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Chapter 11: Standard Costs and Variance Analysis
229
Chapter 11
Standard Costs and VarianceAnalysis
LEARNING OBJECTIVES
Chapter 11 addresses the following questions:
LO1 Explain the role of variance analysis in the strategic management process.
LO2 Describe a standard costing system and how it is used.
LO3 Calculate and journalize direct cost variances.
LO4 Analyze and use direct cost variance information.
LO5 Calculate and journalize variable and fixed overhead variances.
LO6 Analyze and use overhead variance information.
LO7 Journalize closing entries for manufacturing cost variances.
LO8 Calculate and analyze profit-related variances. (Appendix 11A)
These learning questions (LO1 through LO8) are cross-referenced in the textbook to individual
exercises and problems.
© 2012 John Wiley and Sons Canada, Ltd. 230 Cost Management
QUESTIONS
11.1 Managers need information about the costs of direct materials and direct labour as well as
whether direct materials and labour have been used efficiently. If the price and efficiency
variances are combined, it is impossible to separate the causes of the variance into
potential changes in prices of direct materials (or the labour hourly wage) and changes in
the amount of materials (or labour hours) used to manufacture the product. Managers
need specific information to better monitor operations and investigate changes.
11.2 Utilities are considered fixed costs. These include phone service, natural gas, and
electricity. The use of natural gas and electricity is affected by weather patterns.
Because weather patterns change, these costs cannot be perfectly predicted. There may
be unanticipated price changes in the cost of utilities. In addition, employees could be
careless in their use of electricity or telephones. Therefore, variances occur regularly.
11.3 Variances compare actual costs to budgeted or standard costs. As such, they reflect a
diagnostic control system that indicates whether or not preset goals are met. Managers
investigate large variances, particularly unfavorable variances, to investigate reasons why
plans are not met and to consider taking corrective action.
11.4 GAAP requires that revenues and expenses be matched. Revenues from the sales of units
must be matched to the costs of producing those same units. When a standard cost
system is used, production costs are recorded at standard rather than at actual costs. At
the end of the accounting period adjusting entries are made to close the variance accounts
and to distribute the amounts to inventory and cost of goods sold. These entries
simultaneously close the variance accounts and adjust inventory and cost of goods sold to
reflect actual costs for the period.
11.5 For a simple but meaningful variance report for costs, the following variances should be
calculated.
• Price and efficiency variances for direct materials and direct labour provide
information about price changes, purchasing efficiencies and the use of materials.
Managers can correct some of these problems to insure cost-effective production.
• The variable overhead spending variance and the fixed overhead budget
variance provide information about whether costs are being kept under control.
• The efficiency variance for variable overhead and production volume
variances do not provide any incremental information about whether inputs were
purchased or used efficiently.
11.6 At the end of the accounting period, the following variances need to be recorded: direct
materials and direct labour price and efficiency variances, variable overhead spending
variance, fixed overhead budget variance, variable overhead efficiency variance, and
production volume variance. If the sum of these is immaterial, it is closed to cost of
goods sold. If the sum is material, it is prorated across inventory and COGS.
© 2012 John Wiley and Sons Canada, Ltd. Chapter 11: Standard Costs and Variance Analysis 231
11.7 Managers monitor variances that are large and unexpected. Sometimes a minimum dollar
amount is set as a criteria so that only variances greater than that amount are investigated.
Managers make trade-offs between the costs of investigating and the benefit from
improving the process or standard. Trends in variances also may affect whether a
variance is investigated. If accountants know a variance is increasing over time, they
may decide to investigate to identify ways to reverse a negative trend or to modify future
standards for a positive trend.
11.8 The cost categories that are measured and monitored in a given organization depend on
several factors, including the following:
• Nature of goods or services: Manufacturers monitor input prices and
efficiency of labour and materials, whereas service organizations monitor cost per
service provided, which may not include materials. All organizations monitor
fixed costs, although the type of fixed costs varies widely with the type of
business.
• Cost accounting system used: The cost categories will be more precise with
more complex cost accounting systems. An organization with an ABC system
that separates costs into flexible and committed categories could develop
standards and measure variances for every activity performed. Alternatively, only
broad categories may be tracked, such as the traditional direct materials and direct
labour categories.
• Costs that managers consider important: Overhead costs are often aggregated
together and include indirect costs such as oil for machine maintenance. While
these costs may not be individually important, they are often monitored as part of
the larger category of overhead costs.
• Cost/benefit trade-off for monitoring individual costs: For those costs already
reported by the accounting system, such as direct labour in a job costing system,
the cost to develop standards and monitor variances is probably low, and the
benefit could be relatively high if such monitoring encourages labour to be more
efficient. However, other costs, such as indirect materials used during set-ups,
may be expensive to track. The benefit from tracking these costs may be low if
only very small amounts of materials are used per set-up. These costs are likely
to be aggregated into overhead.
11.9 Standard costs are often set using the most recent year’s data. Historical trends may be
analyzed and used. Sometimes industrial engineers develop standards by analyzing the
manufacturing or service delivery process.
11.10 Recurring favourable variances may indicate that some process has improved. These
should be investigated so that standard production practices reflect the process
improvements. Variances may also reflect opportunities to examine the manufacturing
process and quality of materials to determine improvements. Sometimes the standard is
© 2012 John Wiley and Sons Canada, Ltd. 232 Cost Management
wrong, and the monitoring process is improved by changing the standard to reflect
current operations.
11.11 When the direct materials price variance is large and favourable while direct materials
efficiency variance is large and unfavourable, it is possible that lower quality materials
are being purchased. This could have a negative effect on the efficiency variance if
defective materials are being discarded. Both purchasing and production personnel
should be asked whether there has been a change in the quality of materials purchased.
Production personnel should also be asked to explain the unfavourable efficiency
variances.
11.12 If the direct material price variance is recorded at the time of purchase, direct materials
are recorded in inventory at standard cost and do not need to be tracked by purchase date
and purchase price. This reduces bookkeeping time and effort and simplifies inventory
control. It also clarifies that the price variance occurs at the time of purchase rather than
at the time direct materials are used.
