ACCT102 Standard Costing

ACCT102 Managerial Accounting October 2011
Cheng Nam Sang 1

Objective: Standard Costing
To understand Standard Costing and To understand Standard Costing and
standard setting
1
Basic Costing Methods
Manufacturing Costs
Direct
materials
Direct
labour Overhead
Actual Costing Actual Actual Actual
2
g
Normal Costing Actual Actual Budgeted
Standard Costing Standard Standard Standard
Budgets vs. Standards
Are standards the
A standard is a per
3
Are standards the
same as budgets?
A budget is set for
total costs.
p
unit cost.
Standards are often
used when
preparing budgets.
Currently attainable standards are levels of
General terms in standard
costing
Currently attainable standards are levels of
performance that can be achieved by realistic
levels of effort.
Allowances are made for normal
defectives, spoilage, waste, and non-
productive time.
4
productive time.
Cheng Nam Sang 2
Standard Cost
Expected and standard costs Expected and standard costs
The building blocks of planning and
control system The Master Budget
Expected cost
The cost most likely to be attained
St d d t
5
Standard cost
Determined cost per unit that should
be attained (can be <, =, >expected
cost)
Standard Costs
Predetermined.
Standard
Costs are
Used for planning labour, material
and overhead requirements.
Benchmarks for
measuringperformance.
6
measuring performance.
Used to simplify the
accounting system.
General terms in standard
costing
Standard cost systems are accounting Standard cost systems are accounting
systems that value products according to
standard costs only.
Perfection standards (ideal standards) are
expressions of the most efficient
f ibl d th b t
7
performance possible under the best
conceivable conditions, using existing
specifications and equipment.
No provision is made for waste, spoilage,
machine breakdowns, and the like.
How do we normally set the
budget Standard?
Expectation and Standards Expectation and Standards
engineering studies Perfect
Standards / Attainable Standards
analysis of historical data Attainable
Standards
continuous improvement goals
8
continuous improvement goals
Continuous Improvement Standards
Benchmarking Benchmark
Standards
Cheng Nam Sang 3
Accountants, engineers, personnel
Setting Standard Costs
administrators, and production managers
combine efforts to set standards based on
experience and expectations.
9
Should we use
practical standards
or ideal standards?
10
Engineer
Managerial
Accountant
Practical standards should be
set at levels that are currently
attainable with reasonable and
efficient effort.
11
Production
manager
I agree. Ideal standards,
based on perfection,
are unattainable and
discourage most
employees.
12
Human Resources
Manager
Cheng Nam Sang 4
Note
The argument that ideal standards are
discouraging has been persuasive for many
years. So normal defects and waste were
built into the standards.
In recent years, Six Sigma, Continuous
Improvement and other initiatives have
sought to eliminate all defects and waste
13
sought to eliminate all defects and waste.
Ideal standards, that allow for no waste, have
become more popular.
The emphasis is on improvement over time, not
attaining the ideal standards right now.
Recap MCQ
Extra Exercises
(Variance Analysis extra
exercises)
EQ1
EQ2
14
Setting Direct Material
Standards
Price
Standards
Quantity
Standards Standards
Final, delivered
cost of materials,
net of discounts
Standards
Use product
design specifications.
15
net of discounts.
Setting Direct Labor Standards
Rate
Standards
Time
Standards Standards
Use wage
surveys and
labor contracts.
Standards
Use time and
motion studies for
each labor operation
16
labor contracts.
each labor operation.
Cheng Nam Sang 5
Setting Variable Overhead
Standards
Rate
Standards
Activity
Standards Standards
The rate is the
variable portion of the
predetermined overhead
Standards
The activity is the
base used to calculate
the predetermined
17
rate.
p
overhead.
Standard Cost Card
Variable Production Cost
A standard cost card for one unit of
d t i ht l k lik thi product might look like this:
A A x B
Standard Standard Standard
Quantity Price Cost
Inputs or Hours or Rate per Unit
B
18
Inputs or Hours or Rate per Unit
Di rect materi al s 3.0 l bs. 4.00 $ per l b. 12.00 $
Di rect l abor 2.5 hours 14.00 per hour 35.00
Vari abl e mfg. overhead 2.5 hours 3.00 per hour 7.50
Total standard uni t cost 54.50 $
Why do actual results normally
differ from the master budget and
sometimes standard as well?
sales and other cost- sales and other cost
driver activities were
not the same as
originally forecasted.
i bl
19
revenue or variable
costs per unit of
activity and fixed
costs per period were
not as expected.
Variances
The variances of actual results from the
master budget are called master (static)
budget variances budget variances.
The variances between the flexible budget
and actual results are called flexible-
budget variances
due to pricing and cost control
The differences betweenthe master
20
The differences between the master
budget and the flexible budget are due to
activity levels, not cost control, and are
called activity-level variances.
due to activity levels NOT cost control
Cheng Nam Sang 6
Standard Cost Variances
A standard cost variance is the amount by which
an actual cost differs from the standard cost.
s
t
Standard
Thi i i f bl
21
C
o
s
This variance is unfavorable
because the actual cost
exceeds the standard cost.
I see that there
First, they point to causes of
problems and directions
for improvement
I see that there
is an unfavorable
variance.
But why are
variances
important to me?
for improvement.
Second, they trigger
investigations in departments
having responsibility
for incurring the costs.
22
Variance Analysis
Managers focus on quantities and costs
that differ from expectation, a practice known as
management by exception
Direct
Material
management by exception.
A
m
o
u
n
t
Di t
Standard
23
Material
Type of Product Cost
A
Direct
Labour
Manufacturing
Overhead
Advantages of Standard
Costs
Management by Possible reductions
exception in production costs
Advantages
24
Improved cost control
and performance
evaluation
Better Information
for planning and
decision making
Cheng Nam Sang 7
Emphasis on Favorable variances
Disadvantages of
Standard Costs
Potential
Problems
p
negative may
impact morale.
may be
misinterpreted.
Continuous
improvement
may be more
important than
Standard cost
reports may
25
Emphasizing standards
may exclude other
important objectives.
p
meeting standards.
p y
not be timely.
Incentives to build
inventories.
Static Budget
Use of original budgeted figures to
ith th t l lt compare with the actual results
(Actual results Master budget results)
Ignored changes in activity due to
controllable and/or uncontrollable factors controllable and/or uncontrollable factors
Not a good performance evaluation device
26
How do you solve the
bl i problems on comparison
between Master budget
figures and Actual Results?
27
Cheng Nam Sang 1
Objectives: Variance Analysis
To understand flexed (or flexible) budget
To understand how to calculate and
interpret simple variances
1
To be able to prepare a simple variance-
based performance report
Why do actual results normally differ
from the master budget and
sometimes standard as well?
sales and other cost- sales and other cost
driver activities were
not the same as
originally forecasted.
i bl
2
revenue or variable
costs per unit of
activity and fixed
costs per period were
not as expected.
Variances
The variances of actual results from the
master budget are called master (static)
budget variances budget variances.
The variances between the flexible budget
and actual results are called flexible-
budget variances
due to pricing and cost control
The differences betweenthe master
3
The differences between the master
budget and the flexible budget are due to
activity levels, not cost control, and are
called activity-level variances.
due to activity levels NOT cost control
A standard cost variance is the amount by which
an actual cost differs from the standard cost.
s
t
Standard
Thi i i f bl
4
C
o
s
This variance is unfavorable
because the actual cost
exceeds the standard cost.
Cheng Nam Sang 2
I see that there
First, they point to causes of
problems and directions
for improvement
I see that there
is an unfavorable
variance.
But why are
variances
important to me?
for improvement.
Second, they trigger
investigations in departments
having responsibility
for incurring the costs.
5
Variance Analysis
Managers focus on quantities and costs
that differ from expectation, a practice known as
management by exception
Direct
Material
management by exception.
A
m
o
u
n
t
Di t
Standard
6
Material
Type of Product Cost
A
Direct
Labour
Manufacturing
Overhead
Advantages of Standard
Costs
Management by Possible reductions
exception in production costs
Advantages
7
Improved cost control
and performance
evaluation
Better Information
for planning and
decision making
Emphasis on Favorable variances
Disadvantages of
Standard Costs
Potential
Problems
p
negative may
impact morale.
may be
misinterpreted.
Continuous
improvement
may be more
important than
Standard cost
reports may
8
Emphasizing standards
may exclude other
important objectives.
p
meeting standards.
p y
not be timely.
Incentives to build
inventories.
Cheng Nam Sang 3
Static Budget
Use of original budgeted figures to
ith th t l lt compare with the actual results
Ignored changes in activity due to
controllable and/or uncontrollable factors
Not a good performance evaluation device
9
Flexible Budget
(variable budget)
Purpose: Purpose:
to isolate
unexpected effects
on actual results
10
that can be
corrected if adverse
or enhanced if
beneficial.
Flexible Budget (variable budget)
a budget that adjusts for changes in sales
volume and other cost-driver activities.
identical to the master budget in format,
but managers may prepare it for any level
of activity.
based on the same assumptions of
(
11
revenue and cost behavior (within the
relevant range) as is the master budget
incorporating effects on each cost and
revenue caused by changes in activity
A simplified chocolate example
Milk Cocoa
Standard 1000kg 500kg 500kg
Actual 900kg 480kg 420kg
12
Cheng Nam Sang 4
A simplified chocolate example
Milk Cocoa
Actual 900kg 480kg 420kg
13
Standard
(for the actual
production)
900kg 450kg 450kg
Variance 30 kg (U) 30kg (F)
Price Variance
The difference between
Quantity Variance
14
the actual price and the
standard price
the actual quantity and
the standard quantity
A General Model for
Variance Analysis
Actual Quantity Actual Quantity Standard Quantity y y y

