Exam 11: Standard Costs and Variance Analysis

Variance analysis is used for monitoring and performance evaluation.

The accountants at Value Vases developed the following standards for producing exquisite vases from a liquid silicate: Direct materials 2.5 litres @ $5 per litre Direct labour 3.5 hours @ $15 per hour Variable overhead $10.00 per direct labour hour Fixed overhead $5.00 per direct labour hour Value's volume of direct labour hours for normal costing is 1,680 each month. In a recent month, Value produced 500 vases and incurred the following costs: Direct materials purchased & used 1,200 litres @ $6 per litre Direct labour 1,700 hours @ $14 per hour Variable overhead $15,000 Fixed overhead $8,500 a)Calculate the following eight variances: Direct material price variance Direct material efficiency variance Direct labour price variance Direct labour efficiency variance Variable overhead spending variance Variable overhead efficiency variance Fixed overhead spending variance Fixed overhead production volume variance b)Suggest one possible cause for each of the following variances calculated in part (a): Direct material price variance Direct labour efficiency variance Fixed overhead spending variance

Everett, Inc. budgeted $1,488,000 for total overhead. The standard variable overhead rate was $2 per direct labour hour, or $6 per unit, based on an anticipated activity level of 600,000 direct labour hours. During the year 220,000 units were produced. Fixed overhead costs incurred were $300,000. The variable overhead budget variance was $19,800 unfavourable, and the actual variable overhead rate was $2.10 per direct labour hour. The actual variable overhead costs incurred were:

The standard cost of direct materials is computed as the standard price per unit of input times the standard quantity per unit of input.

Fixed overhead production volume variances reflect:

Everett, Inc. budgeted $1,488,000 for total overhead. The standard variable overhead rate was $2 per direct labour hour, or $6 per unit, based on an anticipated activity level of 600,000 direct labour hours. During the year 220,000 units were produced. Fixed overhead costs incurred were $300,000. The variable overhead budget variance was $19,800 unfavourable, and the actual variable overhead rate was $2.10 per direct labour hour. The standard fixed overhead rate per direct labour hour was:

If a variance is unfavourable, it should be closed directly to cost of goods sold.

Vashon Corporation had the following activity during a recent period: Standard quantity of direct materials 9,000 kilograms Actual quantity of direct materials purchased and used 8,800 kilograms Efficiency variance $2,400 favourable Total direct materials budget variance $200 favourable The direct materials price variance was:

Provide one pro and one con for building waste into cost standards.

(Appendix 11A)The contribution margin sales volume variance calculates:

Pardee, Inc. completed operations for the week and the accountant was preparing to make journal entries necessary to prepare a set of interim financial statements. Unfortunately, he discovered some of the data concerning direct materials had been lost. He was able to find the following: Efficiency variance $4,500 Unfavourable Standard price $10 per unit Actual units purchased 9,000 Inventory decrease 1,000 units Budget variance $900 Favourable The actual direct materials price paid per unit was:

Standard costs should be reviewed:

Brodie Co. uses a standard job cost system and a denominator volume of 25,000 direct labour hours for allocating overhead. The actual output was 12,000 units, which cost $185,700 for direct labour (23,000 hours), $27,525 for variable overhead, and $136,400 for fixed overhead. The standard variable overhead per unit is $2 (2 hours @ $1 per hour), and the standard fixed overhead per unit is $10 (2 hours @ $5 per hour). All variances are immaterial and are closed to Cost of Goods Sold at the end of the period. The entry to close the fixed overhead variances includes a:

Everett, Inc. budgeted $1,488,000 for total overhead. The standard variable overhead rate was $2 per direct labour hour, or $6 per unit, based on an anticipated activity level of 600,000 direct labour hours. During the year 220,000 units were produced. Fixed overhead costs incurred were $300,000. The variable overhead budget variance was $19,800 unfavourable, and the actual variable overhead rate was $2.10 per direct labour hour. The variable overhead efficiency variance was:

ELM Corporation introduced a new automated production process that has reduced the amount of labour needed, but not affected the use of materials. The standard cost system has not been changed yet to reflect this new process. Assuming the machinery is functioning properly and that workers were properly trained in its use, which of the following variances is most likely to result?

In a traditional manufacturing accounting system, the standard cost of a unit of output is the sum of the standard costs of:

Everett, Inc. budgeted $1,488,000 for total overhead. The standard variable overhead rate was $2 per direct labour hour, or $6 per unit, based on an anticipated activity level of 600,000 direct labour hours. During the year 220,000 units were produced. Fixed overhead costs incurred were $300,000. The variable overhead budget variance was $19,800 unfavourable, and the actual variable overhead rate was $2.10 per direct labour hour. The standard direct labour hours allowed were:

(Appendix 11A)For organizations that sell multiple products, contribution margin and sales mix variances are often useful for decision making.

(Appendix 11A)Wanda's Wand Shop sells a variety of magic wands. In a recent month, Wanda's accounting information system revealed the following information: Budget Actual Units 2,500 3,200 Sales revenue $10,000 $12,000 Variable product costs 1,200 2,000 Fixed manufacturing costs 800 700 Variable selling costs 1,500 1,400 Fixed nonmanufacturing costs 500 600 a)Calculate the following variances: Revenue budget variance Sales price variance Revenue sales quantity variance b)Suggest two reasons why managers might be interested in investigating one or more of the variances in part (a).

During the current period, Richeleau Company produced 1,000 units of product. The flexible budget for standard costs for the 1,000 units is: Direct materials $43,000 Direct labour 67,000 Variable overhead 30,000 Fixed overhead 25,000 Richeleau purchases only the amount of material required for production each period; it does not maintain raw material inventories. Variances for the period are: Direct materials price $400 U Direct materials efficiency 500 U Direct labour price 600 F Direct labour efficiency 200 U Variable overhead spending 300 F Variable overhead efficiency 100 F Fixed overhead spending 500 F Fixed overhead production volume 1000 U Prepare the journal entries necessary to record all variances and then to close them, assuming that they are all immaterial.