11.13 Anchoring bias is a term that refers to a tendency to overly rely on one particular and
often irrelevant piece of information while ignoring other relevant information. For
example, at the end of an accounting period, management may budget for very high sales
revenue next period based solely on the high sales volumes achieved in the prior period,
even if the sales were due to a temporary consumer trend. Similarly, costs are often
budgeted based largely on prior period costs without taking into account opportunities for
greater cost efficiency.
11.14 The contribution margin variance calculates the effects of changes in contribution
margins, given the actual level of sales. The contribution margin sales volume variance
calculates the effects of changes in units sold, given the standard contribution margins.
This information helps managers focus on the reason that the contribution margin is
changing. Managers may want to focus on the underlying variable costs, or pricing, or
consider product emphasis. These variances help determine whether it’s a change in the
volume of sales, or change in the price or variable cost that causes the variance. When
sales are slow, prices could be lowered, which would be reflected in the contribution
margin variance. These types of changes should be investigated.
11.15 The sales price variance reflects the difference between standard and actual selling prices
for the volume of units actually sold. This variance is favourable if the actual selling
price exceeds the standard price, and it is unfavourable if the reverse is true. The revenue
sales quantity variance reflects the difference between the standard and actual quantity of
units sold at the standard selling price. This variance will be favourable when actual
quantities exceed standard quantities, and it will be unfavourable otherwise. These
variances help managers determine whether changes in revenues are driven by changes in
selling price or changes in quantities sold. To remedy any problems, this information is
quite useful.
© 2012 John Wiley and Sons Canada, Ltd. Chapter 11: Standard Costs and Variance Analysis 233
11.16 Each individual type of product in a product mix has a specific contribution margin. As
the proportion of each product changes, that is, as the product mix changes, the total
contribution margin changes, increasing when the proportion of products with larger
contribution margins increase and decreasing as they decrease.
© 2012 John Wiley and Sons Canada, Ltd. 234 Cost Management
MULTIPLE-CHOICE QUESTIONS
11.17 Generico Ltd. uses an injection device to regulate the flow of raw materials into moulds
in itsproduction process. When the injector device is “out of control,” the entire
production line mustbe shut down.
The production data for the past month indicated an unfavourable raw material cost
variance,as follows:
Budgeted production volume 40,000 units
Actual production volume 39,000 units
Budgeted raw materials (40,000 x 2 grams @ $10 per gram) $800,000
Actual raw materials (39,000 x 2.2 grams @ $12 per gram) 1,029,600
Variance (unfavourable) $229,600
The variance was either caused by the injector device being out of control or by random
factorsthat would disappear on their own. The production manager must decide whether
to shut downproduction to investigate the cause of the variance or wait another month.
Data regarding investigation of the cause of the variance are as follows:
Cost to inspect injector device (10 hours @ $300) $3,000
Cost to repair injector device (20 hours @ $300) $6,000
Lost contribution margin during downtime $1,000 per hour
Based on past experience, there is a 10% chance that the injector device is out of control.
If it isout of control and not corrected right away, the net cost to the company until the
next regularlyscheduled maintenance adjustment will be $90,000.
Which of the following represents the materials efficiency variance?
a) $93,600 unfavourable
b) $69,600 unfavourable
c) $78,000 unfavourable
d) $58,000 unfavourable
e) $156,000 unfavourable
Ans: C 39,000 * (2.00-2.20) * $10.00 = ($78,000)
11.18 (Appendix 11A) The budget and actual results for Acme Co. Inc. for the first quarter of
the year are as follows:
Static Budget Actual Results
Unit sales: Regular 40,000 15,000
Deluxe 60,000 65,000
Total 100,000 80,000
Unit selling price: Regular $6 $6
Deluxe $ 12 $ 13
Unit variable costs: Regular $ 4 $ 3
Deluxe $ 7 $ 9
Market size (total units 500,000 480,000
of both products)
© 2012 John Wiley and Sons Canada, Ltd. Chapter 11: Standard Costs and Variance Analysis 235
The total sales (contribution margin) mix variance for the first quarter (rounded to the
nearestthousand) is:
a) Zero
b) $102,000 unfavourable
c) $75,000 unfavourable
d) $17,000 unfavourable
e) $64,000 unfavourable
Ans: C [(40,000*($6-$4) – (15,000*($6-$3)] +[(60,000*($12-$7) – (65,000*($13-$9)]
11.19 (Appendix 11A) Acme Beds Inc. produces two models of beds: Regular and Majestic.
Budget andactual data were as follows:
Budget Actual
Regular Majestic Regular Majestic
Selling price per unit $300 $800 $325 $700
Sales volume in units 4,500 5,500 7,200 4,800
Variable costs per unit $220 $590 $238 $583
Master Budget Actual
Sales revenue $5,750,000 $5,700,000
Variable costs 4,235,000 4,512,000
Contribution margin 1,515,000 1,188,000
Fixed costs 882,500 919,500
Operating income $ 632,500 $ 268,500
Market Data
Expected total market sale of beds 500,000 beds
Actual total market sales of beds 666,667 beds
The sales price variance is:
a) $437,500 unfavourable
b) $300,000 unfavourable
c) $50,000 unfavourable
d) $660,000 unfavourable
e) $69,000 favourable
Ans: B [(4500*$300)-(7200*$325)]+[(5500*$800)-(4800*$700)]
The following information pertains to Questions 11.20 and 11.21: Lynn Company uses a
standardcost system. Overhead is applied on the basis of direct labour hours (DLH), and
the annual practicalcapacity of 42,000 DLH is used in establishing the standard overhead
rates. The following summarizesbudget and actual data for the past year:
Budget Actual
Units produced 100,000 92,000
Direct materials (kilograms) 50,000 47,840
Direct labour hours (DLH) 40,000 37,720
Production costs:
Direct materials $200,000 $ 188,968
© 2012 John Wiley and Sons Canada, Ltd. 236 Cost Management
Direct labour $500,000 $ 471,500
Variable factory overhead $ 80,000 a $ 84,640
Fixed factory overhead $160,000 a $162,000
a Applied.