Actual Price Standard Price Standard Price
Price Variance Quantity Variance
15
Standard price is the amount that should
have been paid for the resources acquired.
Actual Quantity Actual Quantity Standard Quantity
A General Model for
Variance Analysis
y y y

Standard quantity is the quantity allowed for
16
Standard quantity is the quantity allowed for
the actual output.
Standard input per unit of output
times amount of good output.
Cheng Nam Sang 5
A General Model for
Variance Analysis
AQ(AP - SP)
y y y

17
AQ(AP SP)
AQ x AP AQ x SP
AQ x AP
AQ x SP
AQ = Actual Quantity
AP = Actual Price
SP = Standard Price
A General Model for
Variance Analysis
SP(AQ SQ)
y y y

18
SP(AQ SQ)
AQ = Actual Quantity
AP = Actual Price
SP = Standard Price
SP x AQ SP x SQ
SP x AQ
SP x SQ
Sales Variances
AQ x AP Q
Price Variance
AQ x SP
Volume Variance
SQ x SP
19
SQ x SP ______________
Total Flexed Variance
A =Actual; S =Standard;
Q =Quantity; P =Price; R =Rate; H =Hr
Comprehensive Class Example
FaFa Pte Ltd (Variance Analysis Example.pdf)
See Fa Fa Pte Ltd for details of calculations of
sales, material, labour, variable overhead and
fixed overhead variances
20
Cheng Nam Sang 6
Sales Variances
Price Variance (possible examples)
Unplanned change in selling price e.g.
Due to unexpected change in costs
Management decision on pricing, volume and
profit trade off
21
profit trade-off
Response to actions of competitors
Sales Variances
Volume Variance (possible examples)
Reduction/Increase in demand e.g.
Increase/reduce in selling price
Production or logistics problems creating
stock-out situations
22
Recession or competitors price cutting
Advances/Problems of competitors
products
Over-/under-estimated budget
Cost Variances
Material variances
Price; usage
Labour variances
Rate of pay; idle time; efficiency
Variable overhead variances
Rate; efficiency
23
Rate; efficiency
Fixed overhead variances
Spending; Volume
Material Variances
AQ x AP
Price Variance
AQ x SP
Usage Variance
SQ x SP _____________
24
(Std Quantity for the Total Flexed Variance
Actual production/output)
i.e. Applied Standard
(Aoutput x Std required for the Quantity) x SP
Cheng Nam Sang 7
Class Exercises CQ.1 to3
Pl d lli Please do your polling
25
Material Variances
Price Variance (possible causes)
Cheaper substitutes / shortage of
supplies
Bulk purchase discounts
Different suppliers
General market factors e g oil crisis;
26
General market factors e.g. oil crisis;
adverse weather
Standard setting issues weighted
average? last purchase prices?
Usage Variance
Sub-standard materials
Material Variances
Sub standard materials
Mechanical breakdown leading to
spoilage
Unrealistic standards
Measurement errors e.g. unrecorded
materials leading to o erstating act al
27
materials leading to overstating actual
usage in the current period but
understating usage in the following
period
Operating inefficiencies
Labour Variances
AHp x AR p
Rate (Spending) variance
AHp x SR
Idle time variance
AHwx SR
Efficiencyvariance
28
Efficiency variance
SH x SR ________________
(SH for actual production) Total flexed variance
i.e. AppliedStandard
(Aoutput x Std hour required) x SR
Cheng Nam Sang 8
Class Exercises file CQ.4
Please do your
polling
29
Labour Variances
Rate of Pay Variance (possible causes)
Unexpected overtime rush orders?
U t d dj t t Unexpected pay adjustments
Using different grades of labour
Idle Time Variance (possible causes)
Machinery problems
30
Machinery problems
Strikes
Illness and absenteeism
Failure to allocate all productive time
accurately
Labour Variances
Efficiency Variance (possible causes)
Quality of raw material resulting
less or more labour efforts
Learning curve problem
General morale or personal
problems or other human problems
31
p p
Wrong standards / unattainable
standards
Recap MCQ
CQ 5
CQ 6
CQ 7
32
CQ 8
Please do your polling
Cheng Nam Sang 9
Another Attempt
(See Class Exercises CQ.9)
1 MPV = $74 400 U 1. MPV = $74,400 U
MUV = $128,000 U
2. LRV = $14,500 U
LEV = $90,000 U
33
Variable Overhead Variances
AHw x AR
Rate (spending) var.
AHw x SR
Efficiency var.
SH x SR _______________
34
(SH for actual production) Total flexed variance
i.e. Applied Standard
(Aoutput x Std hour required) x SR
Rate (Spending) and Efficiency Variances
Difficult for interpretation due to the
overhead rate per unit/hour being likely to
be amalgamation of many different cost
elements
Choice of activity base/cost driver
35
y
Careful analysis of actual costs
Breakdown of the standard cost into its
constituent parts e.g. material, labour
Fixed Overhead Variances
Actual
Spending variance
Budget
(Boutput x SH) x POR
Denominator Hr x POR
Applied
SH x SR
(S f
Volume variance
36
(Std Hr for the actual output _______________
@ std rate)
(Aoutput x SH) x POR Total Variance
(over-/under-applied fixed overhead)
Cheng Nam Sang 10
(Normal Textbooks approach)
Garrison et al Asian ed. also shows this method of
calculatingvolume variance (see p.600) calculating volume variance (see p.600)
Identify pre-determined overhead rate which covers both
variable and fixed overheads
Separate variable and fixed overheads as only fixed overhead
component is relevant for the fixed overhead variance analysis
Defined: Denominator Activity and Denominator Hour (see
p.598, 600)
Volume variance =
Fixed component of the predetermined overhead rate
x
(Denominator hours Standard hours allowed)
37
Spending variance (also refers as budget variance)
shows the budgeting errors on fixed overhead.
Volume variance reflects the capacity and effectiveness
(not efficiency) of utilizing the facility, such as production
facility (planned volume vs actual volume).
This can be affected by management decision to change the
utilization of facility due to change of market condition, but
can also be caused by uncontrollable events such as machine
breakdown.
38
Total fixed overhead variance (effectively is the over-
/under-applied fixed overhead)
Flexible Budget Performance Report

Master
Budget
Activity
Variances
Flexed
Budget
Revenue & Spending
Variances
Actual
Results
$ $ $ $ $ $ $ $ $ $
Revenue

Direct materials Cost
Labour Cost
Variable production overhead
Fixed production overhead

39
Net Income

Variance Analysis Cycle
Identify
ti
Receive
l ti
Take
corrective
Analyze
variances
questions explanations
actions
Conduct next
periods
operations
40
Prepare standard
cost performance
report
Begin
operations
Cheng Nam Sang 11
Potential Problems in Variance
Analysis and Standard Costing
Dysfunctional behaviour (budget gaming) Dysfunctional behaviour (budget gaming)
Interactions among variances
Aggregated nature of variances
Lack of timeliness of variances
Outdated/irrelevant standards
41
Outdated/irrelevant standards
Your Chance to do another
Comprehensive Exercise
Meng Meng Pte Ltd
(Dont forget there may
be unannounced quiz!) q )
42
Objectives achieved?
Do you understand Standard Costing and
t d d tti ? standard setting?
What is a flexible (or flexed) budget?
Do you understand the basic principles in
calculating and interpreting variances
Can you compute simple variances?
43
Can you compute simple variances?
Can perform simple variance
interpretation/analysis?
What is a performance report?
ACCT 102 Managerial Accounting

Variance Analysis
Cheng Nam Sang 1
Variance Analysis: Example

FaFa Pte Ltd produces soap in bulk.

