Standard Cost Systems: Overview of Brief Exercises, Exercises, Problems, and Critical Thinking Cases

CHAPTER 24
STANDARD COST SYSTEMS

OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Brief Learning
Exercises Topic Objectives Skills
B. Ex. 24.1 Variances and normal capacity 1, 2, 5 Analysis, judgment
B. Ex. 24.2 Standard cost applied to production 3 Analysis
B. Ex. 24.3 Expected volume variance 4 Analysis
B. Ex. 24.4 Volume and spending variances 4, 5 Analysis
B. Ex. 24.5 Normal vs. ideal standard costs 2, 5 Analysis, communication,
judgment
B. Ex. 24.6 Computing labor cost variances 1, 3, 5 Analysis, judgment
B. Ex. 24.7 Journal entry for direct labor 3 Analysis
B. Ex. 24.8 Computing materials cost variances 3 Analysis
B. Ex. 24.9 Journal entry for direct materials 3 Analysis
B. Ex. 24.10 Overhead cost variances 4 Analysis, communication
Learning
Exercises Topic Objectives Skills
24.1 Accounting terminology 1–5 Analysis
24.2 Relationships among standard costs, actual 3, 4 Analysis
costs, and cost variances
24.3 Understanding materials cost variances 3, 5 Analysis, judgment
24.4 Computing materials cost variances and 3–5 Analysis, judgment
volume variance
24.5 Manufacturing overhead variances 4, 5 Analysis, judgment
24.6 Computing labor cost variances 1, 3, 5 Analysis, judgment,
communication
24.7 Elements of materials cost variances 3 Analysis
24.8 Interpreting variances 5 Analysis, communication,
judgment
24.9 Computing overhead cost variances 4 Analysis
24.10 Overhead journal entries 4 Analysis
24.11 Overhead cost variances 4, 5 Analysis
24.12 Understanding overhead variances 4 Analysis, communication,
judgment
24.13 Computing materials and labor variances 3 Analysis
24.14 Causes of cost variances 1, 3, 5 Analysis, communication,
judgment
24.15 Real World: Standards for Home Depot 1, 5 Analysis, communication,
judgment, research
© The McGraw-Hill Companies, Inc., 2010

CH24-Overview
Problems Learning
Sets A, B Topic Objectives Skills
24.1 A,B Understanding materials cost variances and 3–5 Analysis, judgment,
volume variance communication
24.2 A,B Computing and journalizing cost variances 3, 4 Analysis
24.7 A,B Computing, journalizing, and analyzing cost 3–5 Analysis, communication,
variances judgment
24.8 A,B Understanding cost variances: solving for 1, 3, 4 Analysis, judgment
missing data
24.9 A,B Understanding variance calculations 3, 4 Analysis
Critical Thinking Cases

24.1 It's not my fault 1, 3–5 Analysis, communication,
judgment
24.2 Determination and use of standard costs 1, 3–5 Analysis, communication,
judgment
24.3 Real World: Penske Truck Leasing 1, 2 Analysis, communication,
(Business Week) Outsourcing and labor judgment
efficiency
24.4 Real World: Travelocity.com 2, 5 Analysis, communication,
(Internet) Standards for travel costs judgment, research,
technology
24. 5 Standard cost systems and inventory 4 Analysis, communication,
misstatement judgment, research,
(Ethics, fraud and corporate governance) technology

CH24-Overview (p.2)
DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES
Below are brief descriptions of each problem and case. These descriptions are accompanied by the
estimated time (in minutes) required for completion and by a difficulty rating. The time estimates
assume use of the partially filled-in working papers.
Problems (Sets A and B)

24.1 A,B Wilson’s/Denton's 25 Strong
Materials variances must be computed with missing data. The problem
requires an understanding of relationships among variances, including a
volume variance.
24.2 A,B AgriChem Industries/Dyelot Industries 30 Medium

Compute cost variances for direct materials, direct labor, and overhead,
and prepare journal entries to record manufacturing costs in a standard
cost system.
24.3 A,B American Hardwood Products/Latin Silk Products 25 Medium

Prepare journal entries to record cost variances and the costs incurred in
the Work in Process account. Also record cost of units completed and
cost of units sold. Compute fixed manufacturing overhead.
24.4 A,B Sven Enterprises/Hans Enterprises 45 Strong

A comprehensive problem requiring knowledge of all variances and
corresponding journal entries.
24.5 A,B Slick Corporation/Smooth Corporation 45 Strong

A comprehensive problem requiring knowledge of all variances and
corresponding journal entries.
24.6 A,B Polyglaze, Inc./Monoglut, Inc. 40 Strong

Compute cost variances and prepare journal entries to record the flow of
manufacturing costs through a standard cost accounting system.
24.7 A,B Heritage Furniture Co./Colonial Furniture Co. 40 Strong

A comprehensive standard cost problem. Requires computation of cost
variances, journal entries, and an analysis of the company’s strengths and
weaknesses.
24.8 A,B Ripley Corporation/Foding Corporation 60 Strong

This is a comprehensive problem with missing data. An analytical
approach is required. This would be an excellent problem to assign to
small groups or to teams of students.

Description Problems
24.9 A,B The Anton Company/The Ninna Company 45 Medium
Given budget items and a variance report, the student is asked to solve
for various actual amounts. Also, the meaning of favorable and
unfavorable variances must be applied. A good comprehensive review
problem well suited for a group assignment.

Desc. of Problems (p.2)
Critical Thinking Cases
24.1 It’s Not My Fault 25 Strong
In a company using standard costs and a responsibility cost accounting
system, who should be charged with the responsibility for unfavorable
labor rate variances incurred when the production department works
overtime to fill “rush” orders?
24.2 Armstrong Chemical 50 Strong

Evaluate arguments given by the president of a company against the
revision of standard costs and the value assigned to inventory. Assuming
that standards for the year just ended should be revised, determine the
value of ending inventory using revised standard costs.
24.3 Outsourcing and Labor Efficiency 20 Strong

Business Week
Students consider the impact of outsourcing labor jobs on labor
standards for rates and efficiency. The ethical difficulties of managing
global employees are considered.
24.4 Travelocity.com 30 Medium

Internet
Students are given a budgeted amount for travel to a given destination.
Using actual ticket prices obtained from travelocity.com they calculate a
current spending variance. Factors that might affect the reasonability of
the budgeted amount are also discussed.
24.5 Standard Cost Systems and Inventory Misstatements 30 Medium

Ethics, Fraud & Corporate Governance
The ethical problems created by inappropriate standards are explained.
Students visit the IMA website for this research.

Desc. of Cases
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1. Standard costs are predetermined estimates of what it should cost to produce a product or to
perform a particular operation under normal conditions. The use of a standard cost helps
management plan (preparing a budget, for example) and control, which requires the
establishment of performance standards. The essence of control is the comparison of actual
results (costs incurred, for example) with the performance standards and the taking of corrective
action when actual results do not measure up to standards.
2. The statement is incorrect because job order and process are the names of cost accounting
systems in which costs may be compiled on either an actual cost basis or a standard cost basis. In
other words, standard costs may be used in connection with either a job order cost system or a
process cost system.
3. Standard costs are developed from a set of assumptions about future (budgeted) prices, wages,
production methods, and normal production levels. If unexpected changes in prices, such as the
costs of direct materials or wage rates occur, the standard costs should be revised to reflect the
new existing conditions. Also, standard costs should be revised if significant changes are made in
production methods or in the normal volume of production.
4. Variances from standard cost that are generally computed are:
Direct materials: price and quantity variances.

Direct labor: rate and efficiency variances.
Manufacturing overhead: spending and volume variances.
5. The production manager exercises a degree of control over the quantities of materials used in the
production process and is therefore responsible for the materials quantity variance. However, the
price paid for materials is negotiated by the purchasing department, not by the production
manager. Therefore, the production manager should not be held responsible for the materials
price variance.
6. A favorable labor efficiency variance indicates that the actual number of labor hours worked in
achieving a given level of production was less than the standard number of hours for that
production level. The labor efficiency variance is equal to the difference between the standard
and the actual labor hours multiplied by the standard hourly rate.
7. The amount of fixed manufacturing overhead included in the standard unit cost is computed
under the assumption of a normal volume of production. Whenever actual production is below
normal volume, the fixed manufacturing overhead costs charged to production (standard fixed
overhead per unit times units produced) will be less than actual fixed manufacturing overhead
costs, resulting in an unfavorable volume variance. A favorable volume variance will occur
whenever actual production exceeds normal volume.