During the year, 90,000 units were sold. There were no beginning or ending work-in-
processinventories, but there were 3,000 units of finished goods on hand at the end of the
year.
11.20 The standard cost of goods sold for the past year is:
a) $983,000
b) $940,000
c) $874,200
d) $864,800
e) $846,000
Ans: E ($200,000+$500,000+$80,000+$160,000)/100,000*90,000
11.21 The variable factory overhead flexible budget variance is:
a) $12,640 unfavourable
b) $4,560 unfavourable
c) $9,200 unfavourable
d) $11,040 unfavourable
e) $4,600 unfavourable
Ans: D ($80,000/100,000*92000)-($84,640)
© 2012 John Wiley and Sons Canada, Ltd. Chapter 11: Standard Costs and Variance Analysis 237
EXERCISES
11.22 Direct Labour Variance – Sisyphus Company
Labour price variance = (Standard price – Actual price) × Actual labour hours
Standard price = $1,900/950 DLH = $2.00 per DLH
Actual price = $1,850/920 DLH = $2.0109 per DLH
($2 - $2.0109) × 920 DLH = $10 Unfavorable Price Variance
Labour efficiency variance = (Standard hours for output – Actual hours for output) ×
Standard price
(950 - 920) × $2 = $60 Favorable Efficiency Variance
11.23 Direct Labour Variance – Fine Furniture
A. Labour efficiency variance: Standard hours at Standard price – Actual hours at Standard
price = $1,750 – $1,680 = $70 Favorable
B. Labour price variance: Actual hours at Standard price – Actual hours at Actual price =
$1,680 – $1,752 = $72 Unfavorable
11.24 Direct Material Variances – Up North’s
A. Standard quantity of litres per unit:
First calculate the total amount of materials allowed for expected production:
($173,600 / $2.80 per litre) = 62,000 litres
Then calculate the standard quantity of materials per unit:
62,000 litre / 20,000 units = 3.1 litres per unit
B. Direct materials efficiency variance:
(Standard quantity for actual production – Actual quantity for actual production) ×
Standard price
= [(3.1 litre per unit * 19,100 units) – 57,300 litres)]*$2.80 = $5,348 Favourable
© 2012 John Wiley and Sons Canada, Ltd. 238 Cost Management
C. Direct materials price variance:
(Standard price minus Actual price)× Actual materials purchased
= [$2.80 * 57,300 litres) - $163,305 = $2,865 Unfavorable
11.25 Fixed Overhead Variances, Solve for Unknown – Country Pet Clinic
A. Patient hours recorded:
$248,000 allocated fixed overhead cost / $40 per hour = 6,200 patient hours
B. Budgeted fixed overhead:
$40 per hour × 6,000 patient hours = $240,000
C. Production volume variance:
(Standard patient hours for actual patients minus Budgeted patient hours) × Standard
allocation rate per hour
= [(11,000 patients × 0.5 hour per patient) – 6,000 hours] × $40 per hour
= $20,000 Unfavorable
D. Actual fixed overhead:
Budgeted fixed overhead – Actual fixed overhead = Fixed overhead spending variance
$240,000 – Actual fixed overhead = $24,000 Unfavorable
$240,000 + $24,000 = $264,000 Actual fixed overhead
11.26 Fixed and Variable Overhead Variances – Robertson Consulting
A. Spending overhead variances:
Variable overhead spending variance
[($15,300 Budgeted variable overhead / 8,500 Standard hours) – ($14,000 Actual
variable overhead / 8,200 Actual hours)] × 8,200 Actual hours = $760 Favorable
Fixed overhead spending variance = $19,125 - $19,000 = $125 Favorable
B. Overhead allocation rates:
Fixed overhead rate: $19,125 Budgeted cost / 8,500 Estimated hours = $2.25 per hour
Variable overhead rate: $15,300 Budgeted cost / 8,500 Estimated hours = $1.80 per hour
© 2012 John Wiley and Sons Canada, Ltd. Chapter 11: Standard Costs and Variance Analysis 239
C. Fixed overhead volume variance:
(8,300 Standard hours for actual volume – 8,500 Estimated hours) × $2.25 Fixed
overhead rate = $450 Unfavorable
D. Variable overhead efficiency variance:
(8,300 Standard hours for actual volume – 8,200 Actual hours) × $1.80 Variable
overhead rate = $180 Favorable
11.27 Direct Labour Variances, Overhead Spending Variance - Kitchen Tile Company
A. This question requires a missing piece of information: the actual number of hours
worked. However, because the labour efficiency variance is given, the variance formula
can be used to solve for actual labour hours as follows:
Labour efficiency variance = (Standard hours – Actual hours) x Standard price
The variance amount is given as $6,720 Favourable, and the standard labour price is
given as $24.00 per hour. The number of standard labour hours is calculated as follows:
Actual production = 18,000 tiles
Standard efficiency is 6 tiles per labour hour
Standard number of labour hours for 18,000 tiles:
= 18,000 tiles/6 tiles per hour
= 3,000 hours
Now solve for actual labour hours using the variance formula:
$6,720 = $24.00 * (3,000 hours – Actual hours)
$6,720/$24 = 3,000 – Actual hours
280 = 3,000 – Actual hours
Actual hours = 3,000 – 280 = 2,720
Quicker approach: The efficiency variance represents the amount by which actual hours
exceed standard hours, times the standard price. This means that the efficiency variance
represents 280 hours ($6,720/$24). Because the variance was favourable, 280 fewer
hours were used than the standard required. For 18,000 tiles, standard labour hours are
3,000 (18,000/6). Therefore, actual hours are 3,000 – 280 = 2,720 hours.