The standard cost per drum is made up as follows:

Raw Materials 100 kg costing $2 per kg
Labour 12 hours costing $3 per hour
Variable production overheads 12 hours costing $2.5 per hour

Fixed production costs per month are budgeted at $90,000. For April,
budgeted production was 7,500 drums.

The company budgeted to sell all 7,500 units at $450 per unit.

The actual costs incurred in the period were:

Raw materials (900,000 kg purchased) $1,755,000
Labour (110,000 hours paid, 102,000 hours worked) $341,000
Variable production overheads $280,000
Fixed production costs $86,000

During April 7,800 drums of soap were actually produced. There were no raw
materials inventories at the start or end of the period.

The actual sales for the period were 7,200 drums at price of $480 each.

Assumptions:

1. We are operating a total absorption costing system, so that all production
costs are absorbed into units produced; and
2. The basis for absorbing fixed overheads is labour hours. Despite the
advent of ABC, this is the most commonly used absorption basis in
practice.

Variance Analysis
Cheng Nam Sang 2
Standard Cost Card for soap
$
Raw materials (100 kg x $2) 200
Labour (12 hours x $3) 36
Variable production overheads (12 hours x $2.5) 30
Fixed production overheads (12 hours x $1) NB1 12
278

NB 1 Fixed overhead absorption (or applied) rate:
Produce 7,500 drums, each taking 12 hours to produce.
Total budgeted hours =7,500 x 12 =90,000
Fixed overhead budgeted =$90,000
Fixed overhead absorption rate per hour =$90,000 / 90,000
=$1 per hr

Actual vs Master Budget (Static Variances)

Budgeted production =7,500 drums Budgeted Actual Variance
Actual production =7,800 drums
$ $ $
Revenue 3,375,000 3,456,000 81,000 F
Direct materials Cost 1,500,000 1,755,000 255,000 U
Labour Cost 270,000 341,000 71,000 U
Variable production overhead 225,000 280,000 55,000 U
Fixed production overhead 90,000 86,000 4,000 F
2,085,000 2,462,000 377,000 U

Flexible Budget vs Master Budget (Activity Variances)

Flexed Budget: Sales =7,200 drums Master Flexed Variance
Prodn =7,800 drums
$ $ $
Revenue 3,375,000 3,240,000 135,000 U
All Costs @ Standard Costs:
Direct materials Cost 1,500,000 1,560,000 60,000 U
Labour Cost 270,000 280,800 10,800 U
Variable production overhead 225,000 234,000 9,000 U
Fixed production overhead 90,000 90,000 0
2,085,000 2,164,800 79,800 U


Variance Analysis

Cheng Nam Sang 3

FaFa Pte Ltd Flexible Budget Performance Report
For the month of April

Master
Budget
Activity
Variances
Flexed
Budget
Revenue & Spending
variances
Actual
Results
$ $ $ $ $
Revenue 3,375,000 135,000 U 3,240,000 216,000 F 3,456,000

Direct materials Cost 1,500,000 60,000 U 1,560,000 195,000 U 1,755,000
Labour Cost 270,000 10,800 U 280,800 60,200 U 341,000
Variable production overhead 225,000 9,000 U 234,000 46,000 U 280,000
Fixed production overhead 90,000 0 U 90,000 4,000 F 86,000
2,085,000 79,800 U 2,164,800 297,200 U 2,462,000

ACCT 102

Variance Analysis

Cheng Nam Sang
Flexible Budget Variances (Detailed breakdown)

Sales Variances
$ $ Variances
AQ x AP =7,200 x $480 = 3,456,000
(Actual Sales)
216,000 F Price
AQ x SP =7,200 x $450 = 3,240,000
(135,000) U Volume
SQ x SP =7,500 x $450 = 3,375,000

81,000 F Total Flexed

COSTS

Raw Material Variances
$ $ Variances
AQ x AP =900,000 x $1.95 1,755,000
(Actual Cost)
(45,000) F Price
AQ x SP =900,000 x $2 1,800,000
240,000 U Usage
SQ
NB2
x SP =(7800 x 100) x $2 1,560,000 195,000 U Total Flexed
(Actual output x std RM quantity)

x SP
60,000 U Activity
BQ x SP =(7500 x 100) x $2 1,500,000
(Budgeted Cost) =(Budgeted output x std RM quantity) x SP

NB2 SQ =Standard Quantity for actual output
=7,800 drums x 100 kg
=780,000 kg

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ACCT 102

Variance Analysis

Cheng Nam Sang
Labour Variances
$ $ Variances
AHp x AR =110,000 x $3.1= 341,000
(Actual Cost)
11,000 U Rate
AHp x SR =900,000 x $3 = 330,000
24,000 U Idle Time
AHw x SR =102,000 x $3 = 306,000
25,200 U Efficiency
SHw
NB3
x SR =(7800 x 12) x $3 = 280,800 60,200 U Total Flexed
(Actual output x std Labour Hr)

x SR
10,800 U Activity
BH x SR =(7500 x 12) x $3 = 270,000
(Budgeted Cost) =(Budgeted output x std Labour Hr) x SR

NB3 SHw =Standard Hours worked for actual output
=7,800 drums x 12 hours
=93,600 hours

$ $ Variances
AHw x AR = 280,000
(Actual Cost)
25,000 U Rate
AHw x SR =102,000 x $2.5 = 255,000
21,000 U Efficiency
SHw
NB3
x SR =(7,800 x 12) x $2.5 = 234,000 46,000 U Total Flexed

x SR
9,000 U Activity
BH x SR =(7,500 x 12) x $2.5 = 225,000
(Budgeted Cost) =(Budgeted output x std Labour Hr) x SR

Fixed Overhead Variances (Different from the rest)

$ $ Variances
Actual Cost = 86,000
(4,000) F Spending
Budgeted Cost =(7500 x 12) x $1
NB1
90,000
(Budgeted output x Std labour Hr) x SR
Denominator Hr x POR
(3,600) F Volume
SHw
NB3
x SR = (7800 x 12) x $1 93,600 (7,600) F Total Flexed

x SR

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Variance Analysis

Cheng Nam Sang 6

Further reference

1 In this example, we assumed no Raw Material Inventory.

If purchased quantity is more than used quantity then there is inventory at the
end of the period. The proforma should be:

AQ (purchased) x AP
Price variance
AQ (purchased) x SP
Inventory @ standard cost
AQ (used) x SP
Usage variance
SQ (for actual production) x SP

2 If you need to analyse sales or material mix and yield variances

Sales Variances

AQ x AM x AP
Price variance
AQ x AM x SP
Mix variance
AQ x SM x SP
Quantity variance
SQ x SM x SP

Material Variances

AQ x AM x AP
Price variance
AQ x AM x SP
Mix variance
AQ x SM x SP
Yield variance
SQ x SM x SP
(Standard Quantity at standard price in standard mix for actual production)

ACCT 102 Management Accounting
Class Exercise

Cheng Nam Sang 1
Far West Ltd produces high-quality leather wallets. The company uses a standard cost system
and has set the following standards for materials and labour:

Leather (6 strips @ $8) $48
Direct Labour (1.5 hours @ $12) 18
Total Prime Cost $66

During the year, Far West produced 10,000 leather wallets. Actual leather purchased was 61,000
strips at $7.96 per strip. There were no beginning and ending inventories of leather. Actual direct
labour was 15,600 hours at $12.50 per hour.

