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$23.75
3.75
15.00
7.50
5.00
$55.00
Normal volume per month for overhead allocation purposes was assumed to be 1,200
toilets. The budgeted overhead cost function was $3,672 plus $1.94 per toilet.
After six months of operations using the new cost system, Petersen was disturbed over
the lack of attention paid to the standards. He felt that the potters were just too set in
their ways to pay any attention to the new system. As a result, although the standards
existed, they were seldom met. In reviewing the June production results, actual
production was 1,145 toilets with the following actual costs:
Materials used
Clay
Glaze
Direct labor
Molding
Glazing
Overhead associated with toilets:
Variable
Fixed
Petersen met with his most experienced master potter, Jim Sedgefield, to discuss the
variances from the standards. Clive explained the problem, Well, Jim, it looks like we
will have unfavorable variances again this month as well as more missed shipping dates.
Sedgefield was not impressed, Well, Clive, I never have understood this system at all.
Why dont you ask that fast-talking accountant to explain the variances? She seems to
know what these numbers mean. All I know is that we seemed to spend all month
struggling with that new brand of clay you purchased because it was cheaper.
Required
1. Compute the following variances for the month:
a. material price variances for clay and glaze
b. material usage variances for clay and glaze
c. direct labor price variances for molding and glazing
d. direct labor usage variances for molding and glazing
e. variable overhead budget variance
f. fixed overhead budget variance
g. production-volume variance
2. What conclusions can be drawn from these variances regarding cost performance for
the month?
3. What suggestions do you have for Mr. Petersen regarding his new standard cost
system?
4. Choosing your own source(s), provide a general and brief explanation of some pros
and cons of standard costs and cost variances.