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SOLUTIONS TO BRIEF EXERCISES
B. Ex. 24.1 The problem at Bramford Industries is a result of operating well above normal capacity.
The standard rates and efficiencies were based on normal operations. Because
production was required to be ramped up 25% above normal, there were likely to be
overtime hours at higher pay, machine breakdowns, spoilage and waste that created
significant unfavorable variances.
B. Ex. 24.2 The standard direct labor applied to production was $92,100 (actual direct labor of
$90,000, less an unfavorable rate variance of $2,800, plus a favorable efficiency variance
of $4,900).
B. Ex. 24.3
Production = 780 units
Overhead applied to work in process
at a $14 standard rate $ 10,920
Less budgeted overhead:
Fixed 5,600
Variable ($6 per unit) 4,680
Volume variance - favorable $ 640
B. Ex. 24.4 The normal or expected hours are lower than the actual billed hours. Furthermore, the
actual expenditures were more than expected. The actual, budgeted, and applied
overhead are:
$53,000 (applied based
$60,000 (actual) $45,000 (budget based on normal) on actual)
B. Ex. 24.5 Normal standard cost per unit = (2.4 lbs. x $10) + (4 hrs. x $17 ) = $92.
Ideal standard cost per unit = (2.0 lbs. x $9.50) + (3.5 hrs. x $16) = $75.
Managers using ideal standards would expect unfavorable variances on a regular basis.
They would strive to make the unfavorable variances as small as possible, but would
recognize that there will never be favorable variances. Normal standards are based on
reasonably attainable costs and efficiencies so managers expect no unfavorable variances
and expect to occasionally see favorable variances.
B. Ex. 24.6 Actual labor rate = $24,464 ÷ 2,780 hours = $8.80 per hour.
Labor efficiency variance = $8.25 x [(0.75 hrs./vase x 4,000 vases) – 2,780 hours] = $1,815
favorable.
Labor rate variance = ($8.80 - $8.25) x 2,780 hours = -$1,529 unfavorable.
Loring seemed to be able to hire workers that were more efficient (2,780 actual hours
rather than 3,000 hours allowed). Thus, the favorable efficiency variance of $1,815 offset
the unfavorable rate variance of $1,529.
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B. Ex. 24.7 The direct labor journal entry for Loring Glassware in September is:
Work in Process Inventory ………………………………… 24,750
Labor Rate Variance ……………………………………… 1,529
Labor Efficiency Variance ……………………………………… 1,815
Direct Labor Payable ……………………………………………… 24,464
B. Ex. 24.8 Materials price variance = 42,640 – (20,800 lbs × $2 / lb.) = $1,040 unfav.
Materials quantity variance = (20,000 lbs. – 20,800 lbs.) × $2/lb. = $1,600 unfav.
B. Ex. 24.9 The journal entry for Hearts and Flowers is:
Work in Process Inventory ………………………………… 40,000
Materials Price Variance ………………………………… 1,040
Materials Quantity Variance ……………………………… 1,600
Direct Materials Inventory ……………………………………… 42,640
B. Ex. 24.10 Given that Ringo incurred actual overhead costs of $10,500, applied overhead
costs of $9,000, and reported a $2,000 unfavorable overhead spending variance
for the period, we can construct the diagam shown below:
$2,000 Unfavorable ?
Spending Variance
From the above diagram, we see the standard overhead costs allowed must be
$8,500 ($10,500 less the $2,000 unfavorable spending variance). Since overhead
costs applied ($9,000) exceeds the standard amount allowed ($8,500), actual
output must have exceeded normal output, making the $500 volume variance
favorable.
