Chapter 12

Standard Costs and Variance Analysis
Solutions to Questions

12-1 A quantity standard indicates how much of an input should be used to make a unit of output. The quantity might be measured either in terms of units of direct materials or hours of direct labour time. A price standard indicates what the cost of the input should be.

12-2 Ideal standards do not allow for any imperfections or inefficiencies. Thus, ideal standards are rarely, if ever, attained. Practical standards allow for normal inefficiency, machine breakdown time, etc., and can be attained by employees working at a reasonable, though highly efficient pace.

12-3 Inability to meet a standard is likely to be demoralising to employees, and may result in decreased productivity.

12-4 A budget is a total concept, whereas a standard is a unit concept. A standard might be viewed as the budgeted cost for one unit of product.

12-5 A variance is the difference between what was planned or expected and what was actually accomplished. In a standard cost system, there are at least two types of variances. The price variance focuses on the difference between standard and actual prices. The quantity variance is concerned with the difference between the standard quantity of input allowed for the actual output and the actual amount of the input used.

12-6 Under the management by exception approach, managers focus their attention on operating results that deviate from expectations. It is assumed that the

results that meet expectations do not require investigation.

12-7 Price paid and quantity used represent two different decisions on the part of managers. Not only are these different decisions, but the decisions often fall at two different points in time, and generally are made by different managers.

12-8 The materials price variance is usually the responsibility of the purchasing manager. The materials quantity variance is usually the responsibility of the production managers and supervisors. The labour efficiency variance generally is also the responsibility of the production managers and supervisors.

12.9 The materials price variance can be computed either when materials are purchased or when they are placed into production. It is better to compute the variance when materials are purchased. This permits earlier recognition of the variance, since materials can lay in the warehouse for many months before being used in production. In addition, this allows the company to carry its raw materials in the stock accounts at standard cost, which greatly simplifies bookkeeping.

12.10 This combination of variances may indicate that inferior quality materials are being purchased in order to economise on price, but that the materials are not satisfactory in production (due to poor quality), therefore resulting in waste.

12.11 If used as punitive tools, standards can undermine goal setting and can breed resentment toward the organisation. Standards must never be used as an excuse to conduct witch hunts, or as a means of finding someone to blame for problems.

12.12 Several factors other than the contractual rate paid to workers can cause a labour rate variance. For example, skilled workers with high hourly rates of pay can be given duties that require little skill and that call for low hourly rates of pay, thereby resulting in unfavourable rate variances. Or unskilled or untrained workers can be assigned to tasks that should be filled by more skilled workers with higher rates of pay, thereby resulting in favourable rate variances. Unfavourable rate variances can arise from overtime work at premium rates if part (or all) of the overtime cost is charged to the direct labour account.

12-13 Poor quality materials can unfavourably affect the labour efficiency variance. If the materials are unsuitable for production, the result could be an excessive use of labour time and therefore an unfavourable labour efficiency variance. Poor quality materials would not ordinarily affect the labour rate variance.

12-14 The variable overhead efficiency variance and the direct labour efficiency variance will always be favourable or unfavourable together. Both are dependent on the number of direct labour-hours actually worked as compared to the standard hours allowed. That is, in each case the formula is:

SR(AH – SH) = Efficiency Variance

Only the ‘SR’ part of the formula differs for the two variances.

12-15 A control chart is a statistical method of isolating those variances that can properly be called exceptions, and that are not due to random or chance causes. Upper and lower limits are set. Any variances falling between these limits are considered to be normal and due to chance causes. Any variances falling outside of these limits are considered exceptions and are investigated.

12-16 If labour is a fixed cost and standards are tight, then the only way to generate favourable labour efficiency variances is for every work station to produce at capacity. However, the output of the entire system is limited by the capacity of the bottleneck. If work stations before the bottleneck in the production process produce at capacity, the bottleneck will be unable to process all of the work-in-process. In general, if a work station with higher capacity precedes a work station with lower capacity, work-in-process stocks will build up in front of the work station with lower capacity if every work station is attempting to produce at capacity.

Exercise 12-1 (20 minutes)
| 1. |Cost per 15-gallon container | |£115.00 | | |
| |Less 2% cash discount | |2.30 | | |
| | Net cost | |112.70 | | |
| |Add freight cost per container | | | | |
| |(£130 ( 100) | |1.30 | | |
| |Total cost per 15-gallon container | |£114.00 | |(a) |
| |Number of quarts per container | | | | |
| |(15 gallon x 4) | |60 | |(b) |
| |Standard cost per quart purchased | | | | |
| |(a) ( (b) | |£ 1.90 | | |
| 2. |Content per bill of materials | |7.6 | |qts. |
| |Add allowance for evaporation and | | | | |
| |spillage (7.6 qts. ( 0.95 = 8.0 qts.; | | | | |
| |8.0 qts. – 7.6 qts. = 0.4 qts.) | |0.4 | |qts. |
| | Total | |8.0 | |qts. |
| |Add allowance for rejected units | | | | |
| |(8.0 qts. ( 40 bottles) | |0.2 | |qts. |
| |Standard quantity per saleable bottle | | | | |
| |of solvent | |8.2 | |qts. |
| 3. | | | | | | |Standard Cost per Bottle |
| | | |Standard Quantity | |Standard Price | | |
| |Item | | | | | | |
| |Echol | |8.2 qts. | |£1.90 per qt. | |£15.58 |

Exercise 12-2 (15 minutes)

|1. |Number of helmets |35,000 |
| |Standard kilograms of plastic per helmet |x 0.6 |
| |Total standard kilograms allowed |21,000 |
| |Standard cost per kilogram |x RM8 |
| |Total standard cost |RM168,000 |
| | | |
| |Actual cost incurred (given) |RM171,000 |
| |Total standard cost (above) |168,000 |
| |Total material variance—unfavourable |RM 3,000 |

| 2. |Actual Quantity of Inputs, | |Actual Quantity of | |Standard Quantity |
| |at Actual Price | |Inputs, at Standard | |Allowed for Output, |
| | | |Price | |at Standard Price |
| |(AQ x AP) | |(AQ x SP) | |(SQ x SP) |
| |RM171,000 | |22,500 kgs. | |21,000 kgs.* |
| | | |x RM8 per kg. | |x RM8 per kg. |
| | | |= RM180,000 | |= RM168,000 |
| | | | | | | | | |
| |( | | |( | | |( | |
|Price Variance, |Quantity Variance, |
|RM9,000 F |RM12,000 U |
| |
|Total Variance, RM3,000 U |

*35,000 helmets @ 0.6 kgs. per helmet = 21,000 kgs.

Alternatively:

Materials price variance = AQ (AP – SP)
22,500 kgs. (RM7.60 per kg.* – RM8.00 per kg.) = RM9,000 F

*RM171,000 ( 22,500 kgs. = RM7.60 per kg.

Materials quantity variance = SP (AQ – SQ)
RM8 per kg. (22,500 kgs. – 21,000 kgs.) = RM12,000 U
Exercise 12-3 (15 minutes)

| 1. |Actual Quantity of Inputs, at | |Actual Quantity of Inputs, at | |Standard Quantity Allowed for Output,|
| |Actual Price | |Standard Price | |at Standard Price |
| |(AQ x AP) | |(AQ x SP) | |(SQ x SP) |
| |20,000 kilos. | |20,000 kilos. | |18,400 kilos.* |
| |( £2.35 per kilo. | |x £2.50 per kilo. | |x £2.50 per kilo. |
| |= £47,000 | |= £50,000 | |= £46,000 |
| | | | | | | | | |
| |( | | |( | | |( | |
|Price Variance, |Quantity Variance, |
|£3,000 F |£4,000 U |
| |
|Total Variance, £1,000 U |

*4,000 units x 4.6 kilos. per unit = 18,400 kilos.