B. The direct labour price variance is calculated using the following formula:
Actual labour hours * (Standard price – Actual price)
= 2,720 hours * ($24.00 - $24.50)
= $1,360 Unfavourable
© 2012 John Wiley and Sons Canada, Ltd. 240 Cost Management
C. The fixed overhead budget (i.e., spending) variance is calculated by simply taking the
difference between standard and actual fixed costs:
Standard fixed costs – Actual fixed costs
= $60,000 - $58,720
= $1,280 Favourable
11.28 Direct Materials and Labour Variances, Variances to Investigate - Nakatani
Enterprises
A. Standard costs for actual output of 15,342 units:
Direct materials (15,342 units x 0.8 kg. x $2.00/kg.) $24,547.20
Direct labour (15,342 units x 0.2 hrs x $17.00/hour) 52,162.80
Total $76,710.00
B. Direct materials price variance
Standard cost for actual purchases ($2.00/kg x 11,000 kg.) $22,000
Actual cost of purchases 21,730
Price variance $ 270 F
C. Direct materials efficiency variance
Standard quantity of materials for actual output (15,342 x 0.8 kg.) 12,273.6 kg.
Actual quantity of materials used 13,252.0kg.
Variance in kilograms (978.4) kg.
Times standard cost per kilogram $2.00
Efficiency variance $(1,956.80) U
D. Direct labour price variance
Standard cost for actual labour hours ($17 x 2,730 hours) $46,410
Actual labour cost 47,000
Price variance $ (590) U
E. Direct labour efficiency variance
Standard labour hours for actual output (15,342 x 0.2 hours) 3,068.40
Actual labour hours 2,730.00
Variance in hours 338.4 hours
Times standard cost per hour $ 17.00
Efficiency variance $5,752.80 F
F. If managers use 10% of total direct costs as the criteria for investigation, none of these
variances would be investigated. However, the direct labour efficiency variance is
relatively large compared to total direct labour cost at 11% ($5,752.80/$52,162.80).
Some managers may want to investigate this variance, especially if this company is
concerned about quality as a strategy. If quality has decreased as a result of this
favourable variance, defective or low quality units could affect Nakatani’s reputation and
future revenues if customers are disgruntled. If production processes have improved, and
© 2012 John Wiley and Sons Canada, Ltd. Chapter 11: Standard Costs and Variance Analysis 241
there is no adverse change in quality, managers might want to change the labour quantity
standard.
11.29 Direct Materials and Direct Labour Variances, Journal Entries - Nell Company
A.
Direct material price variance [($0.20 - $0.17) x 100,000] $3,000 F
Direct material efficiency variance [(5 * 10,000 - 60,000) x $0.20] 2,000 U
Direct labour price variance [($7.00 - $7.20) x 3,900] 780 U
Direct labour efficiency variance [(0.4 * 10,000 - 3,900) x $7.00] 700 F
B. Journal entries:
Raw materials inventory (100,000 lbs at $0.20/kg.) $20,000
Direct materials price variance $3,000
Accounts payable $17,000
Work in process inventory (5*10,000*$0.20) $10,000
Direct materials efficiency variance $2,000
Raw materials inventory (60,000 * $0.20) $12,000
Work in process inventory (0.4*10,000*$7.00) $28,000
Direct labour price variance $780
Direct labour efficiency variance $700
Wages payable (3,900 * $7.20) $28,080
11.30 Direct Labour Variances, Solve for Unknowns – Chase Company
A. The exercise provides only partial information, so the standard hourly pay rate for direct
labour must be calculated in a series of steps.
First, determine the direct labour budget:
Total direct labour budget = 7,000 units × Standard DL cost per unit = $168,000
Standard DL cost per unit = $168,000 / 7,000 units = $24
Second, determine the direct labour flexible budget:
Standard DL budget for actual volume (i.e., DL flexible budget)
= 7,200 units × $24 DL cost per unit = $172,800
© 2012 John Wiley and Sons Canada, Ltd. 242 Cost Management
Third, use the preceding calculations and the direct labour variance information to
determine total actual direct labour costs and total actual labour hours:
Standard DL cost for actual volume – Actual DL cost = Total DL variance
$172,800 – Actual DL cost = $1,660 Unfavourable
Actual DL cost = $172,800 + $1,660 = $174,460
Total actual DL cost = Actual DL hours × Actual DL cost per hour
$174,460 = Actual DL hours × $12.20 per hour
Actual DL hours = $174,460 / $12.20 per hour = 14,300 hours
Fourth, use the preceding calculations and the direct labour price variance to calculate
actual direct labour hours at the standard rate:
Actual DL hours at standard rate – Actual DL hours at actual rate = DL price
variance
Actual DL hours at standard rate – $174,460 = $2,860 Unfavourable
Actual DL hours at standard rate = $174,460 – $2,860 = $171,600
Finally, use the preceding information to calculate the standard wage rate:
Actual DL hours × Standard wage Rate = Actual DL hours at standard rate
14,300 hours × Standard wage rate = $171,600
Standard wage rate = $171,600 / 14,300 hours = $12 per hour
B. The standard direct labour hours per unit can be calculated using the total direct cost per
unit and the standard direct labour cost per hour (see calculations in Part A):
Standard DL cost per unit = Standard DL hours per unit × Standard DL cost per
hour
$24 per unit = Standard DL hours per unit × $12 per hour
Standard DL hours = $24 per unit / $12 per hour = 2 hours per unit
C. Actual direct labour hours = 14,300 (see calculations in Part A)
D. Direct labour efficiency variance:
(Standard DL hours for actual volume – Actual DL hours) × Standard rate per
hour
= [(2 hours per unit × 7,200 units) – 14,300 hours] ×$12 per hour
= $1,200 Favourable
E. Journal entries for direct labour
© 2012 John Wiley and Sons Canada, Ltd. Chapter 11: Standard Costs and Variance Analysis 243
Work in process inventory (7,200*2.00*$12.00) $172,800
Direct labour price variance $2,860
Direct labour efficiency variance $1,200
Wages payable (14,300*$12.20) $174,460
11.31 Variable and Fixed Overhead Variances, Journal Entries - Derf Company
Standard fixed overhead is $135,000 x 0.20 = $27,000
Standard variable overhead is $135,000 x 0.80 = $108,000
The standard fixed overhead allocation rate is $27,000/(9,000 x 2) = $1.50 per hour
The standard variable overhead allocation rate is $108,000/(9,000 x 2) = $6.00 per hour
A. The variable overhead spending variance is:
[$6.00 – ($108,500/17,200)] x 17,200 = $5,300 U
B. The variable overhead efficiency variance is:
[8,500 * 2 - 17,200] x $6 = $1,200 U
C. The fixed overhead spending (budget) variance is:
$27,000 - $28,000 = $1,000 U
D. The fixed production volume variance is:
$1.50 x [(8,500 x 2) – (9,000 x 2)] = $1,500 U
E. Journal entries
Variable overhead cost control (actual cost) $108,500
Accounts payable and other accounts $108,500
Work in Process inventory (8,500 x 2 hrs x $6/hr) 102,000
Variable overhead cost control 102,000
Variable overhead spending variance $5,300
Variable overhead efficiency variance $1,200
Variable overhead cost control $6,500
Fixed overhead cost control $28,000
Accounts payable and other accounts $28,000
WIP inventory (8,500 x 2 x $1.50) $25,500
Fixed overhead cost control $25,500
© 2012 John Wiley and Sons Canada, Ltd. 244 Cost Management
Fixed overhead spending (budget) variance $1,000
Production volume variance $1,500
Fixed overhead cost control $2,500
a
Ending WIP, finished goods, and/or COGS $9,000
Variable overhead spending variance $5,300
Variable overhead efficiency variance $1,200
Fixed overhead spending (budget) variance $1,000
Production volume variance $1,500
a
The total variance of $9,000 U would be prorated based on the ending balances
in work-in-process inventory, finished goods inventory, and cost of goods sold.
