Exam 12: Standard Costs: Direct Labor and Materials

Basic Price and Quantity Variances for Labor and Materials Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost.Arrow has established the following standards for the direct costs of one unit of product. During May,Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000.The total factory wages for May were $42,000,90 percent of which were for direct labor.Arrow manufactured 19,000 units of product during May using 142,500 pounds of direct material and 5,000 direct labor hours. Required: a.Calculate the direct materials price variance for May. b.Calculate the direct materials quantity variance for May. c.Calculate the direct labor wage rate variance for May. d.Calculate the direct labor efficiency variance for May.

Establishing a Standard Cost System The Tippa Canoe Company makes fiberglass canoes.The fiberglass resin is initially molded to the shape of a canoe,then sanded and painted.Metal or wooden seats and frames are added for stability.The Tippa Canoe Company was started several years ago in the owner's garage.The owner,Jeff George,did a lot of the initial manual labor with the help of a few friends.The company has since expanded into a large warehouse and new employees have been hired.Because of the expansion,Jeff is no longer directly involved with production and is concerned about his ability to plan for and control the company.He is considering the implementation of a standard cost system. Required: a.Describe the procedures Jeff should use in setting standards for direct labor and direct materials. b.Describe how Jeff could use standards for planning purposes, c.Describe how Jeff could use standards for motivating employees and problems in using standards as performance measures. d.Why are some of Jeff's friends who worked with from the beginning not very excited about a change to a standard cost system?

Materials Quantity Variance:Solving for Actual Quantity Todco planned to produce 3,000 units of its single product,Teragram,during November.The standard specifications for one unit of Teragram include six pounds of material at $0.30 per pound.Actual production in November was 3,100 units of Teragram.The accountant computed a favorable materials purchase price variance of $380 and an unfavorable materials quantity variance of $120. Required: Based on these data,calculate how many pounds of material were used in the production of Teragram during November.

Assignment of Decision Rights for Setting Standards Associated Media Graphics (AMG)is a rapidly expanding company involved in the mass reproduction of instructional materials.AMG is organized into a number of production departments,each of which is responsible for a particular stage of the production process,such as copyediting,typesetting,printing,and binding.An engineering department provides technical assistance to the various production units.Ralph Davis,owner and manager of AMG,has made a concentrated effort to provide a quality product at a competitive price with delivery on the promised due date.Expanding sales have been attributed to this philosophy.Davis is finding it increasingly difficult to personally supervise the operations of AMG and is beginning to institute an organizational structure that would facilitate management control. One change recently made was the designation of operating departments as cost centers,with control over departmental operations transferred from Davis to each departmental manager.However,quality control still reports directly to Davis,as do the finance and accounting functions.A materials manager was hired to purchase all raw materials and to oversee the inventory handling (receiving,storage,etc. )and record-keeping functions.The materials manager is also responsible for maintaining an adequate inventory based upon planned production levels. The loss of personal control over the operations of AMG caused Davis to look for a method of efficiently evaluating performance.Dave Cress,a new cost accountant,proposed the use of a standard cost system.Variances for materials and labor could then be calculated and reported directly to Davis. Required: a.Assume that AMG is going to implement a standard cost system and establish standards for materials,labor,and manufacturing overhead.For each of these cost components,identify and discuss. (i)Who should be involved in setting the standards. (ii)The factors that should be considered in establishing the standards. b.Describe the basis for assignment of responsibility under a standard cost system.

Expected,Standard,and Actual Labor Hours The Pizza Company makes two types of frozen pizzas:pepperoni and cheese.The Pizza Company allocates overhead to these two products based on the number of direct labor hours.The direct labor hours per unit for making a pepperoni pizza is 5 minutes or 1/12 of an hour.The direct labor hours per unit for making a cheese pizza is 4 minutes or 1/15 of an hour.At the start of the year the Pizza Company expected to make 12,000 pepperoni pizzas and 6,000 cheese pizzas.During the year,the Pizza Company actually made 9,000 pepperoni pizzas and 7,500 cheese pizzas.The time cards indicate that direct laborers worked for 1,300 hours.What are the total expected direct labor hours,standard direct labor hours,and actual direct labor hours?

Developing Standards ColdKing Company is a small producer of fruit-flavored frozen desserts.For many years,ColdKing's products have had strong regional sales on the basis of brand recognition;however,other companies have begun marketing similar products in the area,and price competition has become increasingly important.John Wakefield,the company's controller,is planning to implement a standard cost system for ColdKing and has gathered considerable information from his co-workers on production and materials requirements for ColdKing's products.Wakefield believes that the use of standard costing will allow ColdKing to improve cost control and make better pricing decisions. ColdKing's most popular product is raspberry sherbet.The sherbet is produced in 10-gallon batches,and each batch requires six quarts of good raspberries.The fresh raspberries are sorted by hand before entering the production process.Because of imperfections in the raspberries and normal spoilage,one quart of berries is discarded for every four quarts of acceptable berries.Three minutes is the standard direct labor time for sorting to obtain one quart of acceptable raspberries.The acceptable raspberries are then blended with the other ingredients;blending requires 12 minutes of direct labor time per batch.After blending,the sherbet is packaged in quart containers.Wakefield has gathered the following pricing information: • ColdKing purchases raspberries at a cost of $0.80 per quart.All other ingredients cost a total of $4.50 per 10-gallon batch. • Direct labor is paid at the rate of $9.00 per hour. • The total cost of material and labor required to package the sherbet is $0.38 per quart. Required: a.Develop the standard cost for the direct cost components of a 10-gallon batch of raspberry sherbet.For each direct cost component of a batch of raspberry sherbet,the standard cost should identify the (i)standard quantity. (ii)standard rate. (iii)standard cost per batch. b.As part of the implementation of a standard cost system at ColdKing,John Wakefield plans to train those responsible for maintaining the standards in the use of variance analysis.Wakefield is particularly concerned with the causes of unfavorable variances. (i)Discuss the possible causes of unfavorable materials price variances and identify the individual(s)who should be held responsible for them. (ii)Discuss the possible causes of unfavorable labor efficiency variances and identify the individual(s)who should be held responsible for them.

Labor Variances Hospital Software sells and installs computer software used by hospitals for patient admissions and billing.Every sale requires that Hospital Services modify its proprietary software for the specific demands of the client.Prior to each installation,Hospital Software estimates the number of hours of programming time each job will require and the cost of the programmers.Programmers record the amount of time they spend on each modification,and variance reports are prepared at the end of each installation. For the Denver General Hospital account,Hospital Software estimates the following labor standards: After the job was completed,the following costs were reported: Required: Calculate the labor efficiency and labor wage rate variances for the junior and senior programmers on the Denver General Hospital account.

Standard Labor Variances A CPA firm estimates that an audit will require the following work: The actual hours and costs were: Required: Calculate the direct labor,wage rate,and labor efficiency variances for each type of auditor and interpret.