80,000 Different Caffeinated Combinations
When Howard Schultz purchased a small Seattle coffee-roasting business in 1987, he set out to create a new kind of company. He thought the company should sell coffee by the cup in its store, in addition to the bags of roasted beans it already sold. He also felt that the store shouldn't just sell coffee but also a pleasant atmosphere and experience. Schultz saw the store as a place where you could order a beverage, custom-made to your unique tastes, in an environment that would give you the sense that you had escaped, if only momentarily, from the chaos we call life. Finally, Schultz believed that the company would prosper if employees shared in its success.
In a little more than 20 years, Howard Schultz's company, Starbucks, grew from that one store to over 17,000 locations in 54 countries. That is an incredible rate of growth, and it didn't happen by accident. While Starbucks does everything it can to maximize the customer's experience, behind the scenes it needs to control costs. Consider the almost infinite options of beverage combinations and variations at Starbucks. The company must determine the most efficient way to make each beverage, it must communicate these methods in the form of standards to its employees, and it must then evaluate whether those standards are being met.
Schultz's book, Onward: How Starbucks Fought for Its Life Without Losing Its Soul, describes a painful period in which Starbucks had to close 600 stores and lay off thousands of employees. However, when a prominent shareholder suggested that the company eliminate its employee health-care plan, as so many other companies had done, Schultz refused. The health-care plan represented one of the company's most tangible commitments to employee well-being as well as to corporate social responsibility. Schultz feels strongly that providing health care to the company's employees is an essential part of the standard cost of a cup of Starbucks’ coffee.
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p. 1188 p. 1192 p. 1197
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After studying this chapter, you should be able to:
[1] Distinguish between a standard and a budget.
[2] Identify the advantages of standard costs.
[3] Describe how companies set standards.
[4] State the formulas for determining direct materials and direct labor variances.
[5] State the formula for determining the total manufacturing overhead variance.
[6] Discuss the reporting of variances.
[7] Prepare an income statement for management under a standard costing system.
[8] Describe the balanced scorecard approach to performance evaluation.
Preview of Chapter 25
Standards are a fact of life. You met the admission standards for the school you are attending. The vehicle that you drive had to meet certain governmental emissions standards. The hamburgers and salads that you eat in a restaurant have to meet certain health and nutritional standards before they can be sold. As described in our Feature Story, Starbucks has standards for the costs of its materials, labor, and overhead. The reason for standards in these cases is very simple. They help to ensure that overall product quality is high while keeping costs under control.
In this chapter, we continue the study of controlling costs. You will learn how to evaluate performance using standard costs and a balanced scorecard.
The content and organization of Chapter 25 are as follows.
The Need for Standards
Standards are common in business. Those imposed by government agencies are often called regulations. They include the Fair Labor Standards Act, the Equal Employment Opportunity Act, and a multitude of environmental standards. Standards established internally by a company may extend to personnel matters, such as employee absenteeism and ethical codes of conduct, quality control standards for products, and standard costs for goods and services. In managerial accounting, standard costs are predetermined unit costs, which companies use as measures of performance.
We will focus on manufacturing operations in this chapter. But you should also recognize that standard costs also apply to many types of service businesses as well. For example, a fast-food restaurant such as McDonald's knows the price it should pay for pickles, beef, buns, and other ingredients. It also knows how much time it should take an employee to flip hamburgers. If the company pays too much for pickles or if employees take too much time to prepare Big Macs, McDonald's notices the deviations and takes corrective action. Not-for-profit entities, such as universities, charitable organizations, and governmental agencies, also may use standard costs as measures of performance.
Distinguishing Between Standards and Budgets
Both standards and budgets are predetermined costs, and both contribute to management planning and control. There is a difference, however, in the way the terms are expressed. A standard is a unit amount. A budget is a total amount. Thus, it is customary to state that the standard cost of direct labor for a unit of product is, say, $10. If the company produces 5,000 units of the product, the $50,000 of direct labor is the budgeted labor cost. A standard is the budgeted cost per unit of product. A standard is therefore concerned with each individual cost component that makes up the entire budget.
There are important accounting differences between budgets and standards. Except in the application of manufacturing overhead to jobs and processes, budget data are not journalized in cost accounting systems. In contrast, as we illustrate in Appendix 25A, standard costs may be incorporated into cost accounting systems. Also, a company may report its inventories at standard cost in its financial statements, but it would not report inventories at budgeted costs.
Why Standard Costs?
Standard costs offer a number of advantages to an organization, as shown in Illustration 25-1.
The organization will realize these advantages only when standard costs are carefully established and prudently used. Using standards solely as a way to place blame can have a negative effect on managers and employees. To minimize this effect, many companies offer wage incentives to those who meet the standards.
Setting Standard Costs
The setting of standard costs to produce a unit of product is a difficult task. It requires input from all persons who have responsibility for costs and quantities. To determine the standard cost of direct materials, management consults purchasing agents, product managers, quality control engineers, and production supervisors. In setting the standard cost for direct labor, managers obtain pay rate data from the payroll department. Industrial engineers generally determine the labor time requirements. The managerial accountant provides important input for the standard-setting process by accumulating historical cost data and by knowing how costs respond to changes in activity levels.
Illustration 25-1
Advantages of Standard Costs
To be effective in controlling costs, standard costs need to be current at all times. Thus, standards are under continuous review. They should change whenever managers determine that the existing standard is not a good measure of performance. Circumstances that warrant revision of a standard include changed wage rates resulting from a new union contract, a change in product specifications, or the implementation of a new manufacturing method.
Ideal versus Normal Standards
Companies set standards at one of two levels: ideal or normal. Ideal standards represent optimum levels of performance under perfect operating conditions. Normal standards represent efficient levels of performance that are attainable under expected operating conditions.
Some managers believe ideal standards will stimulate workers to ever-increasing improvement. However, most managers believe that ideal standards lower the morale of the entire workforce because they are difficult, if not impossible, to meet. Very few companies use ideal standards.
Most companies that use standards set them at a normal level. Properly set, normal standards should be rigorous but attainable. Normal standards allow for rest periods, machine breakdowns, and other “normal” contingencies in the production process. In the remainder of this chapter, we will assume that standard costs are set at a normal level.
Ethics Note 
When standards are set too high, employees sometimes feel pressure to consider unethical practices to meet these standards.
ACCOUNTING ACROSS THE ORGANIZATION 
How Do Standards Help a Business?
A number of organizations, including corporations, consultants, and governmental agencies, share information regarding performance standards in an effort to create a standard set of measures for thousands of business processes. The group, referred to as the Open Standards Benchmarking Collaborative, includes IBM, Procter and Gamble, the U.S. Navy, and the World Bank. Companies that are interested in participating can go to the group's website and enter their information.
Source: William M. Bulkeley, “Business, Agencies to Standardize Their Benchmarks,” Wall Street Journal (May 19, 2004).
How will the creation of such standards help a business or organization? (See page 1225.)
A Case Study
To establish the standard cost of producing a product, it is necessary to establish standards for each manufacturing cost element—direct materials, direct labor, and manufacturing overhead. The standard for each element is derived from the standard price to be paid and the standard quantity to be used.
To illustrate, we use an extended example. Xonic Beverage Company uses standard costs to measure performance at the production facility of its caffeinated energy drink, Xonic Tonic. Xonic produces one-gallon containers of concentrated syrup that it sells to coffee and smoothie shops, and other retail outlets. The syrup is mixed with ice water or ice “slush” before serving. The potency of the beverage varies depending on the amount of concentrated syrup used.
DIRECT MATERIALS
The direct materials price standard is the cost per unit of direct materials that should be incurred. This standard is based on the purchasing department's best estimate of the cost of raw materials. This cost is frequently based on current purchase prices. The price standard also includes an amount for related costs such as receiving, storing, and handling. The materials price standard per pound of material for Xonic Tonic is:
Illustration 25-2
Setting direct materials price standard
The direct materials quantity standard is the quantity of direct materials that should be used per unit of finished goods. This standard is expressed as a physical measure, such as pounds, barrels, or board feet. In setting the standard, management considers both the quality and quantity of materials required to manufacture the product. The standard includes allowances for unavoidable waste and normal spoilage. The standard quantity per unit for Xonic Tonic is as follows.
Illustration 25-3
Setting direct materials quantity standard
The standard direct materials cost per unit is the standard direct materials price times the standard direct materials quantity. For Xonic, the standard direct materials cost per gallon of Xonic Tonic is $12.00 ($3 × 4 pounds).
DIRECT LABOR
The direct labor price standard is the rate per hour that should be incurred for direct labor. This standard is based on current wage rates, adjusted for anticipated changes such as cost of living adjustments (COLAs). The price standard also generally includes employer payroll taxes and fringe benefits, such as paid holidays and vacations. For Xonic, the direct labor price standard is as follows.
Alternative Terminology
The direct labor price standard is also called the direct labor rate standard.
Illustration 25-4
Setting direct labor price standard
The direct labor quantity standard is the time that should be required to make one unit of the product. This standard is especially critical in labor-intensive companies. Allowances should be made in this standard for rest periods, cleanup, machine setup, and machine downtime. For Xonic, the direct labor quantity standard is as follows.
Alternative Terminology
The direct labor quantity standard is also called the direct labor efficiency standard.
Illustration 25-5
Setting direct labor quantity standard
The standard direct labor cost per unit is the standard direct labor rate times the standard direct labor hours. For Xonic, the standard direct labor cost per gallon is $30 ($15 × 2 hours).
MANUFACTURING OVERHEAD
For manufacturing overhead, companies use a standard predetermined overhead rate in setting the standard. This overhead rate is determined by dividing budgeted overhead costs by an expected standard activity index. For example, the index may be standard direct labor hours or standard machine hours.
As discussed in Chapter 21, many companies employ activity-based costing (ABC) to allocate overhead costs. Because ABC uses multiple activity indices to allocate overhead costs, it results in a better correlation between activities and costs incurred than do other methods. As a result, the use of ABC can significantly improve the usefulness of standard costing for management decision-making.
Xonic uses standard direct labor hours as the activity index. The company expects to produce 13,200 gallons of Xonic Tonic during the year at normal capacity. Normal capacity is the average activity output that a company should experience over the long run. Since it takes two direct labor hours for each gallon, total standard direct labor hours are 26,400 (13,200 gallons × 2 hours).
At normal capacity of 26,400 direct labor hours, overhead costs are expected to be $132,000. Of that amount, $79,200 are variable and $52,800 are fixed. Illustration 25-6 shows computation of the standard predetermined overhead rates for Xonic.
Illustration 25-6
Computing predetermined overhead rates
The standard manufacturing overhead rate per unit is the predetermined overhead rate times the activity index quantity standard. For Xonic, which uses direct labor hours as its activity index, the standard manufacturing overhead rate per gallon of Xonic Tonic is $10 ($5 × 2 hours).
TOTAL STANDARD COST PER UNIT
After a company has established the standard quantity and price per unit of product, it can determine the total standard cost. The total standard cost per unit is the sum of the standard costs of direct materials, direct labor, and manufacturing overhead. The total standard cost per gallon of Xonic Tonic is $52, as shown on the following standard cost card.
Illustration 25-7
Standard cost per gallon of Xonic Tonic
The company prepares a standard cost card for each product. This card provides the basis for determining variances from standards.
MANAGEMENT INSIGHT
How Can We Make Susan's Chili Profitable? 
Susan's Chili Factory manufactures and sells chili. The cost of manufacturing Susan's chili consists of the costs of raw materials, labor to convert the basic ingredients to chili, and overhead. Managers need to develop three standards for materials: (1) What should be the formula (mix) of ingredients for one gallon of chili? (2) What should be the normal wastage (or shrinkage) for the individual ingredients? (3) What should be the standard cost for the individual ingredients that go into the chili?
Susan's Chili Factory also illustrates how managers can use standard costs in controlling costs. Suppose that summer droughts have reduced crop yields. As a result, prices have doubled for beans, onions, and peppers. In this case, actual costs will be significantly higher than standard costs, which will cause management to evaluate the situation. Similarly, assume that poor maintenance caused the onion-dicing blades to become dull. As a result, usage of onions to make a gallon of chili tripled. Because this deviation is quickly highlighted through standard costs, managers can take corrective action promptly.
Source: Adapted from David R. Beran, “Cost Reduction Through Control Reporting,” Management Accounting (April 1982), pp. 29–33.
How might management use this raw materials cost information? (See page 1225.)
DO IT!
Standard Costs
Ridette Inc. accumulated the following standard cost data concerning product Cty31.
Direct materials per unit: 1.5 pounds at $4 per pound.
Direct labor per unit: 0.25 hours at $13 per hour.
Manufacturing overhead: predetermined rate is 120% of direct labor cost.
Compute the standard cost of one unit of product Cty31.
Action Plan
Know that standard costs are predetermined unit costs.
