Chap 011

Chapter 11
Standard Costs and Operating

Performance Measures
Solutions to Questions
11-1 A quantty standard ndcates how
much of an nput shoud be used to make
a unt of output. A prce standard ndcates
how much the nput shoud cost.
11-2 Idea standards assume perfecton
and do not aow for any neffcency. Idea
standards are rarey, f ever, attaned.
Practca standards can be attaned by
empoyees workng at a reasonabe,
though effcent pace and aow for norma
breaks and work nterruptons.
11-3 Under management by excepton,
managers focus ther attenton on resuts
that devate from expectatons. It s
assumed that resuts that meet
expectatons do not requre nvestgaton.
11-4 Separatng an overa varance nto
a prce varance and a quantty varance
provdes more nformaton. Moreover,
prce and quantty varances are usuay
the responsbtes of dfferent managers.
11-5 The materas prce varance s
usuay the responsbty of the purchasng
manager. The materas quantty and abor
effcency varances are usuay the
responsbty of producton managers and
supervsors.
11-6 The materas prce varance can be
computed ether when materas are
purchased or when they are paced nto
producton. It s usuay better to compute
the varance when materas are
purchased because that s when the
purchasng manager, who has
responsbty for ths varance, has
competed hs or her work. In addton,
recognzng the prce varance when
materas are purchased aows the
company to carry ts raw materas n the
nventory accounts at standard cost, whch
greaty smpfes bookkeepng.
11- Ths combnaton of varances may
ndcate that nferor quaty materas
were purchased at a dscounted prce, but
the ow-quaty materas created
producton probems.
11-! If standards are used to fnd who to
bame for probems, they can breed
resentment and undermne morae.
Standards shoud not be used to fnd
someone to bame for probems.
11-" Severa factors other than the
contractua rate pad to workers can cause
a abor rate varance. For exampe, sked
workers wth hgh houry rates of pay can
be gven dutes that requre tte sk and
that ca for ow houry rates of pay,
resutng n an unfavorabe rate varance.
Or unsked or untraned workers can be
assgned to tasks that shoud be fed by
more sked workers wth hgher rates of
pay, resutng n a favorabe rate varance.
Unfavorabe rate varances can aso arse
from overtme work at premum rates.
11-1# If poor quaty materas create
producton probems, a resut coud be
excessve abor tme and therefore an
unfavorabe abor effcency varance. Poor
quaty materas woud not ordnary
affect the abor rate varance.
The McGraw-H Companes, Inc., 2010
30 Managera Accountng, 13th Edton
11-11 If overhead s apped on the bass
of drect abor-hours, then the varabe
overhead effcency varance and the
drect abor effcency varance w aways
be favorabe or unfavorabe together. Both
varances are computed by comparng the
number of drect abor-hours actuay
worked to the standard hours aowed.
That s, n each case the formua s:
Effcency Varance = SR(AH - SH)
Ony the "SR" part of the formua, the
standard rate, dffers between the two
varances.
11-12 A statstca contro chart s a
graphca ad that heps dentfy varances
that shoud be nvestgated. Upper and
ower mts are set on the contro chart.
Any varances fang between those mts
are consdered to be norma. Any
varances fang outsde of those mts are
consdered abnorma and are nvestgated.
11-13 If abor s a fxed cost and
standards are tght, then the ony way to
generate favorabe abor effcency
varances s for every workstaton to
produce at capacty. However, the output
of the entre system s mted by the
capacty of the botteneck. If workstatons
before the botteneck n the producton
process produce at capacty, the
botteneck w be unabe to process a of
the work n process. In genera, f every
workstaton s attemptng to produce at
capacty, then work n process nventory
w bud up n front of the workstatons
wth the east capacty.
11-14 The dfference between devery
cyce tme and throughput tme s the
watng perod between when an order s
receved and when producton on the
order s started. Throughput tme s made
up of process tme, nspecton tme, move
tme, and queue tme. These four
eements can be cassfed nto vaue-
added tme (process tme) and non-vaue-
added tme (nspecton tme, move tme,
and queue tme).
11-15 An MCE of ess than 1 means that
the producton process ncudes non-vaue-
added tme. An MCE of 0.40, for exampe,
means that 40% of throughput tme
conssts of actua processng, and that the
other 60% conssts of movng, nspecton,
and other non-vaue-added actvtes.
The McGraw-H Companes, Inc., 2010
$%ercise 11-1 (20 mnutes)
1. Cost per 15-gaon contaner......................... $115.00
Less 2% cash dscount.................................. 2.30
Net cost........................................................ 112.70
Add shppng cost per contaner ($130
100)............................................................ 1.30
Tota cost per 15-gaon contaner (a)............ $114.00
Number of quarts per contaner
(15 gaons 4 quarts per gaon) (b)......... 60
Standard cost per quart purchased (a) (b). $1.90
2. Content per b of materas..................... 7.6 quarts
Add aowance for evaporaton and
spage
(7.6 quarts 0.95 = 8.0 quarts;
8.0 quarts - 7.6 quarts = 0.4 quarts).... 0.4 quarts
Tota......................................................... 8.0 quarts
Add aowance for re|ected unts
(8.0 quarts 40 bottes)........................ 0.2 quarts
Standard quantty per saabe botte of
sovent................................................... 8.2 quarts
3.
Item
Standard
Quantity
Standard
Price
Standard
Cost per
Bottle
Echo 8.2 quarts
$1.90 per
quart $15.58
The McGraw-H Companes, Inc., 2010. A rghts reserved.
Soutons Manua, Appendx 11A 32
1. Number of hemets..................................... 35,000
Standard kograms of pastc per hemet. . . 0.6
Tota standard kograms aowed............... 21,000
Standard cost per kogram......................... RM8
Tota standard cost..................................... RM168,000
Actua cost ncurred (gven)........................ RM171,000
Tota standard cost (above)........................ 168,000
Tota matera varance-unfavorabe......... RM 3,000
2. Actua
Ouantty of
Input, at
Actua Prce
Actua Ouantty of Input,
at Standard Prce
Standard Ouantty
Aowed for Output, at
Standard Prce
(AO AP) (AO SP) (SO SP)
22,500 kograms 21,000 kograms*
RM8 per kogram RM8 per kogram
RM171,000 = RM180,000 = RM168,000

Prce Varance,
RM9,000 F
Ouantty Varance,
RM12,000 U
Tota Varance,
RM3,000 U
*35,000 hemets 0.6 kograms per hemet = 21,000
kograms
Aternatvey, the varances can be computed usng the
formuas:
Materas prce varance = AO (AP - SP)
22,500 kograms (RM7.60 per kogram* - RM8.00 per
kogram)
= RM9,000 F
* RM171,000 22,500 kograms = RM7.60 per kogram
Materas quantty varance = SP (AO - SO)
RM8 per kogram (22,500 kograms - 21,000 kograms)
= RM12,000 U
1. Number of meas prepared............. 4,000
Standard drect abor-hours per
mea............................................. 0.25
Tota drect abor-hours aowed...... 1,000
Standard drect abor cost per hour $9.75
Tota standard drect abor cost...... $9,750
Actua cost ncurred........................ $9,600
Tota standard drect abor cost
(above)......................................... 9,750
Tota drect abor varance.............. $ 150 Favorabe
2. Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for Output,
at the Standard
Rate
(AH AR) (AH SR) (SH SR)
960 hours
$10.00 per hour
960 hours
$9.75 per hour
1,000 hours
$9.75 per hour
= $9,600 = $9,360 = $9,750

Rate Varance,
$240 U
Effcency Varance,
$390 F
Tota Varance,
$150 F
formuas:
Labor rate varance = AH(AR - SR)
= 960 hours ($10.00 per hour - $9.75 per
hour)
= $240 U
Labor effcency varance = SR(AH - SH)
= $9.75 per hour (960 hours - 1,000
hours)
= $390 F
1. Number of tems shpped......................... 120,000
Standard drect abor-hours per tem....... 0.02
Tota drect abor-hours aowed............... 2,400
Standard varabe overhead cost per
hour....................................................... $3.25
Tota standard varabe overhead cost..... $ 7,800
Actua varabe overhead cost ncurred.... $7,360
Tota standard varabe overhead cost
(above).................................................. 7,800
Tota varabe overhead varance............. $ 440 Favorabe
2. Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for Output,
at the Standard
Rate
2,300 hours
$3.20 per hour*
2,300 hours
$3.25 per hour
2,400 hours
$3.25 per hour
= $7,360 = $7,475 = $7,800