11.32 Profit-Related Variances (Appendix 11A) – Sunflower Company
A. Contribution Margin Sales Mix Variance $277.50 Unfavourable
B. Contribution Margin Sales Quantity Variance $590 Favourable
C. Contribution Margin Sales Volume Variance $312.50 Favourable
11.33 Profit-Related Variances (Appendix 11A) – Afos Sofas Inc.
A.
Sales quantity variance = (Actual sales volume at budgeted mix - Budgeted volume) x
Budgeted contribution margin
Budgeted Budgeted
Sales Volume Sales Mix
Budget 4,000 4,000 / 10,000 = 40%
Deluxe 6,000 6,000 / 10,000 = 60%
Total 10,000
Total Actual units sold = 6,800 + 4,200 = 11,000 units
Standard [(11,000 *0.4) - 4,000] * ($400 - $260) = $56,000 favourable
Deluxe [(11,000 * 0.6) - 6,000] * ($900 - $670) = $138,000 favourable
$56,000 F + $138,000 F = $194,000 favourable
B.
Industry volume variance = (Actual market size - Budgeted market size) x Budgeted
market share x Budgeted average contribution margin
= (220,000 - 250,000) * [(10,000)/250,000] * [$1,940,000/10,000]
© 2012 John Wiley and Sons Canada, Ltd. Chapter 11: Standard Costs and Variance Analysis 245
= -30,000 * 4% * $194 = $232,800 unfavourable
C.
The actual contribution margin per unit was higher for Standard sofas (i.e. $150 actual
versus $140 budget) and was lower for Deluxe sofas (i.e. $165 actual versus $230
budget). However, the contribution margin for Deluxe sofas is higher than for Standard
sofas. Therefore, by selling more of the Standard sofas and less of the Deluxe sofas, an
unfavourable mix variance would result. As well, the decrease in the contribution margin
per Deluxe sofa resulted in a decrease in the actual versus budgeted average contribution
margin [i.e. $155.73 actual versus $194 budget] and a decrease in income. The actual
average variable cost per sofa of $431.55 was lower than the budgeted average variable
cost of $506.00, which should have contributed to increasing, not decreasing, income.
11.34 Profit-Related Variances (Appendix 11A) – Slumber CozyInc.
A.
Sales volume variance = Budgeted contribution margin x (Actual sales volume -
Budgeted sales volume)
Budgeted Regular CM = $300 - $220 = $80
Budgeted Majestic CM = $800 - $590 = $210
Regular $80 * (7,200 - 4,500) = $216,000 favourable
Majestic $210 * (4,800 - 5,500) = $147,000 unfavourable
$216,000 F - $147,000 U = $ 69,000 favourable
B.
Industry volume variance = (Actual market size - Budgeted market size) x Budgeted
market share x Budgeted average contribution margin
= (666,667 - 500,000) * [(4,500 + 5,500)/500,000] * [$1,515,000/(4,500 + 5,500)]
= 166,667 * 0.02 *151.50
= $505,000 F
C.
The actual contribution margin per unit was higher for Regular beds (i.e. $87 actual
versus $80 budget) but was lower for Majestic beds (i.e. $117 actual versus $210 budget).
Although more Regular beds were sold, which would have a positive impact on profits,
the significant decrease in the number of Majestic beds sold [the model with the higher
contribution margin] and the decrease in the contribution margin per Majestic bed
resulted in a decrease in the actual versus budgeted average contribution margin [i.e. $99
actual versus $151.50 budget] and a decrease in income. The actual average variable cost
per bed of $376 was lower than the budgeted average variable cost of $423.50, which
should have contributed to increasing, not decreasing, income.
© 2012 John Wiley and Sons Canada, Ltd. 246 Cost Management
11.35 Profit-Related Variances (Appendix 11A) - Mitchellville Products Company
A. Revenue budget variance = $60,000 – $53,200 = $6,800 Unfavourable
B. Sales price variance:
Standard unit price = $60,000/4,000 = $15
Actual unit price = ($53,200/3,800) = $14
Sales price variance = ($15 - $14) x 3,800 = $3,800 Unfavourable
C. Revenue sales quantity variance = (4,000 – 3,800) x $15 = $3,000 Unfavourable
D. The standard contribution margin is
Sales $60,000
Less:
Variable manufacturing 16,000
Variable selling and administration 8,000
Contribution margin $36,000
Becausecontribution margin represents 4,000 units, the contribution margin per unit must
be $36,000/4,000 = $9. Then, the contribution margin sales volume variance is
$9 x (4,000 - 3,800) = $1,800 U
11.36 Contribution Margin Variances, Analysis (Appendix 11A) - Metropolitan Motors
A. The contribution margin budget variance is the difference between the standard
contribution margin and the actual contribution margin.