To establish the standard cost of producing a product, establish the standard for each manufacturing cost element—direct materials, direct labor, and manufacturing overhead.
Compute the standard cost for each element from the standard price to be paid and the standard quantity to be used.
Solution
Related exercise material: BE25-2, BE25-3, E25-1, E25-2, E25-3, and DO IT! 25-1.
Analyzing and Reporting Variances from Standards
State the formulas for determining direct materials and direct labor variances.
One of the major management uses of standard costs is to identify variances from standards. Variances are the differences between total actual costs and total standard costs.
To illustrate, assume that in producing 1,000 gallons of Xonic Tonic in the month of June, Xonic incurred the following costs.
Illustration 25-8
Actual production costs
Companies determine total standard costs by multiplying the units produced by the standard cost per unit. The total standard cost of Xonic Tonic is $52,000 (1,000 gallons × $52). Thus, the total variance is $3,000, as shown below.
Illustration 25-9
Computation of total variance
Alternative Terminology
In business, the term variance is also used to indicate differences between total budgeted and total actual costs.
Note that the variance is expressed in total dollars, and not on a per unit basis.
When actual costs exceed standard costs, the variance is unfavorable. The $3,000 variance in June for Xonic Tonic is unfavorable. An unfavorable variance has a negative connotation. It suggests that the company paid too much for one or more of the manufacturing cost elements or that it used the elements inefficiently.
If actual costs are less than standard costs, the variance is favorable. A favorable variance has a positive connotation. It suggests efficiencies in incurring manufacturing costs and in using direct materials, direct labor, and manufacturing overhead.
However, be careful: A favorable variance could be obtained by using inferior materials. In printing wedding invitations, for example, a favorable variance could result from using an inferior grade of paper. Or, a favorable variance might be achieved in installing tires on an automobile assembly line by tightening only half of the lug bolts. A variance is not favorable if the company has sacrificed quality control standards.
To interpret a variance, you must analyze its components. A variance can result from differences related to the cost of materials, labor, or overhead. Illustration 25-10 shows that the total variance is the sum of the materials, labor, and overhead variances.
Illustration 25-10
Components of total variance
In the following discussion, you will see that the materials variance and the labor variance are the sum of variances resulting from price differences and quantity differences. Illustration 25-11 shows a format for computing the price and quantity variances.
Illustration 25-11
Breakdown of materials or labor variance into price and quantity variances
Note that the left side of the matrix is actual cost (actual quantity times actual price). The right hand is standard cost (standard quantity times standard price). The only additional element you need in order to compute the price and quantity variances is the middle element, the actual quantity at the standard price.
Direct Materials Variances
Part of Xonic's total variance of $3,000 is due to a materials variance. In completing the order for 1,000 gallons of Xonic Tonic, the company used 4,200 pounds of direct materials. The direct materials were purchased at a price of $3.10 per unit. From Illustration 25-3, we know that Xonic's standards require it to use 4 pounds of materials per gallon produced, so it should have only used 4,000 (4 × 1,000) pounds of direct materials to produce 1,000 gallons. Illustration 25-2 shows that the standard cost of each pound of direct materials is $3 instead of the $3.10 actually paid. Illustration 25-12 shows that the total materials variance is computed as the difference between the amount paid (actual quantity times actual price) and the amount that should have been paid based on standards (standard quantity times standard price of materials).
Illustration 25-12
Formula for total materials variance
Thus, for Xonic, the total materials variance is $1,020 ($13,020 − $12,000) unfavorable.
The total materials variance could be caused by differences in the price paid for the materials or by differences in the amount of materials used. Illustration 25-13 (page 1186) shows that the total materials variance is the sum of the materials price variance and the materials quantity variance.
Illustration 25-13
Components of total materials variance
The materials price variance results from a difference between the actual price and the standard price. Illustration 25-14 shows that the materials price variance is computed as the difference between the actual amount paid (actual quantity of materials times actual price) and the standard amount that should have been paid for the materials used (actual quantity of materials times standard price).1
Illustration 25-14
Formula for materials price variance
Helpful Hint The alternative formula is:
For Xonic, the materials price variance is $420 ($13,020 − $12,600) unfavorable.
The price variance can also be computed by multiplying the actual quantity purchased by the difference between the actual and standard price per unit. The computation in this case is 4,200 × ($3.10 − $3.00) = $420 U.
As seen in Illustration 25-13, the other component of the materials variance is the quantity variance. The quantity variance results from differences between the amount of material actually used and the amount that should have been used. As shown in Illustration 25-15, the materials quantity variance is computed as the difference between the standard cost of the actual quantity (actual quantity times standard price) and the standard cost of the amount that should have been used (standard quantity times standard price for materials).
Illustration 25-15
Formula for materials quantity variance
Thus, for Xonic, the materials quantity variance is $600 ($12,600 − $12,000) unfavorable.
The quantity variance can also be computed by applying the standard price to the difference between actual and standard quantities used. The computation in this example is $3.00 × (4,200 − 4,000) = $600 U.
The total materials variance of $1,020 U, therefore, consists of the following.
Helpful Hint The alternative formula is:
Illustration 25-16
Summary of materials variances
Companies sometimes use a matrix to analyze a variance. When the matrix is used, a company computes the amounts using the formulas for each cost element first and then computes the variances. Illustration 25-17 shows the completed matrix for the direct materials variance for Xonic. The matrix provides a convenient structure for determining each variance.
Illustration 25-17
Matrix for direct materials variances
CAUSES OF MATERIALS VARIANCES
What are the causes of a variance? The causes may relate to both internal and external factors. The investigation of a materials price variance usually begins in the purchasing department. Many factors affect the price paid for raw materials. These include availability of quantity and cash discounts, the quality of the materials requested, and the delivery method used. To the extent that these factors are considered in setting the price standard, the purchasing department is responsible for any variances.
However, a variance may be beyond the control of the purchasing department. Sometimes, for example, prices may rise faster than expected. Moreover, actions by groups over which the company has no control, such as the OPEC nations’ oil price increases, may cause an unfavorable variance. For example, during a recent year, Kraft Foods and Kellogg Company both experienced unfavorable materials price variances when the cost of dairy and wheat products jumped unexpectedly. There are also times when a production department may be responsible for the price variance. This may occur when a rush order forces the company to pay a higher price for the materials.
The starting point for determining the cause(s) of a significant materials quantity variance is in the production department. If the variances are due to inexperienced workers, faulty machinery, or carelessness, the production department is responsible. However, if the materials obtained by the purchasing department were of inferior quality, then the purchasing department is responsible.
Direct Materials Variances
The standard cost of Wonder Walkers includes two units of direct materials at $8.00 per unit. During July, the company buys 22,000 units of direct materials at $7.50 and uses those materials to produce 10,000 Wonder Walkers. Compute the total, price, and quantity variances for materials.
Action Plan
Use the formulas for computing each of the materials variances:
Total materials variance = (AQ × AP) − (SQ × SP)
Materials price variance = (AQ × AP) − (AQ × SP)
Materials quantity variance = (AQ × SP) − (SQ × SP)
Solution
Standard quantity = 10,000 × 2.
Substituting amounts into the formulas, the variances are:
Total materials variance = (22,000 × $7.50) − (20,000 × $8.00) = $5,000 unfavorable
Materials price variance = (22,000 × $7.50) − (22,000 × $8.00) = $11,000 favorable
Materials quantity variance = (22,000 × $8.00) − (20,000 × $8.00) = $16,000 unfavorable
Related exercise material: BE25-4, E25-5, and DO IT! 25-2.
Direct Labor Variances
The process of determining direct labor variances is the same as for determining the direct materials variances. In completing the Xonic Tonic order, the company incurred 2,100 direct labor hours at an average hourly rate of $14.80. The standard hours allowed for the units produced were 2,000 hours (1,000 gallons × 2 hours). The standard labor rate was $15 per hour.
The total labor variance is the difference between the amount actually paid for labor versus the amount that should have been paid. Illustration 25-18 shows that the total labor variance is computed as the difference between the amount actually paid for labor (actual hours times actual rate) and the amount that should have been paid (standard hours times standard rate for labor).
Illustration 25-18
Formula for total labor variance
The total labor variance is $1,080 ($31,080 − $30,000) unfavorable.
The total labor variance is caused by differences in the labor rate or difference in labor hours. Illustration 25-19 shows that the total labor variance is the sum of the labor price variance and the labor quantity variance.
Illustration 25-19
Components of total labor variance
The labor price variance results from the difference between the rate paid to workers versus the rate that was supposed to be paid. Illustration 25-20 shows that the labor price variance is computed as the difference between the actual amount paid (actual hours times actual rate) and the amount that should have been paid for the number of hours worked (actual hours times standard rate for labor).
Illustration 25-20
Formula for labor price variance
For Xonic, the labor price variance is $420 ($31,080 − $31,500) favorable.
The labor price variance can also be computed by multiplying actual hours worked by the difference between the actual pay rate and the standard pay rate. The computation in this example is 2,100 × ($15.00 − $14.80) = $420 F.
The other component of the total labor variance is the labor quantity variance. The labor quantity variance results from the difference between the actual number of labor hours and the number of hours that should have been worked for the quantity produced. Illustration 25-21 shows that the labor quantity variance is computed as the difference between the amount that should have been paid for the hours worked (actual hours times standard rate) and the amount that should have been paid for the amount of hours that should have been worked (standard hours times standard rate for labor).
Helpful Hint The alternative formula is:
Illustration 25-21
Formula for labor quantity variance
Thus, for Xonic, the labor quantity variance is $1,500 ($31,500 − $30,000) unfavorable.
The same result can be obtained by multiplying the standard rate by the difference between actual hours worked and standard hours allowed. In this case, the computation is $15.00 × (2,100 − 2,000) = $1,500 U.
The total direct labor variance of $1,080 U, therefore, consists of:
Helpful Hint The alternative formula is:
Illustration 25-22
Summary of labor variances
These results can also be obtained from the matrix in Illustration 25-23 (page 1190).
CAUSES OF LABOR VARIANCES
Labor price variances usually result from two factors: (1) paying workers different wages than expected, and (2) misallocation of workers. In companies where pay rates are determined by union contracts, labor price variances should be infrequent. When workers are not unionized, there is a much higher likelihood of such variances. The responsibility for these variances rests with the manager who authorized the wage change.
Illustration 25-23
Matrix for direct labor variances
Misallocation of the workforce refers to using skilled workers in place of unskilled workers and vice versa. The use of an inexperienced worker instead of an experienced one will result in a favorable price variance because of the lower pay rate of the unskilled worker. An unfavorable price variance would result if a skilled worker were substituted for an inexperienced one. The production department generally is responsible for labor price variances resulting from misallocation of the workforce.
Labor quantity variances relate to the efficiency of workers. The cause of a quantity variance generally can be traced to the production department. The causes of an unfavorable variance may be poor training, worker fatigue, faulty machinery, or carelessness. These causes are the responsibility of the production department. However, if the excess time is due to inferior materials, the responsibility falls outside the production department.
Manufacturing Overhead Variances
The total overhead variance is the difference between the actual overhead costs and overhead costs applied based on standard hours allowed for the amount of goods produced. As indicated in Illustration 25-8 (page 1184), Xonic incurred overhead costs of $10,900 to produce 1,000 gallons of Xonic Tonic in June. The computation of the actual overhead is comprised of a variable and a fixed component. Illustration 25-24 shows this computation.
Illustration 25-24
Actual overhead costs
To find the total overhead variance in a standard costing system, we determine the overhead costs applied based on standard hours allowed. Standard hours allowed are the hours that should have been worked for the units produced. Overhead costs for Xonic Tonic are applied based on direct labor hours. Because it takes two hours of direct labor to produce one gallon of Xonic Tonic, for the 1,000-gallon Xonic Tonic order, the standard hours allowed are 2,000 hours (1,000 gallons × 2 hours). We then apply the predetermined overhead rate to the 2,000 standard hours allowed.
Recall from Illustration 25-6 (page 1182) that the amount of budgeted overhead costs at normal capacity of $132,000 was divided by normal capacity of 26,400 direct labor hours, to arrive at a predetermined overhead rate of $5 ($132,000 ÷ 26,400). The predetermined rate of $5 is then multiplied by the 2,000 standard hours allowed, to determine the overhead costs applied.
Illustration 25-25 shows the formula for the total overhead variance and the calculation for Xonic for the month of June.
Illustration 25-25
Formula for total overhead variance
Thus, for Xonic, the total overhead variance is $900 unfavorable.
The overhead variance is generally analyzed through a price and a quantity variance. (These computations are discussed in more detail in advanced courses.) The name usually given to the price variance is the overhead controllable variance; the quantity variance is referred to as the overhead volume variance. Appendix 25B discusses how the total overhead variance can be broken down into these two variances.
