chapter 16 - answer

CHAPTER 16

MANAGEMENT ACCOUNTING - Solutions Manual

Chapter 16 Standard Costs and Operating Performance MeasuresStandard Costs and Operating Performance Measures Chapter 16

CHAPTER 16

STANDARD COSTS AND OPERATING PERFORMANCE MEASURES

I.Questions1.Standard costs are superior to past data for comparison with actual costs because they ask the question Is present performance better than the past?.

2.No. Cost control and cost reduction are not the same, but cost reduction does affect the standards which are used as basis for cost control. Cost reduction means finding ways to achieve a given result through improved design, better methods, new layouts and so forth. Cost reduction results in setting new standards. On the other hand, cost control is a process of maintaining performance at or as new existing standards as is possible.

3.Managerial judgment is the basis for deciding whether a given variance is large enough to warrant investigation. For some items, a small amount of variance may spark scrutiny. For some items, 5%, 10% or 25% variances from standard may call for follow-up. Management may also derive the standard deviation based on past cost data.

4.The techniques for overhead control differ because

1) The size of individual overhead costs usually does not justify elaborate individual control systems;

2) The behavior of individual overhead item is either impossible or difficult to trace to specific lots or operations; and

3) Various overhead items are the responsibility of different people.

5.In the year-to-year planning of fixed costs, managers must consider:

1) the projected maximum and minimum levels of activity,

2) prices of cost factors, and

3) changes in facilities and organization.

6.Four criteria for selecting a volume base are:

1) Cause of cost variability.

2) Adequacy of control over the base.

3) Independence of activity unit.

4) Ease of understanding.

7.Non-volume factors which cause costs to vary are:

1) Changes in plant and equipment.

2) Changes in products made, materials used, or methods of manufacturing.

3) Changes in prices paid for cost factors.

4) Changes in managerial policy toward costs.

5) Lag between cost incurrence and measurement of volume.

8.A budget is usually expressed in terms of total pesos, whereas a standard is expressed on a per unit basis. A standard might be viewed as the budgeted cost for one unit.

9.Under management by exception, managers focus their attention on operating results that deviate from expectations. It is assumed that results that meet expectations do not require investigation.

10.Separating an overall variance into a price variance and a quantity variance provides more information. Moreover, prices and quantities are usually the responsibilities of different managers.

11.The materials price variance is usually the responsibility of the purchasing manager. The materials quantity variance is usually the responsibility of the production managers and supervisors. The labor efficiency variance generally is also the responsibility of the production managers and supervisors.

12.If used as punitive tools, standards can breed resentment in an organization and undermine morale. Standards must never be used as an excuse to conduct witch-hunts, or as a means of finding someone to blame for problems.

13.Several factors other than the contractual rate paid to workers can cause a labor rate variance. For example, skilled workers with high hourly rates of pay can be given duties that require little skill and that call for low hourly rates of pay, resulting in an unfavorable rate variance. Or unskilled or untrained workers can be assigned to tasks that should be filled by more skilled workers with higher rates of pay, resulting in a favorable rate variance. Unfavorable rate variances can also arise from overtime work at premium rates.14.Poor quality materials can unfavorably affect the labor efficiency variance. If the materials create production problems, a result could be excessive labor time and therefore an unfavorable labor efficiency variance. Poor quality materials would not ordinarily affect the labor rate variance.

15.If labor is a fixed cost and standards are tight, then the only way to generate favorable labor efficiency variances is for every workstation to produce at capacity. However, the output of the entire system is limited by the capacity of the bottleneck. If workstations before the bottleneck in the production process produce at capacity, the bottleneck will be unable to process all of the work in process. In general, if every workstation is attempting to produce at capacity, then work in process inventory will build up in front of the workstations with the least capacity.16.A quantity standard indicates how much of an input should be used to make a unit of output. A price standard indicates how much the input should cost.

17.Chronic inability to meet a standard is likely to be demoralizing and may result in decreased productivity.