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SOLUTIONS TO EXERCISES
Ex. 24.1 a. Standard costs
b. Labor efficiency variance
c. Volume variance
d. Materials quantity variance
e. Spending variance
f. Materials price variance
g. Labor rate variance
b. Given that Blue’s materials price variance equals its materials quantity
variance, both variances must equal zero. Thus, the standard quantity of
material allowed per batch of Allegro must equal the 2,500 grams actually
used, as shown below:
Total grams used ……………………………… 150,000
÷ Number of batches …………………………… 60
Grams per batch ……………………………… 2,500 grams (or 2.5 kg)
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Ex. 24.4 a. Gumchara’s materials price variance is computed as follows:
Materials Price Variance = Actual Quantity Used × (Standard Price -
Actual Price)
= 6,000 grams × ($4 - $3*)
= $6,000 Favorable
*Actual Price per Gram = $18,000 ÷ 6,000 grams = $3/gram
b. Gumchara’s materials quantity variance is computed as follows:
Materials Quantity Variance = Standard Price × (Standard Quantity -
Actual Quantity)
= $4 per gram × (5,000 grams* - 6,000
grams)
= -$4,000 (or $4,000 Unfavorable)
*Standard Quantity Allowed = 1,000 units × 5 grams/unit = 5,000
c. Gumchara’s overhead volume variance will be favorable because its actual
output for the period (1,000 units) was more than “normal” output (900
units).
Ex. 24.5 a. Fixed overhead rate = $400,000 ÷ 50,000 units = $8 per unit;
Total overhead application rate = $8 + $4 = $12 per unit.
b. Overhead applied = $12 × 52,000 units = $624,000.
c. The amount of overapplied overhead = $624,000 - $614,000 = $10,000; the
spending variance = $400,000 + ($4 × 52,000) - $614,000 = -$6,000
unfavorable; the volume variance = (52,000 × $8) - $400,000 = $16,000
favorable.
d. Chasman was able to spend less than budget for the overhead while
simultaneously producing more than the normal or expected number of
units.
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Ex. 24.6 c. Extended hours worked during the period may have resulted in an
(continued) increased average wage rate due to overtime wage premiums. This may
explain Marlo’s unfavorable labor rate variance. The standard time
allowed to produce a single unit is 0.5 hours. The average time it actually
took to produce a single unit during the period was 0.4 hours (3,600
hours/9,000 units). Thus, although many employees worked extra hours
during the period, their time spent in production was efficiently used as
evidenced by Marlo’s favorable labor efficiency variance.
Ex. 24.7 a. Standard price, $6.80 per pound
The unfavorable materials price variance of $800 indicates actual costs
were $0.20 per pound above standard ($800 ÷ 4,000 lbs. = $0.20/lb.). Thus,
given the actual cost was $7.00/lb., the standard cost must have been
$6.80/lb.
b. Standard price, $6.80 per pound
The materials quantity variance is found by multiplying the standard
materials price by the difference between the standard quantity of
materials and the actual quantity used. The standard price of materials,
$6.80/lb., was determined in part a, above.
c. Actual quantity of materials used, 4,000 pounds
In computing the materials quantity variance, the actual quantity of
materials used is deducted from the standard quantity, and this difference
is multiplied by the standard price. Thus, (c) represents the actual quantity
of materials used. This amount, 4,000 pounds, appeared in the partially
complete formula for computing the materials price variance.
d. Materials quantity variance, $2,720 favorable
Computation: $6.80 Standard Price × (4,400 Standard Pounds - 4,000
Actual Pounds) = $2,720.
Ex. 24.8 a. A favorable direct materials price variance means that the purchase price
of materials was lower than budgeted. Reasons for favorable price
variances could include better negotiation on the part of purchasing agents,
the purchase of lower quality materials at a lower price, higher quantity
discounts, inaccurate budgeted prices for materials, or a lowering of the
basic cost of materials due to external economic factors.
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Ex. 24.8 b. One explanation of the variances is that higher skilled workers were hired at
(continued) wages greater than the budgeted rate. The higher skilled workers may have
been more efficient at performing their tasks and at using materials, resulting
in favorable labor efficiency and materials quantity variances. The favorable
materials price variance could be due to any of the factors listed in part a
(except the purchase of lower quality materials).