Varabe Overhead
Rate Varance, $115
F
Varabe Overhead
Effcency Varance,
$325 F
Tota Varance,
$440 F
*$7,360 2,300 hours = $3.20 per hour
formuas:
Varabe overhead rate varance:
AH(AR - SR) = 2,300 hours ($3.20 per hour - $3.25 per
hour)
= $115 F
Varabe overhead effcency varance:
SR(AH - SH) = $3.25 per hour (2,300 hours - 2,400 hours)
= $325 F
1.
Throughput tme
=
Process tme + Inspecton tme + Move tme
+
Oueue tme
= 2.7 days + 0.3 days + 1.0 days + 5.0 days
= 9.0 days
2. Ony process tme s vaue-added tme; therefore the
manufacturng cyce effcency (MCE) s:
- Value added time 2.7 days
MCE = = = 0.30
Throughput time 9.0 days
3. If the MCE s 30%, then 30% of the throughput tme was spent
n vaue-added actvtes. Consequenty, the other 70% of the
throughput tme was spent n non-vaue-added actvtes.
4.
Devery cyce tme
= Wat tme + Throughput tme
= 14.0 days + 9.0 days
= 23.0 days
5. If a queue tme s emnated, then the throughput tme drops
to ony 4 days (2.7 + 0.3 + 1.0). The MCE becomes:
- Value added time 2.7 days
MCE = = = 0.675
Throughput time 4.0 days
Thus, the MCE ncreases to 67.5%. Ths exercse shows qute
dramatcay how ean producton can mprove the effcency of
operatons and reduce throughput tme.
1. The standard prce of a kogram of whte chocoate s
determned as foows:
Purchase prce, fnest grade whte chocoate............. 7.50
Less purchase dscount, 8% of the purchase prce of
7.50....................................................................... (0.60)
Shppng cost from the supper n Begum................ 0.30
Recevng and handng cost....................................... 0.04
Standard prce per kogram of whte chocoate......... 7.24
2. The standard quantty, n kograms, of whte chocoate n a
dozen truffes s computed as foows:
Matera requrements....................... 0.70
Aowance for waste.......................... 0.03
Aowance for re|ects......................... 0.02
Standard quantty of whte chocoate 0.75
3. The standard cost of the whte chocoate n a dozen truffes s
determned as foows:
Standard quantty of whte chocoate
(a)...................................................... 0.75
kogram
Standard prce of whte chocoate (b)... 7.24 per kogram
Standard cost of whte chocoate (a)
(b)...................................................... 5.43
$%ercise 11- (30 mnutes)
1. a. Notce n the souton beow that the materas prce varance
s computed on the entre amount of materas purchased,
whereas the materas quantty varance s computed ony on
the amount of materas used n producton.
Actua Ouantty
of Input, at
Actua Prce
Actua Ouantty of
Input, at Standard
Prce
Standard Ouantty
Aowed for Output, at
Standard Prce
25,000 mcrons
$0.48 per mcron
25,000 mcrons
$0.50 per mcron
18,000 mcrons*
$0.50 per mcron
= $12,000 = $12,500 = $9,000

Prce Varance,
$500 F
20,000 mcrons $0.50 per mcron
= $10,000
Ouantty Varance,
$1,000 U
*3,000 toys 6 mcrons per toy = 18,000 mcrons
formuas:
25,000 mcrons ($0.48 per mcron - $0.50 per mcron) =
$500 F
$0.50 per mcron (20,000 mcrons - 18,000 mcrons) =
$1,000 U
$%ercise 11- (contnued)
b. Drect abor varances:
Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for Output,
at the
Standard Rate
4,000 hours
$8.00 per hour
3,900 hours*
$8.00 per hour
$36,000 = $32,000 = $31,200

Rate Varance,
$4,000 U
Effcency Varance,
$800 U
Tota Varance,
$4,800 U
*3,000 toys 1.3 hours per toy = 3,900 hours
formuas:
Labor rate varance = AH (AR - SR)
4,000 hours ($9.00 per hour* - $8.00 per hour) = $4,000 U
*$36,000 4,000 hours = $9.00 per hour
Labor effcency varance = SR (AH - SH)
$8.00 per hour (4,000 hours - 3,900 hours) = $800 U
$%ercise 11- (contnued)
2. A varance usuay has many possbe expanatons. In
partcuar, we shoud aways keep n mnd that the standards
themseves may be ncorrect. Some of the other possbe
expanatons for the varances observed at Dawson Toys appear
beow:
Materials Price VarianceSnce ths varance s favorabe, the
actua prce pad per unt for the matera was ess than the
standard prce. Ths coud occur for a varety of reasons ncudng
the purchase of a ower grade matera at a dscount, buyng n
an unusuay arge quantty to take advantage of quantty
dscounts, a change n the market prce of the matera, or
partcuary sharp barganng by the purchasng department.
Materials Quantity VarianceSnce ths varance s unfavorabe,
more materas were used to produce the actua output than
were caed for by the standard. Ths coud aso occur for a
varety of reasons. Some of the possbtes ncude poory
traned or supervsed workers, mpropery ad|usted machnes,
and defectve materas.
Labor Rate VarianceSnce ths varance s unfavorabe, the
actua average wage rate was hgher than the standard wage
rate. Some of the possbe expanatons ncude an ncrease n
wages that has not been refected n the standards,
unantcpated overtme, and a shft toward more hghy pad
workers.
Labor Efficiency VarianceSnce ths varance s unfavorabe, the
actua number of abor hours was greater than the standard
abor hours aowed for the actua output. As wth the other
varances, ths varance coud have been caused by any of a
number of factors. Some of the possbe expanatons ncude
poor supervson, poory traned workers, ow-quaty materas
requrng more abor tme to process, and machne breakdowns.
In addton, f the drect abor force s essentay fxed, an
unfavorabe abor effcency varance coud be caused by a
reducton n output due to decreased demand for the companys
products.
It s worth notng that a of these varances coud have been
caused by the purchase of ow quaty materas at a cut-rate
prce.
$%ercise 11-! (20 mnutes)
1. Actua Ouantty
of Input, at
Actua Prce
Actua Ouantty
of Input, at
Standard Prce
Standard
Ouantty Aowed
for Output, at
Standard Prce
20,000 pounds
$2.35 per pound
20,000 pounds
$2.50 per pound
18,400 pounds*
$2.50 per pound
= $47,000 = $50,000 = $46,000

Prce Varance,
$3,000 F
Ouantty Varance,
$4,000 U
Tota Varance,
$1,000 U
*4,000 unts 4.6 pounds per unt = 18,400 pounds
formuas:
20,000 pounds ($2.35 per pound - $2.50 per pound) =
$3,000 F
$2.50 per pound (20,000 pounds - 18,400 pounds) = $4,000
U
$%ercise 11-! (contnued)
2. Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for Output,
at the Standard
Rate
750 hours
$12.00 per hour
800 hours*
$12.00 per hour
$10,425 = $9,000 = $9,600

Rate Varance,
$1,425 U
Effcency Varance,
$600 F
Tota Varance,
$825 U
*4,000 unts 0.2 hours per unt = 800 hours
formuas:
750 hours ($13.90 per hour* - $12.00 per hour) = $1,425 U
*10,425 750 hours = $13.90 per hour
$12.00 per hour (750 hours - 800 hours) = $600 F
$%ercise 11-" (15 mnutes)
Notce n the souton beow that the materas prce varance s
computed for the entre amount of materas purchased,
whereas the materas quantty varance s computed ony for
the amount of materas used n producton.
Actua Ouantty of
Input, at Actua
Prce
Actua Ouantty
of Input, at
Standard Prce
Standard Ouantty
Aowed for
Output, at
Standard Prce
20,000 pounds
$2.35 per pound
20,000 pounds
$2.50 per pound
13,800 pounds*
$2.50 per pound
= $47,000 = $50,000 = $34,500

Prce Varance,
$3,000 F
14,750 pounds $2.50 per pound =
$36,875
Ouantty Varance,
$2,375 U
*3,000 unts 4.6 pounds per unt = 13,800 pounds
formuas:
$3,000 F
U
$%ercise 11-1# (30 mnutes)
1. Number of unts manufactured..................... 20,000
Standard abor tme per unt
(18 mnutes 60 mnutes per hour).......... 0.3
Tota standard hours of abor tme aowed.... 6,000
Standard drect abor rate per hour............... $12
Tota standard drect abor cost..................... $72,000
Actua drect abor cost................................. $73,600
Standard drect abor cost............................. 72,000
Tota varance-unfavorabe.......................... $1,600
2. Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for Output,
at the
Standard Rate
5,750 hours
$12.00 per hour
6,000 hours*
$12.00 per hour
$73,600 = $69,000 = $72,000

Rate Varance,
$4,600 U
Effcency Varance,
$3,000 F
Tota Varance,
$1,600 U
*20,000 unts 0.3 hours per unt = 6,000 hours
formuas:
*$73,600 5,750 hours = $12.80 per hour
$12.00 per hour (5,750 hours - 6,000 hours) = $3,000 F
$%ercise 11-1# (contnued)
3. Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for Output,
at the Standard Rate
5,750 hours
$4.00 per hour
6,000 hours
$4.00 per hour
$21,850 = $23,000 = $24,000

Rate Varance,
$1,150 F
Effcency Varance,
$1,000 F
Tota Varance,
$2,150 F
formuas:
Varabe overhead rate varance = AH (AR - SR)
5,750 hours ($3.80 per hour* - $4.00 per hour) = $1,150 F
*$21,850 5,750 hours = $3.80 per hour
Varabe overhead effcency varance = SR (AH - SH)
1. If the tota varance s $93 unfavorabe, and the rate varance s
$87 favorabe, then the effcency varance must be $180
unfavorabe, because the rate and effcency varances taken
together aways equa the tota varance. Knowng that the
effcency varance s $180 unfavorabe, one approach to the
souton woud be:
Effcency varance = SR (AH - SH)
$9.00 per hour (AH - 125 hours*) = $180 U
$9.00 per hour AH - $1,125 = $180**
$9.00 per hour AH = $1,305
AH = $1,305 $9.00 per hour
AH = 145 hours
*50 |obs 2.5 hours per |ob = 125 hours
**When used wth the formua, unfavorabe varances are
postve and favorabe varances are negatve.
2. Rate varance = AH (AR - SR)
145 hours (AR - $9.00 per hour) = $87 F
145 hours AR - $1,305 = -$87*
145 hours AR = $1,218
AR = $1,218 145 hours
AR = $8.40 per hour
*When used wth the formua, unfavorabe varances are
$%ercise 11-11 (contnued)
An aternatve approach woud be to work from known to
unknown data n the coumnar mode for varance anayss:
Actua Hours of
Input, at the Actua
Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for Output,
at the Standard
Rate
145 hours
$8.40 per hour
145 hours
$9.00 per hour*
125 hours

