PROBLEM 8–18B Comprehensive Variance Analysis [LO4, LO5, LO6]

CHECK FIGURE
(1a) Materials quantity variance: 500 F;
(1b) Labor rate variance: $1,140 F

Michiana Company’s Benton Harbor Plant produces precast ingots for industrial use. Angelo
Lorenzo, who was recently appointed general manager of the Benton Harbor Plant, has just
been handed the plant’s contribution format income statement for October. The statement is
shown below:

Budgeted Actual
Sales (8,000 ingots) ........................... $240,000 $240,00
Variable expenses:
Variable cost of goods sold* ........... 94,000 112,470
Variable selling expenses ................ 10,000 10,000
Total variable expenses .................. 104,000 122,470
Contribution margin ........................... 136,000 117,530
Fixed expenses:
Manufacturing overhead ................. 55,000 55,000
Selling and administrative ............... 70,000 70,000
Total fixed expenses ........................... 125,000 125,000
Net operating income (loss) ................ $ 11,000 $(7,470)

*Contains direct materials, direct labor, and variable manufacturing overhead.

Mr. Lorenzo was shocked to see the loss for the month, particularly because sales were exactly
as budgeted. He stated, “I sure hope the plant has a standard cost system in operation. If it
doesn’t, I won’t have the slightest idea of where to start looking for the problem.” The plant
does use a standard cost system, with the following standard variable cost per ingot:

Standard Quantity Standard Price Standard

or Hours or Rate Cost
Direct materials ................................ 3.5 pounds $2.50 per pound $ 8.75
Direct labor ...................................... 0.4 hours $6.50 per hour 2.60
Variable manufacturing overhead ...... 0.2 hours* $2.00 per hour 0.40
Total standard variable cost .............. $11.75
*Based on machine-hours.
During October the plant produced 8,000 ingots and incurred the following costs:
a. Purchased 33,000 pounds of materials at a cost of $2.95 per pound. There were no raw
materials in inventory at the beginning of the month.
b. Used 27,800 pounds of materials in production. (Finished goods and work in process
inventories are insignificant and can be ignored.)
c. Worked 3,800 direct labor-hours at a cost of $6.20 per hour.
d. Incurred a total variable manufacturing overhead cost of $4,560 for the month. A total of
1,900 machine-hours was recorded.

It is the company’s policy to close all variances to cost of goods sold on a monthly basis.
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Chapter 8 Alternate Problems 8-1

Required:
1. Compute the following variances for October:
a. Direct materials price and quantity variances.
b. Direct labor rate and efficiency variances.
c. Variable overhead rate and efficiency variances.
2. Summarize the variances that you computed in (1) above by showing the net overall
favorable or unfavorable variance for October. What impact did this figure have on the
company’s income statement?
3. Pick out the two most significant variances that you computed in (1) above. Explain to Mr.
Lorenzo possible causes of these variances.

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prior written consent of McGraw-Hill Education.

Chapter 8 Alternate Problems 8-2

PROBLEM 8–19B More Than One Cost Driver [LO2, LO3]
CHECK FIGURE
(1) Flexible budget total cost: $21,528

Streeterville Pizza is a small neighborhood pizzeria that has a small area for in-store dining as
well offering takeout and free home delivery services. The pizzeria’s owner has determined that
the shop has two major cost drivers—the number of pizzas sold and the number of deliveries
made. Data concerning the pizzeria’s costs appear below:

Fixed
Cost per Cost per Cost per
Month Pizza Delivery
Pizza ingredients ................ $5.00
Kitchen staff ...................... $5,800
Utilities .............................. 520 $.10
Delivery person .................. $2.90
Delivery vehicle .................. 680 $2.10
Equipment depreciation ...... 387
Rent .................................. 1,730
Miscellaneous ..................... 730 $.01

In October, the pizzeria budgeted for 2,000 pizzas at an average selling price of $13.00 per
pizza and for 190 deliveries.

Data concerning the pizzeria’s operations in October appear below:

Actual
Results
Pizzas ..................................... 2,100
Deliveries ................................ 190
Revenue ................................. $27,840
Pizza ingredients ..................... $10,550
Kitchen staff ........................... $5,740
Utilities ................................... $855
Delivery person ....................... $551
Delivery vehicle ....................... $1,233
Equipment depreciation ........... $387
Rent ....................................... $1,730
Miscellaneous .......................... $743

Required:
1. Compute the revenue and spending variances for the pizzeria for October.
2. Explain the revenue and spending variances.

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Chapter 8 Alternate Problems 8-3

PROBLEM 8–20B Basic Variance Analysis; the Impact of Variances on Unit Costs
[LO4, LO5, LO6]
CHECK FIGURE
(1b) Labor rate variance: $6,930 F
(1c) Variable overhead efficiency variance: $2,200 U

Perry Company manufactures a number of products. The standards relating to one of these
products are shown below, along with actual cost data for May.