18.A variance is the difference between what was planned or expected and what was actually accomplished. A standard cost system has at least two types of variances. A price variance focuses on the difference between the standard price and the actual price of an input. A quantity variance is concerned with the difference between the standard quantity of the input allowed for the actual output and the actual amount of the input used.II.Matching Type 1. E3. C5. A7. J9. I

2. G4. H6. D8. B10. F

III.Exercises

Exercise 1 (Setting Standards; Preparing a Standard Cost Card)

Requirement 1

Cost per 2 kilogram container

P6,000.00

Less: 2% cash discount

120.00

Net cost

P5,880.00

Add freight cost per 2 kilogram container (P1,000 10 containers)

100.00

Total cost per 2 kilogram container (a)

P5,980.00

Number of grams per container (2 kilograms 1000 grams per kilogram) (b)

2,000

Standard cost per gram purchased (a) (b)

P2.99

Requirement 2Beta ML12 required per capsule as per bill of materials

6.00grams

Add allowance for material rejected as unsuitable (6 grams 0.96 = 6.25 grams;

6.25 grams 6.00 grams = 0.25 grams)

0.25grams

Total

6.25grams

Add allowance for rejected capsules (6.25 grams 25 capsules)

0.25grams

Standard quantity of Beta ML12 per salable capsule

6.50grams

Requirement 3ItemStandard Quantity per CapsuleStandard Price per GramStandard Cost per Capsule

Beta ML126.50 gramsP2.99P19.435

Exercise 2 (Material Variances)

Requirement 1

Number of chopping blocks

4,000

Number of board feet per chopping block

2.5

Standard board feet allowed

10,000

Standard cost per board foot

P1.80

Total standard cost

P18,000

Actual cost incurred

P18,700

Standard cost above

18,000

Total varianceunfavorable

P 700

Requirement 2

Actual Quantity of Inputs, at Actual PriceActual Quantity of Inputs, at Standard PriceStandard Quantity Allowed for Output, at Standard Price

(AQ AP)(AQ SP)(SQ SP)

P18,70011,000 board feet P1.80 per board foot10,000 board feet P1.80 per board foot

= P19,800= P18,000

Alternatively:

Materials Price Variance = AQ (AP SP)

11,000 board feet (P1.70 per board foot* P1.80 per board foot) =

P1,100 F

* P18,700 11,000 board feet = P1.70 per board foot.

Materials Quantity Variance = SP (AQ SQ)

P1.80 per board foot (11,000 board feet 10,000 board feet) = P1,800 U

Exercise 3 (Labor and Variable Overhead Variances)

Requirement 1

Number of units manufactured

20,000

Standard labor time per unit

0.4*

Total standard hours of labor time allowed

8,000

Standard direct labor rate per hour

P6

Total standard direct labor cost

P48,000

*24 minutes 60 minutes per hour = 0.4 hour

Actual direct labor cost

P49,300

Standard direct labor cost

48,000

Total varianceunfavorable

P1,300

Requirement 2

Actual Hours of Input, at the Actual RateActual Hour of Input, at Standard RateStandard Hours Allowed for Output, at the Standard Rate

(AH AR)(AH SR)(SH SR)

P49,3008,500 hours P6 per hour 8,000 hours* P6 per hour

= P51,000= P48,000

*20,000 units 0.4 hour per unit = 8,000 hours

Alternative Solution:

Labor Rate Variance = AH (AR SR)

8,500 hours (P5.80 per hour* P6.00 per hour) = P1,700 F

*P49,300 8,500 hours = P5.80 per hour

Labor Efficiency Variance = SR (AH SH)

P6 per hour (8,500 hours 8,000 hours) = P3,000 U

Requirement 3

Actual Hours of Input, at the Actual RateActual Hour of Input, at Standard RateStandard Hours Allowed for Output, at the Standard Rate


P39,1008,500 hours P4 per hour8,000 hours P4 per hour

= P34,000= P32,000

Alternative Solution:

Variable Overhead Spending Variance = AH (AR SR)

8,500 hours (P4.60 per hour* P4.00 per hour) = P5,100 U

*P39,100 8,500 hours = P4.60 per hour

Variable Overhead Efficiency Variance = SR (AH SH)

P4 per hour (8,500 hours 8,000 hours) = P2,000 U

Exercise 4 (Working Backwards from Labor Variances)

Requirement 1

If the total variance is P330 unfavorable, and if the rate variance is P150 favorable, then the efficiency variance must be P480 unfavorable, since the rate and efficiency variances taken together always equal the total variance.