$9.00 per hour*
= $1,218 = $1,305 = $1,125

Rate Varance,
$87 F*
Effcency Varance,
$180 U
Tota Varance,
$93 U*
50 tune-ups* 2.5 hours per tune-up* = 125 hours

*Gven
Pro&lem 11-12 (45 mnutes)
1. a. In the souton beow, the materas prce varance s
computed on the entre amount of materas purchased
whereas the materas quantty varance s computed ony on
the amount of materas used n producton:
Actua Ouantty
of Input, at
Actua Prce
Actua Ouantty
of Input, at
Standard Prce
Standard Ouantty
Aowed for Output,
at Standard Prce
12,000 ounces
$20.00 per ounce
9,375 ounces*
$20.00 per ounce
$225,000 = $240,000 = $187,500

Prce Varance,
$15,000 F
9,500 ounces $20.00 per ounce
= $190,000
Ouantty Varance,
$2,500 U
*3,750 unts 2.5 ounces per unt = 9,375 ounces
formuas:
12,000 ounces ($18.75 per ounce* - $20.00 per ounce) =
$15,000 F
*$225,000 12,000 ounces = $18.75 per ounce
$20.00 per ounce (9,500 ounces - 9,375 ounces) = $2,500 U
b. Yes, the contract probaby shoud be sgned. The new prce of
$18.75 per ounce s substantay ower than the od prce of
$20.00 per ounce, resutng n a favorabe prce varance of
$15,000 for the month. Moreover, the matera from the new
supper appears to cause tte or no probem n producton
as shown by the sma materas quantty varance for the
month.
Pro&lem 11-12 (contnued)
2. a.
Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for Output,
at the Standard
Rate
5,600 hours*
$12.00 per hour
5,600 hours
$12.50 per hour
5,250 hours**
$12.50 per hour
= $67,200 = $70,000 = $65,625

Rate Varance,
$2,800 F
Effcency Varance,
$4,375 U
Tota Varance,
$1,575 U
*35 techncans 160 hours per techncan = 5,600
hours
**3,750 unts 1.4 hours per techncan = 5,250 hrs
formuas:
5,600 hours ($12.00 per hour - $12.50 per hour) = $2,800 F
$12.50 per hour (5,600 hours - 5,250 hours) = $4,375 U
b. No, the new abor mx probaby shoud not be contnued.
Athough t decreases the average houry abor cost from
$12.50 to $12.00, thereby causng a $2,800 favorabe abor
rate varance, ths savngs s more than offset by a arge
unfavorabe abor effcency varance for the month. Thus,
the new abor mx ncreases overa abor costs.
3. Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for
Output, at the
Standard Rate
5,600 hours*
$3.50 per hour
5,250 hours**
$3.50 per hour
$18,200 = $19,600 = $18,375

Rate Varance,
$1,400 F
Effcency Varance,
$1,225 U
Tota Varance,
$175 F
* Based on drect abor hours:
35 techncans 160 hours per techncan = 5,600
hours
** 3,750 unts 1.4 hours per unt = 5,250 hours
formuas:
*$18,200 5,600 hours = $3.25 per hour
Both the abor effcency varance and the varabe overhead
effcency varance are computed by comparng actua abor-
hours to standard abor-hours. Thus, f the abor effcency
varance s unfavorabe, then the varabe overhead effcency
varance w be unfavorabe as we.
1. a., b., and c.
Month
1 ! "
Throughput tme-days:
Process tme (x)............................ 2.1 2.0 1.9 1.8
Inspecton tme............................. 0.6 0.7 0.7 0.6
Move tme..................................... 0.4 0.3 0.4 0.4
Oueue tme................................... 4.3 5.0 5.8 6.7
Tota throughput tme (y).............. 7.4 8.0 8.8 9.5
Manufacturng cyce effcency
(MCE):
Process tme (x)
Throughput tme (y)................... 28.4%25.0%
21.6
% 18.9%
Devery cyce tme-days:
Wat tme from order to start of
producton..................................
16.
0
17.
5
19.
0 20.5
Throughput tme........................... 7.4 8.0 8.8 9.5
Tota devery cyce tme...............
23.
4
25.
5
27.
8 30.0
2. A of the performance measures dspay unfavorabe trends.
Throughput tme per unt s ncreasng-argey because of an
ncrease n queue tme. Manufacturng cyce effcency s
decnng and devery cyce tme s ncreasng. In addton, the
percentage of on-tme deveres has dropped.
3. a. and b.
Month
# $
Throughput tme-days:
Process tme (x)........................................ 1.8 1.8
Inspecton tme......................................... 0.6 0.0
Move tme................................................. 0.4 0.4
Oueue tme............................................... 0.0 0.0
Tota throughput tme (y).......................... 2.8 2.2
Manufacturng cyce effcency (MCE):
Process tme (x) Throughput tme (y).... 64.3% 81.8%
As a company reduces non-vaue-added actvtes, the
manufacturng cyce effcency ncreases rapdy. The goa, of
course, s to have an effcency of 100%. Ths w be acheved
when all non-vaue-added actvtes have been emnated and
process tme s equa to throughput tme.
1. a.
Actua Ouantty of
Input, at Actua
Prce
Actua Ouantty
of Input, at
Standard Prce
Standard Ouantty
Aowed for
Output, at
Standard Prce
60,000 pounds
$1.95 per pound
60,000 pounds
$2.00 per pound
45,000 pounds*
$2.00 per pound
= $117,000 = $120,000 = $90,000

Prce Varance,
$3,000 F
49,200 pounds $2.00 per pound =
$98,400
Ouantty Varance,
$8,400 U
*15,000 poos 3.0 pounds per poo = 45,000 pounds
formuas:
$3,000 F
U
b.
Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for
Output, at the
Standard Rate
11,800 hours
$7.00 per hour
11,800 hours
$6.00 per hour
12,000 hours*
$6.00 per hour
= $82,600 = $70,800 = $72,000

Rate Varance,
$11,800 U
Effcency Varance,
$1,200 F
Tota Varance,
$10,600 U
*15,000 poos 0.8 hours per poo = 12,000 hours
formuas:
11,800 hours ($7.00 per hour - $6.00 per hour) = $11,800 U
c.
Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for
Output, at the
Standard Rate
5,900 hours
$3.00 per hour
6,000 hours*
$3.00 per hour
$18,290 = $17,700 = $18,000

Rate Varance,
$590 U
Effcency Varance,
$300 F
Tota Varance,
$290 U
*15,000 poos 0.4 hours per poo = 6,000 hours
formuas:
5,900 hours ($3.10 per hour* - $3.00 per hour) = $590 U
*$18,290 5,900 hours = $3.10 per hour
$3.00 per hour (5,900 hours - 6,000 hours) = $300 F
2. Summary of varances:
Matera prce varance................... $ 3,000 F
Matera quantty varance.............. 8,400 U
Labor rate varance......................... 11,800 U
Labor effcency varance................ 1,200 F
Varabe overhead rate varance..... 590 U
Varabe overhead effcency
varance....................................... 300 F
Net varance................................... $16,290 U
The net unfavorabe varance of $16,290 for the month caused
the pants varabe cost of goods sod to ncrease from the
budgeted eve of $180,000 to $196,290:
Budgeted cost of goods sod at $12 per poo.
$180,00
0
Add the net unfavorabe varance, as above. 16,290
Actua cost of goods sod...............................
$196,29
0
Ths $16,290 net unfavorabe varance aso accounts for the
dfference between the budgeted net operatng ncome and the
actua net operatng ncome for the month.
Budgeted net operatng ncome.................... $36,000
Deduct the net unfavorabe varance added
to cost of goods sod for the month............. 16,290
Net operatng ncome.................................... $ 19 ,710
3. The two most sgnfcant varances are the materas quantty
varance and the abor rate varance. Possbe causes of the
varances ncude:
Materas quantty
varance:
Outdated standards, unsked
workers, poory ad|usted
machnes, careessness, poory
traned workers, nferor quaty
materas.
Labor rate varance: Outdated standards, change n
pay scae, overtme pay.
1. The standard quantty of pates aowed for tests performed
durng the month woud be:
Bood tests.............................. 1,800
Smears.................................... 2,400
Tota........................................ 4,200
Pates per test......................... 2
Standard quantty aowed....... 8,400
The varance anayss for pates woud be:
Actua Ouantty of
Input, at Actua
Prce
Actua Ouantty
of Input, at
Standard Prce
Standard Ouantty
Aowed for
Output, at
Standard Prce
12,000 pates
$2.50 per pate
8,400 pates
$2.50 per pate
$28,200 = $30,000 = $21,000