Q1-7
8. A basic principle in evaluating the performance of department managers is that managers should
be evaluated based only upon events under their control. An unfavorable volume variance
results automatically whenever the actual volume of production is less than the “normal” level
assumed in developing the standard unit cost. The level of production scheduled in a given
month may be affected by many factors that are not controllable by the production manager, such
as seasonal demand for the product or the company’s desire to reduce the size of its inventories.
Thus, as long as the production department produces the desired (scheduled) number of units, the
production manager has no control over the resulting volume variance.
9. Responsibility centers identify the assets and costs that a manager will have responsibility for
during the period. The budget is an essential part of the manager’s plan for the coming period.
The budget can be thought of as an informal contract agreed upon between the manager and
upper management about what the manager should be doing in the coming period. The standard
cost system is an integral part of how the manager knows if the operations of the responsibility
center are meeting the expectations set out in the budget. All three components, assigning
responsibility, laying out the budget plan and continuously monitoring progress toward meeting
budget goals through the standard cost variances are important for maintaining cost control.
10. Overtime hours are normally paid at a higher rate than regular hours. Also, overtime hours are
not typically part of the budget plan and are not used in setting standards because they are not
viewed as normal operating procedures. Thus, the extra pay for overtime hours usually increase
the actual labor cost above the standard labor cost and result in an unfavorable labor rate
variance.
11. Standard cost systems are typically based on normal operations. If the waste, spoilage or
equipment breakdowns are not part of the normal operating procedures of the company, then
these items will appear in either material quantity variances (waste and spoilage) or in the
overhead spending variance for equipment breakdown. If the equipment breakdown results in
idle time for labor, the labor efficiency variance could also be influenced.
12. The costs associated with a closed or idle factory are not typically part of normal operations.
Thus these idle capacity costs should not be part of normal product costs.
13. Direct materials and direct labor are variable costs that are directly traceable to the product.
Overhead items, by definition are indirect and not traceable. Furthermore, overhead typically
includes a significant fixed portion that does not vary with production. Thus, the fixed portion
cannot be associated with the efficiency of the operations that create the product.
14. Immaterial standard variance account balances are added to (for unfavorable variances-debit) or
deducted from (for favorable variances-credit) cost of goods sold. Material standard variance
account balances are divided between cost of goods sold and the inventory accounts: direct
materials inventory, work in process inventory, and finished goods inventory.

Q8-14
15. When a company operates at 100% capacity, there is no margin for any errors. Thus, there are no
sick workers, no equipment down time, no late shipments of supplies or materials, etc. A
company, fully utilizing its capacity, is typically operating above its normal or expected
operating range. The normal range allows for unforeseen or unexpected events. As a result, the
standards are set for a normal operating range. A late shipment or sick workers can result in cost
over-runs that appear as unfavorable variances.
16. The selling price of the finished product includes a consideration of the quality of the direct
materials used to create the finished product. Of course the quality of the direct materials is
typically related to the cost of those materials with higher quality materials typically costing
more money. Thus, when determining the selling price of the finished product both cost and
quality of direct materials must be considered. The standards that are established for the product
at that selling price must be based on that cost and quality consideration.
17. A plant accountant might want to consult with the manager or supervisor of the production line
to get an idea of the skill level of the direct labor personnel and the quantity of labor needed for a
given production level. Then, the human resources department could identify for the plant
accountant the wage rates for those skill levels.
18. Unfavorable variances are recorded by debit entries because they represent costs in excess of the
budgeted standards. Favorable variances, however, are recorded by credit entries because they
represent cost savings relative to standard amounts.
19. Direct labor rates are typically tied to the skill and efficiency of the labor. Thus, higher paid
laborers are frequently more efficient. In addition, increased labor costs as a result of overtime
can be associated with inefficient labor. In this case, labor costs are higher because the laborers
were inefficient and did not get the production completed during the standard labor hours
allowed.
20. Ideal standards do not allow any downtime for normal happenings such as machine downtime for
repairs, employee turnover or training time, occasional late shipments of supplies, etc. Under
ideal standards there are no allowances for uncertainty in the production process. Reasonably
attainable standards allow for uncertainties by building into the standards a certain amount of
downtime, employee turnover, etc.
If the variances from these two types of standard cost systems are used to evaluate managers,
then under ideal standards the manager will expect unfavorable variances as a normal outcome.
The goal of the manager under ideal standards will be to make the unfavorable variances as small
as possible. Under reasonably attainable standards, the manager will expect variances equal to
zero. Favorable variances will be considered good performance.

Q15-20
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 $89,500 (actual direct labor
of $87,000, less an unfavorable rate variance of $2,500, plus a favorable
efficiency variance of $5,000).
B. Ex. 24.3
Production = 750 units
Overhead applied to work in process
at a $14 standard rate $ 10,500
Less budgeted overhead:
Fixed 5,600
Variable ($6 per unit) 4,500
Volume variance - favorable $ 400
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:
$48,000 (applied based

$56,000 (actual) $42,000 (budget based on normal) on actual)
$14,000 unfavorable Spending Var. $6,000 favorable Volume Var.
B. Ex. 24.5 Normal standard cost per unit = (2 lbs. x $8) + (3 hrs. x $22 ) = $82.
Ideal standard cost per unit = (1.8 lbs. x $7.75) + (2.8 hrs. x $21.50) = $74.15.
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 4000 vases) – 2,780 hours] =
$1815 favorable.
Labor rate variance = ($8.80 - $8.25) x 2,780 hours = $1, 529 unfavorable.

BE24.1,2,3,4,5,6
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.
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 = (20,000lbs. – 20,800lbs.) × $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 $8,000, applied
overhead costs of $7,200, and reported a $1,500 unfavorable overhead
spending variance for the period, we can construct the diagam shown
below:
Actual Overhead Standard Overhead Overhead

Costs Incurred Costs Allowed Costs Applied
$8,000 ? $7,200
$1,500 Unfavorable ?
Spending Variance
From the above diagram, we see the standard overhead costs allowed
must be $6,500 ($8,000 less the $1,500 unfavorable spending variance).
Since overhead costs applied ($7,200) exceeds the standard amount
allowed ($6,500), actual output must have exceeded normal output,
making the $700 volume variance favorable.

BE24.7,8,9,10
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
Ex. 24.2 Actual costs incurred:
Direct materials: Standard cost ($90,000), plus unfavorable price

variance ($4,500), less favorable quantity variance ($2,700) …………$ 91,800
Direct labor: Standard cost ($180,000), less favorable rate
variance ($1,800), plus unfavorable efficiency variance
($5,400) ………………………………………………………………… $ 183,600
Manufacturing overhead: Standard cost ($270,000), less
favorable spending variance ($3,600) and favorable
volume variance ($2,400) ……………………………………………… $ 264,000
Ex. 24.3 a. MPV = Actual Quantity × (Standard Price - Actual Price)

= 100,000 grams × ($60/g - $60/g*)
= $0
*Actual Price = $6,000,000 ÷ 100,000 grams = $60 per gram
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 4,000 grams actually
used, as shown below:
Total grams used ……………………………… 100,000
Number of batches …………………………… 25
Grams per batch ……………………………… 4,000 grams (or 4.0 kg)
c. Materials usage in the pharmaceutical industry must be extremely accurate

and precise. Thus, one would not expect to see a significant materials quantity
variance.

E24.1,2,3
Ex. 24.4 a. Gumchara’s materials price variance is computed as follows:
Materials Price Variance = Actual Quantity Used × (Standard Price -
Actual Price)
= 2,800 grams × ($1.25 - $1.40*)
= -$420 (or $420 Unfavorable)
*Actual Price per Gram = $3,920 ÷ 2,800 grams = $1.40/gram
b. Gumchara’s materials quantity variance is computed as follows:
Materials Quantity Variance = Standard Price × (Standard Quantity -
Actual Quantity)
= $1.25 per gram × (2,080 grams* -
2,800 grams)
*Standard Quantity Allowed = 520 units × 4 grams/unit = 2,080
c. Gumchara’s overhead volume variance will be unfavorable because its actual
output for the period (520 units) was less than “normal” output (550 units).
Ex. 24.5 a. Fixed overhead rate = $330,000 ÷ 60,000 units = $5.50 per unit,
Total overhead application rate = $5.50 + $2.50 = $8.00 per unit.
b. Overhead applied = $8.00 × 65,000 units = $520,000.
c. The amount of overapplied overhead = $520,000 - $400,000 = $120,000, the
spending variance = $330,000 + ($2.5 × 65,000) - $400,000 = $92,500
favorable, the volume variance = (65,000 × $5.50) - $330,000 = $27,500
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.
Ex. 24.6 a. Marlo’s labor rate variance is computed as follows:

Labor Rate Variance = Actual Labor Hours × (Standard Rate -
Actual Rate)
= 3,600 hrs. × ($16 - $18*)
= -$7,200 (or $7,200 Unfavorable)
*Actual Rate per Hour $64,800 ÷ 3,600 hours = $18/hour
b. Marlo’s labor efficiency variance is computed as follows:
Labor Efficiency Variance = Standard Rate × (Standard Hours -
Actual Hours)
= $16 per hour × (4,500 hours* - 3,600
hours)
= $14,400 Favorable
*Standard Hours Allowed = 9,000 units × 0.5 hours/unit = 4,500
hours

E24.4,5,6
c. Extended hours worked during the period may have resulted in an
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, $8.75 per pound
The unfavorable materials price variance, $910, indicates actual costs were
$0.25 per pound above standard ($910 ÷ 3,640 lbs. = $0.25/lb.). Thus, as the
actual cost was $9.00/lb., the standard cost must have been $8.75/lb.
b. Standard price, $8.75 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, $8.75/lb., was
determined in part a, above.
c. Actual quantity of materials used, 3,640 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, 3,640 pounds, appeared in the partially
complete formula for computing the materials price variance.
d. Materials quantity variance, $1,400 favorable

Computation: $8.75 Standard Price × (3,800 Standard Pounds - 3,640
Actual Pounds) = $1,400.
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.

E24.7,8
b. One explanation of the variances is that higher skilled workers were hired at
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).
Ex. 24.9 Overhead spending variance:

Overhead budgeted for actual production (18,000 units):
Fixed …………………………………………………$ 300,000
Variable ($5 per unit × 18,000 units) ……………… 90,000
Overhead per flexible budget ………………………………… $ 390,000
Actual overhead …………………………………………………… 383,800
Overhead spending variance—favorable ………………………… $ 6,200
Volume variance:
Overhead applied to Work in Process Inventory
at standard cost (18,000 units × $20/unit) ………………………… $ 360,000
Less: Budgeted overhead for 18,000 unit production level ………… 390,000
Volume variance (unfavorable) …………………………………… $ (30,000)
Ex. 24.10 Work in Process Inventory ……………………………… 360,000

Overhead Volume Variance …………………………… 30,000
Overhead Spending Variance …………………………………… 6,200
Manufacturing Overhead ………………………………………… 383,800
Ex. 24.11 a. Overhead Spending Variance = Standard Overhead Allowed

at Actual Production Level - Actual Overhead Costs
Standard overhead allowed at the actual production of 4,500

units:
Fixed overhead allowed ……………………………………………$ 40,000
Variable overhead allowed
($60,000/10,000 hrs. × 2 hours per unit × 4,500 units) ……… 54,000
Total overhead allowed ……………………………………… $ 94,000
Spending Variance = $94,000  $93,000 = $1,000 Favorable
b. Overhead Volume Variance = Overhead Applied - Overhead Allowed at

Actual Production Level
Overhead Rate per Direct Labor Budgeted Overhead
=
Hour Budgeted Labor Hours
$100,000
= = $10 per direct labor hour
10,000

E24.9,10,11
Overhead rate per unit = $10 per labor hr. × 2 labor hours per unit = $20 per
unit
Overhead applied = 4,500 actual production units × $20 per unit = $90,000
Volume variance = $90,000  $94,000 (from part a ) = $4,000 Unfavorable
c. Although the overall overhead variance is unfavorable, it is mostly due to an

unfavorable volume variance, reflecting that actual production was less than
budgeted production. The overhead spending variance was favorable, due to
fixed costs that were $2,000 lower than expected ($40,000  $38,000) and variable
costs that were $1,000 higher than allowed at the actual production level ($54,000
 $55,000). Zeta’s manager may want to investigate why the variable overhead
costs per unit were higher than expected and determine if it is linked to the lower
fixed costs. As long as Zeta is meeting its sales demand, the unfavorable volume
variance may not require any corrective action.
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:
Overhead Volume Variance ……………………………… 4,800*
Overhead Spending Variance …………………………………………… 600
Cost of Goods Sold ……………………………………………………… 4,200
*The entry required to close McGill’s favorable volume variance of $4,800.
Ex. 24.13 a. Materials Price Variance = Actual Quantity × (Standard Price - Actual
= 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.

E24.12,13
Ex. 24.15 Several items from the Store Sales and Other Data section of Home Depot’s 10-
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 per employee — when a variance occurs
showing higher actual average store sales per employee, the manager may want
to reward employees for their team efforts in creating sales above the standard
or expected amounts.

E24.14,15
SOLUTIONS TO PROBLEMS SET A
25 Minutes, Strong PROBLEM 24.1A
WILSON'S
a. MPV = Actual Quantity × (Standard Price - Actual Price)
= 600 pounds × ($15/lb - $16/lb)
= $600 (or $600 Unfavorable)
b. The materials quantity variance (MQV) is first used to find the standard quantity of
material allowed for producing 500 units:
MQV = Standard Price × (Standard Quantity - Actual Quantity)

300 = $15/lb × (Standard Quantity - 600 pounds)
Thus we may solve for the Standard Quantity as follows:
-300 = 15 (Standard Quantity) - 9,000

8,700 = 15 (Standard Quantity)
8,700 ÷ 15 = (Standard Quantity) = 580 pounds for 500 units.
580 pounds divided by 500 units = 1.16 pounds per unit.

550 units × 1.16 pounds per unit = 638 pounds, standard quality of materials allowed for
550 units.
c. Work in Process Inventory (580 pounds × $15 per pound) ……………… 8,700
Materials Quantity Variance (unfavorable) ……………………………… 300
Materials Price Variance (unfavorable) ………………………………… 600
Direct Materials Inventory (600 pounds × $16 per pound) ………………… 9,600
To record direct materials applied to production.
d. Wilson’s overhead volume variance is $600, given that it is twice the unfavorable materials
quantity variance of $300. The volume variance is unfavorable because actual output of 500
units was less than normal output of 550 units.

P24.1A
30 Minutes, Medium PROBLEM 24.2A
AGRICHEM INDUSTRIES
a. Computation of materials price variance (MPV):
MPV = Actual Quantity Used × (Standard Price - Actual Price)

= 102,500 lbs. × ($0.60/lb - $0.57/lb.)
= 102,500 lbs. × $0.03/lb.
= $3,075 Favorable
Computation of materials quantity variance (MQV):

= $0.60 × [(500 lbs. × 200 batches) - 102,500 lbs.]
= $0.60 × -2,500 lbs.
= -$1,500 (or $1,500 Unfavorable)
Computation of labor rate variance (LRV):
LRV = Actual Hours × (Standard Hourly Rate - Actual Hourly Rate)

= 4,750 × ($7.00/hr. - $6.80/hr.)
= 4,750 × $0.20/hr.
= $950 Favorable
Computation of labor efficiency variance (LEV):
LEV = Standard Hourly Rate × (Standard Hours - Actual Hours)

= $7.00/hr. × [(25 hrs. × 200 batches) - 4,750 hrs.]
= $7.00/hr. × 250 hrs.
= $1,750 Favorable
Overhead variances are computed on the following page.

P24.2A
PROBLEM 24.2A
AGRICHEM INDUSTRIES (concluded)
Computation of overhead spending variance:

Overhead budgeted for 200 batches:
Fixed $ 50,000
Variable (200 batches × $25 per batch) 5,000
Total budgeted overhead $ 55,000
Less: Actual overhead for the month 54,525
Overhead spending variance (favorable) $ 475
Computation of volume variance:

Overhead applied at standard cost ($225 × 200 batches) $ 45,000
Less: Budgeted overhead (above) 55,000
Volume variance (unfavorable) $ (10,000)
b.
General Journal
Jan. 31 Work in Process Inventory (at standard) 60,000

Materials Quantity Variance 1,500
Materials Price Variance 3,075
Materials Inventory (actual) 58,425
To record direct materials used in January.
Standard cost (200 batches × $300) = $60,000
Actual cost = $58,425
31 Work in Process Inventory (at standard) 35,000

Labor Rate Variance 950
Labor Efficiency Variance 1,750
Direct Labor (actual) 32,300
To record direct labor cost applicable to January
production:

Volume Variance 10,000
Overhead Spending Variance 475
Manufacturing Overhead (actual) 54,525
To apply overhead to work in process, using standard
unit cost:

P24.2A (p.2)
AMERICAN HARDWOOD PRODUCTS
General Journal
a. (1) Work in Process (standard cost) 90,000

Direct Materials Inventory (actual cost) 96,000
To record materials used.
(2) Work in Process (standard cost) 84,000

Labor Rate Variance 3,000
Direct Labor (actual cost) 82,500
To record direct labor cost.