Alternatively:

Materials price variance = AQ (AP – SP)
20,000 kilos. (£2.35 per kilo – £2.50 per kilo.) = £3,000 F

Materials quantity variance = SP (AQ – SQ)
£2.50 per kilo (20,000 kilos. – 18,400 kilos.) = £4,000 U

| 2. |Actual Hours of Input, at the Actual | |Actual Hours of Input, at the Standard | |Standard Hours Allowed for Output, at the |
| |Rate | |Rate | |Standard Rate |
| |(AH x AR) | |(AH x SR) | |(SH x SR) |
| |£10,425 | |750 hrs. | |800 hrs.* |
| | | |( £12.00 per hr. | |x £12.00 per hr. |
| | | |= £9,000 | |= £9,600 |
| | | | | | | | | |
| |( | | |( | | |( | |
|Rate Variance, |Efficiency Variance, |
|£1,425 U |£600 F |
| |
|Total Variance, £825 U |

*4,000 units x 0.2 hrs. per unit = 800 hrs.

Alternatively:

Labour rate variance = AH (AR – SR)
750 hrs. (£13.90 per hr.* – £12.00 per hr.) = £1,425 U

*10,425 ( 750 hrs. = £13.90 per hr.

Labour efficiency variance = SR (AH – SH)
£12.00 per hr. (750 hrs. – 800 hrs.) = £600 F

Exercise 12-4 (10 minutes)
Notice in the solution below that 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 Inputs, at Actual | |Actual Quantity of Inputs, at Standard| |Standard Quantity Allowed for Output, |
|Price | |Price | |at Standard Price |
|(AQ x AP) | |(AQ x SP) | |(SQ x SP) |
|20,000 kilos. | |20,000 kilos. | |13,800 kilos.* |
|( £2.35 per kilo | |( £2.50 per kilo | |( £2.50 per kilo |
|= £47,000 | |= £50,000 | |= £34,500 |
| | | | | | | | |
|( | | |( | | |( | |
|Price Variance, | |
|£3,000 F | |
|14,750 kilos ( £2.50 per kilo. |
|= £36,875 |
|( | |
| |Quantity Variance, £2,375 U |

*3,000 units ( 4.6 kilos. per unit = 13,800 kilos.

Alternatively:

Materials price variance = AQ (AP – SP)
20,000 kilos (£2.35 per kilo – £2.50 per kilo) = £3,000 F

Materials quantity variance = SP (AQ – SQ)
£2.50 per kilo (14,750 kilos. – 13,800 kilos.) = £2,375 U

Exercise 12-5 (20 minutes)

| 1. |Number of units manufactured | |20,000 | |
| |Standard labour time per unit | |( 0.3 |* |
| |Total standard hours of labour time allowed | |6,000 | |
| |Standard direct labour rate per hour | |( £12 | |
| |Total standard direct labour cost | |£72,000 | |
| | | | | |
| | *18 minutes ( 60 minutes per hour = 0.3 hours | | | |
| | | | | |
| |Actual direct labour cost | |£73,600 | |
| |Standard direct labour cost | |72,000 | |
| |Total variance—unfavourable | |£ 1,600 | |

| 2. |Actual Hours of Input, at the | |Actual Hours of Input, at the Standard | |Standard Hours Allowed for Output, at the |
| |Actual Rate | |Rate | |Standard Rate |
| |(AH x AR) | |(AH x SR) | |(SH x SR) |
| |£73,600 | |5,750 hrs. | |6,000 hrs.* |
| | | |( £12.00 per hr. | |x £12.00 per hr. |
| | | |= £69,000 | |= £72,000 |
| | | | | | | | | |
| |( | | |( | | |( | |
|Rate Variance, |Efficiency Variance, |
|£4,600 U |£3,000 F |
| |
|Total Variance, £1,600 U |

*20,000 units x 0.3 hrs. per unit = 6,000 hrs.

Alternate Solution:

Labour rate variance = AH (AR – SR)
5,750 hrs. (£12.80 per hr.* – £12.00 per hr.) = £4,600 U
*£73,600 ( 5,750 hrs. = £12.80 per hr.

Labour efficiency variance = SR (AH – SH)
£12.00 per hr. (5,750 hrs. – 6,000 hrs.) = £3,000 F

| 3. |Actual Hours of Input, at the Actual | |Actual Hours of Input, at the Standard | |Standard Hours Allowed for Output, at the |
| |Rate | |Rate | |Standard Rate |
| |(AH x AR) | |(AH x SR) | |(SH x SR) |
| |£21,850 | |5,750 hrs. | |6,000 hrs. |
| | | |( £4.00 per hr. | |x£4.00 per hr. |
| | | |= £23,000 | |= £24,000 |
| | | | | | | | | |
| |( | | |( | | |( | |
|Spending Variance, |Efficiency Variance, |
|£1,150 F |£1,000 F |
| |
|Total Variance, £2,150 F |

Alternate Solution:

Variable overhead spending variance = AH (AR – SR)
5,750 hrs. (£3.80 per hr.* – £4.00 per hr.) = £1,150 F

*£21,850 ( 5,750 hrs. = £3.80 per hr.

Variable overhead efficiency variance = SR (AH – SH)
£4.00 per hr. (5,750 hrs. – 6,000 hrs.) = £1,000 F

Exercise 12-6 (30 minutes)

1. a. Notice in the solution below that 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 Inputs, at Actual | |Actual Quantity of Inputs, at Standard Price| |Standard Quantity Allowed for Output, at |
|Price | | | |Standard Price |
|(AQ x AP) | |(AQ x SP) | |(SQ x SP) |
|25,000 microns | |25,000 microns | |18,000 microns* |
|( £0.48 per micron | |x £0.50 per micron | |x£0.50 per micron |
|= £12,000 | |= £12,500 | |= £9,000 |
| | | | | | | | |
|( | | |( | | |( | |
|Price Variance, | |
|£500 F | |
|20,000 microns ( £0.50 per micron |
|= £10,000 |
|( | |
| |Quantity Variance, £1,000 U |

*3,000 toys x 6 microns per toy = 18,000 microns

Alternatively:

Materials price variance = AQ (AP – SP)
25,000 microns (£0.48 per micron – £0.50 per micron) = £500 F

Materials quantity variance = SP (AQ – SQ)
£0.50 per micron (20,000 microns – 18,000 microns) = £1,000 U

b. Direct labour variances:

|Actual Hours of Input, at the Actual | |Actual Hours of Input, at the Standard | |Standard Hours Allowed for Output, at the |
|Rate | |Rate | |Standard Rate |
|(AH x AR) | |(AH x SR) | |(SH x SR) |
|£36,000 | |4,000 hrs. | |3,900 hrs.* |
| | |( £8.00 per hr. | |x £8.00 per hr. |
| | |= £32,000 | |= £31,200 |
| | | | | | | | |
|( | | |( | | |( | |
|Rate Variance, |Efficiency Variance, |
|£4,000 U |£800 U |
| |
|Total Variance, £4,800 U |

*3,000 toys x 1.3 hrs. per toy = 3,900 hrs.

Alternatively:

Labour rate variance = AH (AR – SR)
4,000 hrs. (£9.00 per hr.* – £8.00 per hr.) = £4,000 U

*£36,000 ( 4,000 hrs. = £9.00 per hr.

Labour efficiency variance = SR (AH – SH)
£8.00 per hr. (4,000 hrs. – 3,900 hrs.) = £800 U

2. There are usually many possible explanations for a variance. In particular, we should always keep in mind that the standards themselves may be incorrect. Some of the other possible explanations for the variances observed at Dawson Toys appear below:

Materials Price Variance Since this variance is favourable, the actual price paid per unit for the material was less than the standard price. This could occur for a variety of reasons including the purchase of a lower grade material at a discount, buying in an unusually large quantity to take advantage of quantity discounts, a change in the market price of the material, or particularly sharp bargaining by the purchasing department.

Materials Quantity Variance Since this variance is unfavourable, more materials were used to produce the actual output than were called for by the standard. This could also occur for a variety of reasons. Some of the possibilities include poorly trained or supervised workers, improperly adjusted machines, and defective materials.