CAUSES OF MANUFACTURING OVERHEAD VARINACES
One reason for an overhead variance relates to over- or underspending on overhead items. For example, overhead may include indirect labor for which a company paid wages higher than the standard labor price allowed. Or, the price of electricity to run the company's machines increased, and the company did not anticipate this additional cost. Companies should investigate any spending variances, to determine whether they will continue in the future. Generally, the responsibility for these variances rests with the production department.
The overhead variance can also result from the inefficient use of overhead. For example, because of poor maintenance, a number of the manufacturing machines are experiencing breakdowns on a consistent basis, leading to reduced production. Or, the flow of materials through the production process is impeded because of a lack of skilled labor to perform the necessary production tasks, due to a lack of planning. In both of these cases, the production department is responsible for the cause of these variances. On the other hand, overhead can also be underutilized because of a lack of sales orders. When the cause is a lack of sales orders, the responsibility rests outside the production department. For example, at one point Chrysler experienced a very significant unfavorable overhead variance because plant capacity was maintained at excessively high levels, due to overly optimistic sales forecasts.
PEOPLE, PLANET, AND PROFIT INSIGHT 
What's Brewing at Starbucks?
It is one thing for a company to say it is committed to corporate social responsibility. It is another thing for the company to actually spell out measurable goals. Recently, Starbucks published its 10th annual Global Responsibility Report in which it describes its goals, achievements, and even its shortcomings related to corporate social responsibility. For example, the company achieved its goal of getting more than 50% of its electricity from renewable sources. It then set its sights higher by setting a goal of 100% within five years. The company also has numerous goals related to purchasing coffee from sources that are certified as responsibly grown and ethically traded; providing funds for loans to coffee farmers; and partnerships with Conservation International to provide training to farmers on ecologically friendly growing. Further, the company reduced water consumption by more than 20% in a two-year period. Finally, it made a significant investment in programs to increase recycling of paper and plastic at its stores.
The report also candidly explains that the company did not meet its goal to cut energy consumption by 25%. It also fell far short of its goal of getting customers to reuse their cups. In those instances where it didn't achieve its goals, Starbucks set new goals and described steps it would take to achieve them. You can view the company's Global Responsibility Report at www.starbucks.com/2010report.
Source: “Starbucks Launches 10th Global Responsibility Report,” Business Wire (April 18, 2011).
What implications does Starbucks’ commitment to corporate social responsibility have for the standard cost of a cup of coffee? (See page 1225.)
DO IT!
Labor and Manufacturing Overhead Variances
The standard cost of Product YY includes 3 hours of direct labor at $12.00 per hour. The predetermined overhead rate is $20.00 per direct labor hour. During July, the company incurred 3,500 hours of direct labor at an average rate of $12.40 per hour and $71,300 of manufacturing overhead costs. It produced 1,200 units.
(a) Compute the total, price, and quantity variances for labor. (b) Compute the total overhead variance.
Action Plan
Use the formulas for computing each of the variances:
Total labor variance = (AH × AR) − (SH × SR) Labor price variance = (AH × AR) − (AH × SR) Labor quantity variance = (AH × SR) − (SH × SR) Total overhead variance = Actual overhead − Overhead applied*
Solution
Substituting amounts into the formulas, the variances are:
Total labor variance = (3,500 × $12.40) − (3,600 × $12.00) = $200 unfavorable
Labor price variance = (3,500 × $12.40) − (3,500 × $12.00) = $1,400 unfavorable
Labor quantity variance = (3,500 × $12.00) − (3,600 × $12.00) = $1,200 favorable
Total overhead variance = $71,300 − $72,000* = $700 favorable
Related exercise material: BE25-5, BE25-6, E25-4, E25-6, E25-7, E25-8, E25-10, and DO IT! 25-3.
Reporting Variances
All variances should be reported to appropriate levels of management as soon as possible. The sooner managers are informed, the sooner they can evaluate problems and take corrective action.
The form, content, and frequency of variance reports vary considerably among companies. One approach is to prepare a weekly report for each department that has primary responsibility for cost control. Under this approach, materials price variances are reported to the purchasing department, and all other variances are reported to the production department that did the work. The following report for Xonic, with the materials for the Xonic Tonic order listed first, illustrates this approach.
Illustration 25-26
Materials price variance report
The explanation column is completed after consultation with the purchasing department manager.
Variance reports facilitate the principle of “management by exception” explained in Chapter 24. For example, the vice president of purchasing can use the report shown above to evaluate the effectiveness of the purchasing department manager. Or, the vice president of production can use production department variance reports to determine how well each production manager is controlling costs. In using variance reports, top management normally looks for significant variances. These may be judged on the basis of some quantitative measure, such as more than 10% of the standard or more than $1,000.
Statement Presentation of Variances
In income statements prepared for management under a standard cost accounting system, cost of goods sold is stated at standard cost and the variances are disclosed separately. Unfavorable variances increase cost of goods sold, while favorable variances decrease cost of goods sold. Illustration 25-27 (page 1194) shows the presentation of variances in an income statement. This income statement is based on the production and sale of 1,000 units of Xonic Tonic at $70 per unit. It also assumes selling and administrative costs of $3,000. Observe that each variance is shown, as well as the total net variance. In this example, variations from standard costs reduced net income by $3,000.
Standard costs may be used in financial statements prepared for stockholders and other external users. The costing of inventories at standard costs is in accordance with generally accepted accounting principles when there are no significant differences between actual costs and standard costs. Hewlett-Packard and Jostens, Inc., for example, report their inventories at standard costs. However, if there are significant differences between actual and standard costs, the financial statements must report inventories and cost of goods sold at actual costs.
Illustration 25-27
Variances in income statement for management
It is also possible to show the variances in an income statement prepared in the variable costing (CVP) format. To do so, it is necessary to analyze the overhead variances into variable and fixed components. This type of analysis is explained in cost accounting textbooks.
Balanced Scorecard
Financial measures (measurement of dollars), such as variance analysis and return on investment (ROI), are useful tools for evaluating performance. However, many companies now supplement these financial measures with nonfinancial measures to better assess performance and anticipate future results. For example, airlines like Delta, American, and United use capacity utilization as an important measure to understand and predict future performance. Newspaper publishers such as the New York Times and the Chicago Tribune use circulation figures as another measure by which to assess performance. Penske Automotive Group, the owner of 300 dealerships, rewards executives for meeting employee retention targets. Illustration 25-28 lists some key nonfinancial measures used in various industries.
Most companies recognize that both financial and nonfinancial measures can provide useful insights into what is happening in the company. As a result, many companies now use a broad-based measurement approach, called the balanced scorecard, to evaluate performance. The balanced scorecard incorporates financial and nonfinancial measures in an integrated system that links performance measurement with a company's strategic goals. Nearly 50% of the largest companies in the United States, including Unilever, Chase, and Wal-Mart Stores, Inc., are using the balanced scorecard approach.
The balanced scorecard evaluates company performance from a series of “perspectives.” The four most commonly employed perspectives are as follows.
1. The financial perspective is the most traditional view of the company. It employs financial measures of performance used by most firms.
Illustration 25-28
Nonfinancial measures used in various industries
2. The customer perspective evaluates the company from the viewpoint of those people who buy its products or services. This view compares the company to competitors in terms of price, quality, product innovation, customer service, and other dimensions.
3. The internal process perspective evaluates the internal operating processes critical to success. All critical aspects of the value chain—including product development, production, delivery, and after-sale service—are evaluated to ensure that the company is operating effectively and efficiently.
4. The learning and growth perspective evaluates how well the company develops and retains its employees. This would include evaluation of such things as employee skills, employee satisfaction, training programs, and information dissemination.
Within each perspective, the balanced scorecard identifies objectives that contribute to attainment of strategic goals. Illustration 25-29 (page 1196) shows examples of objectives within each perspective.
The objectives are linked across perspectives in order to tie performance measurement to company goals. The financial-perspective objectives are normally set first, and then objectives are set in the other perspectives in order to accomplish the financial goals.
For example, within the financial perspective, a common goal is to increase profit per dollars invested as measured by ROI. In order to increase ROI, a customer-perspective objective might be to increase customer satisfaction as measured by the percentage of customers who would recommend the product to a friend. In order to increase customer satisfaction, an internal-process-perspective objective might be to increase product quality as measured by the percentage of defect-free units. Finally, in order to increase the percentage of defect-free units, the learning-and-growth-perspective objective might be to reduce factory employee turnover as measured by the percentage of employees leaving in under one year.
Illustration 25-29
Examples of objectives within the four perspectives of balanced scorecard
Illustration 25-30 illustrates this linkage across perspectives.
Illustration 25-30
Linked process across balanced scorecard perspectives
Through this linked process, the company can better understand how to achieve its goals and what measures to use to evaluate performance.
In summary, the balanced scorecard does the following:
1. Employs both financial and nonfinancial measures. (For example, ROI is a financial measure; employee turnover is a nonfinancial measure.)
2. Creates linkages so that high-level corporate goals can be communicated all the way down to the shop floor.
3. Provides measurable objectives for nonfinancial measures such as product quality, rather than vague statements such as “We would like to improve quality.”
4. Integrates all of the company's goals into a single performance measurement system, so that an inappropriate amount of weight will not be placed on any single goal.
SERVICE COMPANY INSIGHT
It May Be Time to Fly United Again
Many of the benefits of a balanced scorecard approach are evident in the improved operations at United Airlines. At the time it filed for bankruptcy, United had a reputation for some of the worst service in the airline business. But when Glenn Tilton took over as United's chief executive officer, he recognized that things had to change.
He implemented an incentive program that allows all of United's 63,000 employees to earn a bonus of 2.5% or more of their wages if the company “exceeds its goals for on-time flight departures and for customer intent to fly United again.” After instituting this program, the company's on-time departures were among the best, its customer complaints were reduced considerably, and the number of customers who said that they would fly United again was at its highest level ever.
Source: Susan Carey, “Friendlier Skies: In Bankruptcy, United Airlines Forges a Path to Better Service,” Wall Street Journal (June 15, 2004).
Which of the perspectives of a balanced scorecard were the focus of United's CEO? (See page 1225.)
DO IT!
Balanced Scorecard
Indicate which of the four perspectives in the balanced scorecard is most likely associated with the objectives that follow.
1. Percentage of repeat customers.
2. Number of suggestions for improvement from employees.
3. Contribution margin.
4. Brand recognition.
5. Number of cross-trained employees.
6. Amount of setup time.
Action Plan
The financial perspective employs traditional financial measures of performance.
The customer perspective evaluates company performance as seen by the people who buy its products or services.
The internal process perspective evaluates the internal operating processes critical to success.
The learning and growth perspective evaluates how well the company develops and retains its employees.
Solution
1. Customer perspective.
2. Learning and growth perspective.
3. Financial perspective.
4. Customer perspective.
5. Learning and growth perspective.
6. Internal process perspective.
Related exercise material: BE25-7, E25-16, and DO IT! 25-4.
Manlow Company makes a cologne called Allure. The standard cost for one bottle of Allure is as follows.
During the month, the following transactions occurred in manufacturing 10,000 bottles of Allure.
1. 58,000 ounces of materials were purchased at $1.00 per ounce.
2. All the materials purchased were used to produce the 10,000 bottles of Allure.
3. 4,900 direct labor hours were worked at a total labor cost of $56,350.
4. Variable manufacturing overhead incurred was $15,000 and fixed overhead incurred was $10,400.
The manufacturing overhead rate of $4.80 is based on a normal capacity of 5,200 direct labor hours. The total budget at this capacity is $10,400 fixed and $14,560 variable.
Instructions
(a) Compute the total variance and the variances for direct materials and direct labor elements.
(b) Compute the total variance for manufacturing overhead.
Action Plan
Check to make sure the total variance and the sum of the individual variances are equal.
Find the price variance first, then the quantity variance.
Base budgeted overhead costs on flexible budget data.
Base overhead applied on standard hours allowed.
Ignore actual hours worked in computing overhead variances.
Solution to Comprehensive DO IT!
SUMMARY OF LEARNING OBJECTIVES
1 Distinguish between a standard and a budget. Both standards and budgets are predetermined costs. The primary difference is that a standard is a unit amount, whereas a budget is a total amount. A standard may be regarded as the budgeted cost per unit of product.
2 Identify the advantages of standard costs. Standard costs offer a number of advantages. They (a) facilitate management planning, (b) promote greater economy, (c) are useful in setting selling prices, (d) contribute to management control, (e) permit “management by exception,” and (f) simplify the costing of inventories and reduce clerical costs.
3 Describe how companies set standards. The direct materials price standard should be based on the delivered cost of raw materials plus an allowance for receiving and handling. The direct materials quantity standard should establish the required quantity plus an allowance for waste and spoilage.
The direct labor price standard should be based on current wage rates and anticipated adjustments such as COLAs. It also generally includes payroll taxes and fringe benefits. Direct labor quantity standards should be based on required production time plus an allowance for rest periods, cleanup, machine setup, and machine downtime.