Overhead Spending Variance 3,240
Overhead Volume Variance 4,500
Manufacturing Overhead (actual cost) 123,240
To record manufacturing overhead assigned to
production, and to record overhead variances.
b. (1) Finished Goods Inventory (at standard cost) 270,000

Work in Process (at standard cost) 270,000
To transfer cost of units completed to finished goods
inventory, 9,000 units at $30 per unit.
(2) Cost of Goods Sold (at standard cost) 264,000

Finished Goods Inventory (at standard cost) 264,000
To record cost of units sold, 8,800 units at $30 per unit.
c. Fixed overhead per month = $4,500 (unfavorable

volume variance) ÷ 0.10 (idle capacity percentage) $ 45,000

P24.3A
SVEN ENTERPRISES
a. Materials Price Variance = Actual Quantity Used × (Standard Price - Actual Price)
= 148,450 pounds × ($4.20 - $4.00*)
= $29,690 Favorable
*Actual Price per Pound = $593,800/148,450 pounds = 4.00/pound
Materials Quantity Variance = Standard Price × (Standard Quantity - Actual Quantity)
= $4.20 per pound × (149,940 pounds* - 148,450 pounds)
= $6,258 Favorable
*Standard Quantity Allowed = 147 batches × 1,020 pounds/batch = 149,940 pounds
b. Labor Rate Variance = Actual Labor Hours × (Standard Rate - Actual Rate)
= 2,200 hours × ($8.50 - $8.00*)
= $1,100 Favorable
*Actual Rate per Hour = $17,600/2,200 hours = $8.00/hour
Labor Efficiency Variance = Standard Hourly Rate × (Standard Hours - Actual Hours)
= $8.50 per hour × (2,058 hours* - 2,200 hours)

= -$1,207 (or $1,207 Unfavorable)
*Standard Hours Allowed = 147 batches × 14 hours/batch = 2,058 hours

P24.4A
Problem 24.4A
SVEN ENTERPRISES (continued)
c. Overhead variances:

Fixed $2,450 Fixed $2,800
Variable 1,175 Variable 1,323* $29/batch × 147 batches = $4,263
$3,625 $4,123
$498 Favorable $140 Favorable

Spending Variance Volume Variance
*Standard Variable Overhead Allowed = $9.00/batch × 147 batches = $1,323
d. Entry to charge materials to production:

Work in Process Inventory (at standard cost) ……………………… 629,748 *
Materials Quantity Variance (favorable) ………………………………… 6,258
Materials Price Variance (favorable) ……………………………………… 29,690
Direct Materials Inventory (at actual cost) ……………………………… 593,800
To record the cost of direct materials charged to production.
*147 actual batches × 1,020 pounds allowed per batch × $4.20 per pound = $629,748
e. Entry to charge direct labor to production:

Labor Efficiency Variance (unfavorable) …………………………… 1,207
Labor Rate Variance (favorable) ………………………………………… 1,100
Direct Labor (at actual cost) ……………………………………………… 17,600
To record the cost of direct labor charged to production.
*147 actual batches × 14 hours allowed per batch × $8.50 per hour = $17,493
f. Entry to charge overhead to production:

Work in Process Inventory (at standard cost) ……………………… 4,263
Overhead Spending Variance (favorable) ………………………………………… 498
Overhead Volume Variance (favorable) ………………………………………… 140
Manufacturing Overhead (at actual cost) ………………………………………… 3,625
To apply overhead to production.

24.4A (p.2)
PROBLEM 24.4A
SVEN ENTERPRISES (concluded)
g. Entry to transfer the 147 batches of puppy meal produced in April to finished goods:

Work in Process Inventory (at standard cost) 651,504*
To transfer 147 batches of puppy meal to finished goods in April.
*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).
h. Entry to close overapplied overhead to cost of goods sold:

Overhead Spending Variance (favorable) 498
Overhead Volume Variance (favorable) 140
Cost of Goods Sold 638
To close overhead variances to Cost of Goods Sold.

24.4A (p.3)
SLICK CORPORATION
= 16,500 gallons × ($1.30 - $1.25*)
= $825 Favorable
*Actual Price per Pound = $20,625 ÷ 16,500 gallons = $1.25/gallon

Quantity)
= $1.30 per gallon × (16,250 gallons* - 16,500 gallons)
*Standard Quantity Allowed = 5,000 cases × 3.25 gallons/case = 16,250 gallons
= 4,200 hours × ($16 - $15)
= $4,200 Favorable
= $16 per hour × (3,750 hours* - 4,200 hours)

= -$7,200 (or $7,200 Unfavorable)
*Standard Hours Allowed = 5,000 cases × 0.75 hours/case = 3,750 hours

24.5A
Problem 24.5A
SLICK CORPORATION (concluded)

Variable 7,750 Variable 7,500* $2/case × 5,000 cases = $10,000
$9,950 $10,100
$150 Favorable $100 Unfavorable

*Standard Variable Overhead Allowed = $1.50/case × 5,000 cases = $7,500
d. (1) Work in Process Inventory (at standard cost) ………………… 21,125 *

Materials Quantity Variance (unfavorable) …………………… 325
Materials Price Variance (favorable) …………………………………… 825
*5,000 actual cases x 3.25 gallons allowed per case x $1.30 per gallon = $21,125
(2) Work in Process Inventory (at standard cost) ………………… 60,000 *
Labor Efficiency Variance (unfavorable) ……………………… 7,200
Labor Rate Variance (favorable) ………………………………………… 4,200
Direct Labor (at actual cost) ……………………………………………… 63,000
*5,000 actual cases x 0.75 hours allowed per case x $16 per hour = $60,000
(3) Work in Process Inventory (at standard cost) ………………… 10,000
Overhead Volume Variance (unfavorable) …………………… 100
Overhead Spending Variance (favorable) ……………………………… 150
Manufacturing Overhead (at actual cost) ……………………………… 9,950
(4) Finished Goods Inventory (at standard cost) ………………… 91,125
Work in Process Inventory (at standard cost) …………………………… 91,125*
To transfer 5,000 cases to finished goods in May.
over-head charged to production at standard cost during May ($21,125 + $60,000 +
$10,000).
(5) Overhead Spending Variance (favorable) ……………………… 150

Overhead Volume Variance (unfavorable) …………………………… 100
Cost of Goods Sold ……………………………………………………. 50

P24.5A (p.2)
POLYGLAZE, INC.
a. Materials price variance:

Actual Quantity × (Standard Price - Actual Price)
(8,000 units × 11 ounces) × ($0.15/oz. - $0.16/oz.) $ (880) Unfavorable
Materials quantity variance:

Standard Price × (Standard Quantity - Actual Quantity)
$0.15/oz. × (80,000 ounces - 88,000 ounces) $ (1,200) Unfavorable
Journal entry to record direct materials used in June:
Work in Process Inventory (8,000 units × 10 oz. × $0.15/oz.) 12,000

Materials Price Variance 880
Materials Inventory (8,000 units × 11 oz. × $0.16/oz.) 14,080
To record cost of direct materials used in June.
b. Labor rate variance:

Actual Hours × (Standard Hourly Rate - Actual Hourly Rate)
(8,000 units × .45 hr.) × ($10.00/hr. - $10.40/hr.) $ (1,440) Unfavorable
Labor efficiency variance:

Standard Hourly Rate × (Standard Hours - Actual Hours)
$10.00/hr. × [(8,000 units × .5 hr.) - (8,000 units × 0.45 hr.)]
$10.00/hr. × 400 hrs. $ 4,000 Favorable
Journal entry to record direct labor cost for June:
Work in Process Inventory (8,000 units × 0.5 hr. × $10/hr.) 40,000

Direct Labor (8,000 units × 0.45 hr. × $10.40/hr.) 37,440
To record direct labor costs applicable to production
during June.

P24.6A
PROBLEM 24.6A
POLYGLAZE, INC. (concluded)
c. Overhead spending variance:

Overhead per flexible budget—8,000 units:
Fixed $ 5,000
Variable (8,000 units × $0.50 per unit) 4,000
Total overhead per flexible budget $ 9,000
Less: Actual overhead in June ($5,000 + $4,600) 9,600
Overhead spending variance $ (600) Unfavorable
Overhead volume variance:

Overhead applied at standard cost (8,000 units × $1) $ 8,000
Less: Overhead per flexible budget (above) 9,000
Overhead volume variance $ (1,000) Unfavorable
Journal entry to record overhead applied to work in process:
Work in Process Inventory (8,000 units × $1 per unit) 8,000

Manufacturing Overhead (Actual cost, $5,000 + $4,600) 9,600
To apply overhead cost to 8,000 units produced at the
standard rate of $1 per unit.