Labour Rate Variance Since this variance is unfavourable, the actual average wage rate was higher than the standard wage rate. Some of the possible explanations include an increase in wages that has not been reflected in the standards, unanticipated overtime, and a shimetres toward more highly paid workers.

Labour Efficiency Variance Since this variance is unfavourable, the actual number of labour hours was greater than the standard labour hours allowed for the actual output. As with the other variances, this variance could have been caused by any of a number of factors. Some of the possible explanations include poor supervision, poorly trained workers, low quality materials requiring more labour time to process, and machine breakdowns. In addition, if the direct labour force is essentially fixed, an unfavourable labour efficiency variance could be caused by a reduction in output due to decreased demand for the company’s products.

It is worth noting that all of these variances could have been caused by the purchase of low quality materials at a cut-rate price.
Exercise 12-7 (20 minutes)

1. If the total variance is £93 unfavourable, and the rate variance is £87 favourable, then the efficiency variance must be £180 unfavourable, since the rate and efficiency variances taken together always equal the total variance. Knowing that the efficiency variance is £180 unfavourable, one approach to the solution would be:

Efficiency variance = SR (AH – SH) £9.00 per hr. (AH – 125 hrs.*) = £180 U £9.00 per hr. x AH – £1,125 = £180** £9.00 per hr. x AH = £1,305 AH = 145 hrs.

|* |50 jobs x £2.5 hrs. per job = 125 hrs. |
|** |When used with the formula, unfavourable variances are positive and favourable variances are negative. |

2. Rate variance = AH (AR – SR) 145 hrs. (AR – £9.00 per hr.) = £87 F 145 hrs. x AR – £1,305 = –£87* 145 hrs. x AR = £1,218 AR = £8.40

|* |When used with the formula, unfavourable variances are positive and favourable variances are negative. |

An alternative approach to each solution would be to work from known to unknown data in the columnar model for variance analysis:

|Actual Hours of Input, at the Actual | |Actual Hours of Input, at the Standard | |Standard Hours Allowed for Output, at the|
|Rate | |Rate | |Standard Rate |
|(AH x AR) | |(AH x SR) | |(SH x SR) |
|145 hrs. | |145 hrs. | |125 hrs.1 |
|( £8.40 per hr. | |( £9.00 per hr.* | |x £9.00 per hr.* |
|= £1,218 | |= £1,305 | |= £1,125 |
| | | | | | | | |
|( | | |( | | |( | |
|Rate Variance, |Efficiency Variance, |
|£87 F* |£180 U |
| |
|Total Variance, £93 U* |

150 tune-ups* x 2.5 hrs. per tune-up* = 125 hrs.
*Given

Problem 12-8 (30 minutes)

1. a. Materials quantity variance = SP (AQ – SQ)
£5.00 per metres (AQ – 9,600 metres*) = £4,500 U
£5.00 per metres x AQ – £48,000 = £4,500**
£5.00 per metres x AQ = £52,500
AQ = 10,500 metres

|* |3,200 units x 3 metres per unit = 9,600 metres |
|** |When used with the formula, unfavourable variances are positive and favourable variances are negative. |

Therefore, £55,650 ( 10,500 metres = £5.30 per metres

b. Materials price variance = AQ (AP – SP)
10,500 metres (£5.30 per metres – £5.00 per metres) = £3,150 U

The total variance for materials would be:

|Materials price variance |£3,150 |U | |
|Materials quantity variance |4,500 |U | |
| Total variance |£7,650 |U | |

Alternate approach to parts (a) and (b):

|Actual Quantity of Inputs, at Actual Price | |Actual Quantity of Inputs, at Standard| |Standard Quantity Allowed for Output, at|
| | |Price | |Standard Price |
|(AQ x AP) | |(AQ x SP) | |(SQ x SP) |
|10,500 metres | |10,500 metres | |9,600 metres** |
|x £5.30 per metres | |( £5.00 per metres* | |x £5.00 per metres* |
|= £55,650* | |= £52,500 | |= £48,000 |
| | | | | | | | |
|( | | |( | | |( | |
|Price Variance, |Quantity Variance, |
|£3,150 U |£4,500 U* |
| |
|Total Variance, £7,650 U |

* Given.
** 3,200 units x 3 metres per unit = 9,600 metres

2. a. Labour rate variance = AH (AR – SR)

4,900 hrs. (£7.50 per hr.* – SR) = £2,450 F**
£36,750 – 4,900 hrs. x SR = –£2,450***
4,900 hrs. x SR = £39,200
SR = £8.00

| | |
|* |£36,750 ( 4,900 hrs. = 7.50 per hr. |
|** |£1,650 F + £800 U = £2,450 F. |
|*** |When used with the formula, unfavourable variances are positive and favourable variances are negative. |

b. Labour efficiency variance = SR (AH – SH)
£8.00 per hr. (4,900 hrs. – SH) = £800 U
£39,200 – £8 per hr. x SH = £800*
£8.00 per hr. x SH = £38,400
SH = 4,800 hrs.

|* |When used with the formula, unfavourable variances are positive and favourable variances are negative. |

Alternate approach to parts (a) and (b):

|Actual Hours of Input, at the Actual | |Actual Hours of Input, at the Standard | |Standard Hours Allowed for Output, at the |
|Rate | |Rate | |Standard Rate |
|(AH x AR) | |(AH x SR) | |(SH x SR) |
|£36,750* | |4,900 hrs.* ( £8.00 | |4,800 hrs. x £8.00 |
| | |per hr. | |per hr. |
| | |= £39,200 | |= £38,400 |
| | | | | | | | |
|( | | |( | | |( | |
|Rate Variance, |Efficiency Variance, |
|£2,450 F |£800 U* |
| |
|Total Variance, £1,650 F* |
|* |Given. |

c. The standard hours allowed per unit of product would be:
4,800 hrs. ( 3,200 units = 1.5 hrs. per unit

Problem 12-9
1.

Operating statement year ended 31 October 2001

| |£ |£ |
|Budgeted profit (W1) | |22312.5 |
|Total sales variance (W2) | |937.5 |
|Operational variances | | |
|Direct material cost |0 | |
|Direct labour rate (W3) |3500 (U) | |
|Direct labour efficiency (W4) |4000 (U) | |
|Variable overhead expenditure (W5) |2750 (F) | |
|Fixed overhead efficiency (W6) |1400 (U) | |
|Fixed overhead expenditure(W7) |2400 (U) | |
|Fixed overhead volume (W8) |500 (F) | |
|Total variances | |3250 (U) |
| | | |
|Actual profit (W9) | |20,000.00 |

|Workings: |£ |
|W1 Standard profit per unit | |
|Selling price |2.00 |
|Costs | |
|Labour – 3/60 x £10 |0.50 |
|Material |0.75 |
|Variable overhead 35% x £0.50 |0.175 |
|Fixed overhead 40% x £0.50 |0.20 |
|Profit |0.375 |
| | |
|Budgeted profit | |
|59,500 x £ 0.375 |22,312.50 |
|W2 Total sales margin variance | |
|2500 x 0.375 |937.5 (F) |

W3 Direct labour rate variance

Standard rate £10/hour
Actual £11/hour
(£38,500/3500) £1/hour x 3500 hours = £3500 (U)

W4 Direct labour efficiency variance
Standard hours 3/60 x 62000 3100
Actual hours 3500 400 x £10 = £4000 (U)

W5 variable overhead expenditure variance £
Standard = £10 x 35%= £3.50 x 3500 hours 12,250
Actual 9,500 2,750 (F)

W6 variable overhead efficiency variance
Standard hours 3100 hours
Actual hours 3500 hours 400 x £3.50 = £1400 (U)

W7 Fixed overhead expenditure £
Budgeted expenditure = £0.20 x 59,500 11,900
Actual expenditure 9,500 2400. (F)
W8 Fixed overhead volume variance Budgeted volume 59,500 units Actual volume 62,000 units 2500 units x 0.20 = £500 (F)