Prce Varance,
$1,800 F
10,500 pates $2.50 per pate =
$26,250
Ouantty Varance,
$5,250 U
formuas:
12,000 pates ($2.35 per pate* - $2.50 per pate) = $1,800 F
*$28,200 12,000 pates = $2.35 per pate.
$2.50 per pate (10,500 pates - 8,400 pates) = $5,250 U
Note that a of the prce varance s due to the hosptas 6%
quantty dscount. Aso note that the $5,250 quantty varance
for the month s equa to 25% of the standard cost aowed for
pates.
2. a. The standard hours aowed for tests performed durng the
month woud be:
Bood tests: 0.3 hour per test 1,800 tests. . 540 hours
Smears: 0.15 hour per test 2,400 tests...... 360 hours
Tota standard hours aowed......................... 900 hours
The varance anayss woud be:
Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for Output,
at the Standard
Rate
1,150 hours
$14.00 per hour
900 hours
$14.00 per hour
$13,800 = $16,100 = $12,600

Rate Varance,
$2,300 F
Effcency Varance,
$3,500 U
Tota Varance,
$1,200 U
formuas:
*$13,800 1,150 hours = $12.00 per hour
$14.00 per hour (1,150 hours - 900 hours) = $3,500 U
b. The pocy probaby shoud not be contnued. Athough the
hospta s savng $2 per hour by empoyng more assstants
than senor techncans, ths savngs s more than offset by
other factors. Too much tme s beng taken n performng ab
tests, as ndcated by the arge unfavorabe abor effcency
varance. And, t seems key that most (or a) of the
hosptas unfavorabe quantty varance for pates s
traceabe to nadequate supervson of assstants n the ab.
3. The varabe overhead varances foow:
Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for
Output, at the
Standard Rate
1,150 hours
$6.00 per hour
900 hours
$6.00 per hour
$7,820 = $6,900 = $5,400

Rate Varance,
$920 U
Effcency Varance,
$1,500 U
Tota Varance,
$2,420 U
formuas:
*$7,820 1,150 hours = $6.80 per hour
$6.00 per hour (1,150 hours - 900 hours) = $1,500 U
Yes, the two varances are cosey reated. Both are computed
by comparng actua abor tme to the standard hours aowed
for the output of the perod. Thus, f the abor effcency
varance s favorabe (or unfavorabe), then the varabe
overhead effcency varance w aso be favorabe (or
unfavorabe).
1. Saex quantty standard:
Requred per 10-ter batch (9.6 ters 0.8) 12.0 ters
Loss from re|ected batches (1/5 12 ters). 2.4 ters
Tota quantty per good batch...................... 14.4 ters
Nycyn quantty standard:
Requred per 10-ter batch (12 kograms
0.8)............................................................ 15.0
kogram
s
Loss from re|ected batches (1/5 15
kograms)................................................. 3.0
kogram
s
Tota quantty per good batch...................... 18.0
kogram
s
Protet quantty standard:
Requred per 10-ter batch.......................... 5.0
kogram
s
kograms)................................................. 1.0
kogram
s
Tota quantty per good batch...................... 6.0
kogram
s
2. Tota mnutes per 8-hour day.......................... 480 mnutes
Less rest breaks and ceanup......................... 60 mnutes
Productve tme each day............................... 420 mnutes
Productve tme each day 420 mnutes per day
=
Tme requred per batch 35 mnutes per batch
= 12 batches per day
Tme requred per batch................................. 35 mnutes
Rest breaks and cean up tme
(60 mnutes 12 batches).......................... 5 mnutes
Tota............................................................... 40 mnutes
mnutes)...................................................... 8 mnutes
Tota tme per good batch............................... 48 mnutes
3. Standard cost card:
Standard
Quantity or
%ime
Standard Price
or Rate
Standar
d Cost
Saex................. 14.4 ters $1.50 per ter $21.60
Nycyn............... 18.0
kogram
s $2.80 per kogram 50.40
Protet................ 6.0
kogram
s $3.00 per kogram 18.00
Labor tme.........
48
or 0.8
mnutes,
hour $9.00 per hour 7.20
Tota standard
cost per
acceptabe
batch.............. $97.20
1. a., b., and c.
Month
1 ! "
Throughput tme n days:
Process tme............................. 2.1 2.0 1.9 1.8
Inspecton tme......................... 0.8 0.7 0.7 0.7
Move tme................................. 0.3 0.4 0.4 0.5
Oueue tme durng producton. . 2.8 4.4 6.0 7.0
Tota throughput tme................ 6.0 7.5 9.0 10.0
Manufacturng cyce effcency
(MCE):
Process tme Throughput
tme........................................ 35.0% 26.7% 21.1% 18.0%
Devery cyce tme n days:
Wat tme to start of producton 9.0 11.5 12.0 14.0
Throughput tme....................... 6.0 7.5 9.0 10.0
Tota devery cyce tme........... 15.0 19.0 21.0 24.0
2. a. Areas where the company s mprovng:
Quality control& The number of defects has decreased by
over 50% n the ast four months. Moreover, both warranty
cams and customer compants are down sharpy. In short,
overa quaty appears to have sgnfcanty mproved.
Material control& The purchase order ead tme s ony haf of
what t was four months ago, whch ndcates that purchases
are arrvng n ess tme. Ths trend may be a resut of the
companys move toward |IT purchasng.
'eli(ery performance& The process tme has decreased from
2.1 days to 1.8 days over the ast four months.
b. Areas of deteroraton:
Material control& Scrap as a percentage of tota cost has
trped over the ast four months.
Machine performance& Machne downtme has doubed over
the ast four months. Ths may be a resut of the greater
setup tme, or t may |ust refect efforts to get the new
equpment operatng propery. Aso note that use of the
machnes as a percentage of avaabty s decnng rapdy.
'eli(ery performance& A devery performance measures
are movng n the wrong drecton. Throughput tme and
devery cyce tme are both ncreasng, and the
manufacturng cyce effcency s decreasng.
3. a. and b.
Month
# $
Throughput tme n days:
Process tme..................................... 1.8 1.8
Inspecton tme................................ 0.7 0.0
Move tme........................................ 0.5 0.5
Oueue tme durng producton......... 0.0 0.0
Tota throughput tme....................... 3.0 2.3
Manufacturng cyce effcency (MCE):
Process tme Throughput tme...... 60.0% 78.3%
As non-vaue-added actvtes are emnated, the
manufacturng cyce effcency mproves. The goa, of course, s
to have an effcency of 100%. Ths s acheved when a non-
vaue-added actvtes have been emnated and process tme
equas throughput tme.
Pro&lem 11-1! (45 mnutes)
Ths probem s more dffcut than t ooks. Aow ampe tme for
dscusson.
1.
Actua Ouantty of
Input, at Actua
Prce
Actua Ouantty
of Input, at
Standard Prce
Standard Ouantty
Aowed for
Output, at
Standard Prce
12,000 yards
$4.00 per yard*
11,200 yards**
$4.00 per yard*
$45,600 = $48,000 = $44,800

Prce Varance,
$2,400 F
Ouantty Varance,
$3,200 U
Tota Varance,
$800 U
* $22.40 5.6 yards = $4.00 per yard
** 2,000 sets 5.6 yards per set = 11,200 yards
formuas:
12,000 yards ($3.80 per yard* - $4.00 per yard) = $2,400 F
*$45,600 12,000 yards = $3.80 per yard
$4.00 per yard (12,000 yards - 11,200 yards) = $3,200 U
Pro&lem 11-1! (contnued)
2. Many students w mss parts 2 and 3 because they w try to
use product costs as f they were hourly costs. Pay partcuar
attenton to the computaton of the standard drect abor tme
per unt and the standard drect abor rate per hour.
Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for
Output, at the
Standard Rate
2,800 hours
$6.00 per hour*
3,000 hours**
$6.00 per hour*
$18,200 = $16,800 = $18,000

Rate Varance,
$1,400 U
Effcency Varance,
$1,200 F
Tota Varance,
$200 U
* 2,850 standard hours 1,900 sets = 1.5 standard hours
per set, $9.00 standard cost per set 1.5 standard
hours per set = $6.00 standard rate per hour.
** 2,000 sets 1.5 standard hours per set = 3,000 standard
hours.
formuas:
*$18,200 2,800 hours = $6.50 per hour
Pro&lem 11-1! (contnued)
3. Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for
Output, at the
Standard Rate
2,800 hours
$2.40 per hour*
3,000 hours
$2.40 per hour*
$7,000 = $6,720 = $7,200

Rate Varance,
$280 U
Effcency Varance,
$480 F
Tota Varance,
$200 F
*$3.60 standard cost per set 1.5 standard hours per set
= $2.40 standard rate per hour
formuas:
*$7,000 2,800 hours = $2.50 per hour
$2.40 per hour (2,800 hours - 3,000 hours) = $480 F
Pro&lem 11-1" (45 mnutes)
1. a. Materas quantty varance = SP (AO - SO)
$5.00 per foot (AO - 9,600 feet*) = $4,500 U
$5.00 per foot AO - $48,000 = $4,500**
$5.00 per foot AO = $52,500
AO = 10,500 feet
* $3,200 unts 3 foot per unt
** When used wth the formua, unfavorabe varances
are postve and favorabe varances are
negatve.
Therefore, $55,650 10,500 feet = $5.30 per foot
b. Materas prce varance = AO (AP - SP)
10,500 feet ($5.30 per foot - $5.00 per foot) = $3,150 U
The tota varance for materas s:
Materas prce varance............ $3,150 U
Materas quantty varance...... 4,500 U
Tota varance........................... $7,650 U
Aternatve approach to parts (a) and (b):
Actua Ouantty of
Input, at Actua
Prce
Actua Ouantty
of Input, at
Standard Prce
Standard Ouantty
Aowed for Output,
at Standard Prce
10,500 feet
$5.30 per foot
10,500 feet
$5.00 per foot*
9,600 feet**
$5.00 per foot*
= $55,650* = $52,500 = $48,000