P24.6A (p.2)
HERITAGE FURNITURE CO.
a. (1) Computation of materials price variance (MPV):

= (800 units × 110 ft.) × ($1.30/ft. - $1.20/ft.)
= 88,000 ft. × $0.10
= $8,800 Favorable
(2) Computation of materials quantity variance (MQV):

= $1.30/ft. × [(800 units × 100 ft.) - (88,000 ft.)]
= $1.30/ft. × -8,000 ft.
= -$10,400 (or $10,400 Unfavorable)
(3) Computation of labor rate variance (LRV)

= (800 units × 5.5 hrs.) × ($8.00/hr. - $7.80/hr.)
= 4,400 hrs. × $0.20
= $880 Favorable
(4) Computation of labor efficiency variance (LEV):

= $8.00/hr. × [(800 units × 5 hrs.) - (800 units × 5.5 hrs.)]
= $8.00/hr. × -400 hours
= -$3,200 (or $3,200 Unfavorable)

P24.7A
PROBLEM 24.7A
HERITAGE FURNITURE CO. (continued)
(5) Computation of overhead spending variance:

Overhead per flexible budget for 800 units:
Fixed $ 15,000
Variable (800 units × $7.00 per unit) 5,600 $ 20,600
Overhead spending variance (favorable) $ 2,120
(6) Computation of volume variance:

Overhead applied using standard cost
($800 units × $22 per unit) $ 17,600
Overhead per flexible budget for 800 units
(computed above) 20,600
b.
General Journal
July 31 Work in Process Inventory (at standard) 104,000

Materials Inventory (at actual) 105,600
To record direct materials used during July.
Standard cost = 800 units @ $130 = $104,000
Actual cost = 800 units @ $132 = $105,600

Labor Rate Variance 880
To charge July production with direct labor cost.
Standard cost = 800 units @ $40.00 = $32,000
Actual cost = 800 units @ $42.90 = $34,320

To charge overhead to production at standard cost.
Standard cost = 800 units @ $22.00 = $17,600

P24.7A (p.2)
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.

P24.7A (p.3)
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:
Materials Price Variance = Actual Quantity Used × (Standard Price - Actual Price)
$8,200 = Actual Quantity Used × ($6 - $5)
Thus, the actual quantity of material 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:
-$1,200 = $6 per pound × (Standard Quantity - 8,200 pounds*)

-$1,200 = $6 (Standard Quantity) - $49,200
$48,000 = $6 (Standard Quantity)
Thus, the standard quantity allowed = $48,000/$6 per pound = 8,000 pounds.
*The 8,200 pounds figure was calculated in part a above.
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.

P24.8A
Problem 24.8A
RILEY CORPORATION (concluded)
e. Based on the journal entry to charge overhead costs to work in process, the following
relation-ships exist:

$22,000 ? $25,000
$2,000 Unfavorable $5,000 Favorable

Thus standard overhead costs allowed for in June of $20,000 can be computed as follows:
$22,000 - $2,000 = $20,000, or $25,000 - $5,000 = $20,000.
f. Finished Goods Inventory (at standard cost) 154,000

Work in Process Inventory (at standard cost) 154,000*
To transfer cost of completed units to finished goods.
overhead charged to production at standard cost during June ($48,000 + $81,000 + $25,000).
g. Overhead Volume Variance (favorable) ……………………………… 5,000

Materials Price Variance (favorable) ………………………………… 8,200
Materials Quantity Variance (unfavorable) ……………………………………… 1,200
Direct Labor Rate Variance (unfavorable) ……………………………………… 950
Direct Labor Efficiency Variance (unfavorable) ………………………………… 4,500
Overhead Spending Variance (unfavorable) ……………………………………… 2,000
Cost of Goods Sold ………………………………………………………………… 4,550
To close the cost variance accounts.
h. Given that Ripley’s overhead volume variance was favorable, its actual production during
June must have exceeded “normal” output.

P24.8A (p.2)
THE 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.

-$33 (Unfavorable) = 660 sq. ft. × ($.25 - actual price)/sq. ft.
-33
= $.25  actual price
660
-0.05 = $.25  actual price
Actual Price = $ .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
d. Overhead Spending Variance = Standard Overhead Allowed at Actual Production Level
- Actual Overhead Costs

-$210 (Unfavorable) = $1,040* - actual overhead costs
Actual Overhead Costs = $1,250
*Standard overhead allowed at the actual production of 220 units:
Fixed overhead allowed ($3 × 200 units) ………………………………………………… $ 600
Variable overhead allowed ($2 × 220 units) ……………………………………………… 440
Total overhead allowed …………………………………………………………………$ 1,040

P24.9A
SOLUTIONS TO PROBLEMS SET B
25 Minutes, Strong PROBLEM 24.1B
DENTON'S
a. MPV = Actual Quantity × (Standard Price - Actual Price)
= 800 pounds × ($12/lb - $15/lb)
= -$2,400 (or $2,400 Unfavorable)
b. The materials quantity variance (MQV) is first used to find the standard quantity of material
allowed for producing 600 units:

-$1,200 = $12/lb - (Standard Quantity - 800 pounds)
Thus we may solve for the Standard Quantity as follows:
-1,200 = 12 (Standard Quantity) - 9,600

8,400 = 12 (Standard Quantity)
8,400 ÷ 12 = (Standard Quantity) = 700 pounds for 600 units.
700 pounds ÷ 600 units = 1.167 pounds per unit.

700 units × 1.167 pounds/unit = 817 pounds, standard quantity allowed for 700 units (rounded).
c. Work in Process Inventory (700 pounds × $12 per pound) ………… 8,400
Materials Quantity Variance (unfavorable) …………………………… 1,200
Materials Price Variance (unfavorable) ……………………………… 2,400
Direct Materials Inventory (800 pounds × $15 per pound) …….. 12,000
To record direct materials applied to production.
d. Denton’s overhead volume variance is unfavorable by $2,400, given that it is twice the unfavorable
materials quantity variance of $1,200. The volume variance is unfavorable because actual output
of 600 units was less than normal output of 700 units.

P24.1B
30 Minutes, Medium PROBLEM 24.2B
DYELOT INDUSTRIES
a. Computation of materials price variance (MPV):

= 410,000 lbs. × ($0.80/lb - $0.75/lb.)
= 410,000 lbs. × $0.05/lb.
= $20,500 Favorable
Computation of materials quantity variance (MQV):

= $0.80 × [(1,000 lbs. × 400 batches) - 410,000 lbs.]
= $0.80 × -10,000 lbs.
= -$8,000 (or $8,000 Unfavorable)
Computation of labor rate variance (LRV):

= 7,950 × ($8.00/hr. - $7.80/hr.)
= 7,950 × $0.20/hr.
= $1,590 Favorable
Computation of labor efficiency variance (LEV):

= $8.00/hr. × [(20 hrs. × 400 batches) - 7,950 hrs.]
= $8.00/hr. × 50 hrs.
= $400 Favorable

P24.2B
PROBLEM 24.2B
DYELOT INDUSTRIES (concluded)
Computation of overhead spending variance:

Overhead budgeted for 400 batches:
Fixed $ 150,000
Variable (400 batches × $20 per batch) 8,000
Total budgeted overhead $ 158,000
Overhead spending variance (favorable) $ 7,510
Computation of volume variance:

Overhead applied at standard cost
($320 × 400 batches) $ 128,000
Budgeted overhead (above) 158,000
b.
General Journal
Jan. 31 Work in Process Inventory (at standard) 320,000

Materials Inventory (actual) 307,500
To record direct materials used in January.

Labor Efficiency Variance 400
Direct Labor (actual) 62,010
To record direct labor cost applicable to January
production:

Manufacturing Overhead (actual) 150,490
To apply overhead to work in process, using
standard unit cost:

P24.2B (p.2)
LATIN SILK PRODUCTS
a.
General Journal

Direct Materials Inventory (actual cost) 108,000
To record materials used.

To record direct labor cost.