W9 Actual profit £ £
Sales 62000 x £2 124,000
Costs
Labour 38,500
Materials 62,000x 0.75 46,500
Variable overheads 9,500
Fixed overheads 9,500 104,000
Profit 20,000

Problem 12-10

1. Rate variance AH(SR – AR) or AH x SR – AH x AR Efficiency variance (SH – AH)SR or SH x SR – AH x SR

Adding the second expressions in each case:
(AH x SR – AH x AR) + (SH x SR – AH x SR)

Clear brackets and cancel common terms leaves:
SH x SR – AH x AR

2 (a) Actual wages cost
Actual rate per hour
£97,350
£8·85
= 11,000 hours

(b) LRV = AH(SR – AR)
£1,650 = 11,000(SR – £8·85)
£0·15 = SR – £8·85
SR = £9·00

(c) LEV = SR(SH – AH)
£9,000 = £9·00(SH – 11,000)
£1,000 = SH – 11,000

SH = 12,000 hours
(d) Number of units = 12,000 = 4,000 units 3
(e) DMPV = (SP – AP)AU – £5,700 = ( – £0·30 ) AU AU = 19,000 kg
(f) Actual cost Actual usage £62,700 19,000 kg. Actual price = £3·30 per kg.

(g) Standard price of material = £3·30 – £0·30 = £3·00 per kg.

DMV = SC – AC £2,700 = SC – £62,700 SC = £60,000

Standard usage = Standard Price Standard Cost = £60,000 £3 = 20,000 kg

NB Alternative calculations are acceptable, e.g.
Standard usage = Actual units x SQ per unit = 4,000 x 5 kg = 20,000 kg.

3. The solution to this part is contained in the right-hand column.

Actual cost Variance Total standard Standard cost per unit cost recovered £ £ £ £ £ ( 4,000 units) (12,000 std.hrs.)
Dir. Matl. 62,700 (2,700) 60,000 5 kg at £3 15·00
Dir. Labour 97,350 10,650 108,000 3 hrs. at £9 27·00
Var. o/hd. 19,500 (1,500) 18,000 3 hrs. at £1.50 4·50
Fixed o/hd. 106,500 (16,500) 90,000 3 hrs. at £7.50 22·50 276,000 69·00

4. Fixed overhead variances

The fixed overhead expenditure variance of £1,500 indicates that spending was higher than the level set by the fixed budget. As these costs have been categorised as fixed the target spending level will not have been changed from that which was originally budgeted in spite of any changes in business volume. The volume variance of £15,000 adverse shows that the volume of business actually achieved (4,000 units or 12,000 standard hours) was below that which was budgeted for the period. The volume variance is in effect identifying the under recovery of fixed overheads. It is possible to determine the shortfall in production that occurred by dividing the variance by the fixed overhead recovery rate, that is, £15,000/£7·.5 = 2,000 standard hours of work or 667 units. The original budgeted production was 14,000 hours and the original budget of fixed overheads £105,000.

Variable overhead variance

Variable overheads are applied to the product using standard hours. As there was a favourable labour efficiency variance reported it follows that the favourable effect of this efficiency on costs could apply, not only to direct labour, but also to variable overheads, i.e. all costs that vary with hours worked. The implication is that greater efficiency enabled time to be saved and hence a lower expenditure on variable costs was to be expected. However, management appear to have elected not to report this variance separately and hence there is only one variance related to variable overheads, £1,500 Adv. This is therefore reflecting the combined effect of both spending and efficiency. For the month in question any efficiency saving that may have occurred was outweighed by the fact that the actual expenditure, i.e. bills paid, was greater than the flexible budget set by the number of hours.

Problem 12-11 (45 minutes)

1. The standard quantity of plates allowed for tests performed during the month would be:

| | | |
|Blood tests | |1,800 |
|Smears | |2,400 |
| Total | |4,200 |
|Plates per test | |( 2 |
|Standard quantity allowed | |8,400 |

The variance analysis for plates would be:

|Actual Quantity of Inputs, at Actual Price | |Actual Quantity of Inputs, at Standard | |Standard Quantity Allowed for Output, |
| | |Price | |at Standard Price |
|(AQ x AP) | |(AQ x SP) | |(SQ x SP) |
|£28,200 | |12,000 plates x £2.50 per plate | |8,400 plates x |
| | | | |x £2.50 per plate |
| | |= £30,000 | |= £21,000 |
| | | | | | | | |
|( | | |( | | |( | |
|Price Variance, | |
|£1,800 F | |
|10,500 plates ( £2.50 per plate |
|= £26,250 |
|( | |
| |Quantity Variance, £5,250 U |

Alternate Solution:

Materials price variance = AQ (AP – SP)
12,000 plates (£2.35 per plate* – £2.50 per plate) = £1,800 F
*£28,200 ( 12,000 plates = £2.35 per plate.

Materials quantity variance = SP (AQ – SQ)
£2.50 per plate (10,500 plates – 8,400 plates) = £5,250 U

Note that all of the price variance is due to the hospital’s 6% quantity discount. Also note that the £5,250 quantity variance for the month is equal to 25% of the standard cost allowed for plates. This variance may be a result of using too many assistants in the lab.

2. a. The standard hours allowed for tests performed during the month would be:

|Blood tests: 0.3 hrs. per test x 1,800 tests | |540 | |hours |
|Smears: 0.15 hrs. per test x 2,400 tests | |360 | |hours |
| Total standard hours allowed | |900 | |hours |

The variance analysis would be:

|Actual Hours of Input, at the Actual | |Actual Hours of | |Standard Hours Allowed for Output, at the|
|Rate | |Input, at the Standard Rate | |Standard Rate |
|(AH x AR) | |(AH x SR) | |(SH x SR) |
|£13,800 | |1,150 hrs. | |900 hrs. |
| | |( £14.00 per hr. | |x £14.00 per hr. |
| | |= £16,100 | |= £12,600 |
| | | | | | | | |
|( | | |( | | |( | |
|Rate Variance, |Efficiency Variance, |
|£2,300 F |£3,500 U |
| |
|Total Variance, £1,200 U |

Alternate Solution:

Labour rate variance = AH (AR – SR)
1,150 hrs. (£12.00 per hr.* – £14.00 per hr.) = £2,300 F

*£13,800 ( 1,150 hrs. = £12.00 per hr.

Labour efficiency variance = SR (AH – SH)
£14.00 per hr. (1,150 hrs. – 900 hrs.) = £3,500 U b. The policy probably should not be continued. Although the hospital is saving £2 per hour by employing more assistants than senior technicians, this savings is more than offset by other factors. Too much time is being taken in performing lab tests, as indicated by the large unfavourable labour efficiency variance. And, it seems likely that most (or all) of the hospital’s unfavourable quantity variance for plates is traceable to inadequate supervision of assistants in the lab.

3.
|Actual Hours of Input, at the Actual | |Actual Hours of Input, at the Standard | |Standard Hours Allowed for Output, at |
|Rate | |Rate | |the Standard Rate |
|(AH x AR) | |(AH x SR) | |(SH x SR) |
|£7,820 | |1,150 hrs. | |900 hrs. |
| | |( £6.00 per hr. | |x £6.00 per hr. |
| | |= £6,900 | |= £5,400 |
| | | | | | | | |
|( | | |( | | |( | |
|Spending Variance, |Efficiency Variance, |
|£920 U |£1,500 U |
| |
|Total Variance, £2,420 U |

Alternate Solution:

Variable overhead spending variance = AH (AR – SR)
1,150 hrs. (£6.80 per hr.* – £6.00 per hr.) = £920 U

*£7,820 ( 1,150 hrs. = £6.80 per hr.