Standard Actual
Cost per Cost
Unit per Unit
Direct materials:
Standard: 1.80 feet at $3.00 per foot .................. $ 5.40
Actual: 1.75 feet at $3.20 per foot ...................... $ 5.60
Direct labor:
Standard: 1.00 hours at $16.00 per hour ............. 16.00
Actual: 1.05 hours at $15.40 per hour ................. 16.17
Variable overhead:
Standard: 1.00 hours at $4.00 per hour ............... 4.00
Actual: 1.05 hours at $3.60 per hour ................... 3.78
Total cost per unit .............................................. $25.40 $25.55
Excess of actual cost over standard cost per unit .. $0.15

The production superintendent was pleased when she saw this report and commented: “This
$0.15 excess cost is well within the 1 percent limit management has set for acceptable
variances. It’s obvious that there’s not much to worry about with this product.”

Actual production for the month was 11,000 units. Variable overhead cost is assigned to
products on the basis of direct labor-hours. There were no beginning or ending inventories of
materials.

Required:
1. Compute the following variances for May:
a. Materials price and quantity variances.
b. Labor rate and efficiency variances.
c. Variable overhead rate and efficiency variances.
2. How much of the $0.15 excess unit cost is traceable to each of the variances computed in
(1) above.
3. How much of the $0.15 excess unit cost is traceable to apparent inefficient use of labor
time?
4. Do you agree that the excess unit cost is not of concern?

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Chapter 8 Alternate Problems 8-4

PROBLEM 8–21B Multiple Products, Materials, and Processes [LO4, LO5]
CHECK FIGURE
(2) Materials quantity variance—material Y561: $5,895 U

East Chicago Corporation produces two products, Alpha8 and Zeta9, which pass through two
operations, Sintering and Finishing. Each of the products uses two raw materials, X342 and
Y561. The company uses a standard cost system, with the following standards for each product
(on a per unit basis):

Raw Material Standard Labor Time

Product X342 Y561 Sintering Finishing
Alpha8 ...................... 1.5 kilos 2.3 liters 0.20 hours 0.75 hours
Zeta9 ...................... 2.7 kilos 4.3 liters 0.35 hours 0.85 hours

Information relating to materials purchased and materials used in production during May
follows:

Purchase Standard Used in

Material Purchases Cost Price Production
X342 ..................... 13,000 kilos $46,800 $3.40 per kilo 8,800 kilos
Y561 ..................... 18,000 liters $25,200 $1.50 per liter 14,000 liters

The following additional information is available:

a. The company recognizes price variances when materials are purchased.
b. The standard labor rate is $18.00 per hour in Sintering and $17.00 per hour in Finishing.
c. During May, 1,400 direct labor-hours were worked in Sintering at a total labor cost of
$28,700, and 2,840 direct labor-hours were worked in Finishing at a total labor cost of
$53,960.
d. Production during May was 1,200 Alpha8s and 1,700 Zeta9s.

Required:
1. Prepare a standard cost card for each product, showing the standard cost of direct materials
and direct labor.
2. Compute the materials quantity and price variances for each material.
3. Compute the direct labor efficiency and rate variances for each operation.

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prior written consent of McGraw-Hill Education.

Chapter 8 Alternate Problems 8-5

PROBLEM 8–22B Variance Analysis in a Hospital [LO4, LO5, LO6]
CHECK FIGURE
(1) Materials price variance: $2,210 F
(2a) Labor efficiency variance: $2,784 U

“What’s going on in that lab?” asked Kevin Brolsma, chief administrator for Cincinnati Hospital,
as he studied the prior month’s reports. “Every month the lab teeters between a profit and a
loss. Are we going to have to increase our lab fees again?”

“We can’t,” replied Jessica Duffy, the controller. “We’re getting lots of complaints about the last
increase, particularly from the insurance companies and governmental health units. They’re
now paying only about 80% of what we bill. I’m beginning to think the problem is on the cost
side.”

To determine if lab costs are in line with other hospitals, Mr. Brolsma has asked you to evaluate
the costs for the past month. Ms. Duffy has provided you with the following information:
a. Two basic types of tests are performed in the lab—smears and blood tests. During the past
month, 3,400 smears and 1,000 blood tests were performed in the lab.
b. Small glass plates are used in both types of tests. During the past month, the hospital
purchased 17,000 plates at a cost of $53,040. This cost is net of a 4% purchase discount. A
total of 2,400 of these plates were unused at the end of the month; no plates were on hand
at the beginning of the month.
c. During the past month, 2,400 hours of labor time were used in performing smears and blood
tests. The cost of this labor time was $26,400.
d. The lab’s variable overhead cost last month totaled $19,200.

Cincinnati Hospital has never used standard costs. By searching industry literature, however,
you have determined the following nationwide averages for hospital labs:
Plates: Three plates are required per lab test. These plates cost $3.25 each and are disposed
of after the test is completed.
Labor: Each smear should require 0.4 hours to complete, and each blood test should require
0.8 hours to complete. The average cost of this lab time is $11.60 per hour.
Overhead: Overhead cost is based on direct labor-hours. The average rate of variable
overhead is $7.50 per hour.