$100,000
= = $10 per direct labor hour
10,000
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Ex. 24.11 Overhead rate per unit = $10 per labor hr. × 2 labor hours per unit = $20 per unit
(continued)
Overhead applied = 4,500 actual production units × $20 per unit = $90,000
Volume variance = $90,000 $94,000 (from part a ) = $4,000 Unfavorable
Ex. 24.12 The entry to close McGill’s unfavorable overhead spending variance required that the
variance account be credited for $600. Given that the Cost of Goods Sold account was
also credited for $4,200 to close both the spending and the volume variance, its volume
variance must have been favorable by $4,800 as shown in the following journal entry:
Ex. 24.13 a. Materials Price Variance = Actual Quantity × (Standard Price - Actual Price)
= 27,000 yds. × ($3.10/yd. - $3.05/yd.)
= $1,350 Favorable
Materials Quantity Variance = Standard Price × (Standard Quantity - Actual
Quantity)
= $3.10/yd. × (26,250 yds.* - 27,000 yds.)
= -$2,325 (or $2,325 Unfavorable)
*15,000 pillowcases × 1.75 yds./pillowcase = 26,250 yds.
b. Labor Rate Variance = Actual Hours × (Standard Hourly Rate - Actual
Hourly Rate)
= 3,300 hrs. × ($5.95/hr - $5.80/hr.*)
= $495 Favorable
*$19,140 3,300 hrs. = $5.80/hr.
Labor Efficiency Variance = Standard Hourly Rate × (Standard Hours -
Actual Hours)
= $5.95/hr. × (3,000 hrs.** - 3,300 hrs.)
= -$1,785 (or $1,785 Unfavorable)
**Standard Quantity = 15,000 pillowcases × 0.2 hr./pillowcase = 3,000 hrs.
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Ex. 24.14 a. A favorable materials price variance results from the purchasing department being
able to acquire direct materials at a price below standard cost. This may result from
finding a lower price supplier or from obtaining discounts for quantity purchases.
The manager of the purchasing department (purchasing agent) is responsible for
this variance.
b. An unfavorable labor rate variance may result from incurring unexpected overtime
costs or from using higher payscale workers than are called for in the cost standards
to perform specific manufacturing activities. The production manager is responsible
for the scheduling of direct workers and for the labor rate variance.
c. A favorable volume variance results from producing more units during the period
than the average level of production assumed in determining the standard cost.
Volume variances result merely from the mechanics of using a standard unit cost to
apply fixed overhead to production. Therefore, volume variances do not necessarily
indicate efficiency or inefficiency, and no manager is held “responsible” for these
variances.
d. An unfavorable materials quantity variance means that more than the standard
quantity of materials was used in the manufacture of the units produced. Causes
include employee carelessness or inexperience, production machinery that is out of
adjustment, or, perhaps, the purchase of a lower-grade material by the purchasing
department. In most cases, the production manager is responsible for the efficient
use of materials and is responsible for the materials quantity variance. If, however,
the unfavorable variance stems from the purchase of low-grade materials,
responsibility rests with the manager deciding to purchase this type of material
(production manager or purchasing agent).
Ex. 24.15 Several items from the Store Sales and Other Data section of Home Depot’s 5-Year
Summary could be used to create direct labor standards. For example, weighted average
sales per store per employee, number of customer transactions per employee, and
average ticket price per employee are three that seem obvious. Below are suggestions or
examples about how a store manager could use these standards to help manage a Home
Depot Store:
• Standard number of customer transactions per employee — a variance showing
more actual customer transactions than the standard allowed per employee, might
be a signal to hire more employees. Alternatively, if fewer actual customer
transactions than the standard occurred in a given month, then an investigation
might be necessary to assess if the store is overstaffed or if some other inefficiency is
occurring.
• Average ticket price per employee — when a variance occurs showing average ticket
price per employee below standard, the store manager might want to manage
advertising or employee incentives in such a way to encourage the sale of larger
ticket items.
• Weighted average sales per store — when a variance occurs showing higher actual
average store sales, the manager may want to reward employees for their team
efforts in creating sales above the standard or expected amounts.