Prce Varance,
$3,150 U
Ouantty Varance,
$4,500 U*
Tota Varance,
$7,650 U
* Gven
** 3,200 unts 3 foot per unt = 9,600 feet
Pro&lem 11-1" (contnued)
2. a. Labor rate varance = AH (AR - SR)
4,900 hours ($7.50 per hour* - SR) = $2,450 F**
$36,750 - 4,900 hours SR = -$2,450***
4,900 hours SR = $39,200
SR = $8.00
* $36,750 4,900 hours
** $1,650 F + $800 U.
*** When used wth the formua, unfavorabe
varances are postve and favorabe varances
are negatve.
b. Labor effcency varance = SR (AH - SH)
$8 per hour (4,900 hours - SH) = $800 U
$39,200 - $8 per hour SH = $800*
$8 per hour SH = $38,400
SH = 4,800 hours
* When used wth the formua, unfavorabe varances are
Aternatve approach to parts (a) and (b):
Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for Output,
at the Standard
Rate
4,900 hours*
$8.00 per hour
4,800 hours
$8.00 per hour
$36,750* = $39,200 = $38,400

Rate Varance,
$2,450 F
Effcency Varance,
$800 U*
Tota Varance,
$1,650 F*
*Gven.
c. The standard hours aowed per unt of product are:
4,800 hours 3,200 unts = 1.5 hours per unt
Pro&lem 11-2# (60 mnutes)
1. Standard cost for March producton:
Materas............................................................... $16,800
Drect abor........................................................... 10,500
Varabe manufacturng overhead.......................... 4,200
Tota standard cost (a)........................................... $31,500
Number of backpacks produced (b)....................... 1,000
Standard cost of a snge backpack (a) (b)......... $31.50
2. Standard cost of a snge backpack (above)........... $31.50
Deduct dfference between standard and actua
cost.................................................................... 0.15
Actua cost per backpack...................................... $31.35
3.
Tota standard cost of materas aowed durng
March (a)............................................................ $16,800
Number of backpacks produced durng March (b) 1,000
Standard materas cost per backpack (a) (b). . . $16.80
Standard materas cost per backpack $16.80 per backpack
=
Standard materas cost per yard $6.00 per yard
= 2.8 yards per backpack
4. Standard cost of matera used.....
$16,80
0
Actua cost of matera used.......... 15,000
Tota varance................................
$
1,800 F
The prce and quantty varances together equa the tota
varance. If the quantty varance s $1,200 U, then the prce
varance must be $3,000 F:
Prce varance...............................
$
3,000 F
Ouantty varance.......................... 1,200 U
Tota varance................................
$
1,800 F
Pro&lem 11-2# (contnued)
Aternatve Souton:
Actua Ouantty
of Input, at
Actua Prce
Actua Ouantty
of Input, at
Standard Prce
Standard Ouantty
Aowed for
Output, at
Standard Prce
3,000 yards
$5.00 per yard
3,000 yards
$6.00 per yard*
2,800 yards**
$6.00 per yard*
= $15,000* = $18,000 = $16,800*

Prce Varance,
$3,000 F
Ouantty Varance,
$1,200 U*
Tota Varance,
$1,800 F
* Gven.
** 1,000 unts 2.8 yards per unt = 2,800 yards
5. The frst step n computng the standard drect abor rate s to
determne the standard drect abor-hours aowed for the
months producton. The standard drect abor-hours can be
computed by workng wth the varabe manufacturng
overhead costs, because they are based on drect abor-hours
worked:
Standard varabe manufacturng overhead cost for
March (a)....................................................................
$4,20
0
Standard varabe manufacturng overhead rate per
drect abor-hour (b).................................................... $3.00
Standard drect abor-hours for March (a) (b)............. 1,400
Tota standard drect abor cost for March $10,500
=
Tota standard drect abor-hours for March 1,400 DLHs
= $7.50 per DLH
6. Before the abor varances can be computed, t s necessary to
compute the actua drect abor cost for the month:
Actua cost per backpack produced (part
2)............................................................. $31.35
Number of backpacks produced................. 1,000
Tota actua cost of producton.................... $31,350
Less: Actua cost of materas..................... $15,000
Actua cost of varabe manufacturng
overhead......................................... 3,600 18,600
Actua cost of drect abor........................... $12,750
Wth ths nformaton, the varances can be computed:
Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for Output,
at the Standard
Rate
1,500 hours*
$7.50 per hour
$12,750 = $11,250 $10,500*

Rate Varance,
$1,500 U
Effcency Varance,
$750 U
Tota Varance,
$2,250 U
*Gven.
7. Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for
Output, at the
Standard Rate
1,500 hours*
$3.00 per hour*
$3,600* = $4,500 $4,200*

Rate Varance,
$900 F
Effcency Varance,
$300 U
Tota Varance,
$600 F
*Gven.
8.
Standard
Quantity or
)ours
Standard
Price or
Rate
Standar
d
Cost
Drect materas.......... 2.8 yards
1
$6 per yard $16.80
Drect abor................. 1.4 hours
2
$7.50 per
hour
3
10.50
Varabe
manufacturng
overhead.................. 1.4 hours $3 per hour 4.20
Tota standard cost...... $31.50
1
From part 3.
2
1,400 standard hours (from part 5) 1,000 backpacks
= 1.4 hours per backpack.
3
From part 5.
1. Standard cost for a ten-gaon batch of raspberry sherbet.
Drect matera:
Raspberres (7.5 quarts
1
$0.80 per quart)..... $6.00
Other ngredents (10 gaons $0.45 per
gaon)............................................................ 4.50 $10.50
Drect abor:
Sortng (18 mnutes
2
60 mnutes per hour)
$9.00 per hour............................................ 2.70
Bendng (12 mnutes 60 mnutes per hour)
$9.00 per hour............................................ 1.80 4.50
Packng (40 quarts
3
$0.38 per quart)............ 15.20
Standard cost per ten-gaon batch..................... $30.20
1
6 quarts (5 4) = 7.5 quarts requred to obtan 6 acceptabe
quarts.
2
3 mnutes per quart 6 quarts.
3
4 quarts per gaon 10 gaons = 40 quarts.
2. a. In genera, the purchasng manager s hed responsbe for
unfavorabe matera prce varances. Causes of these
varances ncude the foowng:
Incorrect standards.
Faure to correcty forecast prce ncreases.
Purchasng n nonstandard or uneconomca ots.
Faure to take avaabe purchase dscounts.
Faure to contro transportaton costs.
Purchasng from suppers other than those offerng the
most favorabe terms.
However, faure to meet prce standards may be caused by
an unexpected ncrease n orders or changes n producton
schedues. In ths case, the responsbty for unfavorabe
matera prce varances shoud rest wth the saes manager
or the manager of producton pannng. Varances may aso
be caused by externa events that are uncontroabe, e.g., a
strke at a suppers pant.
b. In genera, the producton manager or foreman s hed
responsbe for unfavorabe abor effcency varances.
Causes of these varances ncude the foowng:
Incorrect standards.
Poory traned abor.
Substandard or neffcent equpment.
Inadequate supervson.
Machne breakdowns from poor mantenance.
Poory motvated empoyees.
Fxed abor force wth demand ess than capacty.
Faure to meet abor effcency standards may aso be
caused by the use of nferor materas or poor producton
pannng. In these cases, responsbty shoud rest wth the
purchasng manager or the manager of producton pannng.
Varances may aso be caused by externa events that are
uncontroabe, e.g., ow unempoyment eadng to the
nabty to hre and retan sked workers.
(Unoffca CMA Souton, adapted)
Appendx 11A
Predetermined O'erhead (ates and
O'erhead )nal*sis in a Standard Costing
S*stem
$%ercise 11)-1 (15 mnutes)
1. The tota overhead cost at the denomnator eve of actvty
must be determned before the predetermned overhead rate
can be computed.
Tota fxed overhead cost per year........................
$250,00
0
Tota varabe overhead cost
($2 per DLH 40,000 DLHs)............................... 80,000
Tota overhead cost at the denomnator eve of
actvty................................................................
$330,00
0
Overhead at the denomnator eve of actvty
Predetermned
=
overhead rate
Denomnator eve of actvty
$330,000
= = $8.25 per DLH
40,000 DLHs
2. Standard drect abor-hours aowed
for the actua output (a)................ 38,000 DLHs
Predetermned overhead rate (b)..... $8.25 per DLH
Overhead apped (a) (b).............. $313,500
1.
Fxed overhead
Fxed porton of the
=
predetermned overhead rate
Denomnator eve of actvty
$250,000
=
25,000 DLHs
= $10.00 per DLH
2.
Budget Actua fxed Budgeted fxed
= -
varance overhead overhead
= $254,000 - $250,000
= $4,000 U
( )
Fxed porton of
Voume Denomnator Standard hours
= the predetermned -
varance hours aowed
overhead rate
= $10.00 per DLH (25,000 DLHs - 26,000 DLHs)
= $10,000 F
1.
Tota overhead at the
denomnator actvty
Predetermned
=
overhead rate
Denomnator actvty
$1.90 per DLH 30,000 per DLH + $168,000
=
30,000 DLHs
$225,000
=
30,000 DLHs
= $7.50 per DLH
Varabe eement: ($1.90 per DLH 30,000 DLHs) 30,000
DLHs = $57,000 30,000 DLHs = $1.90 per DLH
Fxed eement: $168,000 30,000 DLHs = $5.60 per DLH
2. Drect materas, 2.5 yards $8.60 per yard............ $21.50
Drect abor, 3 DLHs* $12.00 per DLH................... 36.00
Varabe manufacturng overhead, 3 DLHs $1.90
per DLH.................................................................. 5.70
Fxed manufacturng overhead, 3 DLHs $5.60 per
DLH........................................................................ 16.80
Tota standard cost per unt....................................... $80.00
*30,000 DLHs 10,000 unts = 3 DLHs per unt.
1. $3 per MH 60,000 MHs + $300,000
Predetermned
=
overhead rate
60,000 MHs
$480,000
=
60,000 MHs
= $8 per MH
Varabe porton of
$3 per MH 60,000 MHs
the predetermned =
60,000 MHs
overhead rate
$180,000
=
60,000 MHs
= $3 per MH
Fxed porton of
$300,000
the predetermned =
60,000 MHs
overhead rate
= $5 per MH
2. The standard hours per unt of product are:
60,000 hours 40,000 unts = 1.5 hours per unt
Gven ths fgure, the standard hours aowed for the actua
producton woud be:
42,000 unts 1.5 hours per unt = 63,000 standard hours
aowed.
60,000 denomnator hours $5 per hour = $300,000.
$%ercise 11)-4 (contnued)
3. Varabe overhead rate varance:
Varabe overhead rate varance = (AH AR) - (AH SR)
($185,600) - (64,000 hours $3 per hour) = $6,400 F
Varabe overhead effcency varance:
$3 per hour (64,000 hours - 63,000 hours) = $3,000 U
The fxed overhead varances are as foows:
Actua Fxed
Overhead
Budgeted Fxed
Overhead
Fxed Overhead Apped
to Work n Process
$302,400 $300,000*
63,000 hours $5 per
hour
= $315,000