First, calculate the contribution margin at budget:
Economy (10*$400) $ 4,000
Family (20*$800) 16,000
Luxury (5*$1,300) 6,500
$26,500
The average contribution margin per sale is $26,500/35 = $757.14
© 2012 John Wiley and Sons Canada, Ltd. Chapter 11: Standard Costs and Variance Analysis 247
The actual contribution margin is
Economy 25 $ 5,625
Family 10 7,500
Luxury 3 4,200
Total 38 $17,325
The average contribution margin per sale is $17,325/38 = $455.92
Contribution margin budget variance = $17,325 - $26,500 = $9,175 U because the actual
contribution margin is less than standard contribution margin.
B. The contribution margin variance reflects the effects of the change in contribution
margin, given the actual level of sales.
First calculate what the contribution margin would have been at actual sales and standard
contribution margin:
Economy 25 x $400 $10,000
Family 10 x $800 8,000
Luxury 3 x $1,300 3,900
38 $21,900
The average contribution margin at actual sales mix, standard contribution margin
is $21,900/38 = $576.32
Then take the difference between this and the actual contribution margin.
Contribution margin variance = $21,900 - $17,325 = $4,575 U
The contribution margin sales volume variance is the difference between the standard
volume, mix, and contribution margin and the actual mix and volume at standard
contribution margin or
$21,900 - $26,500 = $4,600 U
Check: The two variances should equal the contribution margin budget variance.
$9,175U = $4,575 U + $4,600 U
C. The contribution margin sales quantity variance is the difference in actual quantity sold
and the standard quantity, given the standard sales mix and standard contribution margin.
The average contribution margin at standard sales mix and standard contribution margin
was calculated above in part A.
(35 - 38) x $757.14 = $2,271.42 F
© 2012 John Wiley and Sons Canada, Ltd. 248 Cost Management
The contribution margin sales mix variance is the difference between the standard sales
mix and the actual sales mix given actual sales at standard contribution margin. This can
be calculated two different ways. The actual units and actual sales mix at standard
contribution margin total is $21,900. The actual units at standard sales mix and standard
contribution margin is $757.14 x 38 = $28,771.32. So the total variance = $21,900.32 -
$28,771 = $6,871.32 U. Alternatively, the averages from above can be used as follows
Contribution margin sales mix variance = ($757.14 - $576.32) x 38 = $6,871.16 U
These two variances should sum to the contribution margin sales volume variance of
$4,600, and they do ($6,871 - $2,271 = $4,600).
D. No, management would not be pleased. It appears that the bonus induced the salespeople
to put more effort into selling the low margin economy cars at the expense of the higher
markup lines. Further, the price variance implies that the salespeople also accepted lower
prices on the already narrow markups for the economy cars.
11.37 Direct Cost and Overhead Variances, Decision to Automate - Plush Pet Toys
[Note: This problem requires knowledge of decision making from Chapter 4.]
A. Direct materials variances
Direct material price variance
= ($2.00 per metre*30,000 metres) - $62,000
= $60,000 - $62,000
= $2,000 unfavourable because the company paid more than standard
Direct material efficiency variance
= (15 metres per lot * 2,400 lots – 34,000 metres)*$2.00 per metre
= (36,000 metres – 34,000 metres)*$2.00 per metre
= $4,000 favourable because the company used fewer metres than at
standard
Direct labour variances:
Direct labour price variance
= ($10 per hour x 4,200 hours) - $39,000
= $42,000 - $39,000
= $3,000 favourable
Direct labour efficiency variance
= (2 hrs per lot * 2,400 lots – 4,200 hours)*$10 per hour
= (4,800 hours – 4,200 hours)*$10
= $6,000 favourable because the company used fewer hours than at
standard
© 2012 John Wiley and Sons Canada, Ltd. Chapter 11: Standard Costs and Variance Analysis 249
Variable overhead spending variance
= ($5 per lot*2,400 lots - $12,000)
= $12,000 - $12,000 = $0
There is no spending variance for variable overhead.
Fixed overhead budget variance
= $24,000 - $24,920
= $920 unfavourable because the company spent more than standard
Fixed overhead production volume variance
Given that fixed overhead is allocated using the following rate:
$24,000/1,000 = $24/lot
= [(1,000 lots – 2,400 lots)*$24/lot]
= $33,600 favourable because more lots were produced than expected
B.
1.
Reduction in labour hours (2.0 hours – 1.5 hours) 0.5 hours per lot
Times cost per hour $10 per hour
Cost savings per lot $5.00 per lot
2.
Cost savings per month = (1,000 lots * $5.00 per lot) = $5,000
Cost savings over 5 years = ($5,000 per month * 60 months) = $300,000
The maximum price the company would be willing to pay for the new equipment is
$300,000. This is equal to the expected labour cost savings over 5 years (ignoring the
time value of money).
11.38 Journal Entries for Closing Variances - Fine Products Manufacturing Company
A. Total variances = $7,900 unfavourable. Because anything greater than $5,000 is
considered material, the total variance amount is material.
B. Total WIP, FG, and COGS = $32,000.
Each inventory and COGS account gets a portion of the variance:
Work in Process ($2,000/$32,000 x $7,900) $ 494
Finished goods ($6,000/$32,000 x $7,900) 1,481
Cost of goods sold ($24,000/$32,000 x $7,900) 5,925
Total $7,900
© 2012 John Wiley and Sons Canada, Ltd. 250 Cost Management
Journal Entry:
Work in process inventory 494
Finished goods inventory 1,481
Cost of goods sold 5,925
Direct materials efficiency variance 1,500
Variable overhead spending variance 1,000
Direct materials price variance 2,000
Labour price variance 5,000
Labour efficiency variance 2,000
Fixed overhead budget variance 200
Variable overhead efficiency variance 1,200
11.39 Profit-Related Variances (Appendix 11A) - Pet Toys Inc.
A.