Knowing that the efficiency variance is P480 unfavorable, one approach to the solution would be:

Efficiency Variance = SR (AH SH)

P6 per hour (AH 420 hours*) = P480 U

P6 per hour AH P2,520 = P480**

P6 per hour AH = P3,000

AH = 500 hours

*168 batches 2.5 hours per batch = 420 hours

**When used with the formula, unfavorable variances are positive and favorable variances are negative.

Requirement 2

Knowing that 500 hours of labor time were used during the week, the actual rate of pay per hour can be computed as follows:

Rate Variance = AH (AR SR)

500 hours (AR P6 per hour) = P150 F

500 hours AR P3,000 = P150*

500 hours AR = P2,850

AR = P5.70 per hour

*When used with the formula, unfavorable variances are positive and favorable variances are negative.

Exercise 5 (Direct Labor Variances)

1.Number of meals prepared

6,000

Standard direct labor-hours per meal

0.20

Total direct labor-hours allowed

1,200

Standard direct labor cost per hour

P9.50

Total standard direct labor cost

P11,400

Actual cost incurred

P11,500

Total standard direct labor cost (above)

11,400

Total direct labor variance

P100Unfavorable

2.Actual Hours of Input, at the Actual RateActual Hours of Input, at the Standard RateStandard Hours Allowed for Output, at the Standard Rate

(AHAR)(AHSR)(SHSR)

1,150 hours

P10.00 per hour1,150 hours

P9.50 per hour1,200 hours

P9.50 per hour

= P11,500= P10,925= P11,400

(((

Rate Variance,

P575 UEfficiency Variance,

P475 F

Total Variance, P100 U

Alternatively, the variances can be computed using the formulas:

Labor rate variance= AH(AR SR)

= 1,150 hours (P10.00 per hour P9.50 per hour)

= P575 U

Labor efficiency variance= SR(AH SH)

= P9.50 per hour (1,150 hours 1,200 hours)

= P475 F

Exercise 6 (Variable Overhead Variances)

1.Number of items shipped

140,000

Standard direct labor-hours per item

0.04

Total direct labor-hours allowed

5,600

Standard variable overhead cost per hour

P2.80

Total standard variable overhead cost

P15,680

Actual variable overhead cost incurred

P15,950

Total standard variable overhead cost (above)

15,680

Total variable overhead variance

P270Unfavorable

2.Actual Hours of Input, at the Actual RateActual Hours of Input, at the Standard RateStandard Hours Allowed for Output, at the Standard Rate

(AHAR)(AHSR)(SHSR)

5,800 hours

P2.75 per hour*5,800 hours

P2.80 per hour 5,600 hours

P2.80 per hour

= P15,950= P16,240= P15,680

(((

Variable overhead spending variance, P290 FVariable overhead efficiency variance, P560 U

Total variance, P270 U

*P15,950 5,800 hours =P2.75 per hour

Alternatively, the variances can be computed using the formulas:

Variable overhead spending variance:

AH(AR SR)= 5,800 hours (P2.75 per hour P2.80 per hour)

= P290 F

Variable overhead efficiency variance:

SR(AH SH)= P2.80 per hour (5,800 hours 5,600 hours)

= P560 UIV.ProblemsProblem 1 (Comprehensive Variance Analysis)

Requirement 1

a.Actual Quantity of Inputs, at the Actual PriceActual Quantity of Inputs, at Standard PriceStandard Quantity Allowed for Output, at the Standard Price


25,000 pounds x

P2.95 per pound25,000 pounds xP2.50 per pound20,000 pounds* x

P2.50 per pound

= P73,750= P62,500= P50,000

* 5,000 metal molds 4.0 pounds per metal mold = 20,000 pounds

Alternatively:


25,000 pounds (P2.95 per pound P2.50 per pound) = P11,250 U


P2.50 per pound (19,800 pounds 20,000 pounds) = P500 F

b.Actual Hours of Input, at the Actual RateActual Hours of Input, at the Standard RateStandard Hours Allowed for Output, at the Standard Rate


3,600 hours x

P8.70 per hour3,600 hours xP9.00 per hour3,000 hours* x

P9.00 per hour

= P31,320= P32,400= P27,000

* 5,000 metal molds 0.6 hour per metal mold = 3,000 hours

Alternatively:


3,600 hours (P8.70 per hour P9.00 per hour) = P1,080 F


P9.00 per hour (3,600 hours 3,000 hours) = P5,400 U

c.Actual Hours of Input, at the Actual RateActual Hours of Input, at the Standard RateStandard Hours Allowed for Output, at the Standard Rate


P4,3201,800 hours P2 per hour1,500 hours* P2 per hour

= P3,600= P3,000

*5,000 metal molds 0.3 hours per metal mold = 1,500 hours

Alternatively:


1,800 hours (P2.40 per hour* P2.00 per hour) = P720 U

* P4,320 1,800 hours = P2.40 per hour


P2.00 per hour (1,800 hours 1,500 hours) = P600 U

Requirement 2

Summary of variances:

Material price variance

P11,250U

Material quantity variance

500F

Labor rate variance

1,080F

Labor efficiency variance

5,400U

Variable overhead spending variance

720U

Variable overhead efficiency variance

600U

Net variance

P16,390U

The net unfavorable variance of P16,390 for the month caused the plants variable cost of goods sold to increase from the budgeted level of P80,000 to P96,390:

Budgeted cost of goods sold at P16 per metal mold

P80,000

Add the net unfavorable variance (as above)

16,390

Actual cost of goods sold

P96,390

This P16,390 net unfavorable variance also accounts for the difference between the budgeted net operating income and the actual net loss for the month.

Budgeted net operating income

P15,000

Deduct the net unfavorable variance added to cost of goods sold for the month

16,390

Net operating loss

P(1,390)

Requirement 3

The two most significant variances are the materials price variance and the labor efficiency variance. Possible causes of the variances include:

Materials Price Variance:Outdated standards, uneconomical quantity purchased, higher quality materials, high-cost method of transport.

Labor Efficiency Variance:Poorly trained workers, poor quality materials, faulty equipment, work interruptions, inaccurate standards, insufficient demand.

Problem 2 1. 1,000 units4. 14,900 lbs.

2. 25,000 lbs.5. 3,100 hours

3. P2.01 per lb.6. P3.98 per hour

Problem 3 Material mix variance:

Actual quantity x Standard price

Material A (8,000 x P0.30)P2,400

Material B (2,400 x P0.20)480

Material C (2,800 x P0.425) 1,190P4,070

Less: Total actual input x Average

Standard price (13,200 x 0.30*) 3,960

Unfavorable Mix Variance

P 110

*Average Standard price =

= P0.30

Material yield variance:

Total actual input at Average Standard price

P3,960

Less: Total actual output at Standard raw material cost

(10,000 x 0.36**)

3,600

Unfavorable yield variance

P 360

**Standard Material Cost =

= P0.36

Problem 4 (Comprehensive Variance Analysis; Journal Entries)Requirement 1

a.Actual Quantity of Inputs, at Actual PriceActual Quantity of Inputs, at Standard PriceStandard Quantity Allowed for Output, at Standard Price


21,120 yards x

P3.35 per yard21,120 yards x P3.60 per yard 19,200 yards* x

P3.60 per yard

= P70,752= P76,032= P69,120

* 4,800 units 4.0 yards per unit = 19,200 yards

Alternatively:


21,120 yards (P3.35 per yard P3.60 per yard) = P5,280 F


P3.60 per yard (21,120 yards 19,200 yards) = P6,912 Ub.Raw Materials (21,120 yards @ P3.60 per yard)

76,032

Materials Price Variance (21,120 yards @ P0.25 per yard F)

5,280

Accounts Payable (21,120 yards @ P3.35 per yard)

