Chapter 11
Standard Costs and Operating Performance Measures

Problem 11-12 (45 minutes) 1. a. In the solution below, the materials price variance is computed on the entire amount of materials purchased whereas the materials quantity variance is computed only on the amount of materials used in production: Actual Quantity of Input, at Actual Price (AQ × AP) Actual Quantity Standard Quantity of Input, at Allowed for Output, at Standard Price Standard Price (AQ × SP) (SQ × SP) 12,000 ounces × 9,375 ounces* × $20.00 per ounce $20.00 per ounce = $240,000 = $187,500 $225,000    Price Variance, $15,000 F 9,500 ounces × $20.00 per ounce = $190,000  Quantity Variance, $2,500 U

*3,750 units × 2.5 ounces per unit = 9,375 ounces Alternatively, the variances can be computed using the formulas: Materials price variance = AQ (AP – SP) 12,000 ounces ($18.75 per ounce* – $20.00 per ounce) = $15,000 F *$225,000 ÷ 12,000 ounces = $18.75 per ounce Materials quantity variance = SP (AQ – SQ) $20.00 per ounce (9,500 ounces – 9,375 ounces) = $2,500 U
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b. Yes, the contract probably should be signed. The new price of $18.75 per ounce is substantially lower than the old price of $20.00 per ounce, resulting in a favorable price variance of $15,000 for the month. Moreover, the material from the new supplier appears to cause little or no problem in production as shown by the small materials quantity variance for the month.

© The McGraw-Hill Companies, Inc., 2010. All rights reserved. 2 Managerial Accounting, 13th Edition

Problem 11-12 (continued) 2. a. Actual Hours of Actual Hours of Standard Hours Input, at the Input, at the Allowed for Output, at Actual Rate Standard Rate the Standard Rate (AH × AR) (AH × SR) (SH × SR) 5,600 hours* × 5,600 hours × 5,250 hours** × $12.00 per hour