Revenue budget variance
= total budgeted sales – total actual sales
= ($450,000 - $409,500) =$40,500 U
Revenue sales quantity variance
= total budgeted sales – total actual unit sales at standard price
Standard unit selling price Frisbees = $300,000 / 100,000 = $3.00
Standard units of Plush Toys = Frisbees units / 2 = 100,000 /2 = 50,000
Standard unit selling price Plush Toys = $150,000 / 50,000 = $3.00
Actual Unit Sales
at Standard Prices
Frisbee 95,000 x $3 $285,000
Plush toys 40,000 x $3 120,000
Total 135,000 $405,000
= ($450,000 - $405,000) = $45,000 U
Sales price variance
= total actual sales – total actual unit sales at standard price
= ($409,500 - $405,000) = $ 4,500 F
© 2012 John Wiley and Sons Canada, Ltd. Chapter 11: Standard Costs and Variance Analysis 251
B.
Standard contribution margin Frisbees = $125,000 / 100,000 = $1.25
Standard contribution margin Plush Toys = $100,000 / 50,000 = $2.00
Standard
Contribution Margin
Frisbee 95,000 x $1.25 $118,750
Plush toys 40,000 x $2.00 80,000
Total $198,750
Standard units sold at standard Actual units sold at actual Actual units sold at actual
sales mixand standard CM sales mix and standard CM sales mix and actual CM
(100,000x$1.25+50,000x$2) (95,000x$1.25 + 40,000x$2) (95,000x$1.55+40,000x$1.40)
$225,000 $198,750 $203,250
CM sales volume variance Contribution margin variance
($225,000 – $198,750) = $26,250 U ($198,750 - $203,250)= $4,500 F
Contribution margin budget variance
($225,000 - $203,250) = = $21,750 U
C.
Actual units sold at standard
sales mix and standard CM Actual units at actual sales
Standard units sold at standard [(135,000 x .67 x mix and standard CM
sales mix and standard CM $1.25)+(135,000 x .33 x $2)] (95,000x$1.25 + 40,000 x $2)
$225,000 $202,163 $198,750
CM sales quantity variance Contribution margin sales mix variance
($225,000 - $202,163) ($202,163 - $198,750)
= $22,837 U = $3,413U
Contribution margin sales volume variance
($22,837 U + $3,413 U)
= $26,250 U
© 2012 John Wiley and Sons Canada, Ltd. 252 Cost Management
PROBLEMS
11.40 Cost Variances, Variance Analysis, and Employee Motivation - Raging Sage Coffee
A. For a coffee cart business, workers are scheduled with more help available when the shop
is busy, such as in the morning. Although each worker’s hours vary, the schedule
remains fairly fixed, so the cost structure includes a high proportion of fixed cost.
B. In this business, workers need to be at the cart regardless of the number of customers.
Therefore, the direct labour efficiency variance is meaningless and should not be
calculated because it would be measuring whether the clerks sold as many cups of coffee
per labour hour as was expected. Labour costs are fixed, so the computation would
reflect a revenue variance, rather than a labour efficiency variance.
C. Price variance for coffee beans:
Standard cost of actual coffee beans purchased (240 kg x $6.00 per kg) $1,440
Actual cost of coffee beans purchased 1,800
Price variance $ (360) U
Efficiency variance for coffee beans:
Coffee beans at standard kgs. (0.04 kg per cup x 8,260 cups) 330.4 kg
Actual beans 224.0kg
Variance in kilograms 106.4 kg
Standard cost per kilogram $6.00
Efficiency variance $638.40 F
D. The quantity standard for direct labour implies that 20 cups should be sold per hour of
clerk/brewer time:
0.05 hours per cup x 60 minutes per hour = 3 minutes per cup
In 60 minutes, 20 cups are expected to be made and sold
Expected sales volume (600 clerk/brewer hours x 20 cups per hour) 12,000 cups
Actual sales volume 8,260 cups
Difference between expected volume and actual volume (3,740) cups
E. There is an unfavourable coffee bean price variance, a favourable coffee bean efficiency
variance, and sales were off by about 31% (3,740 cups/12,000 cups). These variances
might be related. One possibility is that the higher cost of coffee beans caused the
clerks/brewers to reduce the quantity of coffee beans used per cup. This would have
resulted in weaker coffee, which might have caused customers to go elsewhere.
© 2012 John Wiley and Sons Canada, Ltd. Chapter 11: Standard Costs and Variance Analysis 253
The following are other possible explanations for the unfavourable sales volume
variance:
• A competing coffee business opened nearby.
• A nearby employer went out of business or launched a major lay-off of
employees.
• There was employee turnover. A clerk/brewer who was well-liked by
customers left and was replaced by a clerk/brewer who was often impolite to
customers.
• There was road construction nearby, disrupting traffic to the shopping centre.
• Nearby competitors decreased their selling prices.
• Business fluctuates by season
• There was simply an unexplained fluctuation in sales
F. Instead of basing a bonus based on cost variance measures, give employees a bonus
based on profitability. This provides them motivation to encourage customers to return,
increasing revenue, and also to contain costs.
11.41 Cost Standards, Cost Variances, Improving Cost Variance Information - Sunglass
Guys
A. Standard overhead rate per direct labour hour:
Calculate total estimated overhead at normal production volume:
Estimated overhead = (4,300 x $8.15) + (1,400 x $12.32) + $235,707 = $288,000
Calculate estimated labour hours at normal production volume:
Estimated hours = 0.2 x 4,300 + 0.3 x 1,400 = 1,280 hours
Calculate standard rate by dividing estimated cost by estimated hours:
Rate = $288,000/1,280 = $225 per direct labour hour
B. This method would be useless for monitoring and control because the fixed and variable
overhead costs are not separated. When the production volume variance is commingled
with the fixed overhead budget variance and variable overhead spending variances,
spending variances cannot be calculated, so no information is available about cost
control.
© 2012 John Wiley and Sons Canada, Ltd. 254 Cost Management
C. The recommendation is to separate fixed and variable overhead costs into separate
standards. Only the spending variances will be useful for monitoring and controlling
overhead costs.