To record manufacturing overhead assigned to
production, and to record overhead variances.
b. (1) Finished Goods Inventory (at standard cost) 300,000

Work in Process (at standard cost) 300,000
To transfer cost of units completed to finished goods
inventory, 20,000 units at $15 per unit.
(2) Cost of Goods Sold (at standard cost) 270,000

To record cost of units sold, 18,000 units at $15 per unit.
c. Fixed overhead per month = $6,000 (unfavorable

volume variance) ÷ 0.20 (idle capacity percentage) $ 30,000

P24.3B
HANS ENTERPRISES
= 170,000 pounds × ($5.00 - $4.80*)
= $34,000 Favorable
*Actual Price per Pound = $816,000/170,000 pounds = 4.80/pound

Quantity)
= $5.00 per pound × (164,000 pounds* - 170,000 pounds)
= $30,000 Unfavorable
*Standard Quantity Allowed = 160 batches × 1,025 pounds/batch = 164,000 pounds
= 2,500 hours × ($8.25 - $8.00*)
= $625 Favorable
*Actual Rate per Hour = $20,000/2,500 hours = $8.00/hour
= $8.25 per hour × (2,400 hours* - 2,500 hours)

= -$825 Unfavorable
*Standard Hours Allowed = 160 batches × 15 hours/batch = 2,400 hours

P24.4B
PROBLEM 24.4B
HANS ENTERPRISES (continued)

Variable 1,100 Variable 1,600 $32/batch × 160 batches = $5,120
$4,200 $4,900
$700 Favorable $220 Favorable

*Standard Variable Overhead Allowed = $10.00/batch × 160 batches = $1,600
d. Entry to charge materials to production:

Materials Quantity Variance (unfavorable) ………………………… 30,000
Material Price Variance (favorable) …………………………………………… 34,000
Direct Materials Inventory (at actual cost) ……………………………………… 816,000
*160 actual batches × 1,025 pounds allowed per batch × $5.00 per pound = $820,000
e. Entry to charge direct labor to production:

Labor Efficiency Variance (unfavorable) …………………………… 825
Labor Rate Variance (favorable) ………………………………………………… 625
Direct Labor (at actual cost) …………………………………………………… 20,000
*160 actual batches × 15 hours allowed per batch × $8.25 per hour = $19,800
f. Entry to charge overhead to production:
Work in Process Inventory (at standard cost) ……………………… 5,120

Overhead Spending Variance (favorable) ………………………………………… 700
Overhead Volume Variance (favorable) ………………………………………… 220
Manufacturing Overhead (at actual cost) ………………………………………… 4,200

P24.4B (p.2)
PROBLEM 24.4B
HANS ENTERPRISES (concluded)
g. Entry to transfer the 160 batches of crow bait produced in June to finished goods:
Finished Goods Inventory (at standard cost) ………………………… 844,920

Work in Process Inventory (at standard cost) …………………………………… 844,920*
To transfer 160 batches of crow bait to finished goods in June.
overhead charged to production at standard cost during June ($820,000 + $19,800 + $5,120).
h. Entry to close overapplied overhead to cost of goods sold:

Overhead Spending Variance (favorable) ……………………………… 700
Overhead Volume Variance (favorable) ……………………………… 220
Cost of Goods Sold …………………………………………………… 920

P24.4B (p.3)
SMOOTH CORPORATION
= 34,000 gallons × ($1.32 - $1.28*)
= $1,360 Favorable
*Actual Price per Pound = $43,520 ÷ 34,000 gallons = $1.28/gallon
= $1.32 per gallon × (30,000 gallons* - 34,000 gallons)
= -$5,280 (or $5,280 Unfavorable)
*Standard Quantity Allowed = 10,000 cases × 3.0 gallons/case = 30,000 gallons
= 8,300 hours × ($15 - $14)
= $8,300 Favorable
= $15 per hour × (8,000 hours* - 8,300 hours)

= -$4,500 (for $4,500 Unfavorable)
*Standard Hours Allowed = 10,000 cases × 0.80 hours/case = 8,000 hours

P24.5B
PROBLEM 24.5B
SMOOTH CORPORATION (concluded)

Fixed $ 4,500 Fixed $ 5,252
Variable 15,500 Variable 16,000* $2.12/case × 10,000 cases = $21,200
$21,000 $21,252
$252 Favorable $52 Unfavorable

*Standard Variable Overhead Allowed = $1.60/case × 10,000 cases = $16,000
d. (1) Work in Process Inventory (at standard cost) ………………… 39,600 *

Materials Quantity Variance (unfavorable) …………………… 5,280
Materials Price Variance (favorable) …………………………………… 1,360
*10,000 actual cases × 3.00 gallons allowed per case × $1.32 per gallon = $39,600
(2) Work in Process Inventory (at standard cost) …………………… 120,000 *

Labor Efficiency Variance (unfavorable) ………………………… 4,500
Labor Rate Variance (favorable) ……………………………………………… 8,300
Direct Labor (at actual cost) ………………………………………………… 116,200
*10,000 actual cases × 0.80 hours allowed per case × $15 per hour = $120,000
(3) Work in Process Inventory (at standard cost) …………………… 21,200
Overhead Volume Variance (unfavorable) ……………………… 52
Overhead Spending Variance (favorable) …………………………………… 252
Manufacturing Overhead (at actual cost) …………………………………… 21,000
(4) Finished Goods Inventory (at standard cost) ……………………… 180,800
Work in Process Inventory (at standard cost) ……………………………… 180,800*
To transfer 10,000 cases to finished goods in June.
overhead charged to production at standard cost during June ($39,600 + $120,000 +
$21,200).
(5) Overhead Spending Variance (favorable) ………………………… 252
Overhead Volume Variance (unfavorable) …………………………………… 52
Cost of Goods Sold …………………………………………………………… 200

P24.5B (p.2)
MONOGLUT, INC.
a. Materials price variance:

Actual Quantity × (Standard Price - Actual Price)
(7,000 units × 13 ounces) × ($0.20/oz. - $0.22/oz.) $ (1,820) Unfavorable
Materials quantity variance:

Standard Price × (Standard Quantity - Actual Quantity)
$0.20/oz. × (84,000 ounces - 91,000 ounces) $ (1,400) Unfavorable
Journal entry to record direct materials used in March:
Work in Process Inventory (7,000 units × 12 oz. × $0.20/oz.) 16,800

Materials Inventory (7,000 units × 13 oz. × $0.22/oz.) 20,020
To record cost of direct materials used in March.
b. Labor rate variance:

Actual Hours × (Standard Hourly Rate - Actual Hourly Rate)
(7,000 units × 0.50 hr.) × ($12.00/hr. - $13.00/hr.) $ (3,500) Unfavorable
Labor efficiency variance:

Standard Hourly Rate × (Standard Hours - Actual Hours)
$12.00/hr. × [(7,000 units × 0.6 hr.) - (7,000 units × 0.50 hr.)]
$12.00/hr. × 700 hrs. $ 8,400 Favorable
Journal entry to record direct labor cost for March:
Work in Process Inventory (7,000 units × 0.6 hr. × $12/hr.) 50,400

Direct Labor (7,000 units × 0.50 hr. × $13.00/hr.) 45,500
To record direct labor costs applicable to production during
during March.

P24.6B
PROBLEM 24.6B
MONOGLUT, INC. (concluded)
c. Overhead spending variance:

Overhead per flexible budget—7,000 units:
Fixed $ 6,000
Variable (7,000 units × $0.40 per unit) 2,800
Total overhead per flexible budget $ 8,800
Less: Actual overhead in March ($6,000 + $2,540) 8,540
Overhead spending variance $ 260 Favorable
Overhead volume variance:

Overhead applied at standard cost (7,000 units × $1) $ 7,000
Less: Overhead per flexible budget (above) 8,800
Overhead volume variance $ (1,800) Unfavorable
Journal entry to record overhead applied to work in process:
Work in Process Inventory (7,000 units × $1 per unit) 7,000

Manufacturing Overhead (Actual costs) 8,540
To apply overhead cost to 7,000 units produced at the
standard rate of $1 per unit.