Variable overhead efficiency variance = SR (AH – SH)
£6.00 per hr. (1,150 hrs. – 900 hrs.) = £1,500 U

Yes, there is a relationship between the two variances. Both are computed by comparing actual labour time to the standard hours allowed for the output of the period. Thus, if there is an unfavourable labour efficiency variance, there will also be an unfavourable variable overhead efficiency variance.
Problem 12-12 (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 Inputs, at | |Actual Quantity of Inputs, at Standard | |Standard Quantity Allowed for Output, at Standard |
|Actual Price | |Price | |Price |
|(AQ x AP) | |(AQ x SP) | |(SQ x SP) |
|£225,000 | |12,000 grams | |9,375 grams* |
| | |x £20.00 per gram | |x £20.00 per gram |
| | |= £240,000 | |= £187,500 |
| | | | | | | | |
|( | | |( | | |( | |
|Price Variance, | |
|£15,000 F | |
|9,500 grams. ( £20.00 per gram |
|= £190,000 |
|( | |
| |Quantity Variance, £2,500 U |

*3,750 units x 2.5 grams per unit = 9,375 grams.

Alternatively:

Materials price variance = AQ (AP – SP)
12,000 grams. (£18.75 per gram* – £20.00 per gram) = £15,000 F
*£225,000 ( 12,000 grams = £18.75 per gram.

Materials quantity variance = SP (AQ – SQ)
£20.00 per gram (9,500 grams – 9,375 grams) = £2,500 U

b. Yes, the contract probably should be signed. The new price of £18.75 per gram is substantially lower than the old price of £20.00 per gram, resulting in a favourable 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.
2. a.

|Actual Hours of Input, at the Actual | |Actual Hours of Input, at the Standard| |Standard Hours Allowed for Output, at |
|Rate | |Rate | |the Standard Rate |
|(AH x AR) | |(AH x SR) | |(SH x SR) |
|5,600 hrs.* | |5,600 hrs. | |5,250 hrs.** |
|( £12.00 per hr. | |( £12.50 per hr. | |x £12.50 per hr. |
|= £67,200 | |= £70,000 | |= £65,625 |
| | | | | | | | |
|( | | |( | | |( | |
|Rate Variance, |Efficiency Variance, |
|£2,800 F |£4,375 U |
| |
|Total Variance, £1,575 U |

|* |35 technicians x 160 hrs. per technician |= 5,600 hrs. |
|** |3,750 units x 1.4 hrs. per technician |= 5,250 hrs. |

Alternatively:

Labour rate variance = AH (AR – SR)
5,600 hrs. (£12.00 per hr. – £12.50 per hr.) = £2,800 F

Labour efficiency variance = SR (AH – SH)
£12.50 per hr. (5,600 hrs. – 5,250 hrs.) = £4,375 U

b. No, the new labour mix probably should not be continued. Although it decreases the average hourly labour cost from £12.50 to £12.00, thereby causing a £2,800 favourable labour rate variance, this savings is more than offset by a large unfavourable labour efficiency variance for the month. Thus, the new labour mix increases overall labour costs.

| 3. |Actual Hours of Input, at the Actual | |Actual Hours of Input, at the Standard| |Standard Hours Allowed for Output, at |
| |Rate | |Rate | |the Standard Rate |
| |(AH x AR) | |(AH x SR) | |(SH x SR) |
| |£18,200 | |5,600 hrs.* | |5,250 hrs.** |
| | | |x £3.50 per hr. | |x £3.50 per hr. |
| | | |= £19,600 | |= £18,375 |
| | | | | | | | | |
| |( | | |( | | |( | |
|Spending Variance, |Efficiency Variance, |
|£1,400 F |£1,225 U |
| |
|Total Variance, £175 F |

* Based on direct labour hours : 35 technicians x 160 hours per technician = 5,600 hrs.
** 3,750 units x 1.4 hrs. per unit = 5,250 hrs.

Alternatively:

Variable overhead spending variance = AH (AR – SR)
5,600 hrs. (£3.25 per hr.* – £3.50 per hr.) = £1,400 F

*£18,200 ( 5,600 hrs. = £3.25 per hr.

Variable overhead efficiency variance = SR (AH – SH)
£3.50 per hr. (5,600 hrs. – 5,250 hrs.) = £1,225 U

Both the labour efficiency variance and the variable overhead efficiency variance are computed by comparing actual labour-hours to standard labour-hours. Thus, if the labour efficiency variance is unfavourable, then the variable overhead efficiency variance will be unfavourable as well.

Problem 12-13 (45 minutes)

1.a.

|Actual Quantity of Inputs, at Actual | |Actual Quantity of Inputs, at Standard| |Standard Quantity Allowed for Output, |
|Price | |Price | |at Standard Price |
|(AQ x AP) | |(AQ x SP) | |(SQ x SP) |
|60,000 kilos | |60,000 kilos | |45,000 kilos* |
|( £1.95 per kilo | |x £2.00 per kilo | |x £2.00 per kilo |
|= £117,000 | |= £120,000 | |= £90,000 |
| | | | | | | | |
|( | | |( | | |( | |
|Price Variance, | |
|£3,000 F | |
|49,200 kilos ( £2.00 per kilo |
|= £98,400 |
|( | |
| |Quantity Variance, |
| |£8,400 U |

*15,000 pools x 3.0 kilo per pool = 45,000 kilos.

Alternate Solution:

Materials price variance = AQ (AP – SP)
60,000 kilos. (£1.95 per kilo – £2.00 per kilo) = £3,000 F

Materials quantity variance = SP (AQ – SQ)
£2.00 per kilo (49,200 kilos – 45,000 kilos) = £8,400 U

b.
|Actual Hours of Input, at the Actual | |Actual Hours of Input, at the Standard | |Standard Hours Allowed for Output, at |
|Rate | |Rate | |the Standard Rate |
|(AH x AR) | |(AH x SR) | |(SH x SR) |
|11,800 hrs. | |11,800 hrs. | |12,000 hrs.* |
|( £7.00 per hr. | |( £6.00 per hr. | |x £6.00 per hr. |
|= £82,600 | |= £70,800 | |= £72,000 |
| | | | | | | | |
|( | | |( | | |( | |
|Rate Variance, |Efficiency Variance, |
|£11,800 U |£1,200 F |
| |
|Total Variance, £10,600 U |

*15,000 pools x 0.8 hrs. per pool = 12,000 hrs.

Alternate Solution:

Labour rate variance = AH (AR – SR)
11,800 hrs. (£7.00 per hr. – £6.00 per hr.) = £11,800 U

Labour efficiency variance = SR (AH – SH)
£6.00 per hr. (11,800 hrs. – 12,000 hrs.) = £1,200 F

c.

|Actual Hours of Input, at the Actual | |Actual Hours of Input, at the | |Standard Hours Allowed for Output, at |
|Rate | |Standard Rate | |the Standard Rate |
|(AH x AR) | |(AH x SR) | |(SH x SR) |
|£18,290 | |5,900 hrs. | |6,000 hrs.* |
| | |( £3.00 per hr. | |x £3.00 per hr. |
| | |= £17,700 | |= £18,000 |
| | | | | | | | |
|( | | |( | | |( | |
|Spending Variance, |Efficiency Variance, |
|£590 U |£300 F |
| |
|Total Variance, £290 U |

*15,000 pools x 0.4 hrs. per pool = 6,000 hrs.

Alternate Solution:

Variable overhead spending variance = AH (AR – SR)
5,900 hrs. (£3.10 per hr.* – £3.00 per hr.) = £590 U

*£18,290 ( 5,900 hrs. = £3.10 per hr.