Budget Varance,
$2,400 U
Voume Varance,
$15,000 F
*As orgnay budgeted.
Aternatve approach to the budget varance:
= -
= $302,400 - $300,000
= $2,400 U
Aternatve approach to the voume varance:

Fxed porton of Standard

Voume Denomnator
= the predetermned - hours
Varance hours
overhead rate aowed
= $5 per hour (60,000 hours - 63,000 hours)
= $15,000 F
Company
A:
Ths company has a favorabe voume varance
because the standard hours aowed for the actua
producton are greater than the denomnator hours.
Company
B:
Ths company has an unfavorabe voume varance
because the standard hours aowed for the actua
producton are ess than the denomnator hours.
Company
C:
Ths company has no voume varance because the
standard hours aowed for the actua producton and
the denomnator hours are the same.
1. 9,500 unts 4 hours per unt = 38,000 hours.
2. and 3.
Actua Fxed
Overhead
Budgeted Fxed
Overhead
Fxed Overhead Apped to
Work n Process
$198,700* $200,000 38,000 hours $5 per
hour*
= $190,000

Budget Varance,
$1,300 F
Voume Varance,
$10,000 U*
*Gven.
4.
$200,000
=
Denomnator actvty
= $5 per hour
udgeted !i"ed o#erhead
$i"ed eleme%t o! the
=
predetermi%ed o#erhead rate
&e%omi%ator a'ti#ity
Therefore, the denomnator actvty s: $200,000 $5 per hour
= 40,000 hours.
$%ercise 11)- (15 mnutes)
1. 14,000 unts produced 3 MHs per unt = 42,000 MHs
2. Actua fxed overhead ncurred.........
$267,00
0
Add: Favorabe budget varance........ 3,000
Budgeted fxed overhead cost...........
$270,00
0
$270,000
=
45,000 MHs
= $6 per MH
udgeted !i"ed o#erhead
$i"ed eleme%t o! the
=
predetermi%ed o#erhead rate
&e%omi%ator a'ti#ity
3.
Voume Denomnator
Varance hours
overhead rate aowed
= $6 per MH (45,000 MHs - 42,000 MHs)
= $18,000 U

Aternatve souton to parts 1-3:
Actua Fxed
Overhead
Budgeted Fxed
Overhead
Fxed Overhead Apped
to Work n Process
$267,000* $270,000
1
42,000 MHs
2
$6 per
MH
3
= $252,000

Budget Varance,
$3,000 F*
Voume Varance,
$18,000 U
1
$267,000 + $3,000 = $270,000.
2
14,000 unts 3 MHs per unt = 42,000 MHs
3
$270,000 45,000 denomnator MHs = $6 per MH
*Gven.
Pro&lem 11)-! (30 mnutes)
1. Drect materas, 3 yards $4.40 per yard................... $13.20
Drect abor, 1 DLH $12.00 per DLH........................... 12.00
Varabe manufacturng overhead, 1 DLH $5.00 per
DLH*........................................................................... 5.00
Fxed manufacturng overhead, 1 DLH $11.80 per
DLH**......................................................................... 11.80
Standard cost per unt.................................................. $42.00
*
$25,000 5,000 DLHs = $5.00 per
DLH.
**
$59,000 5,000 DLHs = $11.80 per
DLH.
2. Materas varances:
24,000 yards ($4.80 per yard - $4.40 per yard) = $9,600 U
$4.40 per yard (18,500 yards - 18,000 yards*) = $2,200 U
*6,000 unts 3 yards per unt = 18,000 yards
Labor varances:
5,800 DLHs ($13.00 per DLH - $12.00 per DLH) = $5,800 U
$12.00 per DLH (5,800 DLHs - 6,000 DLHs*) = $2,400 F
*6,000 unts 1 DLH per unt = 6,000 DLHs
Pro&lem 11)-! (contnued)
3. Varabe overhead varances:
Actua DLHs of
Input, at the
Actua Rate
Actua DLHs of
Input, at the
Standard Rate
Standard DLHs
Aowed for
Output, at the
Standard Rate
$29,580 5,800 DLHs
$5.00 per DLH
6,000 DLHs
$5.00 per DLH
= $29,000 = $30,000

Rate Varance,
$580 U
Effcency Varance,
$1,000 F
Tota Varance,
$420 F
Aternatve souton for the varabe overhead varances:
($29,580) - (5,800 DLHs $5.00 per DLH) = $580 U
$5.00 per DLH (5,800 DLHs - 6,000 DLHs) = $1,000 F
Fxed overhead varances:
Actua Fxed
Overhead
Budgeted Fxed
Overhead
Fxed Overhead
Apped to
Work n Process
$60,400 $59,000 6,000 DLHs
$11.80 per DLH
= $70,800

Budget Varance,
$1,400 U
Voume Varance,
$11,800 F
Pro&lem 11)-! (contnued)
Aternatve approach to the budget varance:
= -
= $60,400 - $59,000
= $1,400 U
Aternatve approach to the voume varance:


Voume Denomnator
Varance hours
overhead rate aowed
= $11.80 per DLH (5,000 DLHs - 6,000 DLHs)
= $11,800 F
4. The choce of a denomnator actvty eve affects standard unt
costs n that the hgher the denomnator actvty eve chosen,
the ower standard unt costs w be. The reason s that the
fxed porton of overhead costs s spread over more unts as the
denomnator actvty rses.
The voume varance cannot be controed by controng
spendng. The voume varance smpy refects whether actua
actvty was greater than or ess than the denomnator actvty.
Thus, the voume varance s controabe ony through actvty.
Pro&lem 11)-" (45 mnutes)
1. Drect materas prce and quantty varances:
64,000 feet ($8.55 per foot - $8.45 per foot) = $6,400 U
$8.45 per foot (64,000 feet - 60,000 feet*) = $33,800 U
*30,000 unts 2 feet per unt = 60,000 feet
2. Drect abor rate and effcency varances:
43,500 DLHs ($15.80 per DLH - $16.00 per DLH) = $8,700 F
$16.00 per DLH (43,500 DLHs - 42,000 DLHs*) = $24,000 U
*30,000 unts 1.4 DLHs per unt = 42,000 DLHs
3. a. Varabe overhead spendng and effcency varances:
Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for
Output, at the
Standard Rate
$108,000 43,500 DLHs
$2.50 per DLH
42,000 DLHs
$2.50 per DLH
= $108,750 = $105,000

Rate Varance,
$750 F
Effcency Varance,
$3,750 U
Aternatve souton:
($108,000) - (43,500 DLHs $2.50 per DLH) = $750 F
$2.50 per DLH (43,500 DLHs - 42,000 DLHs) = $3,750 U
Pro&lem 11)-" (contnued)
b. Fxed overhead budget and voume varances:
Actua Fxed
Overhead
Budgeted Fxed
Overhead
Work n Process
$211,800 $210,000* 42,000 DLHs $6 per
DLH
= $252,000

Budget Varance,
$1,800 U
Voume Varance,
$42,000 F
*As orgnay budgeted. Ths fgure can aso be expressed as:
35,000 denomnator DLHs $6 per DLH = $210,000.
Aternatve souton:
Budget varance:
= -
= $211,800 - $210,000
= $1,800 U
Voume varance:


Voume Denomnator
Varance hours
overhead rate aowed
= $6.00 per DLH (35,000 DLHs - 42,000 DLHs)
= $42,000 F
Pro&lem 11)-" (contnued)
4. The tota of the varances woud be:
Drect materas varances:
Prce varance....................................... $ 6,400 U
Ouantty varance................................. 33,800 U
Drect abor varances:
Rate varance........................................ 8,700 F
Effcency varance................................ 24,000 U
Varabe manufacturng overhead
varances:
Rate varance........................................ 750 F
Effcency varance................................ 3,750 U
Fxed manufacturng overhead
varances:
Budget varance.................................... 1,800 U
Voume varance................................... 42,000 F
Tota of varances.................................... $18,300 U
Note that the tota of the varances agrees wth the $18,300
varance mentoned by the presdent.
It appears that not everyone shoud be gven a bonus for good
cost contro. The materas quantty varance and the abor
effcency varance are 6.7% and 3.6%, respectvey, of the
standard cost aowed and thus woud warrant nvestgaton.
The companys arge unfavorabe varances (for materas
quantty and abor effcency) do not show up more ceary
because they are offset by the favorabe voume varance. Ths
favorabe voume varance s a resut of the company operatng
at an actvty eve that s we above the denomnator actvty
eve used to set predetermned overhead rates. (The company
operated at an actvty eve of 42,000 standard hours; the
denomnator actvty eve set at the begnnng of the year was
35,000 hours.) As a resut of the arge favorabe voume
varance, the unfavorabe quantty and effcency varances
have been conceaed n a sma "net" fgure. The arge
favorabe voume varance may have been acheved by
budng up nventores.
Pro&lem 11)-1# (45 mnutes)
1.
PZ297,500
Tota rate: = PZ8.50 per hour
35,000 hours
PZ87,500
Varabe rate: = PZ2.50 per hour
35,000 hours
PZ210,000
Fxed rate: = PZ6.00 per hour
35,000 hours
2. 32,000 standard hours PZ8.50 per hour = PZ272,000.
Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for Output,
at the Standard
Rate
PZ78,000 30,000 hours
PZ2.50 per hour
32,000 hours
PZ2.50 per hour
= PZ75,000 = PZ80,000

Rate Varance,
PZ3,000 U
Effcency Varance,
PZ5,000 F
Aternatve souton:
(PZ78,000) - (30,000 hours PZ2.50 per hour) = PZ3,000 U
PZ2.50 per hour (30,000 hours - 32,000 hours) = PZ5,000 F
Pro&lem 11)-1# (contnued)
Actua Fxed
Overhead
Budgeted Fxed
Overhead
Fxed Overhead Apped
to Work n Process
PZ209,400 PZ210,000 32,000 hours
PZ6 per hour =
PZ192,000

Budget Varance,
PZ600 F
Voume Varance,
PZ18,000 U
Aternatve souton:
Budget varance:
= -
= PZ209,400 - PZ210,000
= PZ600 F
Voume varance:
Voume Denomnator
Varance hours
overhead rate aowed
= PZ6.00 per hour (35,000 hours - 32,000 hours)
= PZ18,000 U

Verfcaton:
Varabe overhead rate varance. PZ 3,000 U
Varabe overhead effcency
varance........................... 5,000
F
Fxed overhead budget varance. 600 F
Fxed overhead voume varance 18,000 U
Underapped overhead.............. PZ15,400 U
Pro&lem 11)-1# (contnued)
4. Varabe overhead
Rate (ariance* Ths varance ncudes both prce and quantty
eements. The overhead spendng varance refects dfferences
between actua and standard prces for varabe overhead
tems. It aso refects dfferences between the amounts of
varabe overhead nputs that were actuay used and the
amounts that shoud have been used for the actua output of
the perod. Because the varabe overhead spendng varance s
unfavorabe, ether too much was pad for varabe overhead
tems or too many of them were used.
Efficiency (ariance* The term "varabe overhead effcency
varance" s a msnomer, because the varance does not
measure effcency n the use of overhead tems. It measures
the ndrect effect on varabe overhead of the effcency or
neffcency wth whch the actvty base s utzed. In ths
company, the actvty base s abor-hours. If varabe overhead
s reay proportona to abor-hours, then more effectve use of
abor-hours has the ndrect effect of reducng varabe
overhead. Because 2,000 fewer abor-hours were requred than
ndcated by the abor standards, the ndrect effect was
presumaby to reduce varabe overhead spendng by about
PZ5,000 (PZ2.50 per hour 2,000 hours).
Fxed overhead
Bud+et (ariance* Ths varance s smpy the dfference
between the budgeted fxed cost and the actua fxed cost. In
ths case, the varance s favorabe whch ndcates that actua
fxed costs were ower than antcpated n the budget.
Volume (ariance* Ths varance occurs as a resut of actua
actvty beng dfferent from the denomnator actvty n the
predetermned overhead rate. In ths case, the varance s
unfavorabe, so actua actvty was ess than the denomnator
actvty. It s dffcut to pace much of a meanngfu economc
nterpretaton on ths varance. It tends to be arge, so t often
swamps the other, more meanngfu varances f they are
smpy netted aganst each other.
Pro&lem 11)-11 (45 mnutes)
1.
$600,000
Tota rate: = $10 per DLH
60,000 DLHs
$120,000
Varabe rate: = $2 per DLH
60,000 DLHs
$480,000
Fxed rate: = $8 per DLH
60,000 DLHs
2. Drect materas: 3 pounds at $7 per pound. . $21
Drect abor: 1.5 DLHs at $12 per DLH.......... 18
Varabe overhead: 1.5 DLHs at $2 per DLH. . 3
Fxed overhead: 1.5 DLHs at $8 per DLH....... 12
Standard cost per unt.................................. $54
3. a. 42,000 unts 1.5 DLHs per unt = 63,000 standard DLHs.
b. Manufacturng Overhead
Actua
costs
606,500 Apped costs 630,000 *
Overapped
overhead
23,500
*63,000 standard DLHs $10 per DLH = $630,000.
Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for Output,
at the Standard Rate
$123,500 65,000 DLHs
$2 per DLH
63,000 DLHs
$2 per DLH
= $130,000 = $126,000

Rate Varance,
$6,500 F
Effcency Varance,
$4,000 U
Pro&lem 11)-11 (contnued)
Aternatve souton:
($123,500) - (65,000 DLHs $2 per DLH) = $6,500 F
$2 per DLH (65,000 DLHs - 63,000 DLHs) = $4,000 U
Actua Fxed
Overhead
Budgeted Fxed
Overhead
Fxed Overhead
Apped to Work n
Process
$483,000 $480,000* 63,000 DLHs $8 per
DLH
= $504,000

Budget Varance,
$3,000 U
Voume Varance,
$24,000 F
*Can be expressed as: 60,000 denomnator DLHs $8 per DLH
= $480,000
Aternatve souton:
Budget varance:
= -
= $483,000 - $480,000
= $3,000 U
Voume varance:


Voume Denomnator
Varance hours
overhead rate aowed
= $8 per DLH (60,000 DLHs - 63,000 DLHs)
= $24,000 F
The companys overhead varances can be summarzed as
foows:
Varabe overhead:
Rate varance............................
$
6,500 F
Effcency varance.................... 4,000 U
Fxed overhead:
Budget varance........................ 3,000 U
Voume varance....................... 24,000 F
Overapped overhead-see part
3
$23,50
0 F
5. Ony the voume varance woud have changed. It woud have
been unfavorabe because the standard DLHs aowed for the
years producton (63,000 DLHs) woud have been ess than the
denomnator DLHs (65,000 DLHs).
Pro&lem 11)-12 (45 mnutes)
1. and 2. Per 'irect Labor,)our
Variabl
e -i.ed %otal
Denomnator of 30,000 DLHs:
$135,000 30,000 DLHs........... $4.50 $4.50
$270,000 30,000 DLHs........... $9.00 9.00
Tota predetermned rate.............. $13.50
Denomnator of 40,000 DLHs:
$180,000 40,000 DLHs........... $4.50 $4.50
$270,000 40,000 DLHs........... $6.75 6.75
Tota predetermned rate.............. $11.25
3.
'enominator /cti(ity*
!01000 'L)s
'enominator /cti(ity*
"01000 'L)s
Drect materas, 4 feet
$8.75 per foot....... $35.00 Same......................... $35.00
Drect abor, 2 DLHs
$15 per DLH............. 30.00 Same......................... 30.00
Varabe overhead, 2
DLHs $4.50 per
DLH........................... 9.00 Same......................... 9.00
Fxed overhead, 2
DLHs $9.00 per
DLH........................... 18.00
Fxed overhead, 2
DLHs $6.75 per
DLH......................... 13.50
Standard cost per unt. $92.00
Standard cost per
unt......................... $87.50
4. a. 18,000 unts 2 DLHs per unt = 36,000 standard DLHs.
b. Manufacturng Overhead
Actua
costs 446,400 Apped costs 486,000 *
Overapped
overhead 39,600
*36,000 standard DLHs $13.50 predetermned rate per
DLH = $486,000.
c. Varabe overhead varances:
Actua DLHs of
Input, at the
Actua Rate
Actua DLHs of
Input, at the
Standard Rate
Standard DLHs
Aowed for
Output, at the
Standard Rate
$174,800 38,000 DLHs
$4.50 per DLH
36,000 DLHs
$4.50 per DLH
= $171,000 = $162,000

Rate Varance,
$3,800 U
Effcency Varance,
$9,000 U
Aternatve souton:
($174,800) - (38,000 DLHs $4.50 per DLH) = $3,800 U
$4.50 per DLH (38,000 DLHs - 36,000 DLHs) = $9,000 U
Actua Fxed
Overhead
Budgeted Fxed
Overhead
Work n Process
$271,600 $270,000* 36,000 DLHs $9 per
DLH
= $324,000