Required:
1. Compute the materials price variance for the plates purchased last month, and compute a
materials quantity variance for the plates used last month.
2. For labor cost in the lab:
a. Compute a labor rate variance and a labor efficiency variance.
b. In most hospitals, three-fourths of the workers in the lab are certified technicians and
one-fourth are assistants. In an effort to reduce costs, Cincinnati Hospital employs only
one-half certified technicians and one-half assistants. Would you recommend that this
policy be continued? Explain.
3. Compute the variable overhead rate and efficiency variances. Is there any relation between
the variable overhead efficiency variance and the labor efficiency variance? Explain.
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Chapter 8 Alternate Problems 8-6

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prior written consent of McGraw-Hill Education.

Chapter 8 Alternate Problems 8-7

PROBLEM 8–23B Flexible Budgets and Spending Variances [LO1 , LO2]
CHECK FIGURE
(2) Overall spending variance: $6,560 U

You have just been hired by OpenDoor Corporation, the manufacturer of a revolutionary new
garage door opening device. The president has asked that you review the company’s costing
system and “do what you can to help us get better control of our manufacturing overhead
costs.” You find that the company has never used a flexible budget, and you suggest that
preparing such a budget would be an excellent first step in overhead planning and control.
After much effort and analysis, you determined the following cost formulas and gathered the
following actual cost data for April:

Actual Cost
Cost Formula in April
Utilities ................................ $16,800 plus $.18 per machine-hour $22,020
Maintenance ........................ $38,700 plus $2.00 per machine-hour $70,500
Supplies ............................... $.50 per machine-hour $9,300
Indirect labor ....................... $94,300 plus $1.60 per machine-hour $125,600
Depreciation ........................ $67,600 $69,300

During April, the company worked 17,000 machine-hours and produced 11,000 units. The
company had originally planned to work 19,000 machine-hours during April.

Required:
1. Prepare a flexible budget for April.
2. Prepare a report showing the spending variances for April. Explain what these variances
mean.

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prior written consent of McGraw-Hill Education.

Chapter 8 Alternate Problems 8-8

PROBLEM 8–24B Comprehensive Variance Analysis [LO4, LO5, LO6]
(1) Materials price variance: $3,720 F
(3) Variable overhead rate variance: $5,750 U

Stephaney Company produces several products in its factory, including a karate robe. The
company uses a standard cost system to assist in the control of costs. According to the
standards that have been set for the robes, the factory should work 780 direct labor-hours each
month and produce 3,900 robes. The standard costs associated with this level of production are
as follows:

Per Unit of
Total Product
Direct materials ................................... $73,710 $18.90
Direct labor ........................................... $13,260 3.40
Variable manufacturing overhead (based
on direct labor-hours) ........................ $2,340 0.60
$22.90

During April, the factory worked only 750 direct labor-hours and produced 4,000 robes. The
following actual costs were recorded during the month:

Per Unit of
Total Product
Direct materials (12,400 yards) ............... $74,400 $18.60
Direct labor ........................................... $14,400 3.60
Variable manufacturing overhead .......... $8,000 2.00
$24.20

At standard, each robe should require 3.0 yards of material. All of the materials purchased
during the month were used in production.

Required:
Compute the following variances for April:
1. The materials price and quantity variances.
2. The labor rate and efficiency variances.
3. The variable manufacturing overhead rate and efficiency variances.

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Chapter 8 Alternate Problems 8-9

PROBLEM 8–25B Materials and Labor Variances; Computations from Incomplete
Data [LO4, LO5]
CHECK FIGURE
(1a) Standard price: $3.00 per pound
(2b) Labor rate variance: $1,115 U

Diamond Company makes one product and has set the following standards for materials and
labor:

Direct Direct
Materials Labor
Standard quantity or hours per unit ....... ? pounds 2.10 hours
Standard price or rate ........................... ? per pound $8.50 per hour
Standard cost per unit ........................... ? $17.85

During the past month, the company purchased 6,200 pounds of direct materials at a cost of
$17,050. All of this material was used in the production of 1,300 units of product. Direct labor
cost totaled $20,070 for the month. The following variances have been computed:

Materials quantity variance .......................... $1,200 U

Total materials spending variance ............... $350 F
Labor efficiency variance ............................. $4,250 F

Required:
1. For direct materials:
a. Compute the standard price per pound for materials.
b. Compute the standard quantity allowed for materials for the month’s production.
c. Compute the standard quantity of materials allowed per unit of product.
2. For direct labor:
a. Compute the actual direct labor cost per hour for the month.
b. Compute the labor rate variance.
(Hint: In completing the problem, it may be helpful to move from known to unknown data
either by using the variance formulas or by using the columnar format shown in Exhibits 8–11
and 8–12.)

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Chapter 8 Alternate Problems 8-10