ACC2002

TUTORIAL 6

Done By:
Liu Xiaoxuan U072692B
Tan Sze Huay Bestia U096840R
Ho Qi Lin U097079U
Ooi Yi Yee Clarissa A0071956W

Tutorial Group B17

Problem 10-39 (P.447) Part 1a
1. Components of Standard Costing System
 Direct Material Standards/Labor Rate Standards:
o Material Price Standards
o Material Quantity Standards

 Direct Labor Standards

o Labor Rate Standards
o Labor Efficiency Standards
Problem 10-39 (P.447) Part 1a
1A)
1A) Who
Who should
should be
be involved
involved in
in setting
setting the
the standards?
standards?

 Material Price Standards/Labor Rates

Standards
 Accounting department, quality control
department, production department
Problem 10-39 (P.447) Part 1a

• Material Quantity Standards/Labor

Efficiency Standards:
– Sales department, production department
Problem 10-39 (P.447) Part 1b
1B)
1B) What
What factors
factors should
should be
be considered
considered in
in establishing
establishing the
the
standards?
standards?

• Material Price Standards/Labor Rate Standards

• Discounts, freight, quality, payroll taxes, fringe benefits,
qualifications.
Problem 10-39 (P.447) Part 1b

• Material Quantity Standards/Labor Efficiency

Standards:
• Historical experience, engineering studies, input
from operating personnel.
Problem 10-39 (P.447) Part 2
2.
2. Who
Who will
will be
be assigned
assigned for
for each
each and
and for
for resulting
resulting variances?
variances?

• Materials Use Variance

Responsibility: Production Manager
Reason: The manager can ensure that the standard is
met through methods such as minimizing scrap,
wastes and rework.
Problem 10-39 (P.447) Part 2
• Materials Price Variance
Responsibility: Purchasing Supervisor
(under Production department)

Reason: Price of materials is largely beyond his/her control;

however the price variance can be influenced by factors such
as quality, quantity discounts, distance of the source from
plants etc which are under control of the purchasing
manager.
Problem 10-39 (P.447) Part 2
• Labor Use Variance
Responsibility: Production Manager

Reason: Methods to promote the efficiency of labors are under

control of the production manager. Examples of such methods
are: allocating employees based on their skills, increase
quality of trainings, increase quality of production
supervision and increase motivation level of employees.
Problem 10-39 (P.447) Part 2
• Labor Wages Variance
Responsibility: Production Manager
Reason: Production manager is able to ensure standards are
met through mixing different skill levels employees to
work tasks.
Problem 10-42 (P.447)
Standard Quantity
(materials: lbs.
labor, OH: hrs) Standard Price ($) Standard Cost ($)
Direct Material 12 3 36
Direct Labor 1.6 10 16
Variable Overhead 1.6 2.5 4
0 15.2 15.5 56

During 1st Week:

Units Produced 4,000
Actual Labor Costs $70,000
Actual Labor Hours 6,600
Materials Purchased 46,000 @ $3.05
Actual Variable Overhead Cost $26,500
Problem 10-42 (P.447) Part 1

1. Computation of Material Price Variance

Actual Price (AP) $3.05

Actual Quantity (AQ) 46,000 lbs
Standard Price (SP) $3.00
Standard Quantity (SQ) 12 lbs x 4,000 units = 48,000 lbs

Material Price Variance

MPV= AQ ( AP - SP )
= 46,000 x (3.05 - 3.00)
= $2,300 (Unfavorable)
Problem 10-42 (P.447) Part 1

1. Computation of Material Quantity Variance

Actual Price (AP) $3.05

Actual Quantity (AQ) 46,000 lbs
Standard Price (SP) $3.00
Standard Quantity (SQ) 12 lbs x 4,000 units= 48,000 lbs

Material Quantity Variance

MQV = SP ( AQ - SQ )
= 3.00 (46,000 - 48,000)
= $6,000 (Favorable)
Problem 10-42 (P.447) Part 1

Total Material Variance = MPV+ MQV

= 6000 (F) - 2300 (U)
= $3,700.00 (Favourable)

Recommend purchasing agent to continue

buying this quality because total overall
material variance is favorable.
Problem 10-42 (P.447) Part 2

2. Computation of Labour Rate Variance

Actual Rate (AR) 70,000 / 6,600 = $ 10.61

10 20/ 33
Actual Hours (AH) 6,600 hrs
Standard Rate (SR) $10.00
Standard Hours (SH) 1.6 x 4,000 6,400 hrs

Labor Rate Variance

LRV= AH( AR- SR)
= 6,600 x (10 20/ 33 - 10)
= $4,000 (Unfavorable)
Problem 10-42 (P.447) Part 2

Total Labor Variance = LRV+ LEV

= 4,000 (U) - 2000 (U)
= $6,000.00 (Unfavourable)

New manufacturing process should be

discontinued because overall total labor
variance is unfavorable.
Problem 10-42 (P.447) Part 3

3. Computation of NEW Labor Rate Variance

Actual Rate (AR) *Revised 62,000 / 6,000 = $ 10.33

10 1/ 3
Actual Hours (AH) *Revised 6,000 hrs
Standard Rate (SR) $10.00
Standard Hours (SH) 1.6 x 4,000 6,400 hrs

Labor Rate Variance

LRV = AH( AR- SR)
= 6,000 x (10 1/ 3 - 10)
= $2,000 (Unfavorable)
Problem 10-42 (P.447) Part 3