Budget Varance,
$1,600 U
Voume Varance,
$54,000 F
*Can be expressed as: 30,000 denomnator DLHs $9 per
DLH = $270,000.
Aternatve souton:
Budget varance:
= -
= $271,600 - $270,000
= $1,600 U
Voume varance:


Voume Denomnator
Varance hours
overhead rate aowed
= $9.00 per DLH (30,000 DLHs - 36,000 DLHs)
= $54,000 F
Summary of varances:
Varabe overhead rate varance......... $3,800 U
Varabe overhead effcency varance 9,000 U
Fxed overhead budget varance......... 1,600 U
Fxed overhead voume varance........ 54,000 F
Overapped overhead........................ $39,600 F
5. The ma|or dsadvantage of usng norma actvty s the arge
voume varance that ordnary resuts. Ths occurs because the
denomnator actvty used to compute the predetermned
overhead rate s dfferent from the actvty eve that s
antcpated for the perod. In the case at hand, the company
has used a ong-run norma actvty fgure of 30,000 DLHs to
compute the predetermned overhead rate, whereas actvty for
the perod was expected to be 40,000 DLHs. Ths has resuted
n a arge favorabe voume varance that may be dffcut for
management to nterpret. In addton, the arge favorabe
voume varance n ths case has masked the fact that the
company dd not acheve the budgeted eve of actvty for the
perod. The company had panned to work 40,000 DLHs, but
managed to work ony 36,000 DLHs (at standard). Ths
unfavorabe resut s conceaed due to usng a denomnator
fgure that s out of step wth current actvty.
On the other hand, usng ong-run norma actvty as the
denomnator resuts n unt costs that are stabe from year to
year. Thus, managements decsons are not couded by unt
costs that |ump up and down as the actvty eve rses and
fas.
)ppendi% 11+
,ournal $ntries to (ecord -ariances
$%ercise 11+-1 (20 mnutes)
1. The genera edger entry to record the purchase of materas
for the month s:
Raw Materas
(12,000 meters at $3.25 per meter).......... 39,000
Materas Prce Varance
(12,000 meters at $0.10 per meter F) 1,200
Accounts Payabe
(12,000 meters at $3.15 per meter). . 37,800
2. The genera edger entry to record the use of materas for the
month s:
Work n Process
(10,000 meters at $3.25 per meter).......... 32,500
Materas Ouantty Varance
(500 meters at $3.25 per meter U)............ 1,625
Raw Materas
(10,500 meters at $3.25 per meter). . 34,125
3. The genera edger entry to record the ncurrence of drect
abor cost for the month s:
Work n Process (2,000 hours at $12.00 per
hour).......................................................... 24,000
Labor Rate Varance
(1,975 hours at $0.20 per hour U).............. 395
Labor Effcency Varance
(25 hours at $12.00 per hour F)......... 300
Wages Payabe
(1,975 hours at $12.20 per hour)....... 24,095
$%ercise 11+-2 (45 mnutes)
1. a.
Actua Ouantty
of Input, at
Actua Prce
Actua Ouantty
of Input, at
Standard Prce
Standard Ouantty
Aowed for Output,
at Standard Prce
10,000 yards
$13.80 per yard
10,000 yards
$14.00 per yard
7,500 yards*
$14.00 per yard
= $138,000 = $140,000 = $105,000

Prce Varance,
$2,000 F
8,000 yards $14.00 per yard
= $112,000
Ouantty Varance,
$7,000 U
*3,000 unts 2.5 yards per unt = 7,500 yards
formuas:
10,000 yards ($13.80 per yard - $14.00 per yard) = $2,000 F
$14.00 per yard (8,000 yards - 7,500 yards) = $7,000 U
Soutons Manua, Appendx 11B 104
$%ercise 11+-2 (contnued)
b. The |ourna entres woud be:
Raw Materas
(10,000 yards 14.00 per yard)........... 140,000
(10,000 yards $0.20 per yard F) 2,000
Accounts Payabe
(10,000 yards $13.80 per yard). 138,000
Work n Process
(7,500 yards $14.00 per yard)........... 105,000
(500 yards U $14.00 per yard)........... 7,000
Raw Materas
(8,000 yards $14.00 per yard)... 112,000
2. a.
Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for Output,
at the Standard
Rate
5,000 hours
$8.00 per hour
4,800 hours*
$8.00 per hour
$43,000 = $40,000 = $38,400

Rate Varance,
$3,000 U
Effcency Varance,
$1,600 U
Tota Varance,
$4,600 U
*3,000 unts 1.6 hours per unt = 4,800 hours
$%ercise 11+-2 (contnued)
Aternatve Souton:
*$43,000 5,000 hours = $8.60 per hour
b. The |ourna entry woud be:
Work n Process
(4,800 hours $8.00 per hour).............. 38,400
Labor Rate Varance
(5,000 hours $0.60 per hour U)........... 3,000
(200 hours U $8.00 per hour).............. 1,600
Wages Payabe
(5,000 hours $8.60 per hour)......
43,00
0
3. The entres are: entry (a), purchase of materas; entry (b),
ssue of materas to producton; and entry (c), ncurrence of
drect abor cost.
Raw Materas Work n Process
(a) 140,000 (b) 112,000 (b) 105,000
Ba.* 28,000 (c) 38,400
Accounts Payabe Wages Payabe
(a) 138,000 (c) 43,000
Materas Prce Varance Materas Ouantty Varance
(a) 2,000 (b) 7,000
Labor Rate Varance Labor Effcency Varance
(c) 3,000 (c) 1,600
*2,000 yards of matera at a standard cost of $14.00 per yard
Pro&lem 11+-3 (60 mnutes)
1. a.
Actua Ouantty of
Input, at Actua
Prce
Actua Ouantty
of Input, at
Standard Prce
Standard Ouantty
Aowed for Output,
at Standard Prce
32,000 feet
$4.80 per foot
32,000 feet
$5.00 per foot
29,600 feet*
$5.00 per foot
= $153,600 = $160,000 = $148,000

Prce Varance,
$6,400 F
Ouantty Varance,
$12,000 U
Tota Varance,
$5,600 U
*8,000 footbas 3.7 ft. per footba = 29,600 feet
formuas:
32,000 feet ($4.80 per foot - $5.00 per foot) = $6,400 F
$5.00 per foot (32,000 feet - 29,600 feet) = $12,000 U
b.
Raw Materas (32,000 feet $5.00 per
foot)..................................................... 160,000
(32,000 feet $0.20 per foot F). . 6,400
Accounts Payabe
(32,000 feet $4.80 per foot)..... 153,600
Work n Process
(29,600 feet $5.00 per foot)............. 148,000
(2,400 feet U $5.00 per foot)............ 12,000
Raw Materas
(32,000 feet $5.00 per foot)..... 160,000
Pro&lem 11+-3 (contnued)
2. a.
Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for
Output, at the
Standard Rate
6,400 hours*
$8.00 per hour
6,400 hours
$7.50 per hour
7,200 hours**
$7.50 per hour
= $51,200 = $48,000 = $54,000

Rate Varance,
$3,200 U
Effcency Varance,
$6,000 F
Tota Varance,
$2,800 F
* 8,000 footbas 0.8 hours per footba = 6,400
hours
** 8,000 footbas 0.9 hours per footba = 7,200
hours
formuas:
b.
Work n Process (7,200 hours $7.50 per
hour)........................................................
54,00
0
Labor Rate Varance
(6,400 hours $0.50 per hour U)............ 3,200
(800 hours F $7.50 per hour) ....... 6,000
Wages Payabe
(6,400 hours $8.00 per hour)........
51,20
0
3. Actua Hours of
Input, at the
Actua Rate
Actua Hours of
Input, at the
Standard Rate
Standard Hours
Aowed for
Output, at the
Standard Rate
6,400 hours
$2.75 per hour
6,400 hours
$2.50 per hour
7,200 hours
$2.50 per hour
= $17,600 = $16,000 = $18,000

Rate Varance,
$1,600 U
Effcency Varance,
$2,000 F
Tota Varance,
$400 F
formuas:
4. No. He s not correct n hs statement. The company has a
arge, unfavorabe materas quantty varance that shoud be
nvestgated. Aso, the overhead rate varance equas 10% of
standard, whch shoud aso be nvestgated.
It appears that the companys strategy to ncrease output by
gvng rases was effectve. Athough the rases resuted n an
unfavorabe rate varance, ths varance was more than offset
by a arge, favorabe effcency varance.
5. The varances have many possbe causes. Some of the more
key causes ncude the foowng:
Materials (ariances*
Favorabe prce varance: Good prce, nferor quaty materas,
unusua dscount due to quantty purchased, drop n market
prce, ess costy method of freght, outdated or naccurate
standards.
Unfavorabe quantty varance: Careessness, poory ad|usted
machnes, unsked workers, nferor quaty materas,
outdated or naccurate standards.
Labor (ariances*
Unfavorabe rate varance: Use of hghy sked workers,
change n pay scae, overtme, outdated or naccurate
standards.
Favorabe effcency varance: Use of hghy sked workers,
hgh-quaty materas, new equpment, outdated or naccurate
standards.
Variable o(erhead (ariances*
Unfavorabe rate varance: Increase n costs, waste, theft,
spage, purchases n uneconomca ots, outdated or
naccurate standards.
Favorabe effcency varance: Same as for abor effcency
varance.


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Chapter 11

Standard Costs and Operating

50 tune-ups* 2.5 hours per tune-up* = 125 hours

Fxed porton of Standard

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