Required

CQ1. Compute the costs of leather and direct labour that should have been incurred (i.e. flexible
budget) for the production of 10,000 leather wallets.

Material Labour
a) $796,000 $125,000
b) $480,000 $180,000
c) $800,000 $120,000
d) $477,600 $187,500
e) $485.560 $195,000

CQ2. Compute the total static (budgeted) variances for material and labour.

Material Labour
a) $5,560 F $15,000 F
b) $5,560 U $15,000 U
c) $2,440 F $7,800 U
d) $2,440 U $7,800 F
e) None of the above

CQ3. Break down the total variance for materials into a price variance and usage variance

Price Variance Usage Variance
a) $2,440 F $8,000 U
b) $2,440 U $8,000 F
c) $5,560 F $2,440 F
d) $5,560 F $2,440 U

CQ4. Break down the total variance for labour into a rate variance and an efficiency variance

Rate Variance Efficiency Variance
a) $15,000 F $7,800 U
b) $15,000 U $7,800 F
c) $7,800 F $7,200 F
d) $7,800 U $7,200 U

CQ5. The Standard quantity of materials allowed is computed by the equation

a) Unit quantity standard x Standard output
b) Unit quantity standard x Actual output
c) Unit quantity standard x Practical output
d) Unit quantity standard x Normal output

Class Exercise

Cheng Nam Sang 2

CQ6. The standard direct labour hours allowed is given by the question

a) Unit labour standard x Normal output
b) Unit labour standard x Practical output
c) Unit labour standard x Standard output
d) Unit labour standard x Actual output
e) Unit labour standard x Theoretical output

CQ7. The total (flexible budget) variance is given by the equation

a) (AP x AQ) (SP x SQ)
b) (SP x AQ) (AP x SQ)
c) (SP x AQ) (SP x SQ)
d) (AP x SP) (AQ x SQ)

CQ8. Investigating variances from standard is

a) always done
b) done if the variance is outside an acceptable range
c) not done if the variance is expected to recur
d) done if the variance is less than 10 percent of standard cost
e) none of the above

CQ9. At the beginning of the year, Paul & Mary Ltd had the following stand cost sheet for one
of its chemical products:
Direct materials (5 kg @$3.20) $16
Direct labour (2 hrs @$9.00) 18
Standard prime cost per unit 34
The actual results for the year are as follows:
i) Unites produced: 140,000.
ii) Materials purchased: 744,000 kg @$3.30
iii) Materials used: 740,000 kg
iv) Direct labour: 290,000 hours @9.05.

Required
a. Compute price and usage variances for materials
b. Compute the labour rate and labour efficiency variances


Cheng Nam Sang 1
Flexible Budget & Variance Analysis

1. provide expected revenues and costs for several levels of activity.

a. Continuous budgets
b. Flexible budgets
c. Master budgets
d. Static budgets

2. are budgets for a single activity level.

a. Flexible budgets
b. Master budgets
c. Static budgets
d. Both b and c are correct.

3. The Zachary Fitness Company has the following budgeted costs for the production of its only product,
exercise machines:

Variable manufacturing costs $30.00 per unit
Shipping expenses (selling) $ 1.00 per unit
Administrative $ 0.50 per unit
Fixed manufacturing costs $50,000 per month
Fixed selling and admin. costs $35,000 per month

What are Zachary's expected costs for 1,000 units of product to be produced and sold in March?

a. $30,000
b. $31,000
c. $85,000
d. $116,500.

4. The flexible budget is based on the same assumptions of revenue and cost behavior (within the relevant
range) as is the:

a. master budget
b. static budget
c. both a and b
d. neither a nor b

5. Which of the following is descriptive of an activity-based flexible budget:

a. based on budgeted costs for each activity center and related cost driver
b. based on actual costs for each activity center and related cost driver
c. is limited to no more than ten activity centers
d. a and c

6. The key differences between the traditional flexible budget and the activity-based flexible budget is:

a. the traditional should be used when a significant portion of the costs vary with cost drivers other
than units of production
b. some manufacturing costs that are fixed with respect to units are variable with respect to cost drivers,
other than units, used for an activity-based flexible budget
c. traditional flexible budgeting is dramatically increasing in popularity
d. the larger the company, the more likely the activity-based flexible budget will not be used


Cheng Nam Sang 2
7. Flexible budgets allow for financial performance evaluation because actual results can be compared with

a. the expected prices and variable costs per unit and fixed cost for the period.
b. the continuous budget for the period.
c. the static budget for the period.
d. the master budget for the period.

8. The flexible budget is prepared using the:

a. estimated levels of activity of the closest competitor
b. historical levels of activity
c. actual levels of activity
d. most conservative levels of activity

9. measure how effective managers have been in meeting the planned level of sales.

a. Continuous-budget variances
b. Flexible-budget variances
c. Master-budget variances
d. Sales-activity variances

10. measure the efficiency of operations at the actual level of activity.

a. Zero-based budget variances

Use the following information for questions 11 through 14.

The Blake Company has developed the following standards for one of their products.

Direct materials: 30 pounds x $3 per pound
Direct labor: 10 hours x $8 per hour
Variable overhead: 10 hours x $2 per hour

The following activity occurred during the month of November:

Materials purchased: 500,000 pounds at $3.20 per pound
Material used: 460,000 pounds
Units Produced: 15,000 units
Direct labor: 145,000 hours at $7.90 per hour
Actual variable OH: $295,000

The company records the materials price variance at the time of purchase.

11. The materials price variance is

a. $0.
b. $92,000 unfavorable.
c. $100,000 favorable.
d. $100,000 unfavorable.

12. The labor usage variance is

a. $39,500 favorable.
c. $40,000 unfavorable.
d. $40,000 favorable.

Cheng Nam Sang 3
13. The variable overhead spending variance is


14. The variable overhead efficiency variance is

a. $10,000 unfavorable
b. $ 0
c. $10,000 favorable
d. cannot be determined

Cheng Nam Sang 4
Flexible Budget & Variance Analysis

1. [b] 2. [d]

3. [d] From the information provided, Zachary's flexible-budget cost formula is $85,000 + $31.50 X, where X is the
number of units produced. Inserting 1,000 for X gives $85,000 + ($31.50 x 1,000) which equals $116,500.

4. [c] 5. [a] 6. [b] 7. [a] 8. [c] 9 [d]

10. [b]

11. [d] As stated, the company determines the price variance based on the material purchased. Therefore, the price
variance is ($3.20 - $3.00) x 500,000 pounds which is $100,000. The variance is unfavorable since the actual
price paid ($3.20) exceeds the standard price ($3.00).

12. [d] The labor usage variance is found by multiplying the standard labor rate ($8) by the difference between the
actual hours worked (145,000) and the number of hours that should have been taken to produce 15,000
units (150,000 = 15,000 x 10 hrs./unit). The resulting variance is $40,000, which is favorable because fewer
hours were worked than should have been for the production level achieved.

13. [b] Spending variance = (AH x AR) (AH x SR) = AH x (AR SR)
= 295,000 (145,000 x 2)
= 295,000 290,000
= 5,000 Unfavourable

14. [c] The efficiency variance is the difference between the actual quantity of the cost-driver activity and the
standard quantity allowed, which is then multiplied by the standard rate. The actual quantity of 145,000
hours is less than the standard allowed of 150,000 hours. The 5,000 hour difference is multiplied by the
standard rate of $2 to arrive at a $10,000 favorable variance.

Efficiency variance =AH x SR SH x SR
=(145,000 x 2) [(15,000 x 10) x 2]
=290,000 300,000
=10,000 Favourable
ACT 102 Management Accounting: Variance Analysis

Cheng Nam Sang 1
1 The activity base that is used for a flexible budget for an overhead cost should be:
A) direct labor-hours.
B) units of output.
C) expressed in dollars, if possible.
D) the cause of the overhead cost.

2. The following costs appear in Malgorzata Company's flexible budget at an activity
level of 15,000 machine-hours:

Total Cost
Indirect materials ............... $7,800
Factory rent ....................... $18,000

What would be the flexible budget amounts at an activity level of 12,000 machine-
hours if indirect materials is a variable cost and factory rent is a fixed cost?