P24.6B (p.2)
COLONIAL FURNITURE CO.
a. (1) Computation of materials price variance (MPV):

= (1,800 units × 105 ft.) × ($1.50/ft. - $1.40/ft.)
= 189,000 ft. × $0.10
= $18,900 Favorable
(2) Computation of materials quantity variance (MQV):

= $1.50/ft. × [(1,800 units × 100 ft.) - (189,000 ft.)]
= $1.50/ft. × -9,000 ft.
= -$13,500 (or $13,500 Unfavorable)
(3) Computation of labor rate variance (LRV)

= (1,800 units × 4.5 hrs.) × ($10.00/hr. - $9.00/hr.)
= 8,100 hrs. × $1.00
= $8,100 Favorable
(4) Computation of labor efficiency variance (LEV):

= $10.00/hr. × [(1,800 units × 4 hrs.) - (1,800 units × 4.5 hrs.)]
= $10.00/hr. × -900 hours
= -$9,000 (or $9,000 Unfavorable)

P24.7B
PROBLEM 24.7B
COLONIAL FURNITURE CO. (continued)
(5) Computation of overhead spending variance:

Overhead per flexible budget for 800 units:
Fixed $ 20,000
Variable (1,800 units × $8.00 per unit) 14,400 $ 34,400
Overhead spending variance (favorable) $ 200
(6) Computation of volume variance:

Overhead applied using standard cost
($1,800 units × $18 per unit) $ 32,400
Overhead per flexible budget for 1,800 units
(computed above) 34,400
b.
General Journal
May 31 Work in Process Inventory (at standard) 270,000

Materials Inventory (at actual) 264,600
To record direct materials used during May.
Standard cost = 1,800 units @ $150 = $270,000
Actual cost = 1,800 units @ $147 = $264,600

To charge May production with direct labor cost.
Standard cost = 1,800 units @ $40.00 = $72,000
Actual cost = 1,800 units @ $40.50 = $72,900

To charge overhead to production at standard cost.
Standard cost = 1,800 units @ $18.00 = $32,400

P24.7B (p.2)
PROBLEM 24.7B
COLONIAL 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 ($13,500) 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 had two significantly favorable variances: (1) the material price variance,
and (2) the labor rate variance. The favorable price variance may indicate that the
purchasing department is doing an excellent job of securing materials at advantageous
prices. The favorable labor rate variance may indicate that the number of lower paid
inexperienced workers used during the period was higher than normal. If so, their
inexperience may help to explain the unfavorable labor efficiency variance.
The favorable materials price variance may mean that the purchasing department is
buying lower-grade materials than normal. If some of these materials are unusable, this
might explain the large unfavorable materials quantity variance. Also, if these materials
are difficult to work with, this might be contributing to the unfavorable labor efficiency
variance. Management should investigate thoroughly the causes of these variances.

P24.7B (p.3)
FODING CORPORATION
a. Based on the journal entry to charge direct materials costs to work in process, the actual
quantity of material purchased and used during May is determined as follows:
$1,500 = Actual Quantity Used × ($7 - $6)
Thus, the actual quantity of material used during May was 1,500 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 May is determined as
follows:
-$1,000 = $7 per pound × (Standard Quantity - 1,500 pounds*)

-$1,000 = $7 (Standard Quantity) - $10,500
$9,500 = $7 (Standard Quantity)
Thus, the standard quantity allowed = 9,500 ÷ 7 = 1,357 pounds.
*The 1,500 pounds figure was calculated in part a above.
c. Based on the journal entry to charge direct labor costs to work in process, the average per
hour labor cost incurred in May is determined as follows:
Labor Rate Variance = Actual Labor Hours × (Standard Rate - Actual Rate)
-$8,000 = 4,000 hours × ($10 - Actual Rate)
-$8,000 = $40,000 - 4,000 (Actual Rate)
-$48,000 = -4,000 (Actual Rate)
Thus, the actual hourly rate incurred = -$48,000 ÷ -4,000 = $12 per hour.
d. Based on the journal entry to charge direct labor costs to work in process, the standard direct
labor hours allowed during May is determined as follows:
-$5,000 = $10 per hour × (Standard Hours - 4,000 hours)

-$5,000 = $10 (Standard Hours) - $40,000
$35,000 = $10 (Standard Hours)
Thus, the standard hours allowed = $35,000 ÷ $10 = 3,500 hours.

P24.8B
PROBLEM 24.8B
FODING CORPORATION (concluded)
e. Based on the journal entry to charge overhead costs to work in process, the following
relationships exist:

$25,000 ? $28,000
$3,000 Unfavorable $6,000 Favorable

Thus standard overhead costs allowed for in May of $22,000 can be computed as follows:
$25,000 - $3,000 = $22,000, or $28,000 - $6,000 = $22,000.
f. Finished Goods Inventory (at standard cost) ……………………… 72,500

Work in Process Inventory (at standard cost) …………………………………… 72,500*
To transfer cost of completed units to finished goods.
overhead charged to production at standard cost during May ($9,500 + $35,000 + $28,000).
g. Cost of Goods Sold …………………………………………………… 9,500

Overhead Volume Variance (favorable) …………………………… 6,000
Materials Price Variance (favorable) ………………………………… 1,500
Materials Quantity Variance (unfavorable) ……………………………………… 1,000
Direct Labor Rate Variance (unfavorable) ……………………………………… 8,000
Direct Labor Efficiency Variance (unfavorable) ………………………………… 5,000
Overhead Spending Variance (unfavorable) ……………………………………… 3,000
To close the cost variance accounts.
h. Given that Foding’s overhead volume variance was favorable, its actual production during
May must have exceeded “normal” output.

P24.8B (p.2)
THE NINNA COMPANY
a. Since the direct materials quantity variance is $0, the actual quantity of materials used per
shelf must equal the budgeted quantity per shelf. Thus the total quantity purchased and used
is:
250 shelves × 4 square feet per shelf = 1,000 square feet.
-$40 = 1,000 sq. ft. × ($.20 - actual price)/sq. ft.
-40
= $.20  actual price
1,000
-0.04 = $.20  actual price

Actual Price = $ .24 per square foot
b. Labor Efficiency Variance = Standard Hourly Rate × (Standard Hours - Actual

Hours)
-$300 (Unfavorable) = $12 × (.4 hours per unit - actual hours per unit) × 250
units
-$300
= .4 hours per unit  actual hours per unit
$3,000
-0.10 = .4 hours per unit  actual hours per unit
Actual Hours Per Unit = .50 hours per unit
c. Labor Rate Variance = Actual Labor Hours × (Standard Rate - Actual Rate)
$200 (Favorable) = .50 hours per unit × 250 units × ($12 per hour - actual
rate)
$200 = 125 hours × ($12 per hour - actual rate)
$200
= $12  actual rate
125
$1.60 = $12  actual rate

Actual Rate Per Hour = $10.40 per hour
d. Overhead Spending Variance = Standard Overhead Allowed at Actual Production Level

- Actual Overhead Costs
-$100 (Unfavorable) = $1,400* - actual overhead costs
Actual Overhead Costs = $1,500
*Standard overhead allowed at the actual production of 250 units:
Fixed overhead allowed ($4 × 225 units) ……………………………………………… $ 900
Variable overhead allowed ($2 × 250 units) …………………………………………… 500
Total overhead allowed …………………………………………………………… $ 1,400

P24.9B
SOLUTIONS TO CRITICAL THINKING CASES
25 Minutes, Strong CASE 24.1
IT'S NOT MY FAULT
a. The basic problem is that the production manager is being unfairly charged with cost
overruns that should be assigned to the sales department. If we assume that filling the large
“rush” order is appropriate, the production manager apparently has no choice but to incur
labor costs at overtime rates. Under these circumstances, the production manager should
not be held responsible for exceeding a budget that does not include overtime labor costs.
Also, the performance reports of the sales department overstate that department’s
contribution to the profitability of the business. The gross profit credit to the sales
department is based upon standard costs. This practice overstates the actual gross profit
earned on “rush” orders, because it ignores any overtime costs incurred in filling these
orders.
b. The production manager should not be penalized by the extra direct labor costs incurred
when the production department is asked to produce beyond normal capacity. The extra
costs relating to overtime should be considered a “normal” cost of the “rush” order and,
therefore, should be included in the cost of goods sold charged against the sales
department. This may be accomplished by charging any unfavorable labor rate variances
resulting from overtime on rush orders against the sales department, instead of the
production department. This will cause the sales department to consider the possible
overtime costs in deciding whether or not to accept rush orders.