Variable overhead efficiency variance = SR (AH – SH)
£3.00 per hr. (5,900 hrs. – 6,000 hrs.) = £300 F

2. Summary of variances:

|Material price variance | |£ 3,000 | |F |
|Material quantity variance | |8,400 | |U |
|Labour rate variance | |11,800 | |U |
|Labour efficiency variance | |1,200 | |F |
|Variable overhead spending variance | |590 | |U |
|Variable overhead efficiency variance | |300 | |F |
| Net variance | |£16,290 | |U |

The net unfavourable variance of £16,290 for the month caused the plant’s variable cost of goods sold to increase from the budgeted level of £180,000 to £196,290:

|Budgeted cost of goods sold at £12 per pool | |£180,000 |
|Add the net unfavourable variance, as above | |16,290 |
|Actual cost of goods sold | |£196,290 |

This £16,290 net unfavourable variance also accounts for the difference between the budgeted net profit and the actual net profit for the month.

|Budgeted net profit | |£36,000 | |
|Deduct the net unfavourable variance added to cost | | | |
|of goods sold for the month | |16,290 | |
|Net profit | |£ 19,710 | |

3. The two most significant variances are the materials quantity variance and the labour rate variance. Possible causes of the variances include:
|Materials quantity variance: | |Outdated standards, unskilled workers, poorly adjusted machines, |
| | |carelessness, poorly trained workers, inferior quality materials. |
| | | |
|Labour rate variance: | |Outdated standards, change in pay scale, overtime pay. |

Problem 12-14 (40 minutes)
| 1. |Salex quantity standard: | | | | |
| | Required per 10-litre batch (9.6 litres ( 0.8) | |12.0 | |litres |
| | Loss from rejected batches (1/5 x12 litres) | |2.4 | |litres |
| | Total quantity per good batch | |14.4 | |litres |
| | | | | | |
| |Nyclyn quantity standard: | | | | |
| | Required per 10-litre batch (12 kgs. ( 0.8) | |15.0 | |kgs. |
| | Loss from rejected batches (1/5 x 15 kgs.) | |3.0 | |kgs. |
| | Total quantity per good batch | |18.0 | |kgs. |
| | | | | | |
| |Protet quantity standard: | | | | |
| | Required per 10-litre batch | |5.0 | |kgs. |
| | Loss from rejected batches (1/5 x 5 kgs.) | |1.0 | |kgs. |
| | Total quantity per good batch | |6.0 | |kgs. |
| | | | | | |
|2. |Total minutes per 8-hour day | |480 | |min. |
| |Less rest breaks and cleanup | |60 | |min. |
| |Productive time each day | |420 | |min. |

[pic]12 batches per day

| | Time required per batch | |35 | |min. |
| | Rest breaks and clean up time | | | | |
| |(60 min. ( 12 batches) | |5 | |min. |
| | Total | |40 | |min. |
| | Loss from rejected batches (1/5 x 40 min.) | |8 | |min. |
| | Total time per good batch | |48 | |min. |

3. Standard cost card:

| | |Standard Quantity or Time | |Standard Price or Rate | |Standard |
| | | | | | |Cost |
|Salex | |14.4 litres | |£1.50/ltr. | |£21.60 |
|Nyclyn | |18.0 kgs. | |2.80/kg. | |50.40 |
|Protet | |6.0 kgs. | |3.00/kg. | |18.00 |
|Labour time | |48 min., or 0.8 hrs. | |9.00/hr. | |7.20 |
|Total standard cost | | | | | |£97.20 |
Problem 12-15 (45 minutes)

| 1. |Standard cost for March production: | | | | |
| | Materials | |£16,800 | | |
| | Direct labour | |10,500 | | |
| | Variable manufacturing overhead | |4,200 | | |
| | Total standard cost | |£31,500 | |(a) |
| | | | | | |
| |Number of backpacks produced | |1,000 | |(b) |
| | | | | | |
| |Standard cost of a single backpack (a) ( (b) | |£31.50 | | |
| | | | | | |
| 2. |Standard cost of a single backpack (above) | |£31.50 | | |
| |Deduct difference between standard and actual cost | |0.15 | | |
| |Actual cost per backpack | |£31.35 | | |

|3. |Total standard cost of materials used during March | |£16,800 | |(a) |
| |Number of backpacks produced during March | |1,000 | |(b) |
| |Standard materials cost per backpack (a) ( (b) | |£ 16.80 | | |

[pic]

| 4. |Standard cost of material used | |£16,800 | | |
| |Actual cost of material used | |15,000 | | |
| | Total variance | |£ 1,800 | |F |

The price and quantity variances together equal the total variance. If the quantity variance is £1,200 U, then the price variance must be £3,000 F:

|Price variance | |£ 3,000 | |F |
|Quantity variance | |1,200 | |U |
| Total variance | |£ 1,800 | |F |

Alternate Solution:

|Actual Quantity of Inputs, at Actual | |Actual Quantity of Inputs, at Standard| |Standard Quantity Allowed for Output, |
|Price | |Price | |at Standard Price |
|(AQ x AP) | |(AQ x SP) | |(SQ x SP) |
|3,000 metres. | |3,000 metres. | |2,800 metres.** |
|( £5.00 per metre. | |( £6.00 per metre.* | |x £6.00 per metre. * |
|= £15,000* | |= £18,000 | |= £16,800 |
| | | | | | | | |
|( | | |( | | |( | |
|Price Variance, |Quantity Variance, |
|£3,000 F |£1,200 U* |
| |
|Total Variance, £1,800 F |

|* |Given. |
|** |1,000 units x 2.8 metres. per unit = 2,800 metres. |

5. The first step in computing the standard direct labour rate is to determine the standard direct labour-hours allowed for the month’s production. The standard direct labour-hours can be computed by working with the variable overhead cost figures, since they are based on direct labour- hours worked:

|Standard variable manufacturing overhead cost | | | | |
|for March | |£4,200 | |(a) |
|Standard variable manufacturing overhead rate | | | | |
|per direct labour-hour | |£3.00 | |(b) |
|Standard direct labour-hours for March (a) ( (b) | |1,400 | | |

[pic]

6. Before the labour variances can be computed, it is necessary first to compute the actual direct labour cost for the month:

|Actual cost per backpack produced (part 2) | | | |£ 31.35 |
|Number of backpacks produced | | | |( 1,000 |
|Total actual cost of production | | | |£31,350 |
|Less: Actual cost of materials | |£15,000 | | |
| Actual cost of variable overhead | |3,600 | |18,600 |
|Actual cost of direct labour | | | |£12,750 |

With this information, the variances can be computed:

|Actual Hours of Input, at the Actual | |Actual Hours of Input, at the Standard | |Standard Hours Allowed for Output, at the|
|Rate | |Rate | |Standard Rate |
|(AH x AR) | |(AH x SR) | |(SH x SR) |
|£12,750 | |1,500 hrs.* | |£10,500* |
| | |( £7.50 per hr. | | |
| | |= £11,250 | | |
| | | | | | | | |
|( | | |( | | |( | |
|Rate Variance, |Efficiency Variance, |
|£1,500 U |£750 U |
| |
|Total Variance, £2,250 U |

*Given.

| 7. |Actual Hours of Input, at the Actual | |Actual Hours of Input, at the Standard | |Standard Hours Allowed for Output, at |
| |Rate | |Rate | |the Standard Rate |
| |(AH x AR) | |(AH x SR) | |(SH x SR) |
| |£3,600* | |1,500 hrs.* | |£4,200* |
| | | |( £3.00 per hr.* | | |
| | | |= £4,500 | | |
| | | | | | | | | |
| |( | | |( | | |( | |
|Spending Variance, |Efficiency Variance, |
|£900 F |£300 U |
| |
|Total Variance, £600 F |

*Given.

|8. | | |Standard Quantity or | |Standard | | |
| | | |Hours | |Price or | |Standard |
| | | | | |Rate | |Cost |
| |Direct materials | | 2.8 metres1 | |£6 per metre | |£16.80 |
| |Direct labour | | 1.4 hours2 | |£7.50 per hour3 | |10.50 |
| |Variable manufacturing | | | | | | |
| |Overhead | | 1.4 hours | |£3 per hour | |4.20 |
| |Total standard cost | | | | | |£31.50 |

1From part 3.
21,400 standard hours (from part 5) ( 1,000 backpacks = 1.4 hours per backpack.
3From part 5.