Indirect Materials Factory Rent
A) $7,800 $14,400
B) $7,800 $18,000
C) $6,240 $14,400
D) $6,240 $18,000

3. Riggs Enterprise's flexible budget cost formula for indirect materials, a variable cost,
is $0.45 per unit of output. If the company's performance report for last month shows
a $90 favorable variance for indirect materials and if 8,700 units of output were
produced last month, then the actual costs incurred for indirect materials for the
month must have been:
A) $4,005
B) $3,915
C) $3,825
D) $3,735

4. Teall Corporation has a standard cost system in which it applies manufacturing
overhead to products on the basis of standard machine-hours (MHs). The company
has provided the following data for the most recent month:

Budgeted level of activity ................................................. 8,500 MHs
Actual level of activity ...................................................... 8,600 MHs
Cost formula for variable manufacturing overhead cost ... $5.70 per MH
Budgeted fixed manufacturing overhead cost ................... $50,000
Actual total variable manufacturing overhead .................. $51,600
Actual total fixed manufacturing overhead ....................... $54,000


Cheng Nam Sang 2
What was the fixed overhead budget variance for the month?
A) $4,000 unfavorable
B) $4,000 favorable
C) $570 favorable
D) $570 unfavorable

5. Alapai Corporation has a standard cost system in which it applies manufacturing
overhead to products on the basis of standard machine-hours (MHs). The company
has provided the following data for the most recent month:

Budgeted level of activity ................................................ 7,000 MHs
Actual level of activity ..................................................... 7,200 MHs
Cost formula for variable manufacturing overhead cost .. $9.40 per MH
Budgeted fixed manufacturing overhead cost .................. $40,000
Actual total variable manufacturing overhead ................. $66,960
Actual total fixed manufacturing overhead ...................... $37,000

What was the total of the variable overhead spending and fixed overhead budget
variances for the month?
A) $3,720 favorable
B) $2,280 unfavorable
C) $1,840 favorable
D) $1,880 unfavorable

6. Ronda Manufacturing Company uses a standard cost system with machine-hours as
the activity base for overhead. Last year, Ronda incurred $840,000 of fixed
manufacturing overhead and generated a $42,000 favorable fixed overhead budget
variance. The following data relate to last year's operations:

Denominator activity level in machine-hours ................ 21,000
Standard machine-hours allowed for actual output ........ 20,000
Actual number of machine-hours incurred .................... 22,050

What amount of total fixed manufacturing overhead cost did Ronda apply to
production last year?
A) $837,900
B) $840,000
C) $926,100
D) $972,405


Cheng Nam Sang 3
Use the following to answer questions 7-12:

A manufacturing company has a standard costing system based on standard direct labor-hours
(DLHs) as the measure of activity. Data from the company's flexible budget for
manufacturing overhead are given below:

Denominator level of activity ................................ 1,000 DLHs
Overhead costs at the denominator activity level:
Variable overhead cost ........................................ $3,800
Fixed overhead cost ............................................ $14,250

The following data pertain to operations for the most recent period:

Actual hours ........................................................... 1,200 DLHs
Standard hours allowed for the actual output ........ 885 DLHs
Actual total variable overhead cost ........................ $4,380
Actual total fixed overhead cost ............................ $12,450

7. What is the predetermined overhead rate to the nearest cent?
A) $14.03
B) $16.83
C) $15.04
D) $18.05

8. How much overhead was applied to products during the period to the nearest dollar?
A) $18,050
B) $16,830
C) $15,974
D) $21,660

9. What was the variable overhead spending variance for the period to the nearest
dollar?
A) $180 U
B) $180 F
C) $580 U
D) $580 F

10. What was the variable overhead efficiency variance for the period to the nearest
dollar?
A) $133 U
B) $580 U
C) $1,150 U
D) $1,197 U


Cheng Nam Sang 4
11. What was the fixed overhead budget variance for the period to the nearest dollar?
A) $1,800 F
B) $3,268 F
C) $161 U
D) $4,650 U

12. What was the fixed overhead volume variance for the period to the nearest dollar?
A) $4,489 U
B) $1,618 U
C) $2,850 F
D) $1,639 U

13. Flick Company uses a standard cost system in which manufacturing overhead is
applied to units of product on the basis of standard direct labor-hours. The company's
total budgeted variable and fixed manufacturing overhead costs at the denominator
level of activity are $20,000 for variable overhead and $30,000 for fixed overhead.
The predetermined overhead rate, including both fixed and variable components, is
$2.50 per direct labor-hour. The standards call for two direct labor-hours per unit of
output produced. Last year, the company produced 11,500 units of product and
worked 22,000 direct labor-hours. Actual costs were $22,500 for variable overhead
and $31,000 for fixed overhead.

Required:

a. What is the denominator level of activity?
b. What were the standard hours allowed for the output last year?
c. What was the variable overhead spending variance?
d. What was the variable overhead efficiency variance?
e. What was the fixed overhead budget variance?
f. What was the fixed overhead volume variance?


Cheng Nam Sang 5
Ans 1: D

Ans 2: D
Budgeted number of machine hours: 15,000

Cost Formula
(per machine-hour)
Activity
(in machine-hours):
12,000
Variable costs:
Indirect materials ......... $0.52* $6,240
Fixed costs:
Factory rent .................. $18,000

*$7,800 15,000 MHs = $0.52 per MH

Ans 3: C
Variable overhead spending variance = AQ (AP SP) = 90 F
8,700 (AP 0.45) = -90
(8,700 AP) 3,915 = -90
(8,700 AP) = 3,825
AP = 3,825 8,700 = $0.4396
Actual indirect materials = 8,700 $0.4396 = $3,825

Ans 4: A
Budget variance = Actual fixed overhead cost Budgeted fixed overhead cost
= $54,000 $50,000 = $4,000 U

Ans 5: A
Actual rate =
Actual total variable manufacturing overhead Actual machine-hours =
$66,960 7,200 = $9.30
Variable overhead spending variance = AH (AR SR)
= 7,200 ($9.30 $9.40)
= 7,200 ($0.10) = $720 F

Fixed overhead budget variance
= Actual fixed overhead costs Budgeted fixed overhead cost
= $37,000 $40,000 = $3,000 F

Total overhead variance = $720 F + $3,000 F = $3,720 F

Ans 6: B
Predetermined overhead rate =
$882,000 21,000 denominator machine-hours = $42 per machine-hour
Fixed overhead applied to production =
20,000 standard hours $42 per machine-hour = $840,000

Cheng Nam Sang 6
Ans 7: D
Predetermined overhead rate = Total overhead Denominator level of activity
= ($3,800 + $14,250) 1,000 DLHs
= $18,050 1,000 DLHs = $18.05 per DLH

Ans 8: C
Predetermined overhead rate = Total overhead Denominator level of activity
= ($3,800 + $14,250) 1,000 DLHs
= $18,050 1,000 DLHs = $18.05 per DLH
Applied overhead = 885 DLHs $18.05 per DLH = $15,974

Ans 9: B
Budgeted direct-labor hours: 1,100
Actual direct-labor hours: 1,200
Standard direct-labor hours allowed: 800

Cost
Formula
(per
DLH)
Actual
Costs
Incurred
1,200
DLHs
Budget
Based on
1,200
DLHs
Spending
Variance

Variable overhead
costs ...................... $3.80 * $4,380 $4,560 $180 F

* $3,800 1,000 DLHs = $3.80 per DLH

Ans 10: D
Budgeted direct-labor hours: 1,000
Actual direct-labor hours: 1,200
Standard direct-labor hours allowed: 885

Cost
Formula
(per
DLH)
Budget
Based on
1,200
DLHs
Budget
Based on
885 DLHs
Efficiency
Variance

Variable overhead
costs ...................... $3.80 * $4,560 $3,363 $1,197 U

*$3,800 1,000 = $3.80

Ans 11: A
Fixed overhead budget variance
= Actual fixed overhead cost Budgeted fixed overhead cost
= $12,450 $14,250 = $1,800 F