Case 24.1
ARMSTRONG CHEMICAL
a. The president is not correct in arguing that the standard costs for Tough-Coat should not be
revised for purposes of valuing the inventory at the end of the year. The standards set for
material X-1 and direct labor for future periods, however, depend on anticipated prices and
operating conditions. But the issue in this problem is not future standards; the issue is to
revise past standard costs that have proved to be unrealistic, both for the evaluation of
operating efficiency and for inventory valuation purposes.
There is no merit to the president’s position that, because the cost of material X-1 “shows
signs of going up,” the standard cost of $1.00 per ounce should not be changed. The fact is
that material X-1 actually costs only $0.70 per ounce. If the ending inventory is priced on the
basis of the $1.00 standard cost for material X-1, the inventory would be overstated because
it would include a fictitious cost element. A fundamental accounting principle is that
inventories should be valued at actual cost.
Since the wage rate increased by 10% early in the year, the standard unit cost for direct
labor for Tough-Coat should be increased from $0.80 to $0.88. The fact that the
productivity of workers did not increase is an important point, but it is not a relevant
argument against the revision of the standard cost for direct labor.
b. Revised
Standard
Cost
per Unit
Material X-1 ($840,000 ÷ 1,200,000 ounces purchased) ……………… $ 0.70
Material X-2 (No change required) ……………………………………. 0.50
Direct labor ($0.80 × 110%) …………………………………………… 0.88
Factory overhead (No change required) ……………………………….. 1.40
Total revised cost per unit ……………………………………………. $ 3.48
Revised schedule of inventory at the end of the year:

Materials:
Material X-1, 200,000 ounces @ $0.70 ……………. $ 140,000
Material X-2, 100,000 pounds @ $0.50 ……………. 50,000 $ 190,000
Finished goods:
Tough-Coat, 100,000 units at revised standard cost of $3.48 per unit ………… 348,000
Total inventory at Dec. 31 …………………………………………………………… $ 538,000

Case 24.2
CASE 24.2
ARMSTRONG CHEMICAL (concluded)
c. As the schedule above indicates, the ending inventory would be reduced from $560,000
to $538,000, a reduction of $22,000. This reduction in the valuation of ending inventory
would have the effect of reducing operating income by 44% (from $50,000 to $28,000).
On this point the president is correct, but the use of an unacceptable accounting
procedure cannot be defended on grounds that the use of sound accounting “would
reduce operating income.”
d. (1) Materials price variance (MPV) for X-1:

= 1,000,000* ounces × ($1.00/oz. - $0.70/oz.)
= $300,000 Favorable
Materials quantity variance (MQV) for X-1:

= $1.00/ounce × (1,000,000 ounces - 1,000,000* ounces)
= 0
*$1,200,000 oz. purchased - 200,000 oz. in ending inventory
(2) Materials price variance (MPV) for X-2:

= 1,050,000** pounds × ($0.50/lb. - $0.50/lb.)
= 0
Materials quantity variance (MQV) for X-2:

= $0.50 × (1,000,000 lbs. - 1,050,000** lbs.)
= $25,000 (or $25,000 Unfavorable)
**1,150,000 1bs. purchased  100,000 lbs. in ending inventory
(3) Total Labor Variance = Standard Labor Cost - Actual Labor Cost
= (1,000,000 units × $0.80) - $880,000
= $80,000 (or $80,000 Unfavorable)
(4) Total Overhead Variance = Overhead Applied  Actual Overhead

= (1,000,000 units × $1.40) - $1,400,000
= $0

Case 24.2 (p.2)
OUTSOURCING AND LABOR EFFICIENCY
BUSINESS WEEK
a. Both labor rate and labor efficiency standards will be affected by the outsourcing decisions.
Managers can use the variances to evaluate and reward the virtual employees. However,
because it is impossible to be able to physically monitor these virtual employees, other types
of information should be considered in the evaluation, such as customer complaints and/or
satisfaction measures, on time performance, etc.
b. Instilling a corporate ethical culture or enforcing a code of ethics in global settings is

difficult for a variety of reasons. First, because the culture of countries around the world
have differing perspectives on ethical issues, it is difficult for any manager from any
country to be aware of those culture-based ethical differences. As a result of these
differences, companies with employees in multiple countries often incorporate a company-
wide code of ethics, an Ethics and Standards vice president and an ethics monitoring office.
However, this is often not enough if the employees come from a culture where ethical issues
are defined differently from the parent company’s. Some companies add ethics training as
a means to instill knowledge about ethical issues throughout their organizations. A final
issue is that often the outsourced jobs are managed by another company. In the case of
Penske, Genpact managed the employees. Under these circumstances, Penske loses control
of the ethical climate.

Case 24.3
30 Minutes, Medium CASE 24.4
DELTA AND CONTINENTAL AIRLINES
INTERNET
a. The spending variance will equal the difference between five times the price obtained and
the budget of $1,400.
b. The reasonableness of the standard will be affected by current airline pricing policies and
how far in advance reservations are made. Fares are often lower the earlier reservations
are made and can be substantially more expensive if they are made near the date of
departure.

Case 24.4
STANDARD COST SYSTEM
AND INVENTORY MISSTATEMENT
ETHICS, FRAUD & CORPORATE GOVERNANCE
a. Buck appears to be attempting to increase the factory’s profit by closing the material favorable
variance account balance to cost of goods sold, thereby decreasing cost of goods sold and
increasing operating profits. The finished goods and work in process inventories would be
overstated if the total favorable variance account balance is credited to cost of goods sold.
b. The IMA code of ethics suggests the following procedure to resolve ethical conflicts:
follow your organization’s established policies on the resolution of such conflict. If these policies
do not resolve the ethical conflict, you should consider the following courses of action:
• Discuss the issue with your immediate supervisor except when it appears that the supervisor is
involved. In that case, present the issue to the next level. If you cannot achieve a satisfactory
resolution, submit the issue to the next management level. If your immediate superior is the
chief executive officer or equivalent, the acceptable reviewing authority may be a group such
as the audit committee, executive committee, board of directors, board of trustees, or owners.
Contact with levels above the immediate superior should be initiated only with your
superior’s knowledge, assuming he or she is not involved. Communication of such problems to
authorities or individuals not employed or engaged by the organization is not considered
appropriate, unless you believe there is a clear violation of the law.
• Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethics
Counselor or other impartial advisor to obtain a better understanding of possible courses of
action.
• Consult your own attorney as to legal obligations and rights concerning the ethical conflict.

Case 24.5

Standard Cost Systems: Overview of Brief Exercises, Exercises, Problems, and Critical Thinking Cases

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CHAPTER 24

STANDARD COST SYSTEMS

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Critical Thinking Cases

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Problems (Sets A and B)

24.2 A,B AgriChem Industries/Dyelot Industries 30 Medium

24.3 A,B American Hardwood Products/Latin Silk Products 25 Medium

24.4 A,B Sven Enterprises/Hans Enterprises 45 Strong

24.5 A,B Slick Corporation/Smooth Corporation 45 Strong

24.6 A,B Polyglaze, Inc./Monoglut, Inc. 40 Strong

24.7 A,B Heritage Furniture Co./Colonial Furniture Co. 40 Strong

24.8 A,B Ripley Corporation/Foding Corporation 60 Strong

© The McGraw-Hill Companies, Inc., 2010

© The McGraw-Hill Companies, Inc., 2010

24.2 Armstrong Chemical 50 Strong

24.3 Outsourcing and Labor Efficiency 20 Strong

24.4 Travelocity.com 30 Medium

24.5 Standard Cost Systems and Inventory Misstatements 30 Medium

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Direct materials: price and quantity variances.

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$48,000 (applied based

$14,000 unfavorable Spending Var. $6,000 favorable Volume Var.

Managers using ideal standards would expect unfavorable variances on a

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Materials quantity variance = (20,000lbs. – 20,800lbs.) × $2/lb. = $1,600

Actual Overhead Standard Overhead Overhead

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Ex. 24.2 Actual costs incurred:

Direct materials: Standard cost ($90,000), plus unfavorable price

Ex. 24.3 a. MPV = Actual Quantity × (Standard Price - Actual Price)

*Actual Price = $6,000,000 ÷ 100,000 grams = $60 per gram

c. Materials usage in the pharmaceutical industry must be extremely accurate

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Ex. 24.6 a. Marlo’s labor rate variance is computed as follows:

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Ex. 24.7 a. Standard price, $8.75 per pound

b. Standard price, $8.75 per pound

d. Materials quantity variance, $1,400 favorable

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Ex. 24.9 Overhead spending variance:

Ex. 24.10 Work in Process Inventory ……………………………… 360,000

Ex. 24.11 a. Overhead Spending Variance = Standard Overhead Allowed

Standard overhead allowed at the actual production of 4,500

b. Overhead Volume Variance = Overhead Applied - Overhead Allowed at

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c. Although the overall overhead variance is unfavorable, it is mostly due to an

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MQV = Standard Price × (Standard Quantity - Actual Quantity)

Thus we may solve for the Standard Quantity as follows:

-300 = 15 (Standard Quantity) - 9,000

580 pounds divided by 500 units = 1.16 pounds per unit.

© The McGraw-Hill Companies, Inc., 2010

MPV = Actual Quantity Used × (Standard Price - Actual Price)

Computation of materials quantity variance (MQV):

MQV = Standard Price × (Standard Quantity - Actual Quantity)

Computation of labor rate variance (LRV):

LRV = Actual Hours × (Standard Hourly Rate - Actual Hourly Rate)

Computation of labor efficiency variance (LEV):