Problem 12-16 (45 minutes)
1. Materials price variance = (AQ x AP) – (AQ x SP) (£424,800) – (180,000 metres. x £2.40 per metre.) = £7,200 F

2. a. and b.
| | |Lot Number | |
| | |48 | |49 | | |50 | |Total | |
|Standard metres: | | | | | | | | | | |
| Units in lot (dozens) | |1,500 | |950 | | |2,100 | |4,550 | |
| Standard metres per dozens | |(32 | |(32 | | |(32 | |(32 | |
| Total standard metres | | | | | | | | | | |
|Allowed | |48,000 | |30,400 | | |67,200 | |145,600 | |
|Actual metres used | |48,300 | |30,140 | | |67,250 | |145,690 | |
|Quantity variance in metres | |300 |U |260 |F | |50 |U |90 |U |
|Quantity variance in pounds | | | | | | | | | | |
|@ £2.40 per metre | |£720 |U |£624 |F | |£120 |U |£216 |U |

3. Labour rate variance = (AH x AR) – (AH x SR)
(£192,280) – (25,300 hrs.* x £7.50 per hr.) = £2,530 U

*8,900 hrs. + 6,130 hrs. + 10,270 hrs. = 25,300 hrs.

4. a. and b.

| | |Lot Number | | |
| | |48 | | |49 | |50 | |Total |
|Standard hours: | | | | | | | | | |
| Units in lot (dozens) | |1,500 | | |950 | |2,100 | |4,550 |
| Standard hours per dozens | |(6 | | |(6 | |(6 | |(6 |
| Total | |9,000 | | |5,700 | |12,600 | |27,300 |
| Percentage completed | |( 100 | | |( 100 | |( 80 | | — |
| Total standard hours allowed | |9,000 | | |5,700 | |10,080 | |24,780 |
|Actual hours worked | |8,900 | | |6,130 | |10,270 | |25,300 |
|Labour efficiency variance | | | | | | | | | |
|in hours | |100 |F |430 |U |190 |U |520 |U |
|Labour efficiency variance | | | | | | | | | |
|in pounds @ £7.50 per hr. | |£750 |F |£3,225 |U |£1,425 |U |£3,900 |U |

5. It is often better to express quantity variances in units (hours, metres, etc.) rather than in pounds when those variances are to be used by managers whose day-to-day work deals with activity expressed in units. That is, some middle-level managers rarely deal with anything on a pound basis; all of their work may be in terms of unit (hours, metres, etc.) activity. For such persons, variances expressed in pounds may not be nearly as useful as variances expressed in terms of what they work with from day to day.

On the other hand, price variances expressed in units (hours, metres) would make little sense. Such variances should always be expressed in pounds to be most useful to the manager. In addition, quantity variances expressed in both pound and unit terms should be prepared for top management.

Problem 12-17

1. Standard cost for ten-litre batch of raspberry sherbet.

|Direct material: | | | | |
| Raspberries (7.5 litres.* x £0.80 per litre.) | |6.00 | | |
| Other ingredients (10 litre. x £0.45 per litre.) | |4.50 | |£10.50 |
|Direct labour: | | | | |

Sorting (3 mins/60 x 6 litres x £9 per hr 2.70
| Blending (12 min./60) x £9.00 per hr. | |1.80 | | 4.50 |
| Packing (10 litres. ( £0.38 per litre) | | | | 3.80 |
| Standard cost per ten-litre batch | | | |£18.80 |

|* |6 litres x (5 ( 4) = 7.5 litres required to obtain 6 acceptable litres. |

2. a. In general, the purchasing manager is held responsible for unfavourable material price variances. Causes of these variances include the following:

• Incorrect standards. • Failure to correctly forecast price increases. • Purchasing in nonstandard or uneconomical lots. • Failure to take purchase discounts available. • Failure to control transportation costs. • Purchasing from suppliers other than those offering the most favourable terms.

However, failure to meet price standards may be caused by a rush of orders or changes in production schedules. In this case, the responsibility for unfavourable material price variances should rest with the sales manager or the manager of production planning. There may also be times when variances are caused by external events and are therefore uncontrollable, e.g., a strike at a supplier’s plant.

b. In general, the production manager or foreman is held responsible for unfavourable labour efficiency variances. Causes of these variances include the following:

• Incorrect standards. • Poorly trained labour. • Substandard or inefficient equipment. • Inadequate supervision. • Machine breakdowns from poor maintenance. • Poorly motivated employees/absenteeism. • Fixed labour force with demand less than capacity.

Failure to meet labour efficiency standards may also be caused by the use of inferior materials or poor production planning. In these cases, responsibility should rest with the purchasing manager or the manager of production planning. There may also be times when variances are caused by external events and are therefore uncontrollable, e.g., lack of skilled workers caused by low unemployment. (Unofficial CMA Solution, Adapted)

Problem 12-18 (40 minutes)

This problem is more difficult than it looks. Please allow ample time for classroom discussion.

| 1. |Actual Quantity of Inputs, at Actual | |Actual Quantity of Inputs, at Standard| |Standard Quantity Allowed for Output, |
| |Price | |Price | |at Standard Price |
| |(AQ x AP) | |(AQ x SP) | |(SQ x SP) |
| |£45,600 | |12,000 metres. | |11,200 metres.** |
| | | |( £4.00 per metre.* | |x £4.00 per metre.* |
| | | |= £48,000 | |= £44,800 |
| | | | | | | | | |
| |( | | |( | | |( | |
|Price Variance, |Quantity Variance, |
|£2,400 F |£3,200 U |
| |
|Total Variance, £800 U |

|* |£22.40 ( 5.6 metres. = £4.00 per metre |
|** |2,000 sets x 5.6 metres. per set = 11,200 metres. |

Alternate Solution:

Materials price variance = AQ (AP – SP)
12,000 metres. (£3.80 per metre.* – £4.00 per metre.) = £2,400 F

*£45,600 ( 12,000 metres. = £3.80 per metre.

Materials quantity variance = SP (AQ – SQ)
£4.00 per metre. (12,000 metres. – 11,200 metres.) = £3,200 U

2. Many students will miss parts 2 and 3 because they will try to use product costs as if they were hourly costs. Pay particular attention to the computation of the standard direct labour time per unit and the standard direct labour rate per hour.

|Actual Hours of Input, at the Actual | |Actual Hours of Input, at the Standard| |Standard Hours Allowed for Output, at |
|Rate | |Rate | |the Standard Rate |
|(AH x AR) | |(AH x SR) | |(SH x SR) |
|£18,200 | |2,800 hrs. | |3,000 hrs.** x £6.00 per hr.* |
| | |( £6.00 per hr.* | | |
| | |= £16,800 | |= £18,000 |
| | | | | | | | |
|( | | |( | | |( | |
|Rate Variance, |Efficiency Variance, |
|£1,400 U |£1,200 F |
| |
|Total Variance, £200 U |

|* |2,850 standard hours ( 1,900 sets = 1.5 standard hours per set; £9.00 standard cost per set ( 1.5 standard hours per set |
| |= £6.00 standard rate per hour. |
|** |2,000 sets x 1.5 standard hours per set = 3,000 standard hours. |

Alternate Solution:

Labour rate variance = AH (AR – SR)
2,800 hrs. (£6.50 per hr.* – £6.00 per hr.) = £1,400 U

*£18,200 ( 2,800 hrs. = £6.50 per hour.

Labour efficiency variance = SR (AH – SH)
£6.00 per hr. (2,800 hrs. – 3,000 hrs.) = £1,200 F

| 3. |Actual Hours of Input, at the Actual | |Actual Hours of Input, at the Standard| |Standard Hours Allowed for Output, at the |
| |Rate | |Rate | |Standard Rate |
| |(AH x AR) | |(AH x SR) | |(SH x SR) |
| |£7,000 | |2,800 hrs. | |3,000 hrs. |
| | | |( £2.40 per hr.* | |x £2.40 per hr.* |
| | | |= £6,720 | |= £7,200 |
| | | | | | | | | |
| |( | | |( | | |( | |
|Spending Variance, |Efficiency Variance, |
|£280 U |£480 F |
| |
|Total Variance, £200 F |

|* |£3.60 standard cost per set ( 1.5 standard hours per set = £2.40 standard rate per hour. |

Alternate Solution:

Variable overhead spending variance = AH (AR – SR)
2,800 hrs. (£2.50 per hr.* – £2.40 per hr.) = £280 U

*£7,000 ( 2,800 hrs. = £2.50 per hr.