For manufacturing overhead, a standard predetermined overhead rate is used. It is based on an expected standard activity index such as standard direct labor hours or standard machine hours.
4 State the formulas for determining direct materials and direct labor variances. The formulas for the direct materials variances are:
The formulas for the direct labor variances are:
5 State the formula for determining the total manufacturing overhead variance. The formula for the total manufacturing overhead variance is:
6 Discuss the reporting of variances. Variances are reported to management in variance reports. The reports facilitate management by exception by highlighting significant differences.
7 Prepare an income statement for management under a standard costing system. Under a standard costing system, an income statement prepared for management will report cost of goods sold at standard cost and then disclose each variance separately.
8 Describe the balanced scorecard approach to performance evaluation. The balanced scorecard incorporates financial and nonfinancial measures in an integrated system that links performance measurement and a company's strategic goals. It employs four perspectives: financial, customer, internal process, and learning and growth. Objectives are set within each of these perspectives that link to objectives within the other perspectives.
GLOSSARY
Balanced scorecard An approach that incorporates financial and nonfinancial measures in an integrated system that links performance measurement and a company's strategic goals. (p. 1194).
Customer perspective A viewpoint employed in the balanced scorecard to evaluate the company from the perspective of those people who buy and use its products or services. (p. 1195).
Direct labor price standard The rate per hour that should be incurred for direct labor. (p. 1181).
Direct labor quantity standard The time that should be required to make one unit of product. (p. 1181).
Direct materials price standard The cost per unit of direct materials that should be incurred. (p. 1180).
Direct materials quantity standard The quantity of direct materials that should be used per unit of finished goods. (p. 1180).
Financial perspective A viewpoint employed in the balanced scorecard to evaluate a company's performance using financial measures. (p. 1194).
Ideal standards Standards based on the optimum level of performance under perfect operating conditions. (p. 1179).
Internal process perspective A viewpoint employed in the balanced scorecard to evaluate the effectiveness and efficiency of a company's value chain, including product development, production, delivery, and after-sale service. (p. 1195).
Labor price variance The difference between the actual hours times the actual rate and the actual hours times the standard rate for labor. (p. 1188).
Labor quantity variance The difference between actual hours times the standard rate and standard hours times the standard rate for labor. (p. 1189).
Learning and growth perspective A viewpoint employed in the balanced scorecard to evaluate how well a company develops and retains its employees. (p. 1195).
Materials price variance The difference between the actual quantity times the actual price and the actual quantity times the standard price for materials. (p. 1186).
Materials quantity variance The difference between the actual quantity times the standard price and the standard quantity times the standard price for materials. (p. 1186).
Normal capacity The average activity output that a company should experience over the long run. (p. 1182).
Normal standards Standards based on an efficient level of performance that are attainable under expected operating conditions. (p. 1179).
Standard costs Predetermined unit costs which companies use as measures of performance. (p. 1178).
Standard hours allowed The hours that should have been worked for the units produced. (p. 1191).
Standard predetermined overhead rate An overhead rate determined by dividing budgeted overhead costs by an expected standard activity index. (p. 1181).
Total labor variance The difference between actual hours times the actual rate and standard hours times the standard rate for labor. (p. 1188).
Total materials variance The difference between the actual quantity times the actual price and the standard quantity times the standard price of materials. (p. 1185).
Total overhead variance The difference between actual overhead costs and overhead costs applied to work done, based on standard hours allowed. (p. 1190).
Variance The difference between total actual costs and total standard costs. (p. 1184).
APPENDIX 25A Standard Cost Accounting System
A standard cost accounting system is a double-entry system of accounting. In this system, companies use standard costs in making entries, and they formally recognize variances in the accounts. Companies may use a standard cost system with either job order or process costing.
In this appendix, we will explain and illustrate a standard cost, job order cost accounting system. The system is based on two important assumptions:
1. Variances from standards are recognized at the earliest opportunity.
2. The Work in Process account is maintained exclusively on the basis of standard costs.
In practice, there are many variations among standard cost systems. The system described here should prepare you for systems you see in the “real world.”
Journal Entries
We will use the transactions of Xonic to illustrate the journal entries. Note as you study the entries that the major difference between the entries here and those for the job order cost accounting system in Chapter 20 is the variance accounts.
1. Purchase raw materials on account for $13,020 when the standard cost is $12,600.
Xonic debits the inventory account for actual quantities at standard cost. This enables the perpetual materials records to show actual quantities. Xonic debits the price variance, which is unfavorable, to Materials Price Variance.
2. Incur direct labor costs of $31,080 when the standard labor cost is $31,500.
Like the Raw Materials Inventory account, Xonic debits Factory Labor for actual hours worked at the standard hourly rate of pay. In this case, the labor variance is favorable. Thus, Xonic credits Labor Price Variance.
3. Incur actual manufacturing overhead costs of $10,900.
The controllable overhead variance (see Appendix 25B) is not recorded at this time. It depends on standard hours applied to work in process. This amount is not known at the time overhead is incurred.
4. Issue raw materials for production at a cost of $12,600 when the standard cost is $12,000.
Xonic debits Work in Process Inventory for standard materials quantities used at standard prices. It debits the variance account because the variance is unfavorable. The company credits Raw Materials Inventory for actual quantities at standard prices.
5. Assign factory labor to production at a cost of $31,500 when standard cost is $30,000.
Xonic debits Work in Process Inventory for standard labor hours at standard rates. It debits the unfavorable variance to Labor Quantity Variance. The credit to Factory Labor produces a zero balance in this account.
6. Apply manufacturing overhead to production $10,000.
Xonic debits Work in Process Inventory for standard hours allowed multiplied by the standard overhead rate.
7. Transfer completed work to finished goods $52,000.
In this example, both inventory accounts are at standard cost.
8. Sell the 1,000 gallons of Xonic Tonic for $70,000.
The company debits Cost of Goods Sold at standard cost. Gross profit, in turn, is the difference between sales and the standard cost of goods sold.
9. Recognize unfavorable total overhead variance:
Prior to this entry, a debit balance of $900 existed in Manufacturing Overhead. This entry therefore produces a zero balance in the Manufacturing Overhead account. The information needed for this entry is often not available until the end of the accounting period.
Ledger Accounts
Illustration 25A-1 shows the cost accounts for Xonic after posting the entries. Note that five variance accounts are included in the ledger. The remaining accounts are the same as those illustrated for a job order cost system in Chapter 20, in which only actual costs were used.
Illustration 25A-1 Cost accounts with variances
Helpful Hint All debit balances in variance accounts indicate unfavorable variances. All credit balances indicate favorable variances.
SUMMARY OF LEARNING OBJECTIVE FOR APPENDIX 25A
9 Identify the features of a standard cost accounting system. In a standard cost accounting system, companies journalize and post standard costs, and they maintain separate variance accounts in the ledger.
GLOSSARY FOR APPENDIX 25A
Standard cost accounting system A double-entry system of accounting in which standard costs are used in making entries and variances are recognized in the accounts. (p. 1200).
APPENDIX 25B A Closer Look at Overhead Variances
As indicated in the chapter, the total overhead variance is generally analyzed through a price variance and a quantity variance. The name usually given to the price variance is the overhead controllable variance; the quantity variance is referred to as the overhead volume variance.
LEARNING OBJECTIVE 10
Compute overhead controllable and volume variance.
Overhead Controllable Variance
The overhead controllable variance shows whether overhead costs are effectively controlled. To compute this variance, the company compares actual overhead costs incurred with budgeted costs for the standard hours allowed. The budgeted costs are determined from a flexible manufacturing overhead budget. The concepts related to a flexible budget were discussed in Chapter 24.
For Xonic, the budget formula for manufacturing overhead is variable manufacturing overhead cost of $3 per hour of labor plus fixed manufacturing overhead costs of $4,400 ($52,800 ÷ 12, per Illustration 25-6 on page 1182). Illustration 25B-1 shows the monthly flexible budget for Xonic.
Illustration 25B-1 Flexible budget using standard direct labor hours
As shown, the budgeted costs for 2,000 standard hours are $10,400 ($6,000 variable and $4,400 fixed).
Illustration 25B-2 shows the formula for the overhead controllable variance and the calculation for Xonic at 1,000 units of output (2,000 standard labor hours).
Illustration 25B-2 Formula for overhead controllable variance
The overhead controllable variance for Xonic is $500 unfavorable.
Most controllable variances are associated with variable costs, which are controllable costs. Fixed costs are often known at the time the budget is prepared and are therefore not as likely to deviate from the budgeted amount. In Xonic's case, all of the overhead controllable variance is due to the difference between the actual variable overhead costs ($6,500) and the budgeted variable costs ($6,000).
Management can compare actual and budgeted overhead for each manufacturing overhead cost that contributes to the controllable variance. In addition, management can develop cost and quantity variances for each overhead cost, such as indirect materials and indirect labor.
Overhead Volume Variance
The overhead volume variance is the difference between normal capacity hours and standard hours allowed times the fixed overhead rate. The overhead volume variance relates to whether fixed costs were under- or overapplied during the year. For example, the overhead volume variance answers the question of whether Xonic effectively used its fixed costs. If Xonic produces less Xonic Tonic than normal capacity would allow, an unfavorable variance results. Conversely, if Xonic produces more Xonic Tonic than what is considered normal capacity, a favorable variance results.
The formula for computing the overhead volume variance is as follows.
Illustration 25B-3 Formula for overhead volume variance
To illustrate the fixed overhead rate computation, recall that Xonic budgeted fixed overhead cost for the year of $52,800 (Illustration 25-6 on page 1182). At normal capacity, 26,400 standard direct labor hours are required. The fixed overhead rate is therefore $2 per hour ($52,800 ÷ 26,400 hours).
Xonic produced 1,000 units of Xonic Tonic in June. The standard hours allowed for the 1,000 gallons produced in June is 2,000 (1,000 gallons × 2 hours). For Xonic, normal capacity for June is 1,100, so standard direct labor hours for June at normal capacity is 2,200 (26,400 annual hours ÷ 12 months). The computation of the overhead volume variance in this case is as follows.
Illustration 25B-4 Computation of overhead volume variance for Xonic
In Xonic's case, a $400 unfavorable volume variance results. The volume variance is unfavorable because Xonic produced only 1,000 gallons rather than the normal capacity of 1,100 gallons in the month of June. As a result, it underapplied fixed overhead for that period.
In computing the overhead variances, it is important to remember the following.
1. Standard hours allowed are used in each of the variances.
2. Budgeted costs for the controllable variance are derived from the flexible budget.
3. The controllable variance generally pertains to variable costs.
4. The volume variance pertains solely to fixed costs.
SUMMARY OF LEARNING OBJECTIVE FOR APPENDIX 25B
10 Compute overhead controllable and volume variance. The total overhead variance is generally analyzed through a price variance and a quantity variance. The name usually given to the price variance is the overhead controllable variance. The quantity variance is referred to as the overhead volume variance.
GLOSSARY FOR APPENDIX 25B
Overhead controllable variance The difference between actual overhead incurred and overhead budgeted for the standard hours allowed. (p. 1203).
Overhead volume variance The difference between normal capacity hours and standard hours allowed times the fixed overhead rate. (p. 1204).
Self-Test, Brief Exercises, Exercises, Problem Set A, and many more resources are available for practice in WileyPLUS.
*Note: All asterisked Questions, Exercises, and Problems relate to material in the appendices to the chapter.
SELF-TEST QUESTIONS
Answers are on page 1225.
(LO 1)
1. Standards differ from budgets in that:
(a) budgets but not standards may be used in valuing inventories.
(b) budgets but not standards may be journalized and posted.
(c) budgets are a total amount and standards are a unit amount.
(d) only budgets contribute to management planning and control.
(LO 1)
2. Standard costs:
(a) are imposed by governmental agencies.
(b) are predetermined unit costs which companies use as measures of performance.
(c) can be used by manufacturing companies but not by service or not-for-profit companies.
(d) All of these responses are correct.
(LO 2)
3. The advantages of standard costs include all of the following except:
(a) management by exception may be used.
(b) management planning is facilitated.
(c) they may simplify the costing of inventories.
(d) management must use a static budget.
(LO 3)
4. Normal standards:
(a) allow for rest periods, machine breakdowns, and setup time.
(b) represent levels of performance under perfect operating conditions.
(c) are rarely used because managers believe they lower workforce morale.
(d) are more likely than ideal standards to result in unethical practices.
(LO 3)
5. The setting of standards is:
(a) a managerial accounting decision.
(b) a management decision.
(c) a worker decision.
(d) preferably set at the ideal level of performance.
(LO 4)
6. Each of the following formulas is correct except:
(a) Labor price variance = (Actual hours × Actual rate) − (Actual hours × Standard rate).