Cheng Nam Sang 7
Ans 12: D
Fixed portion of predetermined overhead rate
= $14,250 1,000 DLHs = $14.25 per DLH
Volume variance = Fixed portion of predetermined overhead rate (Denominator
hours Standard hours allowed)
= $14.25 per DLH (1,000 DLHs 885 DLHs)
= $14.25 per DLH 115 DLHs = $1,639 U

Ans 13:
a. Total overhead at the denominator level of activity ....... $50,000
Predetermined overhead rate ....................................... $2.50/DLH
= Denominator level of activity ...................................... 20,000 DLHs

b. Actual output .............................. 11,500 units
Standard DLH per unit ............ 2 DLH per unit
= Standard DLHs allowed .......... 23,000 DLHs

c. Computation of variable overhead spending variance:
Spending variance = (AH AR) (AH SR)
= ($22,500) (22,000 $1.00*) = $500 U
*$20,000 20,000 DLHs = $1.00

d. Computation of variable overhead efficiency variance:
Spending variance = (AH SR) (SH SR)
= (22,000 $1.00) (23,000* $1.00) = $1,000 F
* 2 DLHs per unit 11,500 units = 23,000 DLHs

e. Computation of the fixed overhead budget variance:
Budget variance = Actual fixed overhead Budgeted Fixed overhead
= $31,000 $30,000 = $1,000 U

f. Computation of the fixed overhead volume variance:
Volume variance = Fixed portion of predetermined overhead rate
(Denominator hours Standard hours allowed)
= $1.50* (20,000 23,000) = $4,500 F
*$30,000 20,000 DLH = $1.50 per DLH

Variance Analysis - Extra Exercises

Cheng Nam Sang 1
EQ1. Consider the following statements:

I. Behavioral scientists find that perfection standards often discourage employees and
result in low worker morale.
II. Practical standards are also known as attainable standards.
III. Practical standards incorporate a certain amount of inefficiency such as that caused
by an occasional machine breakdown.

Which of the above statements is (are) true?
A. I only.
B. II only.
C. III only.
D. II and III.
E. I, II, and III.

EQ2. Which of the following would not be considered if a company desires to establish a series
of practical manufacturing standards?
A. Production time lost during unusual machinery breakdowns.
B. Normal worker fatigue.
C. Freight charges on incoming raw materials.
D. Production time lost during setup procedures for new manufacturing runs.
E. The historical 2% defect rate associated with raw material inputs.

EQ3. Most companies base the calculation of the materials price variance on the:
A. number of units purchased.
B. number of units spoiled.
C. number of units that should have been used.
D. number of units actually used.
E. number of units to be purchased during the next accounting period.

EQ4. Which of the following variances cannot occur together during the same accounting
period?
A. Unfavorable labor rate variance and favorable labor efficiency variance.
B. Unfavorable labor efficiency variance and favorable materials quantity variance.
C. Favorable labor rate variance and unfavorable total labor variance.
D. Favorable labor efficiency variance and favorable materials quantity variance.
E. None of the above, as all of these variance combinations are possible.

EQ5. Victoria, Inc., recently completed 52,000 units of a product that was expected to consume
five pounds of direct material per finished unit. The standard price of the direct material
was $9 per pound. If the firm purchased and consumed 268,000 pounds in manufacturing
(cost =$2,304,800), the direct-materials quantity variance would be figured as:
A. $72,000F.
B. $72,000U.
C. $107,200F.
D. $107,200U.
E. none of the above.


Cheng Nam Sang 2
Use the following to answer questions 6-10:

Cost standards for product no. C77:
Direct material 3 pounds at $2.50 per pound $ 7.50
Direct labor 5 hours at $7.50 per hour 37.50

Actual results:
Units produced 7,800 units
Direct material purchased 26,000 pounds at $2.70 $ 70,200
Direct material used 23,100 pounds at $2.70 62,370
Direct labor 40,100 hours at $7.30 292,730

EQ6. The direct-material quantity variance is:
A. $750F.
B. $750U.
C. $6,500U.
D. $7,250U.

EQ7. The direct-material price variance is:
A. $4,620F.
B. $4,620U.
C. $5,200F.
D. $5,200U.

EQ8. The direct-labor rate variance is:
A. $7,800F.
B. $7,950F.
C. $8,020F.
D. $8,000U.

EQ9. The direct-labor efficiency variance is:
A. $8,000F.
B. $8,000U.
C. $8,250F.
D. $8,250U.

EQ10. The standard hours allowed for the work performed are:
A. 5.
B. 5.14.
C. 39,000.
D. 40,100.


Cheng Nam Sang 3
EQ11. Consider the following statements about variance investigation:

I. Variance investigation involves a look at only unfavorable variances.
II. Variance investigation is typically based on a cost-benefit analysis.
III. Variance investigation is often performed by establishing guidelines similar to the
following: Investigate variances that are greater than $X or greater than Y% of
standard cost.

Which of the above statements is (are) true?
A. I only.
B. II only.
C. III only.
D. II and III.
E. I, II, and III.

EQ12. J ustin Company recently purchased materials from a new supplier at a very attractive
price. The materials were found to be of poor quality, and the company's laborers
struggled significantly as they shaped the materials into finished product. In a
desperation move to make up for some of the time lost, the manufacturing supervisor
brought in more-senior employees from another part of the plant. Which of the following
variances would have a high probability of arising from this situation?
A. Material price variance, favorable.
B. Material quantity variance, unfavorable.
C. Labor rate variance, unfavorable.
D. Labor efficiency variance, unfavorable.
E. All of the above.

EQ13. Lucky Corporation's purchasing manager obtained a special price on an aluminum alloy
from a new supplier, resulting in a direct-material price variance of $9,500F. The alloy
produced more waste than normal, as evidenced by a direct-material quantity variance of
$2,000U, and was also difficult to use. This slowed worker efficiency, generating a
$2,500U labor efficiency variance. To help remedy the situation, the production manager
used senior line employees, which gave rise to a $900U labor rate variance. If overall
product quality did not suffer, what variance amount is best used in judging the
appropriateness of the purchasing manager's decision to acquire substandard material?
A. $4,100F.
B. $5,000F.
C. $7,000F.
D. $7,500F.
E. $9,500F.


Cheng Nam Sang 4
Use the following information for questions 14 and 15

Red Hot Chili Pepper produces the hottest chili sauce in the world for use in the making of
spicy dishes. In making sure that the company is profitable, Red Hot Chili Peppers
management always analyzes carefully the cost of its raw materials, green chili, which is
sourced from India.

Typically, to ensure that they can produce the hottest chili sauce, 1 kg of green pepper is
squeezed into the making of 1 bottle of their chili sauce through a distillation process. In
addition, to maintain the prices of their chili sauce, the company always manufactures 20,000
bottles monthly.

In the month of October, the following information was available from company records:
Actual quantity of materials used 24,000 kg
Budgeted quantity of materials purchased 26,000 kg
Actual price paid for materials $4 per kg
Budgeted price for materials $5 per kg

The company computes its material price variance at the time of usage.

EQ14. What was the materials price variance for the period?

A. $24,000 (F)
B. $24,000 (U)
C. $26,000 (F)
D. $26,000 (U)
E. None of the above

EQ15. What was the materials quantity variance for the period?

A. $8,000 (U)
B. $10,000 (U)
C. $16,000 (U)
D. $20,000 (U)
E. none of the above


Cheng Nam Sang 5
Use the following information for questions 16 to 19.