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SOLUTIONS TO PROBLEMS SET A
25 Minutes, Strong PROBLEM 24.1A
BRADLEY
a. MPV = Actual Quantity × (Standard Price - Actual Price)
= 800 pounds × ($20/lb - $22/lb)
= $1,600 (or $1,600 Unfavorable)
b. The materials quantity variance (MQV) is first used to find the standard quantity of
material allowed for producing 760 units (MVP is exactly half of MPV):
c. Work in Process Inventory (760 pounds × $20 per pound) ……………… 15,200
Materials Quantity Variance (unfavorable) ……………………………… 800
Materials Price Variance (unfavorable) ………………………………… 1600
Direct Materials Inventory (800 pounds × $22 per pound) ………………… 17,600
To record direct materials applied to production.
d. Bradley’s overhead volume variance is $2,400, given that it is three times the unfavorable
materials quantity variance of $800. The volume variance is unfavorable because actual
output of 760 units was less than normal output of 780 units.
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30 Minutes, Medium PROBLEM 24.2A
AGRICHEM INDUSTRIES
a. Computation of materials price variance (MPV):
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PROBLEM 24.2A
AGRICHEM INDUSTRIES (concluded)
b.
General Journal
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25 Minutes, Medium PROBLEM 24.3A
AMERICAN HARDWOOD PRODUCTS
General Journal
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45 Minutes, Strong PROBLEM 24.4A
SVEN ENTERPRISES
a. Materials Price Variance = Actual Quantity Used × (Standard Price - Actual Price)
= 148,450 pounds × ($4.20 - $4.00*)
= $29,690 Favorable
= $6,258 Favorable
b. Labor Rate Variance = Actual Labor Hours × (Standard Rate - Actual Rate)
= 2,200 hours × ($8.50 - $8.00*)
= $1,100 Favorable
Labor Efficiency Variance = Standard Hourly Rate × (Standard Hours - Actual Hours)
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Problem 24.4A
SVEN ENTERPRISES (continued)
c. Overhead variances:
*147 actual batches × 1,020 pounds allowed per batch × $4.20 per pound = $629,748
*147 actual batches × 14 hours allowed per batch × $8.50 per hour = $17,493
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PROBLEM 24.4A
SVEN ENTERPRISES (concluded)
g. Entry to transfer the 147 batches of puppy meal produced in April to finished goods:
*The $651,504 figure equals the total direct materials, direct labor, and manufacturing
overhead charged to production at standard cost during April ($629,748 + $17,493 +
$4,263).
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45 Minutes, Strong PROBLEM 24.5A
SLICK CORPORATION
a. Materials Price Variance = Actual Quantity Used × (Standard Price - Actual Price)
= 16,500 gallons × ($1.30 - $1.25*)
= $825 Favorable
b. Labor Rate Variance = Actual Labor Hours × (Standard Rate - Actual Rate)
= 4,200 hours × ($16 - $15)
= $4,200 Favorable
Labor Efficiency Variance = Standard Hourly Rate × (Standard Hours - Actual Hours)
= $16 per hour × (3,750 hours* - 4,200 hours)
= -$7,200 (or $7,200 Unfavorable)
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Problem 24.5A
SLICK CORPORATION (concluded)
c. Overhead variances:
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40 Minutes, Strong PROBLEM 24.6A
POLYGLAZE, INC.
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PROBLEM 24.6A
POLYGLAZE, INC. (concluded)
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40 Minutes, Strong PROBLEM 24.7A
HERITAGE FURNITURE CO.
a. (1) Computation of materials price variance (MPV):
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PROBLEM 24.7A
HERITAGE FURNITURE CO. (continued)
b.
General Journal
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PROBLEM 24.7A
HERITAGE FURNITURE CO. (concluded)
c. Comments on cost variances:
The company appears to be having significant problems in two areas. First, the large
unfavorable materials quantity variance ($10,400) indicates that far more material is being
used in the production process than is provided for in the cost standards. Assuming that
the cost standards are reasonable, the quantity of materials being used is excessive. Second,
the unfavorable labor efficiency variance indicates that more labor hours are being used
than indicated by the standards. This indicates low productivity by direct workers. (The
unfavorable volume variance results only from scheduled production being less than
“normal” production and is not a cause for concern.)
