Exam 11: Standard Costs and Variance Analysis

Hyteck, Inc. is a capital intensive firm. Indirect costs make up nearly 70% of the product costs. The company has no direct material costs because customers provide the direct materials used for each job. To plan and control such costs, the firm employs flexible budgets and standard costs. Overhead rates, based on direct labour hours, are derived from the master budget. Master Actual Budget Results Units produced 2,000 1,820 Direct labour hours 10,000 9,200 Fixed overhead $100,000 $98,000 Variable overhead $160,000 $150,000 Direct labour $100,000 $90,000 The fixed overhead spending variance was:

If the total variances in the accounting information system are favourable, accountants must adjust some accounts by decreasing costs during the closing process.

During the period Richeleau produced 1,000 units of product. The flexible budget for standard costs is: Direct materials $43,000 Direct labour 67,000 Variable overhead 30,000 Fixed overhead 25,000 Variances for the period are: Direct materials price $ 400 U Direct materials efficiency 500 F 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 1,000 U The variable overhead allocated was:

Welch Company budgeted the following cost standards for the current year: Direct materials = 1.40 kilograms per unit @ $1.50 per kilogram Direct labour = 0.75 hours per unit @ $6 per hour Actual production and costs were as follows: Units produced = 2,800 Direct materials used = 4,500 kg. Direct materials purchased = 5,000 kg. @ a cost of $5,850 Direct labour incurred = 2,000 hours at a cost of $13,000 The labour efficiency variance was:

Given the following data for LXG Corporation: Standard direct materials per unit 4 ml. Standard direct labour hours per unit 1.5 hours Standard direct materials price $5 per ml. Standard direct labour rate $6 per hour Production (in finished or equivalent units)2,000 units Actual direct labour hours 2,200 hrs Actual direct labour cost $23,490 Actual direct materials used 7,800 ml. Units sold 1,400 units Direct materials purchased 8,000 ml. Cost of direct materials purchased $34,000 a)Calculate the direct material and direct labour price and efficiency variances. b)Suggest two possible causes for the largest variance in part (a). For each cause you identify, describe an appropriate action (if any)that managers should take. c)Describe two general factors that managers should consider in deciding whether to investigate the variances in part (a).

Burkett Company uses a standard cost system. Indirect costs were budgeted at $200,000 plus $15 per direct labour hour. The overhead rate is based on 10,000 hours. Actual results were: Standard direct labour hours 9,000 Actual direct labour hours 10,000 Fixed overhead $190,000 Variable overhead $185,000 The variable overhead efficiency variance was:

If more direct materials were used than expected at standard:

Standard costing allows management to: I. Measure performance II. Identify inefficiencies III. Control costs

Variance analysis can be used for both costs and revenues.

Hogle Mfg. Co. uses a standard costing system. The standard time to produce one unit is 4 hours, and normal production is 3,000 units monthly. Overhead costs were estimated to be $135,000. The standard variable overhead rate is $5 per machine hour. During April the following results were recorded: Units produced 3,100 Units sold 2,800 Machine hours required 12,800 Actual overhead costs $136,000 The combined fixed and variable overhead spending variance was:

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 standard cost of the direct materials used was:

Dem Mfg. has gathered the following data in preparing to record their direct labour payroll costs for the week: Actual hours worked 18,500 Standard hours allowed 20,000 Total direct labour variance $8,300 F Direct labour price variance $3,700 U The standard direct labour price was:

The variable overhead budget variance is the difference between allocated variable overhead cost and actual variable overhead cost.

Mason, Inc. uses a standard costing system. Overhead costs are allocated based on direct labour hours. The standard variable overhead and fixed overhead rates are $1 and $5 per direct labour hour, respectively. Data relevant for the current period include: Direct materials purchased 50,000 kg. @ $12 per kg. Direct materials used 50,000 kg. Standard quantity of direct materials For actual production 45,000 kg. Direct materials standard price $13 per kg. Direct labour costs incurred 75,000 hours @ $12 per hour Standard direct labour hours for Actual production 78,000 hours Standard direct labour cost per hour $11 per hour Variable overhead costs incurred $77,070 Fixed overhead costs incurred $381,920 The variable overhead spending variance is:

Expected costs per unit of input are called:

Normal fluctuations in labour hours may cause a favourable direct labour efficiency variance.

White, Inc. produces a chemical product whose primary component is purchased on credit and any discounts are always taken. The following material and labour elements make up the costs of the product: Purchase price for material $30 per litre Freight and handling $130 per 100 litres Each container of the chemical product contains 5.7 quarts of material. During the process 5% of the material is lost due to waste. Each container of product also requires 1.2 hours of labour. Each day 2 hours are taken for set-up, cleaning, and breaks. Also, the wage rate is $15 per hour and fringes/payroll taxes are 20% of wages. Clients can take a 3% discount if they pay invoices within 10 days; otherwise, the entire invoice amount is due within 30 days. 1 litre equals 4 quarts. The standard rate per hour is:

The production manager of CLR Corporation calculated a material and unfavourable variance of $4,000 with respect to the cost of direct materials. Which of the following is a likely next step for the production manager?

Because managers use estimates in calculating overhead allocation rates, they are likely to experience:

Suppose you are an accountant in a plant that manufactures thermostats for homes and commercial buildings. You have been asked to set up a standard cost system. Explain how you would determine a standard cost for direct materials for each product line.