J FH Company uses a standard cost system. Data for the month of May 20X5 for one of the
companys products is as follows:
Total production of finished product for the month: 10,500 units
Standard quantity of direct material allowed in finished product: 31,500 kg
Standard cost of direct material: $10 per kg
Material usage/quantity variance: $3,000 (U)
Direct material purchased: 33,000kg costing $336,600
Total direct labour variance: $1,500 (F)
Direct labour rate variance: $1,500 (U)
Standard hour of direct labour time: 1 hour per unit
Standard rate for direct labour: $15 per hour
Overhead budget formula: $50,000 per month plus $25 per direct labour hour
Actual overhead incurred: $300,000
Actual fixed overhead costs: $45,000
Normal volume: 10,000 units of finished product per month
Material price variance is computed at the time of purchase

EQ16. Actual quantity of direct material used was:
A. 30,000 kg
B. 30,300 kg
C. 31,500 kg
D. 31,800 kg
E. 33,000 kg
F. none of the above

EQ17. The actual direct labour hour worked was:
A. 9,800 hours
B. 10,000 hours
C. 10,250 hours
D. 10,300 hours
E. 10,500 hours

EQ18. The total variable overhead variance was:
A. $2,500(U)
B. $2,500(F)
C. $5,000(U)
D. $5,000(F)
E. $7,500(U)

EQ19. The fixed overhead volume variance was:
A. $0
B. $2,500(U)
C. $2,500(F)
D. $5,000(U)
E. $5,000(F)


Cheng Nam Sang 6

EQ20. Richie Ventura operates a commercial painting business in Sacramento, which has a very
tight labor market. Much of his work focuses on newly constructed apartments and
townhouses.

The following data relate to crew no. 5 for a recently concluded period when 85
apartment units were painted:
Three new employees were assigned to crew no. 5. Wages averaged $18.80 per hour
for each employee; the crew took 2,550 hours to complete the work.
Based on his knowledge of the operation, articles in trade journals, and conversations
with other painters, Ventura established the following standards:
Typical hourly wage rate of crew personnel: $15
Anticipated crew time for each unit: 34 hours
The paint quantity variance was $6,070F.
The operation did not go as smoothly as planned, with customer complaints and
problems being much higher than expected.

Required:
A. Compute Ventura's direct-labor variances.
B. Is the direct-labor rate variance consistent with what you might expect in a tight labor
market? Explain.
C. Analyze the information given and that you calculated, and determine what likely
happened that would give rise to customer complaints?

EQ21. A manufacturing company is expected to complete a task in 45 minutes. During a recent
accounting period, 3,200 completed units were produced, resulting in the following labor
variances:

Labor rate variance: $520 favorable
Labor efficiency variance: $2,800 unfavorable

The standard labor rate is $14 per hour.

Required:
Calculate (1) the standard hours allowed for the work performed, (2) the actual hours
worked, and (3) the actual wage rate.

EQ22. A Balanced Scorecard is:
A. a performance measurement system that emphasizes profit growth.
B. an evaluation process that focuses on improving sales and productivity.
C. a series of checks and balances based primarily on the information derived from the
financial statements of the organization.
D. a performance measure that evaluates multiple categories of an organizations critical
success factors related to organizational goals.
E. a performance measurement system that focuses exclusively on critical issues
relating to meeting customers expectations such as anticipating customers needs,
after-sale services, and delivery efficiency.
F. none of the above.


Cheng Nam Sang 7
EQ23. Bob's Burgers and Such, a national fast-food chain, has experienced a number of
problems in the past few years, and management is considering the adoption of a
balanced scorecard as part of a turnaround effort.

Required:
A. Briefly explain the concept of a balanced scorecard. What general factors are
included in a typical balanced scorecard?
B. Independent of your answer in requirement "A," assume that Bob's is very concerned
about customer satisfaction. List four different (and specific) customer-satisfaction
measures that may be appropriate for the firm (and for other fast-food providers).
C. Independent of requirement "A," assume that Bob's wants to return to former levels
of profitability. List several financial measures that would allow management to
assess success or failure with respect to the following goals: (1) pay creditors on a
timely basis, (2) keep shareholders happy, and (3) improve profitability over time at
stores that have been open at least one year.

EQ24. provide expected revenues and costs for several levels of activity.

a. Continuous budgets
b. Flexible budgets
c. Master budgets
d. Static budgets

EQ25. are budgets for a single activity level.

a. Flexible budgets
b. Master budgets
c. Static budgets
d. Both b and c are correct.

EQ26. The Zachary Fitness Company has the following budgeted costs for the production of its
only product, exercise machines:

Variable manufacturing costs $30.00 per unit
Shipping expenses (selling) $ 1.00 per unit
Administrative $ 0.50 per unit
Fixed manufacturing costs $50,000 per month
Fixed selling and admin. costs $35,000 per month

What are Zachary's expected costs for 1,000 units of product to be produced and sold in
March?

a. $30,000
b. $31,000
c. $85,000
d. $116,500.

EQ27. The flexible budget is based on the same assumptions of revenue and cost behavior (within
the relevant range) as is the:
a. master budget
b. static budget
c. both a and b
d. neither a nor b

Cheng Nam Sang 8

EQ28. Which of the following is descriptive of an activity-based flexible budget:

a. based on budgeted costs for each activity center and related cost driver
b. based on actual costs for each activity center and related cost driver
c. is limited to no more than ten activity centers
d. a and c

EQ29. The key differences between the traditional flexible budget and the activity-based flexible
budget is:

a. the traditional should be used when a significant portion of the costs vary with cost
drivers other than units of production
b. some manufacturing costs that are fixed with respect to units are variable with
respect to cost drivers, other than units, used for an activity-based flexible budget
c. traditional flexible budgeting is dramatically increasing in popularity
d. the larger the company, the more likely the activity-based flexible budget will not be
used

EQ30. Flexible budgets allow for financial performance evaluation because actual results can be
compared with

a. the expected prices and variable costs per unit and fixed cost for the period.
b. the continuous budget for the period.
c. the static budget for the period.
d. the master budget for the period.

EQ31. The flexible budget is prepared using the:

a. estimated levels of activity of the closest competitor
b. historical levels of activity
c. actual levels of activity
d. most conservative levels of activity

EQ32. measure how effective managers have been in meeting the planned level of
sales.

a. Continuous-budget variances

EQ33. measure the efficiency of operations at the actual level of activity.

a. Zero-based budget variances


Cheng Nam Sang 9
Use the following information for questions 34 through 37.

The Blake Company has developed the following standards for one of their products.

Direct materials: 30 pounds x $3 per pound
Direct labor: 10 hours x $8 per hour
Variable overhead: 10 hours x $2 per hour

The following activity occurred during the month of November:

Materials purchased: 500,000 pounds at $3.20 per pound
Material used: 460,000 pounds
Units Produced: 15,000 units
Direct labor: 145,000 hours at $7.90 per hour
Actual variable OH: $295,000

The company records the materials price variance at the time of purchase.

EQ34. The materials price variance is

a. $0.

EQ35. The labor usage variance is

c. $40,000 unfavorable.
d. $40,000 favorable.

EQ36. The variable overhead spending variance is


EQ37. The variable overhead efficiency variance is

a. $10,000 unfavorable
b. $ 0
c. $10,000 favorable
d. cannot be determined

Cheng Nam Sang 10
Suggested Answers

EQ1 E

EQ2 A

EQ3 A

EQ4 E

EQ5 B

EQ6 A

EQ7 D

EQ8 C

EQ9 D

EQ10 C

EQ11 D

EQ12 E

EQ13 A

EQ14 A

EQ15 D

EQ16 D

Material Quantity

AQ used
SP
SQ used of actual production
SP
?=318,000/10=31,800
10
?=315,000+3,000=318,000
31,500
10
315,000
Usage 3,000(U)

OR
AQ x AP

AQ x SP AQ x 10 =315,000 +3000 =318,000
3,000 U [Usage]
SQ x SP 31,500 x 10 =315,000

AQ =318,000 / 10 =31,800


Cheng Nam Sang 11

EQ17 D

Direct Labour
AH
AR
AH
SR
SH of actual production
SR
10,300

?=154,500+1,500=156,000
?=10,300
15
?=157,500-3,000=154,500
1*10,500=10,500
15
157,500
Rate 1,500(U) Efficiency ?=Rate +Eff=1,500(F)
Efficiency =3,000(F)
Total 1,500(F)
OR

AH x AR AH x AR =154,500 +1,500
1,500 U [Rate]
AH x SR AH x 15 =(157,500 3,000)
3,000 F [Efficiency]
SH x SR (10,500 x 1) x 15 =157,500
Total 1,500 F [Total]

AH x 15 =154,500
AH =10,300

AR =? =(154,500 +1,500) / AH =156,000 / 10,300 =15.15

EQ18 F

VOH
AH
AR
AH
SR
SH of actual production
SR
255,000 1*10,500=10,500
25
262,500
7,500 (F)