The company shows two significant favorable variances: the materials price variance and
the overhead spending variance. The favorable materials price variance ($8,800) may
indicate that the purchasing department is doing an excellent job of securing materials at
advantageous prices. The overhead spending variance may indicate that the production
manager is doing very well at controlling spending on overhead. However, these favorable
variances may be closely linked to the company’s problems in the areas of materials usage
and labor efficiency.
The favorable materials price variance may mean that the purchasing department is
purchasing lower-grade materials than normal and perhaps contributing to the large
unfavorable materials quantity variance because some of these materials prove to be
unusable. The favorable overhead spending variance may result from unfilled supervisory
positions, which may be contributing to the inefficient use of materials and the low
productivity of direct workers. Thus, management should thoroughly investigate the causes
of these cost variances.
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60 Minutes, Strong PROBLEM 24.8A
RIPLEY COPRORATION
a. Based on the journal entry to charge direct materials costs to work in process, the actual
quantity of material purchased and used during June is determined as follows:
Thus, the actual quantity of material purchased and used during June was 8,200 pounds.
b. Based on the journal entry to charge direct material costs to work in process, the standard
quantity of material allowed for the actual level of output achieved in June is determined as
follows:
Materials Quantity Variance = Standard Price × (Standard Quantity - Actual Quantity)
Thus, the standard quantity allowed = $48,000/$6 per pound = 8,000 pounds.
c. Based on the journal entry to charge direct labor costs to work in process, the average per
hour labor cost incurred in June is determined as follows:
Labor Rate Variance = Actual Labor Hours × (Standard Rate - Actual Rate)
-$950 = 9,500 hours × ($9 - Actual Rate)
-$950 = $85,500 - 9,500 (Actual Rate)
-$86,450 = 9,500 (Actual Rate)
Thus, the actual hourly rate incurred = -$86,450 ÷ -9,500 hours = $9.10 per hour.
d. Based on the journal entry to charge direct labor costs to work in process, the standard direct
labor hours allowed during June is determined as follows:
Labor Efficiency Variance = Standard Hourly Rate × (Standard Hours - Actual Hours)
-$4,500 = $9 per hour × (Standard Hours - 9,500 hours)
-$4,500 = $9 (Standard Hours) $85,500
$81,000 = $9 (Standard Hours)
Thus, the standard hours allowed = $81,000/$9 per hour = 9,000 hours.
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Problem 24.8A
RILEY CORPORATION (concluded)
e. Based on the journal entry to charge overhead costs to work in process, the following
relationships exist:
Thus, standard overhead costs allowed for in June of $20,000 can be computed as follows:
*The $154,000 figure equals the total direct materials, direct labor, and manufacturing
overhead charged to production at standard cost during June ($48,000 + $81,000 + $25,000).
h. Given that Ripley’s overhead volume variance was favorable, its actual production during
June must have exceeded “normal” output.
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45 Minutes, Medium PROBLEM 24.9A
ANTON COMPANY
a. Since the direct materials quantity variance is $0, the actual quantity of materials used per
stand must equal the budgeted quantity per stand. Thus, the total quantity purchased and
used is:
220 stands × 3 square feet per stand = 660 square feet.
Materials Price Variance = Actual Quantity Used × (Standard Price - Actual Price)
-$33 (Unfavorable) = 660 sq. ft. × ($0.25 - actual price)/sq. ft.
-33
= $0.25 actual price
660
-0.05 = $0.25 actual price
Actual Price = $0 .30 per square foot
b. Labor Efficiency Variance = Standard Hourly Rate × (Standard Hours - Actual Hours)
-$550 (Unfavorable) = $10 × (.5 hours per unit - actual hours per unit) × 220 units
-550
= .5 hours per unit - actual hours per unit
$2,200
-0.25 = .5 hours per unit - actual hours per unit
Actual Hours Per Unit = .75 hours per unit
c. Labor Rate Variance = Actual Labor Hours × (Standard Rate - Actual Rate)
$231 (Favorable) = .75 hours per unit × 220 units × ($10 per hour - actual
rate)
$231 = 165 hours × ($10 per hour - actual rate)
$231
= $10 - actual rate
165
$1.40 = $10 - actual rate
Actual Rate Per Hour = $8.60 per hour
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