(b) Total overhead variance = Actual overhead − Overhead applied.
(c) Materials price variance = (Actual quantity × Actual price) − (Standard quantity × Standard price).
(d) Labor quantity variance = (Actual hours × Standard rate) − (Standard hours × Standard rate).
(LO 4)
7. In producing product AA, 6,300 pounds of direct materials were used at a cost of $1.10 per pound. The standard was 6,000 pounds at $1.00 per pound. The direct materials quantity variance is:
(a) $330 unfavorable.
(b) $300 unfavorable.
(c) $600 unfavorable.
(d) $630 unfavorable.
(LO 4)
8. In producing product ZZ, 14,800 direct labor hours were used at a rate of $8.20 per hour. The standard was 15,000 hours at $8.00 per hour. Based on these data, the direct labor:
(a) quantity variance is $1,600 favorable.
(b) quantity variance is $1,600 unfavorable.
(c) price variance is $2,960 favorable.
(d) price variance is $2,960 unfavorable.
(LO 5)
9. Which of the following is correct about the total overhead variance?
(a) Budgeted overhead and budgeted overhead applied are the same.
(b) Total actual overhead is composed of variable overhead, fixed overhead, and period costs.
(c) Standard hours actually worked are used in computing the variance.
(d) Standard hours allowed for the work done is the measure used in computing the variance.
(LO 5)
10. The formula for computing the total overhead variance is:
(a) actual overhead less overhead applied.
(b) overhead budgeted less overhead applied.
(c) actual overhead less overhead budgeted.
(d) No correct answer is given.
(LO 6)
11. Which of the following is incorrect about variance reports?
(a) They facilitate “management by exception.”
(b) They should only be sent to the top level of management.
(c) They should be prepared as soon as possible.
(d) They may vary in form, content, and frequency among companies.
(LO 6)
12. In using variance reports to evaluate cost control, management normally looks into:
(a) all variances.
(b) favorable variances only.
(c) unfavorable variances only.
(d) both favorable and unfavorable variances that exceed a predetermined quantitative measure such as a percentage or dollar amount.
(LO 7)
13. Generally accepted accounting principles allow a company to:
(a) report inventory at standard cost but cost of goods sold must be reported at actual cost.
(b) report cost of goods sold at standard cost but inventory must be reported at actual cost.
(c) report inventory and cost of goods sold at standard cost as long as there are no significant differences between actual and standard cost.
(d) report inventory and cost of goods sold only at actual costs; standard costing is never permitted.
(LO 8)
14. Which of the following would not be an objective used in the customer perspective of the balanced scorecard approach?
(a) Percentage of customers who would recommend product to a friend.
(b) Customer retention.
(c) Brand recognition.
(d) Earnings per share.
(LO 9)
*15. Which of the following is incorrect about a standard cost accounting system?
(a) It is applicable to job order costing.
(b) It is applicable to process costing.
(c) It reports only favorable variances.
(d) It keeps separate accounts for each variance.
(LO 10)
*16. The formula to compute the overhead volume variance is:
(a) Fixed overhead rate × (Standard hours − Actual hours).
(b) Fixed overhead rate × (Normal capacity hours − Actual hours).
(c) Fixed overhead rate × (Normal capacity hours − Standard hours allowed).
(d) (Variable overhead rate + Fixed overhead rate) × (Normal capacity hours − Standard hours allowed).
Go to the book's companion website, www.wiley.com/college/weygandt, for additional Self-Test Questions.
QUESTIONS
1. (a) “Standard costs are the expected total cost of completing a job.” Is this correct? Explain.
(b) “A standard imposed by a governmental agency is known as a regulation.” Do you agree? Explain.
2. (a) Explain the similarities and differences between standards and budgets.
(b) Contrast the accounting for standards and budgets.
3. Standard costs facilitate management planning. What are the other advantages of standard costs?
4. Contrast the roles of the management accountant and management in setting standard costs.
5. Distinguish between an ideal standard and a normal standard.
6. What factors should be considered in setting (a) the direct materials price standard and (b) the direct materials quantity standard?
7. “The objective in setting the direct labor quantity standard is to determine the aggregate time required to make one unit of product.” Do you agree? What allowances should be made in setting this standard?
8. How is the predetermined overhead rate determined when standard costs are used?
9. What is the difference between a favorable cost variance and an unfavorable cost variance?
10. In each of the following formulas, supply the words that should be inserted for each number in parentheses.
(a) (Actual quantity × (1)) − (Standard quantity × (2)) = Total materials variance
(b) ((3) × Actual price) − (Actual quantity × (4)) = Materials price variance
(c) (Actual quantity × (5)) − ((6) × Standard price) = Materials quantity variance
11. In the direct labor variance matrix, there are three factors: (1) Actual hours × Actual rate, (2) Actual hours × Standard rate, and (3) Standard hours × Standard rate. Using the numbers, indicate the formulas for each of the direct labor variances.
12. Mikan Company's standard predetermined overhead rate is $9 per direct labor hour. For the month of June, 26,000 actual hours were worked, and 27,000 standard hours were allowed. How much overhead was applied?
13. How often should variances be reported to management? What principle may be used with variance reports?
14. What circumstances may cause the purchasing department to be responsible for both an unfavorable materials price variance and an unfavorable materials quantity variance?
15. What are the four perspectives used in the balanced scorecard? Discuss the nature of each, and how the perspectives are linked.
16. Kerry James says that the balanced scorecard was created to replace financial measures as the primary mechanism for performance evaluation. He says that it uses only nonfinancial measures. Is this true?
17. What are some examples of nonfinancial measures used by companies to evaluate performance?
18. (a) How are variances reported in income statements prepared for management? (b) May standard costs be used in preparing financial statements for stockholders? Explain.
*19. (a) Explain the basic features of a standard cost accounting system. (b) What type of balance will exist in the variance account when (1) the materials price variance is unfavorable and (2) the labor quantity variance is favorable?
*20. If the $9 per hour overhead rate in Question 12 includes $5 variable, and actual overhead costs were $248,000, what is the overhead controllable variance for June? The normal capacity hours were 28,000. Is the variance favorable or unfavorable?
*21. What is the purpose of computing the overhead volume variance? What is the basic formula for this variance?
*22. Alma Ortiz does not understand why the overhead volume variance indicates that fixed overhead costs are under- or overapplied. Clarify this matter for Alma.
*23. John Hsu is attempting to outline the important points about overhead variances on a class examination. List four points that John should include in his outline.
BRIEF EXERCISES
Distinguish between a standard and a budget.
(LO 1)
BE25-1 Perez Company uses both standards and budgets. For the year, estimated production of Product X is 500,000 units. Total estimated cost for materials and labor are $1,300,000 and $1,700,000. Compute the estimates for (a) a standard cost and (b) a budgeted cost.
Set direct materials standard.
(LO 3)
BE25-2 Tang Company accumulates the following data concerning raw materials in making one gallon of finished product: (1) Price—net purchase price $2.30, freight-in $0.20, and receiving and handling $0.10. (2) Quantity—required materials 3.6 pounds, allowance for waste and spoilage 0.4 pounds. Compute the following.
(a) Standard direct materials price per gallon.
(b) Standard direct materials quantity per gallon.
(c) Total standard materials cost per gallon.
Set direct labor standard.
(LO 3)
BE25-3 Labor data for making one gallon of finished product in Tang Company are as follows: (1) Price—hourly wage rate $13.00, payroll taxes $0.80, and fringe benefits $1.20. (2) Quantity—actual production time 1.1 hours, rest periods and cleanup 0.25 hours, and setup and downtime 0.15 hours. Compute the following.
(a) Standard direct labor rate per hour.
(b) Standard direct labor hours per gallon.
(c) Standard labor cost per gallon.
Compute direct materials variances.
(LO 4)
BE25-4 Simba Company's standard materials cost per unit of output is $10 (2 pounds × $5). During July, the company purchases and uses 3,200 pounds of materials costing $16,192 in making 1,500 units of finished product. Compute the total, price, and quantity materials variances.
Compute direct labor variances.
(LO 4)
BE25-5 Hartley Company's standard labor cost per unit of output is $22 (2 hours × $11 per hour). During August, the company incurs 2,100 hours of direct labor at an hourly cost of $10.80 per hour in making 1,000 units of finished product. Compute the total, price, and quantity labor variances.
Compute total overhead variance.
(LO 5)
BE25-6 In October, Roby Company reports 21,000 actual direct labor hours, and it incurs $118,000 of manufacturing overhead costs. Standard hours allowed for the work done is 20,400 hours. The predetermined overhead rate is $6 per direct labor hour. Compute the total overhead variance.
Match balanced scorecard perspectives.
(LO 8)
BE25-7 The four perspectives in the balanced scorecard are (1) financial, (2) customer, (3) internal process, and (4) learning and growth. Match each of the following objectives with the perspective it is most likely associated with: (a) Plant capacity utilization. (b) Employee work days missed due to injury. (c) Return on assets. (d) Brand recognition.
Journalize materials variances.
(LO 9)
*BE25-8 Journalize the following transactions for Combs Company.
(a) Purchased 6,000 units of raw materials on account for $11,500. The standard cost was $12,000.
(b) Issued 5,600 units of raw materials for production. The standard units were 5,800.
Journalize labor variances.
(LO 9)
*BE25-9 Journalize the following transactions for Dewey, Inc.
(a) Incurred direct labor costs of $24,000 for 3,000 hours. The standard labor cost was $25,500.
(b) Assigned 3,000 direct labor hours costing $24,000 to production. Standard hours were 3,150.
Compute the overhead controllable variance.
(LO 10)
*BE25-10 Some overhead data for Roby Company are given in BE25-6. In addition, the flexible manufacturing overhead budget shows that budgeted costs are $4 variable per direct labor hour and $50,000 fixed. Compute the overhead controllable variance.
Compute overhead volume variance.
(LO 10)
*BE25-11 Using the data in BE25-6 and BE25-10, compute the overhead volume variance. Normal capacity was 25,000 direct labor hours.
DO IT! Review
Compute standard cost.
(LO 3)
DO IT! 25-1 Jacque Company accumulated the following standard cost data concerning product I-Tal.
Direct materials per unit: 2 pounds at $5 per pound
Direct labor per unit: 0.2 hours at $15 per hour
Manufacturing overhead: Predetermined rate is 125% of direct labor cost
Compute the standard cost of one unit of product I-Tal.
Compute materials variance.
(LO 4)
DO IT! 25-2 The standard cost of product 777 includes 2 units of direct materials at $6.00 per unit. During August, the company bought 29,000 units of materials at $6.30 and used those materials to produce 16,000 units. Compute the total, price, and quantity variances for materials.
Compute labor and manufacturing overhead variances.
(LO 4, 5)
DO IT! 25-3 The standard cost of product 5252 includes 1.9 hours of direct labor at $14.00 per hour. The predetermined overhead rate is $22.00 per direct labor hour. During July, the company incurred 4,100 hours of direct labor at an average rate of $14.30 per hour and $81,300 of manufacturing overhead costs. It produced 2,000 units.
(a) Compute the total, price, and quantity variances for labor. (b) Compute the total overhead variance.
Match balance scorecard perspectives and their objectives.
(LO 8)
DO IT! 25-4 Indicate which of the four perspectives in the balanced scorecard is most likely associated with the objectives that follow.
1. Ethics violations.
2. Credit rating.
3. Customer retention.
4. Stockouts.
5. Reportable accidents.
6. Brand recognition.
EXERCISES
Compute budget and standard.
(LO 1, 2, 3)
E25-1 Shannon Company is planning to produce 2,000 units of product in 2014. Each unit requires 3 pounds of materials at $5 per pound and a half-hour of labor at $15 per hour. The overhead rate is 70% of direct labor.
Instructions
(a) Compute the budgeted amounts for 2014 for direct materials to be used, direct labor, and applied overhead.
(b) Compute the standard cost of one unit of product.
(c) What are the potential advantages to a corporation of using standard costs?
Compute standard materials costs.
(LO 3)
E25-2 Hank Itzek manufactures and sells homemade wine, and he wants to develop a standard cost per gallon. The following are required for production of a 50-gallon batch.
3,000 ounces of grape concentrate at $0.06 per ounce
54 pounds of granulated sugar at $0.30 per pound
60 lemons at $0.60 each
50 yeast tablets at $0.25 each
50 nutrient tablets at $0.20 each
2,600 ounces of water at $0.005 per ounce
Hank estimates that 4% of the grape concentrate is wasted, 10% of the sugar is lost, and 25% of the lemons cannot be used.
Instructions
Compute the standard cost of the ingredients for one gallon of wine. (Carry computations to two decimal places.)
Compute standard cost per unit.
(LO 3)
E25-3 Kimm Company has gathered the following information about its product.