70,752

Work in Process (19,200 yards @ P3.60 per yard)

69,120

Materials Quantity Variance (1,920 yards U @ P3.60 per yard)

6,912

Raw Materials (21,120 yards @ P3.60 per yard)

76,032

Requirement 2

a.Actual Hours of Input, at the Actual RateActual Hours of Input, at the Standard RateStandard Hours Allowed for Output, at the Standard Rate


6,720 hours* x

P4.85 per hour6,720 hours xP4.50 per hour7,680 hours** x

P4.50 per hour

= P32,592= P30,240= P34,560

*4,800 units 1.4 hours per unit = 6,720 hours

**4,800 units 1.6 hours per unit = 7,680 hours

Alternatively:


6,720 hours (P4.85 per hour P4.50 per hour) = P2,352 U


P4.50 per hour (6,720 hours 7,680 hours) = P4,320 F

b.Work in Process (7,680 hours @ P4.50 per hour)

34,560

Labor Rate Variance (6,720 hours @ P0.35 per hour U)

2,352

Labor Efficiency Variance (960 hours F @ P4.50 per hour)

4,320

Wages Payable (6,720 hours @ P4.85 per hour)

32,592

Requirement 3

Actual Hours of Input, at the Actual RateActual Hours of Input, at the Standard RateStandard Hours Allowed for Output, at the Standard Rate


6,720 hours x

P2.15 per hour6,720 hours x P1.80 per hour7,680 hours x

P1.80 per hour

P14,448= P12,096= P13,824

Alternatively:


6,720 hours (P2.15 per hour P1.80 per hour) = P2,352 U


P1.80 per hour (6,720 hours 7,680 hours) = P1,728 F

Requirement 4

No. This total variance is made up of several quite large individual variances, some of which may warrant investigation. A summary of variances is shown on the next page.Materials:

Price variance

P5,280F

Quantity variance

6,912UP1,632U

Labor:

Rate variance

2,352U

Efficiency variance

4,320F1,968F

Variable overhead:

Spending variance

2,352U

Efficiency variance

1,728F624U

Net unfavorable variance

P288U

Requirement 5

The variances have many possible causes. Some of the more likely causes include:

Materials variances:

Favorable price variance: Fortunate buy, inaccurate standards, inferior quality materials, unusual discount due to quantity purchased, drop in market price.

Unfavorable quantity variance: Carelessness, poorly adjusted machines, unskilled workers, inferior quality materials, inaccurate standards.

Labor variances:

Unfavorable rate variance: Use of highly skilled workers, change in wage rates, inaccurate standards, overtime.

Favorable efficiency variance: Use of highly skilled workers, high quality materials, new equipment, inaccurate standards.

Variable overhead variances:

Unfavorable spending variance: Increase in costs, inaccurate standards, waste, theft, spillage, purchases in uneconomical lots.

Favorable efficiency variance: Same as for labor efficiency variance.

V.Multiple Choice Questions1. C11. B21. A31. A41. B

2. C12. A22. C32. B42. C

3. A13. B23. C33. B43. D

4. B14. C24. C34. D44. A

5. A15. A25. C35. B45. B

6. B16. D26. D36. B

7. C17. D27. E37. C

8. C18. A 28. B38. D

9. B19. D29. B39. D

10. B20. B30. A40. A

P 720

2,400

P 720

2,000

Price Variance,

P1,100 F

Quantity Variance,

P1,800 U


Rate Variance,

P1,700 F

Efficiency Variance,

P3,000 U

Total Variance, P1,300 U

Spending Variance,

P5,100 U


P2,000 U


Price Variance,

P11,250 U

19,800 pounds x P2.50 per pound

= P49,500

Quantity Variance,

P500 F

Rate Variance,

P1,080 F


P5,400 U


Spending Variance,

P720 U


P600 U


Rate Variance,

P2,352 U


Quantity Variance,

P6,912 U

Price Variance,

P5,280 F


P4,320 F

Total Variance, P1,968 F

Spending Variance,

P2,352 U


P1,728 F


16-116-1616-17

chapter 16 - answer

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