Variable overhead efficiency variance = SR (AH – SH)
£2.40 per hr. (2,800 hrs. – 3,000 hrs.) = £480 F

P-12-19

Part 1

Analyse budget cost of direct labour: £
9000 hours total cost 29,000
Fixed cost (4,250)
Therefore variable cost of 9000 hours 24,750

Variable cost per hr = 24,750/9000 = £2.75

Therefore:

Budget cost of 11,320 hrs: £
Variable 31,130
Fixed cost 4,250 35,380

Using high/low method to determine overheads: Hours £
High 7,000 24,500
Low 3,000 13,500
Difference 4,000 11,000

Variable cost = 11,000/4000 = £2.75

Variable cost of 14,000 hours = £38,500
Total cost of 14,000 hours = £45,800
Fixed cost for activity above 10,000 hrs. = £7300

| | Original budget | flexed budget | actual | variance |
|No of machine hrs |9,000 |11,320 |11,320 | |
| |£ |£ |£ |£ |
|Cleaning materials |1,350 |1,698 |1,740 |42 (U) |
|Steel |45,000 |56,600 |56,000 | 600 (F) |
|Other direct materials |450 |566 |700 |134 (U) |
|Direct labour |29,000 |35,380 |32,400 |2,980 (F) |
|Production O/Heads |30,000 |38,430 |42,600 |4,170 (U) |
|Totals |105,800 |132,674 |133,440 |766 (U) |

Case 12-20 (90 minutes)

This is a very rigorous case; be sure that students have some understanding of variances and journal entries before it is assigned.

| 1. |Standard cost of Material A used in production | |£5,760 |(a) |
| |Standard cost of Material A per batch (6 litre. x | | | |
| |£8.00 per litre.) | |£ 48 |(b) |
| |Number of batches produced last week (a) ( (b) | |120 |
|2. a. |Standard cost of last week’s purchases | | |
| |(1,000 litre. x £8.00 per litre.) | |£8,000 |
|Deduct favourable price variance | |300 |
|Actual cost of last week’s purchases | |£7,700 |

Alternate Solution:

Materials price variance = (AQ x AP) – (AQ x SP)
(1,000 litre. x AP) – (1,000 litre. x £8.00 per litre.) = £300 F
(1,000 litre. x AP) – £8,000 = –£300*
(1,000 litre. x AP) = £7,700

*When used in the formula, a favourable variance is negative.

b. The number of litrelons of Material A used in production can be computed through analysis of the raw materials stock account:

|Balance, Material A, 3/1 |£ - 0 - |
|Add purchases (1,000 litre. x £8.00 per litre.) | 8,000 |
| Total Material A available |8,000 |
|Less balance, Material, 3/7 | 2,000 |
| Total Material A used (at standard cost) |£6,000 |

Total material A used, £6,000/£8 standard cost per litre = 750 litres used
c. Materials quantity variance = SP (AQ – SQ)
£8.00 per litre. (750 litre. – 720 litre.*) = £240 U.

*120 batches x 6 litre. per batch = 720 litres

|d. |Raw materials (1,000 litre. x £8.00 per litre.) | |8,000 | | |
| | Materials price variance (1,000 litre. x £0.30 per | | | | |
| |Litre. F) | | | |300 |
| | Creditors (1,000 litre. x £7.70 per litre.*) | | | |7,700 |

*£7,700 ( 1,000 litre. = £7.70 per litre.

|Work in process (720 litre. @ £8.00 per litre.) | |5,760 | | |
|Materials quantity variance (30 litre. U x £8.00 | | | | |
|per litre.) | |240 | | |
| Raw materials (750 litre. x £8.00 per litre.) | | | |6,000 |

3. a.The standard cost per kilo of Material B can be computed by analysing the raw materials stock account:

|Material B used in production | |£2,500 |
|Add balance, Material B, 3/7 | |1,400 |
| Total Material B available last week | |3,900 |
|Deduct balance, Material B, 3/1 | | 700 |
|Purchases of Material B (at standard cost) | |£3,200 |

[pic]

|b. |Material B drawn from | | | | | | |
| |Stock | |£2,500 |( |£4.00 per kilo|= |625 kilos used |
| |Deduct unfavourable quantity | | | | | | |
| |variance | |100 | | | | |
| |Standard cost of material used | |£2,400 |( |£4.00 per kilo|= |600 kilos allowed |

Alternate solution for standard quantity:

Materials quantity variance = (AQ x SP) – (SQ x SP) £2,500 – (SQ x £4.00 per kilo) = £100 U

| £2,500 – £4 per kilo x SQ |= |£100* |
| £4 per kilo x SQ |= |£2,400 |
| SQ |= |600 kilos |
| | | |

*When used with the formula, an unfavourable variance is positive.

c. 600 kilos ( 120 batches = 5 kilos per batch

|d. |Total cost of purchases of materials | | |
| |(creditors) | |£11,460 |
| |Less cost of Material A purchases (Part 2) | |7,700 |
| |Cost of Material B purchases | |£ 3,760 |

Materials price variance = (AQ x AP) – (AQ x SP)
£3,760 – (800 kilos x £4.00 per kilo) =
£3,760 – £3,200 = £560 U

|e. |Raw materials (800 kilo @ £4.00 per kilo) | |3,200 | | |
| |Materials price variance (800 kilos x £0.70 per kilo U) | |560 | | |
| | Creditors (800 kilos x £4.70 per kilo*) | | | |3,760 |

*£3,760 ( 800 kilos = £4.70 per kilo

|Work in process (600 kilos x £4.00 per kilo) | |2,400 | | |
|Materials quantity variance (25 kilos. U x £4.00 per kilo) | |100 | | |
| Raw materials (625 kilos x £4.00 per kilo) | | | |2,500 |

| 4. |a. |Labour rate variance = (AH x AR) – (AH x SR) |
| | |(£4,100) – (400 hrs.* x SR) = £500 U |
| | | £4,100 – 400 hrs. x SR |= |£500** |
| | |400 hrs. x SR |= |£3,600 |
| | |SR |= |£9.00 per hr. |

* 10 workers x 40 hrs. per worker = 400 hrs.
** When used with the formula, an unfavourable variance is positive.

b. The standard hours per batch can be obtained by working through the standard cost card for Maxitol.

|Standard cost per batch (given) | | |£99.50 |
|Less: Material A standard cost (6 litre. x | | | |
|£8.00 per litre.) |£48.00 | | |
| Material B standard cost (5 lbs. x | | | |
|£4.00 per lb.) |20.00 | |68.00 |
|Direct labour standard cost per batch | | |£31.50 |

[pic]
c. 120 batches x 3.5 hrs. per batch = 420 hrs.

d. Labour efficiency variance = (AH x SR) – (SH x SR)
(400 hrs. x £9.00 per hr.) – (420 hrs. x £9.00 per hr.) = £180 F

|e. |Work in process (420 hrs. x £9.00 per hr.) | |3,780 | | |
| |Labour rate variance (400 hrs. x £1.25 per hr. U) | |500 | | |
| | Labour efficiency variance (20 hrs. F x £9.00 | | | | |
| |per hr.) | | | |180 |
| | Wages payable (400 hrs. x £10.25 per hr.*) | | | |4,100 |

*£4,100 ( 400 hrs. = £10.25 per hr.

| 5. | | |Standard Quantity or| |Standard | | |
| | | |Hours | |Price or Rate | |Standard Cost |
| |Material A | |6 litre. | |£8.00 per litre. | |£48.00 |
| |Material B | |5 lbs. | |£4.00 per lbs. | |20.00 |
| |Direct labour | |3.5 hrs. | |£9.00 per hr. | |31.50 |
| | Standard cost per batch | | | | | |£99.50 |