Direct materials. Each unit of product contains 4.5 pounds of materials. The average waste and spoilage per unit produced under normal conditions is 0.5 pounds. Materials cost $5 per pound, but Kimm always takes the 2% cash discount all of its suppliers offer. Freight costs average $0.25 per pound.
Direct labor. Each unit requires 2 hours of labor. Setup, cleanup, and downtime average 0.3 hours per unit. The average hourly pay rate of Kimm's employees is $12. Payroll taxes and fringe benefits are an additional $3 per hour.
Manufacturing overhead. Overhead is applied at a rate of $7 per direct labor hour.
Instructions
Compute Kimm's total standard cost per unit.
Compute labor cost and labor quantity variance.
(LO 3, 4)
E25-4 Monte Services, Inc. is trying to establish the standard labor cost of a typical oil change. The following data have been collected from time and motion studies conducted over the past month.
| Actual time spent on the oil change | 1.0 hour |
| Hourly wage rate | $12 |
| Payroll taxes | 10% of wage rate |
| Setup and downtime | 20% of actual labor time |
| Cleanup and rest periods | 30% of actual labor time |
| Fringe benefits | 25% of wage rate |
Instructions
(a) Determine the standard direct labor hours per oil change.
(b) Determine the standard direct labor hourly rate.
(c) Determine the standard direct labor cost per oil change.
(d) If an oil change took 1.6 hours at the standard hourly rate, what was the direct labor quantity variance?
Compute materials price and quantity variances.
(LO 4)
E25-5 The standard cost of Product B manufactured by MIT Company includes three units of direct materials at $5.00 per unit. During June, 29,000 units of direct materials are purchased at a cost of $4.70 per unit, and 29,000 units of direct materials are used to produce 9,500 units of Product B.
Instructions
(a) Compute the total materials variance and the price and quantity variances.
(b) Repeat (a), assuming the purchase price is $5.15 and the quantity purchased and used is 28,000 units.
Compute labor price and quantity variances.
(LO 4)
E25-6 Lewis Company's standard labor cost of producing one unit of Product DD is 4 hours at the rate of $12.00 per hour. During August, 40,600 hours of labor are incurred at a cost of $12.15 per hour to produce 10,000 units of Product DD.
Instructions
(a) Compute the total labor variance.
(b) Compute the labor price and quantity variances.
(c) Repeat (b), assuming the standard is 4.1 hours of direct labor at $12.25 per hour.
Compute materials and labor variances.
(LO 4)
E25-7 Nona Inc., which produces a single product, has prepared the following standard cost sheet for one unit of the product.
| Direct materials (8 pounds at $2.50 per pound) | $20 |
| Direct labor (3 hours at $12.00 per hour) | $36 |
During the month of April, the company manufactures 235 units and incurs the following actual costs.
| Direct materials purchased and used (1,900 pounds) | $5,035 |
| Direct labor (700 hours) | $8,260 |
Instructions
Compute the total, price, and quantity variances for materials and labor.
Compute the materials and labor variances and list reasons for unfavorable variances.
(LO 4)
E25-8 The following direct materials and direct labor data pertain to the operations of Laurel Company for the month of August.
Instructions
(a) Compute the total, price, and quantity variances for materials and labor.
(b) 
Provide two possible explanations for each of the unfavorable variances calculated above, and suggest where responsibility for the unfavorable result might be placed.
Prepare a variance report for direct labor.
(LO 4,6)
E25-9 During March 2014, Toby Tool & Die Company worked on four jobs. A review of direct labor costs reveals the following summary data.
Analysis reveals that Job A257 was a repeat job. Job A258 was a rush order that required overtime work at premium rates of pay. Job A259 required a more experienced replacement worker on one shift. Work on Job A260 was done for one day by a new trainee when a regular worker was absent.
Instructions
Prepare a report for the plant supervisor on direct labor cost variances for March. The report should have columns for (1) Job No., (2) Actual Hours, (3) Standard Hours, (4) Quantity Variance, (5) Actual Rate, (6) Standard Rate, (7) Price Variance, and (8) Explanation.
Compute overhead variances.
(LO 5)
E25-10 Manufacturing overhead data for the production of Product H by Smart Company are as follows.
| Overhead incurred for 52,000 actual direct labor hours worked | $263,000 |
| Overhead rate (variable $3; fixed $2) at normal capacity of 54,000 direct labor hours | $5 |
| Standard hours allowed for work done | 51,000 |
Instructions
Compute the total overhead variance.
Compute overhead variances.
(LO 5)
E25-11 Byrd Company produces one product, a putter called GO-Putter. Byrd uses a standard cost system and determines that it should take one hour of direct labor to produce one GO-Putter. The normal production capacity for this putter is 100,000 units per year. The total budgeted overhead at normal capacity is $850,000 comprised of $250,000 of variable costs and $600,000 of fixed costs. Byrd applies overhead on the basis of direct labor hours.
During the current year, Byrd produced 95,000 putters, worked 94,000 direct labor hours, and incurred variable overhead costs of $256,000 and fixed overhead costs of $600,000.
Instructions
(a) Compute the predetermined variable overhead rate and the predetermined fixed overhead rate.
(b) Compute the applied overhead for Byrd for the year.
(c) Compute the total overhead variance.
Compute variances for materials.
(LO 4)
E25-12 Wales Company purchased (at a cost of $10,800) and used 2,400 pounds of materials during May. Wales's standard cost of materials per unit produced is based on 2 pounds per unit at a cost $5 per pound. Production in May was 1,070 units.
Instructions
(a) Compute the total, price, and quantity variances for materials.
(b) Assume Wales also had an unfavorable labor quantity variance. What is a possible scenario that would provide one cause for the variances computed in (a) and the unfavorable labor quantity variance?
Prepare a variance report.
(LO 4,6)
E25-13 Picard Landscaping plants grass seed as the basic landscaping for business campuses. During a recent month, the company worked on three projects (Remington, Chang, and Wyco). The company is interested in controlling the materials costs, namely the grass seed, for these plantings projects.
In order to provide management with useful cost control information, the company uses standard costs and prepares monthly variance reports. Analysis reveals that the purchasing agent mistakenly purchased poor-quality seed for the Remington project. The Chang project, however, received higher-than-standard-quality seed that was on sale. The Wyco project received standard-quality seed. However, the price had increased and a new employee was used to spread the seed.
Shown below are quantity and cost data for each project.
Instructions
(a) Prepare a variance report for the purchasing department with the following columns: (1) Project, (2) Actual Pounds Purchased, (3) Actual Price, (4) Standard Price, (5) Price Variance, and (6) Explanation.
(b) Prepare a variance report for the production department with the following columns: (1) Project, (2) Actual Pounds, (3) Standard Pounds, (4) Standard Price, (5) Quantity Variance, and (6) Explanation.
Complete variance report.
(LO 6)
E25-14 Burte Corporation prepared the following variance report.
Instructions
Fill in the appropriate amounts or letters for the question marks in the report.
Prepare income statement for management.
(LO 7)
E25-15 Fisk Company uses a standard cost accounting system. During January, the company reported the following manufacturing variances.
| Materials price variance | $1,200 U |
| Materials quantity variance | 800 F |
| Labor price variance | 550 U |
| Labor quantity variance | $750 U |
| Overhead variance | 800 U |
In addition, 8,000 units of product were sold at $8 per unit. Each unit sold had a standard cost of $5. Selling and administrative expenses were $8,000 for the month.
Instructions
Prepare an income statement for management for the month ended January 31, 2014.
Identify performance evaluation terminology.
(LO 3, 8)
E25-16 The following is a list of terms related to performance evaluation.
1. Balanced scorecard
2. Variance
3. Learning and growth perspective
4. Nonfinancial measures
5. Customer perspective
6. Internal process perspective
7. Ideal standards
8. Normal standards
Instructions
Match each of the following descriptions with one of the terms above.
(a) The difference between total actual costs and total standard costs.
(b) An efficient level of performance that is attainable under expected operating conditions.
(c) An approach that incorporates financial and nonfinancial measures in an integrated system that links performance measurement and a company's strategic goals.
(d) A viewpoint employed in the balanced scorecard to evaluate how well a company develops and retains its employees.
(e) An evaluation tool that is not based on dollars.
(f) A viewpoint employed in the balanced scorecard to evaluate the company from the perspective of those people who buy its products or services.
(g) An optimum level of performance under perfect operating conditions.
(h) A viewpoint employed in the balanced scorecard to evaluate the efficiency and effectiveness of the company's value chain.
Journalize entries in a standard cost accounting system.
(LO 9)
*E25-17 Vista Company installed a standard cost system on January 1. Selected transactions for the month of January are as follows.
1. Purchased 18,000 units of raw materials on account at a cost of $4.50 per unit. Standard cost was $4.40 per unit.
2. Issued 18,000 units of raw materials for jobs that required 17,500 standard units of raw materials.
3. Incurred 7,650 actual hours of direct labor at an actual rate of $10 per hour. The standard rate is $11 per hour. (Credit Factory Wages Payable.)
4. Performed 7,650 hours of direct labor on jobs when standard hours were 7,700.
5. Applied overhead to jobs at the rate of 100% of direct labor cost for standard hours allowed.
Instructions
Journalize the January transactions.
Answer questions concerning missing entries and balances.
(LO 4, 5, 9)
*E25-18 Stiller Company uses a standard cost accounting system. Some of the ledger accounts have been destroyed in a fire. The controller asks your help in reconstructing some missing entries and balances.
Instructions
Answer the following questions.
(a) Materials Price Variance shows a $2,000 unfavorable balance. Accounts Payable shows $128,000 of raw materials purchases. What was the amount debited to Raw Materials Inventory for raw materials purchased?
(b) Materials Quantity Variance shows a $3,000 favorable balance. Raw Materials Inventory shows a zero balance. What was the amount debited to Work in Process Inventory for direct materials used?
(c) Labor Price Variance shows a $1,500 favorable balance. Factory Labor shows a debit of $140,000 for wages incurred. What was the amount credited to Factory Wages Payable?
(d) Factory Labor shows a credit of $140,000 for direct labor used. Labor Quantity Variance shows a $900 favorable balance. What was the amount debited to Work in Process for direct labor used?
(e) Overhead applied to Work in Process totaled $165,000. If the total overhead variance was $1,200 favorable, what was the amount of overhead costs debited to Manufacturing Overhead?
Journalize entries for materials and labor variances.
(LO 9)
*E25-19 Data for Nona Inc. are given in E25-7.
Instructions
Journalize the entries to record the materials and labor variances.
Compute manufacturing overhead variances and interpret findings.
(LO 10)
*E25-20 The information shown below was taken from the annual manufacturing overhead cost budget of Samantha Company.
| Variable manufacturing overhead costs | $34,650 |
| Fixed manufacturing overhead costs | $19,800 |
| Normal production level in labor hours | 16,500 |
| Normal production level in units | 4,125 |
| Standard labor hours per unit | 4 |
During the year, 4,000 units were produced, 16,100 hours were worked, and the actual manufacturing overhead was $55,000. Actual fixed manufacturing overhead costs equaled budgeted fixed manufacturing overhead costs. Overhead is applied on the basis of direct labor hours.
(a) Compute the total, fixed, and variable predetermined manufacturing overhead rates.
(b) Compute the total, controllable, and volume overhead variances.
(c) Briefly interpret the overhead controllable and volume variances computed in (b).
Compute overhead variances.
(LO 10)
*E25-21 The loan department of Calgary Bank uses standard costs to determine the overhead cost of processing loan applications. During the current month, a fire occurred, and the accounting records for the department were mostly destroyed. The data shown below were salvaged from the ashes.
| Standard variable overhead rate per hour | $9 |
| Standard hours per application | 2 |
| Standard hours allowed | 2,000 |
| Standard fixed overhead rate per hour | $6 |
| Actual fixed overhead cost | $12,600 |
| Variable overhead budget based on standard hours allowed | $18,000 |
| Fixed overhead budget | $12,600 |
| Overhead controllable variance | $ 1,200 U |
Instructions
(a) Determine the following.
(1) Total actual overhead cost.
(2) Actual variable overhead cost.
(3) Variable overhead costs applied.
(4) Fixed overhead costs applied.
(5) Overhead volume variance.
(b) Determine how many loans were processed.
Compute variances.
(LO 10)
*E25-22 Alona Company's overhead rate was based on estimates of $200,000 for overhead costs and 20,000 direct labor hours. Alona's standards allow 2 hours of direct labor per unit produced. Production in May was 900 units, and actual overhead incurred in May was $19,000. The overhead budgeted for 1,800 standard direct labor hours is $17,600 ($5,000 fixed and $12,600 variable).
Instructions
(a) Compute the total, controllable, and volume variances for overhead.
(b) What are possible causes of the variances computed in part (a)?
EXERCISES: SET B AND CHALLENGE EXERCISES
Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Exercise Set B and Challenge Exercises.