Using normal monthly volume, the fixed overhead budget variance is:
Estimated fixed overhead cost (i.e., static budget)–Actual fixed overhead cost
= $235,707 - $237,859 = $2,152 U
The variable overhead spending variance (using units of production as the allocation
base):
Standard variable overhead for actual production–Actual variable overhead cost
= ($8.15 * 4,500 Regular units) + ($12.32 * 1,300 Deluxe units) - $54,238
= $36,675 + $16,016 - $54,238
= $1,547 U
D. To calculate the production volume variance, first determine what the fixed overhead
standard rate would have been if it had been calculated separately from the variable
overhead standard rate: (See computation of normal labour hours in the solution to Part
A.)
Standard fixed overhead costs/Normal number of direct labour hours
= $235,707 / 1,280
= $184.15 per labour hour
Production volume variance:
Standard labour hours for actual production
(0.2 * 4,500 Regular + 0.3 * 1,300 Deluxe) 1,290 hours
Normal labour hours 1,280 hours
Volume variance in labour hours 10 hours
Times the standard overhead rate $184.15
Production volume variance $1,842 F
Double-check the fixed overhead variance calculations in Parts C and D as follows:
Standard fixed overhead cost allocated to actual production:
Regular sunglasses: [($184.15*0.2) * 4,500] $ 165,735
Deluxe sunglasses: [($184.15*0.3) * 1,300] 71,819
Total fixed overhead allocated 237,554
Less actual fixed overhead costs 237,859
Total fixed overhead variance $ (305) U
Sum of individual variances: [$(2,152) U + $1,842 F] $ (310) U
Difference due to rounding
© 2012 John Wiley and Sons Canada, Ltd. Chapter 11: Standard Costs and Variance Analysis 255
To calculate the variable overhead efficiency variance, the standard volume of allocation
base for actual output is compared to the actual volume of allocation base. Because
variable overhead is allocated using actual units, an efficiency variance never arises
(actual volume of units always equals actual volume of units). Therefore, the efficiency
variance will be $0.
E. If labour hours and costs are fixed, they do not vary with production. Therefore, labour
hours provide a poor allocation base for variable overhead cost. A better option would be
to allocate variable overhead using units produced because the variable overhead costs
are more related to units than to labour.
11.42 Developing Direct Cost Standards, Cost Variances, Using Variance Analysis - The
Mighty Morphs
A. Documentation price variance for MMMs:
Actual quantity x (standard price per unit – actual price per unit)
= [(825 books used x ($5 - $4.75)]
= $206.25
B. Efficiency variance for DVDs
(Standard quantity – actual quantity) x standard price
= [(1.08DVDs per unit x (1000 + 800) games produced) – 2,025DVDs used] x
$.35/DVD
= (((1,944 – 2,025) * $.35)
= $28.35 U
C. Labour price variance for both games:
(Standard price – actual price) x actual labour hours
= ($15 - $795/55) * 55 $ 30 F
Labour efficiency variance for both games:
(Standard hours for actual output – actual hours) x standard price
= [(0.01 x 1,000) + (0.03 x 800) – 55] x $15
= [(10 + 24) – 55] x $15 315 U
Total labour variance $285 U
© 2012 John Wiley and Sons Canada, Ltd. 256 Cost Management
D. If there were no waste, the company would incur costs for only one DVD and one
documentation book per game produced. Thus, the cost of waste is equal to the number
of DVDs and documentation books used in excess of one per unit, valued at standard
cost:
Waste for DVDs:
[Actual DVDs used – (1,000 + 800) games produced] x $0.35
= (2,025 – 1,800) x $0.35 $ 78.75
Waste for documentation books:
(Actual Power Puffs books used – 1,000) x $3
+ (Actual MMM books used – 800) x $5
= [(1,005 – 1,000) x $3] + [(825 – 800) x $5] 140.00
Total waste $218.75
E. Pros:
• It may be less costly to allow waste in the standard than to inspect incoming
materials or to pay for higher quality materials.
• The company has done it this way a long time, and change might be difficult
for employees.
Cons:
• Several waste-related opportunity costs arise from defective units. As waste
increases, it is likely that the number of defective units sold increases. Greater
defect rates reduce customer satisfaction and reduce sales. By eliminating waste
altogether, this cost is avoided.
11.43 Cost Variance Analysis, Using Variance Information - Baker Street Animal Clinic
A. The technicians have argued that the cost variance was caused by the price increase.
Thus, the total variance can be separated into a price variance and an efficiency variance.
Normally, the price variance is calculated using the purchase quantity. However, no
information is given about the quantity purchased. Also, the problem presents total cost
for serum used of $2,270, which results in a $(270) total variance. However, the serum
for 2,000 injections costs $105 per 1,000cc. Following are calculations for the price
variance.
Price variance for serum:
Standard quantity of serum for actual injections 20,000 cc
Times amount of price increase per cc:
[($100/1,000 cc) – ($105/1,000 cc)]
= ($.10 - $.105) per cc (.005) per cc
Serum Price Variance (20,000 cc * $.005) $(100) U
© 2012 John Wiley and Sons Canada, Ltd. Chapter 11: Standard Costs and Variance Analysis 257
Efficiency variance for serum:
The efficiency variance cannot be calculated using the usual method because the
quantity of serum used is unknown. However, the efficiency variance can be
calculated by subtracting the price variance from the total serum cost variance.
Total variance (given in the problem) $(270) U
Price variance (100) U
Serum Efficiency Variance $(170) U
B. The unfavourable efficiency variance represents the cost of wasted serum. To see this,
consider the formula for the efficiency variance:
Efficiency Variance = Standard cost * (Standard quantity – Actual quantity)
The difference between the standard quantity and the actual quantity is the amount of
serum wasted. At a standard cost of $.10 per cc, the volume of wasted serum is estimated
to be 1,700 cc ($170 unfavourable efficiency variance/$.10 per cc).
Is this a significant amount of waste? This is a matter of judgment. Below are several
ways to quantify the significance.
Waste, relative to standard quantity of serum:
Standard quantity of serum = 2,000 injections * 10 cc 20,000
Percent serum waste (1,700 cc/20,000 cc) 8.5%
Note: The waste could also have been calculated using percent of standard cost:
$170 efficiency variance/$2,000 standard cost = 8.5%
Number of additional injections that could have been

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Related notes for CRM 312