OR

AH x AR AH x AR =255,000

AH x SR

SH x SR (10,500 x 1) x 25 =262,500
Total 7,500 F


Cheng Nam Sang 12
EQ19 C

FOH
Actual Budget Applied
50,000 50,000*10,500/10,000=52,500
Volume 2,500F
OR

Actual 45,000

Budget 50,000
2,500 F [Volume]
SH x SR
Applied
(10,500 * 1) * ($50,000/10,000) =$52,500
Total

EQ20
A.
Actual Labor Cost Standard Labor Cost
Actual
Hours
x
Actual
Rate

Actual
Hours
x
Standard
Rate

Standard
Hours
X
Standard
Rate
2,550 x $18.80 2,550 x $15.00 2,890* x $15.00
$47,940 $38,250 $43,350
$9,690U $5,100F

Direct-labor
rate variance

Direct-labor
efficiency variance

*85 units x 34 hours

OR

AH x AR 2,550 x 18.80 =47,940
9,690 U [Rate]
AH x SR 2,550 x 15.00 =38,250
5,100 F [Efficiency]
SH x SR
(Applied)
(85 x 34) x 15.00 =43,350
Total 4,590 U [Total]

B. Yes. A tight labor market often means that premium wages are needed to attract
qualified employees. These wages would give rise to an unfavorable rate variance.

C. Ventura has two favorable variances: labor efficiency and material (paint) quantity.
The favorable efficiency variance indicates that the crew is spending less time than
budgeted, perhaps rushing the jobs and being a bit sloppy. It is also possible that
employees are being somewhat skimpy in their use of paint, using less than expected
(e.g., applying one coat rather than two in certain applications).


Cheng Nam Sang 13
EQ21

Actual Labor Cost Standard Labor Cost
Actual
Hours
x
Actual
Rate

Actual
Hours
x
Standard
Rate

Standard
Hours
x
Standard
Rate
2,600 x $13.80 2,600 x $14.00 2,400* x $14.00
$35,850 $36,400 $33,600
$520F $2,800U

Direct-labor
rate variance

Direct-labor
efficiency variance

*3,200 units x 0.75 hours

1. Standard hours allowed: 2,400
2. Actual hours worked: 2,600
3. Actual wage rate: $13.80
OR

AH x AR AH x AR =(36,400 520) =35,880
520 F [Rate]
AH x SR AH x 14 =(33,600 +2,800) =36,400
2,800 U [Efficiency]
SH x SR
(Applied)
[3,200 x (45/60)] x 14 =2,400 x 14 =33,600
Total 2,280 U [Total]

AH =36,400 / 14 =2,600

AR =35,880 / AH =35,880 / 2,600 =13.80

EQ22 D
A. a performance measurement system that emphasizes profit growth. Not just profit
growth
B. an evaluation process that focuses on improving sales and productivity. There are
other factors as well
C. a series of checks and balances based primarily on the information derived from the
financial statements of the organization. Use other information such as customers
complaint
D. a performance measure that evaluates multiple categories of an organizations critical
success factors related to organizational goals.
E. a performance measurement system that focuses exclusively on critical issues
relating to meeting customers expectations such as anticipating customers needs,
after-sale services, and delivery efficiency. The word exclusively is incorrect.
F. none of the above.

EQ23
A. A balanced scorecard is a tool that incorporates a variety of different measures, both
financial and non-financial, in the performance-evaluation process. The measures are
critical to a firm's success and are tied to organizational strategy. The goal of a
balanced scorecard is to allow improvement in a number of broad-reaching areas
rather than permit a manager to improve only a small facet of the business at the
expense of others. Typical factors are often divided into four categories: financial,
customer, learning and growth, and internal operations.


Cheng Nam Sang 14
B. Answers will vary but often include market share, queue time, results of a customer
quality survey, number of customer complaints, number of order errors, and number
of repeat customers.

C. Pay creditors on a timely basis: stipulated end-of-period cash balance and current
ratio
Shareholder satisfaction: growth in earnings per share, increases in per-share market
price of Bob's stock, price-earnings ratio
Profitability improvement: gross margin growth rates, earnings growth rates

EQ24. [b] EQ25. [d]

EQ 26. [d] From the information provided, Zachary's flexible-budget cost formula is
$85,000 + $31.50 X, where X is the number of units produced. Inserting 1,000 for X
gives $85,000 + ($31.50 x 1,000) which equals $116,500.

EQ27. [c] EQ28. [a] EQ29. [b] EQ30. [a]

EQ31. [c] EQ32[d] EQ33 [b]

EQ34. [d] As stated, the company determines the price variance based on the material
purchased. Therefore, the price variance is ($3.20 - $3.00) x 500,000 pounds which is
$100,000. The variance is unfavorable since the actual price paid ($3.20) exceeds the
standard price ($3.00).

EQ35. [d] The labor usage variance is found by multiplying the standard labor rate ($8)
by the difference between the actual hours worked (145,000) and the number of hours
that should have been taken to produce 15,000 units (150,000 = 15,000 x 10
hrs./unit). The resulting variance is $40,000, which is favorable because fewer hours
were worked than should have been for the production level achieved.

EQ36. [b] Spending variance = (AH x AR) (AH x SR) = AH x (AR SR)
= 295,000 (145,000 x 2)
= 295,000 290,000
= 5,000 Unfavourable

EQ37. [c] The efficiency variance is the difference between the actual quantity of the
cost-driver activity and the standard quantity allowed, which is then multiplied by the
standard rate. The actual quantity of 145,000 hours is less than the standard allowed
of 150,000 hours. The 5,000 hour difference is multiplied by the standard rate of $2
to arrive at a $10,000 favorable variance.

Efficiency variance =AH x SR SH x SR
=(145,000 x 2) [(15,000 x 10) x 2]
=290,000 300,000
=10,000 Favourable

ACCT102 Management Accounting
Variance Analysis Exercise

Cheng Nam Sang 1
Ming Ming Pte Ltd manufacturers power drills that are sold throughout Singapore. The
company uses standard costs for its budgeting process and compares actual results to
budgeted amounts on a monthly basis. Each month, Ming Mings accounting department
prepares a variance analysis and distributes the report to all responsible parties. Richard Tan,
production manager, is upset about the results for J une. Richard, who is responsible for the
cost of goods manufactured, has implemented several cost-cutting measures in the
manufacturing area and is discouraged by the unfavourable variances in variable costs.

Ming Ming Pte Ltd
Operating Results
For the Month of June
Master
Budget
Actual Variance

Unit sold .. 5,000 4,800 200 U

$000 $000 $000
Revenue ...... 1,200 1,152 48 U
Variable cost ... 760 790 30 U
Contribution margin . 440 362 78 U
Fixed production overhead ........ 180 180
Fixed general administrative cost ... 120 115 5 F
Operating income . 140 67 73

When the master budget was prepared, Ming Mings cost accountant, Ian Yeo, supplied the
following unit costs:

direct material (2kg @$30/kg) ....... $60 direct labour (4hr @$11/hr) ..... $44
variable overhead (4DLH @$9/hr) $36 variable selling per unit ... $12
<DLH =direct labour hour>

The total actual variable costs of $790,000 for J une include $310,008 for direct material,
$232,320 for direct labour, $184,500 for variable overhead, and $63,172 for variable selling
expenses. Ian believes that Ming Mings monthly reports would be more meaningful to
everyone if the company adopted flexible budgeting and prepared more detailed analyses.

REQUIRED:

1. Prepare a flexible budget for Ming Ming Pte Ltd for the month of J une.
2. Calculate all possible variances based on information provided so far.
3. In order to convince everyone about the use flexible budget, Ian has collected further
details from Richard as follows:
Actual material usage and price per unit: 1.9kg @34 per kg
Actual labour hours paid : 21,120 hours @$11 per hour
Actual labour hours work: 19,680 hours (due to non-delivery of materials for 2 days)
Expand the flexible budget variances into more meaningful details and offer possible
explanations for variances that exceed $10,000.
4. Discuss how the revised flexible budget and variance data are likely to impact the
behaviour of Richard Tan, the production manager.

ACCT102 Standard Costing

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ACCT102 Managerial Accounting October 2011

Cheng Nam Sang 1

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