PROBLEMS: SET A
Compute variances.
(LO 4, 5)
P25-1A Costello Corporation manufactures a single product. The standard cost per unit of product is shown below.
The predetermined manufacturing overhead rate is $10 per direct labor hour ($16.00 ÷ 1.6). It was computed from a master manufacturing overhead budget based on normal production of 8,000 direct labor hours (5,000 units) for the month. The master budget showed total variable costs of $60,000 ($7.50 per hour) and total fixed overhead costs of $20,000 ($2.50 per hour). Actual costs for October in producing 4,900 units were as follows.
The purchasing department buys the quantities of raw materials that are expected to be used in production each month. Raw materials inventories, therefore, can be ignored.
Instructions
(a) Compute all of the materials and labor variances.
(b) Compute the total overhead variance.
(a) MPV $1,020 U
Compute variances, and prepare income statement.
(LO 4, 5, 7)
P25-2A Ayala Corporation accumulates the following data relative to jobs started and finished during the month of June 2014.
Overhead is applied on the basis of standard machine hours. Three hours of machine time are required for each direct labor hour. The jobs were sold for $400,000. Selling and administrative expenses were $40,000. Assume that the amount of raw materials purchased equaled the amount used.
Instructions
(a) Compute all of the variances for (1) direct materials and (2) direct labor.
(b) Compute the total overhead variance.
(c) Prepare an income statement for management. (Ignore income taxes.)
(a) LQV $4,800 F
Compute and identify significant variances.
(LO 4, 5, 6)
P25-3A Hopkins Clothiers is a small company that manufactures tall-men's suits. The company has used a standard cost accounting system. In May 2014, 11,200 suits were produced. The following standard and actual cost data applied to the month of May when normal capacity was 14,000 direct labor hours. All materials purchased were used.
Overhead is applied on the basis of direct labor hours. At normal capacity, budgeted fixed overhead costs were $49,000, and budgeted variable overhead was $36,400.
Instructions
(a) Compute the total, price, and quantity variances for (1) materials and (2) labor.
(b) Compute the total overhead variance.
(c) Which of the materials and labor variances should be investigated if management considers a variance of more than 4% from standard to be significant?
(a) MPV $22,625 F
Answer questions about variances.
(LO 4, 5)
P25-4A Kansas Company uses a standard cost accounting system. In 2014, the company produced 28,000 units. Each unit took several pounds of direct materials and 1.6 standard hours of direct labor at a standard hourly rate of $12.00. Normal capacity was 50,000 direct labor hours. During the year, 117,000 pounds of raw materials were purchased at $0.92 per pound. All materials purchased were used during the year.
Instructions
(a) If the materials price variance was $3,510 favorable, what was the standard materials price per pound?
(b) If the materials quantity variance was $4,750 unfavorable, what was the standard materials quantity per unit?
(c) What were the standard hours allowed for the units produced?
(d) If the labor quantity variance was $7,200 unfavorable, what were the actual direct labor hours worked?
(e) If the labor price variance was $9,080 favorable, what was the actual rate per hour?
(f) If total budgeted manufacturing overhead was $360,000 at normal capacity, what was the predetermined overhead rate?
(g) What was the standard cost per unit of product?
(h) How much overhead was applied to production during the year?
(i) Using one or more answers above, what were the total costs assigned to work in process?
(b) 4.0 pounds
(f) $7.20 per DLH
Compute variances, prepare an income statement, and explain unfavorable variances.
(LO 4, 5, 7)
P25-5A Pace Labs, Inc. provides mad cow disease testing for both state and federal governmental agricultural agencies. Because the company's customers are governmental agencies, prices are strictly regulated. Therefore, Pace Labs must constantly monitor and control its testing costs. Shown below are the standard costs for a typical test.
The lab does not maintain an inventory of test tubes. Therefore, the tubes purchased each month are used that month. Actual activity for the month of November 2014, when 1,500 tests were conducted, resulted in the following.
| Direct materials (3,050 test tubes) | $ 4,209 |
| Direct labor (1,600 hours) | 36,800 |
| Variable overhead | 7,400 |
| Fixed overhead | 15,000 |
Monthly budgeted fixed overhead is $14,000. Revenues for the month were $75,000, and selling and administrative expenses were $5,000.
Instructions
(a) Compute the price and quantity variances for direct materials and direct labor.
(b) Compute the total overhead variance.
(c) Prepare an income statement for management.
(d) Provide possible explanations for each unfavorable variance.
(a) LQV $2,400 U
Journalize and post standard cost entries, and prepare income statement.
(LO 4, 5, 7, 9)
*P25-6A Jorgensen Corporation uses standard costs with its job order cost accounting system. In January, an order (Job No. 12) for 1,900 units of Product B was received. The standard cost of one unit of Product B is as follows.
Normal capacity for the month was 4,200 machine hours. During January, the following transactions applicable to Job No. 12 occurred.
1. Purchased 6,200 pounds of raw materials on account at $1.05 per pound.
2. Requisitioned 6,200 pounds of raw materials for Job No. 12.
3. Incurred 2,000 hours of direct labor at a rate of $7.80 per hour.
4. Worked 2,000 hours of direct labor on Job No. 12.
5. Incurred manufacturing overhead on account $25,000.
6. Applied overhead to Job No. 12 on basis of standard machine hours allowed.
7. Completed Job No. 12.
8. Billed customer for Job No. 12 at a selling price of $65,000.
Instructions
(a) Journalize the transactions.
(b) Post to the job order cost accounts.
(c) Prepare the entry to recognize the total overhead variance.
(d) Prepare the January 2014 income statement for management. Assume selling and administrative expenses were $2,000.
(d) NI $15,890
Compute overhead controllable and volume variances.
(LO 10)
*P25-7A Using the information in P25-1A, compute the overhead controllable variance and the overhead volume variance.
Compute overhead controllable and volume variances.
(LO 10)
*P25-8A Using the information in P25-2A, compute the overhead controllable variance and the overhead volume variance.
Compute overhead controllable and volume variances.
(LO 10)
*P25-9A Using the information in P25-3A, compute the overhead controllable variance and the overhead volume variance.
Compute overhead controllable and volume variances.
(LO 10)
*P25-10A Using the information in P25-5A, compute the overhead controllable variance and the overhead volume variance.
PROBLEMS: SET B
Compute variances.
(LO 4, 5)
P25-1B Buil Corporation manufactures a single product. The standard cost per unit of product is as follows.
The master manufacturing overhead budget for the month based on normal productive capacity of 20,000 direct labor hours (10,000 units) shows total variable costs of $70,000 ($3.50 per labor hour) and total fixed costs of $50,000 ($2.50 per labor hour). Normal productive capacity is 20,000 direct labor hours. Overhead is applied on the basis of direct labor hours. Actual costs for November in producing 9,700 units were as follows.
The purchasing department normally buys the quantities of raw materials that are expected to be used in production each month. Raw materials inventories, therefore, can be ignored.
Instructions
(a) Compute all of the materials and labor variances.
(b) Compute the total overhead variance.
(a) MPV $1,000 F
Compute variances, and prepare income statement.
(LO 4, 5, 7)
P25-2B Huang Company uses a standard cost accounting system to account for the manufacture of exhaust fans. In July 2014, it accumulates the following data relative to 1,800 units started and finished.
Manufacturing overhead was applied on the basis of direct labor hours. Normal capacity for the month was 3,400 direct labor hours. At normal capacity, budgeted overhead costs were $16 per labor hour variable and $12 per labor hour fixed. Total budgeted fixed overhead costs were $40,800.
Jobs finished during the month were sold for $270,000. Selling and administrative expenses were $20,000.
Instructions
(a) Compute all of the variances for (1) direct materials and (2) direct labor.
(b) Compute the total overhead variance.
(c) Prepare an income statement for management. (Ignore income taxes.)
(a) LQV $1,800 F
Compute and identify significant variances.
(LO 4, 5, 6)
P25-3B Zimmerman Clothiers manufactures women's business suits. The company uses a standard cost accounting system. In March 2014, 15,700 suits were made. The following standard and actual cost data applied to the month of March when normal capacity was 20,000 direct labor hours. All materials purchased were used in production.
Overhead is applied on the basis of direct labor hours. At normal capacity, budgeted fixed overhead costs were $125,000, and budgeted variable overhead costs were $63,000.
Instructions
(a) Compute the total, price, and quantity variances for (1) materials and (2) labor.
(b) Compute the total overhead variance.
(c) Which of the materials and labor variances should be investigated if management considers a variance of more than 5% from standard to be significant?
(a) MPV $34,200 U
Answer questions about variances.
(LO 4, 5)
P25-4B Beta Company uses a standard cost accounting system. In 2014, 45,000 units were produced. Each unit took several pounds of direct materials and 2 standard hours of direct labor at a standard hourly rate of $12.00. Normal capacity was 86,000 direct labor hours. During the year, 200,000 pounds of raw materials were purchased at $1.00 per pound. All materials purchased were used during the year.
Instructions
(a) If the materials price variance was $10,000 unfavorable, what was the standard materials price per pound?
(b) If the materials quantity variance was $23,750 favorable, what was the standard materials quantity per unit?
(b) 5.0 pounds
(c) What were the standard hours allowed for the units produced?
(d) If the labor quantity variance was $10,080 unfavorable, what were the actual direct labor hours worked?
(e) If the labor price variance was $18,168 favorable, what was the actual rate per hour?
(f) If total budgeted manufacturing overhead was $713,800 at normal capacity, what was the predetermined overhead rate per direct labor hour?
(g) What was the standard cost per unit of product?
(h) How much overhead was applied to production during the year?
(i) Using selected answers above, what were the total costs assigned to work in process?
(f) $8.30 per DLH
Compute variances, prepare an income statement, and explain unfavorable variances.
(LO 4, 5, 7)
P25-5B Bonita Labs performs steroid testing services to high schools, colleges, and universities. Because the company deals solely with educational institutions, the price of each test is strictly regulated. Therefore, the costs incurred must be carefully monitored and controlled. Shown below are the standard costs for a typical test.
The lab does not maintain an inventory of petri dishes. Therefore, the dishes purchased each month are used that month. Actual activity for the month of May 2014, when 2,500 tests were conducted, resulted in the following.
| Direct materials (2,530 dishes) | $ 5,060 |
| Direct labor (1,240 hours) | 26,040 |
| Variable overhead | 10,100 |
| Fixed overhead | 5,700 |
Monthly budgeted fixed overhead is $6,000. Revenues for the month were $55,000, and selling and administrative expenses were $2,000.
Instructions
(a) Compute the price and quantity variances for direct materials and direct labor.
(b) Compute the total overhead variance.
(c) Prepare an income statement for management.
(d) Provide possible explanations for each unfavorable variance.
(a) LQV $205 F
Journalize and post standard cost entries, and prepare income statement.
(LO 4, 5, 7, 9)
*P25-6B Frio Company uses standard costs with its job order cost accounting system. In January, an order (Job No. 84) was received for 5,500 units of Product D. The standard cost of 1 unit of Product D is as follows.
Overhead is applied on the basis of direct labor hours. Normal capacity for the month of January was 6,000 direct labor hours. During January, the following transactions applicable to Job No. 84 occurred.
1. Purchased 8,100 pounds of raw materials on account at $3.70 per pound.
2. Requisitioned 8,100 pounds of raw materials for production.
3. Incurred 5,200 hours of direct labor at $9.20 per hour.
4. Worked 5,200 hours of direct labor on Job No. 84.
5. Incurred $87,500 of manufacturing overhead on account.
6. Applied overhead to Job No. 84 on the basis of direct labor hours.
7. Transferred Job No. 84 to finished goods.
8. Billed customer for Job No. 84 at a selling price of $270,000.
Instructions
(a) Journalize the transactions.
(b) Post to the job order cost accounts.
(c) Prepare the entry to recognize the total overhead variance.
(d) Prepare the January 2014 income statement for management. Assume selling and administrative expenses were $60,000.
(d) NI $44,690
Compute overhead controllable and volume variances.
(LO 10)
*P25-7B Using the information in P25-1B, compute the overhead controllable variance and the overhead volume variance.
Compute overhead controllable and volume variances.
(LO 10)
*P25-8B Using the information in P25-2B, compute the overhead controllable variance and the overhead volume variance.
Compute overhead controllable and volume variances.
(LO 10)
*P25-9B Using the information in P25-3B, compute the overhead controllable variance and the overhead volume variance.
Compute overhead controllable and volume variances.
(LO 10)
*P25-10B Using the information in P25-5B, compute the overhead controllable variance and the overhead volume variance.
PROBLEMS: SET C
Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Problem Set C.
WATERWAYS CONTINUING PROBLEM
(This is a continuation of the Waterways Problem from Chapters 19 through 24.)
