,800 x P0.425)
1,190
Less: Total actual input x Average
Standard price (13,200 x 0.30*)
Unfavorable Mix Variance
P 720
* Average Standard price = 2,400
=

P4,070
3,960
P 110
P0.30

Material yield variance:


Total actual input at Average Standard price
Less: Total actual output at Standard raw material cost
(10,000 x 0.36**)
Unfavorable yield variance
** Standard Material Cost

16-12

P 720
2,000

P3,960
3,600
P 360

P0.36

Standard Costs and Operating Performance Measures Chapter 16

Problem 4 (Comprehensive Variance Analysis; Journal Entries)


Requirement 1
a.
Actual Quantity of Inputs, at
Actual Price
(AQ AP)
21,120 yards x
P3.35 per yard

Actual Quantity of Inputs, at


Standard Price
(AQ SP)
21,120 yards x
P3.60 per yard

= P70,752

= P76,032
Price Variance,
P5,280 F

Standard Quantity Allowed for


Output, at Standard Price
(SQ SP)
19,200 yards* x
P3.60 per yard

= P69,120
Quantity Variance,
P6,912 U

Total Variance, P1,632 U


* 4,800 units 4.0 yards per unit = 19,200 yards

Alternatively:
Materials Price Variance = AQ (AP SP)
21,120 yards (P3.35 per yard P3.60 per yard) = P5,280 F
Materials Quantity Variance = SP (AQ SQ)
P3.60 per yard (21,120 yards 19,200 yards) = P6,912 U
Raw Materials (21,120 yards @ P3.60 per yard)....................................................
76,032
Materials Price Variance
(21,120 yards @ P0.25 per yard F).............................................................
5,280
Accounts Payable
(21,120 yards @ P3.35 per yard).................................................................
70,752
Work in Process (19,200 yards @ P3.60 per
yard)....................................................................................................................
69,120
Materials Quantity Variance
(1,920 yards U @ P3.60 per yard).......................................................................
6,912
Raw Materials (21,120 yards @ P3.60 per
yard)............................................................................................................
76,032
16-13

Chapter 16 Standard Costs and Operating Performance Measures

Requirement 2
a.
Actual Hours of Input, at
the Actual Rate
(AH AR)
6,720 hours* x
P4.85 per hour

Actual Hours of Input, at


the Standard Rate
(AH SR)
6,720 hours x
P4.50 per hour

Standard Hours Allowed for


Output, at the Standard Rate
(SH SR)
7,680 hours** x
P4.50 per hour

= P32,592

= P30,240

= P34,560
Efficiency Variance,
P4,320 F

Rate Variance,
P2,352 U

Total Variance, P1,968 F

* 4,800 units 1.4 hours per unit = 6,720 hours


** 4,800 units 1.6 hours per unit = 7,680 hours
Alternatively:
Labor Rate Variance = AH (AR SR)
6,720 hours (P4.85 per hour P4.50 per hour) = P2,352 U
Labor Efficiency Variance = SR (AH SH)
P4.50 per hour (6,720 hours 7,680 hours) = P4,320 F
Work in Process (7,680 hours @ P4.50 per hour)....................................................
34,560
Labor Rate Variance
(6,720 hours @ P0.35 per hour U)......................................................................
2,352
Labor Efficiency Variance
(960 hours F @ P4.50 per hour)..................................................................
4,320
Wages Payable (6,720 hours @ P4.85 per
hour)............................................................................................................
32,592

16-14

Standard Costs and Operating Performance Measures Chapter 16

Requirement 3
Actual Hours of Input, at
the Actual Rate
(AH AR)
6,720 hours x
P2.15 per hour

Actual Hours of Input, at


the Standard Rate
(AH SR)
6,720 hours x
P1.80 per hour

Standard Hours Allowed for


Output, at the Standard Rate
(SH SR)
7,680 hours x
P1.80 per hour

P14,448

= P12,096

= P13,824

Spending Variance,
P2,352 U

Efficiency Variance,
P1,728 F

Total Variance, P624 U

Alternatively:
Variable Overhead Spending Variance = AH (AR SR)
6,720 hours (P2.15 per hour P1.80 per hour) = P2,352 U
Variable Overhead Efficiency Variance = SR (AH SH)
P1.80 per hour (6,720 hours 7,680 hours) = P1,728 F
Requirement 4
No. This total variance is made up of several quite large individual variances,
some of which may warrant investigation. A summary of variances is shown
on the next page.
Materials:
Price variance
Quantity variance
Labor:
Rate variance
Efficiency variance
Variable overhead:
Spending variance
Efficiency variance
Net unfavorable variance

P5,280 F
6,912 U

P1,632 U

2,352 U
4,320 F

1,968 F

2,352 U
1,728 F

Requirement 5

16-15

624 U
P 288 U

Chapter 16 Standard Costs and Operating Performance Measures

The variances have many possible causes. Some of the more likely causes
include:
Materials variances:
Favorable price variance: Fortunate buy, inaccurate standards, inferior quality
materials, unusual discount due to quantity purchased, drop in market price.
Unfavorable quantity variance: Carelessness, poorly adjusted machines,
unskilled workers, inferior quality materials, inaccurate standards.
Labor variances:
Unfavorable rate variance: Use of highly skilled workers, change in wage
rates, inaccurate standards, overtime.
Favorable efficiency variance: Use of highly skilled workers, high quality
materials, new equipment, inaccurate standards.
Variable overhead variances:
Unfavorable spending variance: Increase in costs, inaccurate standards, waste,
theft, spillage, purchases in uneconomical lots.
Favorable efficiency variance: Same as for labor efficiency variance.
V. Multiple Choice Questions
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

C
C
A
B
A
B
C
C
B
B

11.
12.
13.
14.
15.
16.
17.
18.
19.
20.

B
A
B
C
A
D
D
A
D
B

21.
22.
23.
24.
25.
26.
27.
28.
29.
30.

16-16

A
C
C
C
C
D
E
B
B
A

31.
32.
33.
34.
35.
36.
37.
38.
39.
40.

A
B
B
D
B
B
C
D
D
A

41.
42.
43.
44.
45.

B
C
D
A
B