WCP25 Waterways Corporation uses very stringent standard costs in evaluating its manufacturing efficiency. These standards are not “ideal” at this point, but management is working toward that as a goal. This problem asks you to calculate and evaluate the company's variances.
Go to the book's companion website, at www.wiley.com/college/weygandt, to find the completion of this problem.
Broadening Your Perspective
Management Decision-Making
Decision-Making Problem: Current Designs
BYP25-1 The executive team at Current Designs has gathered to evaluate the company's operations for the last month. One of the topics on the agenda is the special order from Huegel Hollow, which was presented in BYP20-1. Recall that Current Designs had a special order to produce a batch of 20 kayaks for a client, and you were asked to determine the cost of the order and the cost per kayak.
Mike Cichanowski asked the others if the special order caused any particular problems in the production process. Dave Thill, the production manager, made the following comments: “Since we wanted to complete this order quickly and make a good first impression on this new customer, we had some of our most experienced type I workers run the rotomold oven and do the trimming. They were very efficient and were able to complete that part of the manufacturing process even more quickly than the regular crew. However, the finishing on these kayaks required a different technique than what we usually use, so our type II workers took a little longer than usual for that part of the process.”
Deb Welch, who is in charge of the purchasing function, said, “We had to pay a little more for the polyethylene powder for this order because the customer wanted a color that we don't usually stock. We also ordered a little extra since we wanted to make sure that we had enough to allow us to calibrate the equipment. The calibration was a little tricky, and we used all of the powder that we had purchased. Since the number of kayaks in the order was fairly small, we were able to use some rope and other parts that were left over from last year's production in the finishing kits. We've seen a price increase for these components in the last year, so using the parts that we already had in inventory cut our costs for the finishing kits.”
Instructions
(a) Based on the comments above, predict whether each of the following variances will be favorable or unfavorable. If you don't have enough information to make a prediction, use “NEI” to indicate “Not Enough Information.”
(1) Quantity variance for polyethylene powder.
(2) Price variance for polyethylene powder.
(3) Quantity variance for finishing kits.
(4) Price variance for finishing kits.
(5) Quantity variance for type I workers.
(6) Price variance for type I workers.
(7) Quantity variance for type II workers.
(8) Price variance for type II workers.
(b) Diane Buswell examined some of the accounting records and reported that Current Designs purchased 1,200 pounds of pellets for this order at a total cost of $2,040. Twenty (20) finishing kits were assembled at a total cost of $3,240. The payroll records showed that the type I employees worked 38 hours on this project at a total cost of $570. The type II finishing employees worked 65 hours at a total cost of $796.25. A total of 20 kayaks were produced for this order.
The standards that had been developed for this model of kayak were used in BYP20-1 and are reproduced here. For each kayak:
54 pounds of polyethylene powder at $1.50 per pound
1 finishing kit (rope, seat, hardware, etc.) at $170
2 hours of type I labor from people who run the oven and trim the plastic at a standard wage rate of $15 per hour
3 hours of type II labor from people who attach the hatches and seat and other hardware at a standard wage rate of $12 per hour.
Calculate the eight variances that are listed in part (a) of this problem.
Decision-Making Across the Organization
BYP25-2 Milton Professionals, a management consulting firm, specializes in strategic planning for financial institutions. James Hahn and Sara Norton, partners in the firm, are assembling a new strategic planning model for use by clients. The model is designed for use on most personal computers and replaces a rather lengthy manual model currently marketed by the firm. To market the new model, James and Sara will need to provide clients with an estimate of the number of labor hours and computer time needed to operate the model. The model is currently being test-marketed at five small financial institutions. These financial institutions are listed below, along with the number of combined computer/labor hours used by each institution to run the model one time.
Any company that purchases the new model will need to purchase user manuals for the system. User manuals will be sold to clients in cases of 20, at a cost of $320 per case. One manual must be used each time the model is run because each manual includes a nonreusable computer-accessed password for operating the system. Also required are specialized computer forms that are sold only by Milton. The specialized forms are sold in packages of 250, at a cost of $60 per package. One application of the model requires the use of 50 forms. This amount includes two forms that are generally wasted in each application due to printer alignment errors. The overall cost of the strategic planning model to clients is $12,000. Most clients will use the model four times annually.
Milton must provide its clients with estimates of ongoing costs incurred in operating the new planning model, and would like to do so in the form of standard costs.
Instructions
With the class divided into groups, answer the following.
(a) What factors should be considered in setting a standard for computer/labor hours?
(b) What alternatives for setting a standard for computer/labor hours might be used?
(c) What standard for computer/labor hours would you select? Justify your answer.
(d) Determine the standard materials cost associated with the user manuals and computer forms for each application of the strategic planning model.
Managerial Analysis
*BYP25-3 Ana Carillo and Associates is a medium-sized company located near a large metropolitan area in the Midwest. The company manufactures cabinets of mahogany, oak, and other fine woods for use in expensive homes, restaurants, and hotels. Although some of the work is custom, many of the cabinets are a standard size.
One such non-custom model is called Luxury Base Frame. Normal production is 1,000 units. Each unit has a direct labor hour standard of 5 hours. Overhead is applied to production based on standard direct labor hours. During the most recent month, only 900 units were produced; 4,500 direct labor hours were allowed for standard production, but only 4,000 hours were used. Standard and actual overhead costs were as follows.
Instructions
(a) Determine the overhead application rate.
(b) Determine how much overhead was applied to production.
(c) Calculate the total overhead variance, controllable variance, and volume variance.
(d) Decide which overhead variances should be investigated.
(e) Discuss causes of the overhead variances. What can management do to improve its performance next month?
Real-World Focus
BYP25-4 Glassmaster Company is organized as two divisions and one subsidiary. One division focuses on the manufacture of filaments such as fishing line and sewing thread; the other division manufactures antennas and specialty fiberglass products. Its subsidiary manufactures flexible steel wire controls and molded control panels.
The annual report of Glassmaster provides the following information.
GLASSMASTER COMPANY
Management Discussion
Gross profit margins for the year improved to 20.9% of sales compared to last year's 18.5%. All operations reported improved margins due in large part to improved operating efficiencies as a result of cost reduction measures implemented during the second and third quarters of the fiscal year and increased manufacturing throughout due to higher unit volume sales. Contributing to the improved margins was a favorable materials price variance due to competitive pricing by suppliers as a result of soft demand for petrochemical-based products. This favorable variance is temporary and will begin to reverse itself as stronger worldwide demand for commodity products improves in tandem with the economy. Partially offsetting these positive effects on profit margins were competitive pressures on sales prices of certain product lines. The company responded with pricing strategies designed to maintain and/or increase market share.
Instructions
(a) Is it apparent from the information whether Glassmaster utilizes standard costs?
(b) Do you think the price variance experienced should lead to changes in standard costs for the next fiscal year?
BYP25-5 The Balanced Scorecard Institute (www.balancedscorecard.org) is a great resource for information about implementing the balanced scorecard. One item of interest provided at its website is an example of a balanced scorecard for a regional airline.
Address: http://www.balancedscorecard.org/portals/0/pdf/regional_airline.pdf, or go to www.wiley.com/college/weygandt
Instructions
Go to the address above and answer the following questions.
(a) What are the objectives identified for the airline for each perspective?
(b) What measures are used for the objectives in the customer perspective?
(c) What initiatives are planned to achieve the objective in the learning perspective?
BYP25-6 The December 22, 2009, edition of the Wall Street Journal has an article by Kevin Kelliker entitled “In Risky Move, GM to Run Plants Around Clock.”
Instructions
Read the article and answer the following questions.
(a) According to the article, what is the normal industry standard for plants to be considered operating at full capacity?
(b) What ideal standard is the company hoping to achieve?
(c) What reasons are given in the article for why most companies do not operate a third shift? How does GM propose to overcome these issues?
(d) What are some potential drawbacks of the midnight shift? What implications does this have for variances from standards?
(e) What potential sales/marketing disadvantage does the third shift create?
Critical Thinking
Communication Activity
BYP25-7 The setting of standards is critical to the effective use of standards in evaluating performance.
Instructions
Explain the following in a memo to your instructor.
(a) The comparative advantages and disadvantages of ideal versus normal standards.
(b) The factors that should be included in setting the price and quantity standards for direct materials, direct labor, and manufacturing overhead.
BYP25-8 At Symond Company, production workers in the Painting Department are paid on the basis of productivity. The labor time standard for a unit of production is established through periodic time studies conducted by Douglas Management Consultants. In a time study, the actual time required to complete a specific task by a worker is observed. Allowances are then made for preparation time, rest periods, and cleanup time. Bill Carson is one of several veterans in the Painting Department.
Bill is informed by Douglas that he will be used in the time study for the painting of a new product. The findings will be the basis for establishing the labor time standard for the next 6 months. During the test, Bill deliberately slows his normal work pace in an effort to obtain a labor time standard that will be easy to meet. Because it is a new product, the Douglas representative who conducted the test is unaware that Bill did not give the test his best effort.
Instructions
(a) Who was benefited and who was harmed by Bill's actions?
(b) Was Bill ethical in the way he performed the time study test?
(c) What measure(s) might the company take to obtain valid data for setting the labor time standard?
All About You
BYP25-9 From the time you first entered school many years ago, instructors have been measuring and evaluating you by imposing standards. In addition, many of you will pursue professions that administer professional examinations to attain recognized certification. Recently, a federal commission presented proposals suggesting all public colleges and universities should require standardized tests to measure their students’ learning.
Instructions
Read the article at www.signonsandiego.com/uniontrib/20060811/news_1n11colleges.html, and answer the following questions.
(a) What areas of concern did the panel's recommendations address?
(b) What are possible advantages of standard testing?
(c) What are possible disadvantages of standard testing?
(d) Would you be in favor of standardized tests?
Considering Your Costs and Benefits
BYP25-10 Do you think that standard costs are used only in making products like wheel bearings and hamburgers? Think again. Standards influence virtually every aspect of our lives. For example, the next time you call to schedule an appointment with your doctor, ask the receptionist how many minutes the appointment is scheduled for. Doctors are under increasing pressure to see more patients each day, which means the time spent with each patient is shorter. As insurance companies and employers push for reduced medical costs, every facet of medicine has been standardized and analyzed. Doctors, nurses, and other medical staff are evaluated in every part of their operations to ensure maximum efficiency. While keeping medical treatment affordable seems like a worthy goal, what are the potential implications for the quality of health care? Does a focus on the bottom line result in a reduction in the quality of health care?
A simmering debate has centered on a very basic question: To what extent should accountants, through financial measures, influence the type of medical care that you receive? Suppose that your local medical facility is in danger of closing because it has been losing money. Should the facility put in place incentives that provide bonuses to doctors if they meet certain standard-cost targets for the cost of treating specific ailments?
YES: If the facility is in danger of closing, then someone should take steps to change the medical practices to reduce costs. A closed medical facility is of no use to me, my family, or the community.
NO: I don't want an accountant deciding the right medical treatment for me. My family and I deserve the best medical care.
Instructions
Write a response indicating your position regarding this situation. Provide support for your view.
Answers to Insight and Accounting Across the Organization Questions
p. 1180 How Do Standards Help a Business? Q: How will the creation of such standards help a business or organization? A: A business or organization may use the data to compare its performance relative to others with regard to common practices such as processing a purchase order or filling a sales order. Armed with this information, an organization can determine which areas to focus on with improvement campaigns.
p. 1183 How Can We Make Susan's Chili Profitable? Q: How might management use this raw materials cost information? A: Management might decide to increase the price of its chili. Or, it might revise its recipes to use cheaper ingredients. Or, it might eliminate some products until ingredients are available at costs closer to standard. Regarding the waste due to dull blades, management should reconsider its maintenance policy, to balance the cost of maintenance versus the cost of wasted product.
p. 1192 What's Brewing at Starbucks? Q: What implications does Starbucks’ commitment to corporate social responsibility have for the standard cost of a cup of coffee? A: Starbucks’ Global Responsibility Report explicitly describes its goals related to corporate social responsibility. By including measurable objectives, it signals that it is committed to meeting these goals. As a consequence of setting measurable objectives, when the company determines the standard costs of its products, it needs to factor in the costs of these programs. For example, if renewable energy costs more per kilowatt, then the company must include this added cost in its determination of its products’ costs.
p. 1197 It May Be Time to Fly United Again Q: Which of the perspectives of a balanced scorecard were the focus of United's CEO? A: Improving on-time flight departures is an objective within the internal process perspective. Customer intent to fly United again is an objective within the customer perspective.
Answers to Self-Test Questions
1.c 2. b 3. d 4. a 5. b 6. c 7. b [(6,300 × $1.00) − (6,000 × $1.00)] 8. a [(14,800 × $8.00) − (15,000 × $8.00)] 9. d 10. a 11. b 12. d 13. c 14. d *15. c *16. c
Remember to go back to The Navigator box on the chapter opening page and check off your completed work.
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