3. Computation of NEW Labor Efficiency Variance

Actual Rate (AR) *Revised 62,000 / 6,000 = $ 10.33

10 1/ 3
Actual Hours (AH) *Revised 6,000 hrs
Standard Rate (SR) $10.00
Standard Hours (SH) 1.6 x 4,000 6,400 hrs

Labor Efficiency Variance

LEV = SR( AH- SH)
= 10 x (6,000 - 6,400)
= $4,000 (Favorable)
Problem 10-42 (P.447) Part 3

3. Computation of Annual Savings

Projected Annual Saving = MPV+ MQV+ LRV+ LEV
= -2,300 (U) + 6,000 (F) - 2,000 (U) + 4,0000 (F)
= $5,700 (Favourable)

• New process should be adopted because total

projected annual savings is favorable.
 Discuss
1.1. D iscuss the
the benefits
benefits of
of aa standard
standard costing
costing system
system for
for Crunchy
Crunchy
Chips.
Chips.

Standard cost system would help Crunchy Chips

(i) To improve planning and control and,

(ii)To facilitate product costing

Question 6
Part 1
Question 3 : Problem 10-42
Requirement 1

Standard Standard
  quantity Price Standard Cost
Direct Material 25 quarts $4/quart $100
Direct Labor 0.768 hours $15/hour $11.52
Variable Overhead 0.768 hours $8/hour $6.14
Fixed Overhead 0.768 hours $12/hour $9.22
Total Standard
Cost     $126.88

Standard Cost = Standard Quantity * Standard Cost

Question 3 : Problem 10-42
Requirement 2

Actual Hour = 1.280hr * 320 units = 409.6hr

Standard Hour = 0.768hr * 320 units = 245.76hr

Since actual hour is more than standard hour, an unfavorable

labor efficiency will be expected.

LEV
= SR(AH - SH)
= $15(409.6 – 245.76)
= $ 2457.60
Requirement 3

Cumulative
=
Total time
Average time
Total units
per unit

Same time taken

for each unit here
1st unit 320th unit 640th unit
Time taken Time taken
is longer is shorter

Since cumulative average time per unit takes into account the
average time of previous serviced unit, cumulative average time
per unit at 640 will be shorter than the cumulative average time
per unit at 320.
Requirement 3 (con’t)

640 units * 1.024 hr – 320 units * 1.280 hr

320 units

= 0.768 hr per unit

0.768 hr per units is a good choice for per unit labor

standard as it is the average most efficient time per unit after
the learning effects are achieved.
 Question 4: Problem 10-44

  Standard quantity Standard Price

Direct Material:
Liquids 1,050,000 ounces $0.25 per ounce
Bottles 250,000 bottles $0.05 per bottle
Direct Labor 50,000 DLH $12.50 per DLH
Variable overhead 50,000 DLH $4.70 per DLH
Fixed overhead 50,000 DLH $1.00 per DLH

  Actual quantity Actual Price

Direct Material:
Liquids 1,150,000 ounces $0.27 per ounce
Bottles 250,000 bottles $0.048 per bottle
Direct Labor 48,250 DLH $12.90 per DLH
Requirement 1

Liquids standard cost Bottles standard cost

= SP * SQ = SP * SQ
= $0.25 * 1,050,000 ounces = $0.05 * 250,000 bottles
= $262,500 = $12,500

Direct material standard cost

= liquids standard cost + bottles standard cost
= $275,000

Upper limit = $295,000

Lower limit = $275,000
Requirement 1 (con’t)

Direct labor standard cost

= SR * SH Upper limit = $645,000
= $12.50 * 50,000 DLH Lower limit = $605,000
= $625,000

Overhead standard cost

= VOH + FOH Upper limit = $305,000
= $0.94 * 250,000 + $0.20 * 250,000 Lower limit = $265,000
= $285,000
 Requirement 2

Bottle price variance Bottle usage variance

= AQ(AP – SP) = SP(AQ – SQ)
= 250,000($0.048 - $0.05) = $0.05(250,000 – 250,000)
= $500 F = $0

Liquids usage variance

Liquids price variance = SP(AQ – SQ)
= AQ(AP – SP) = $0.25(1,150,000 – 1,050,000)
= $25,000 U
= 1,150,000($0.27 - $0.25)
= $23,000 U

Investigate!
Requirement 2 (con’t)

MPV = Liquids price variance + bottle price variance

= $23,000 U + $500 F
= $22,500 U

MUV = Bottle usage variance + Liquids usage variance

= $0 +$25,000 U
= $25,000 U

Total direct material variance

= MPV + MUV
= $22,500 U + $ 25,000 U
= $47,500 U
Requirement 3

LRV = AH(AR – SR)

= 48,250($12.90 - $12.50)
= $19,300 U

LEV = SR(AH – SH)

= $12.50(48,250 – 50,000) Investigate!
= $21,875 F

Total labor variance

= LRV + LEV
= $19,300 U + $21,875 F
= $2,575 F
Qn 5. Problem 10-48 (p.453)
Req 1:
AP = $4.70/lbs
AQpurchased = 260,000 lbs
AQused = 260,000 + 60,000 = 320,000 lbs
SP = $5.00/lbs
SQ = 6.0 x 50,000 = 300,000 lbs
MPV = AQpurchased (AP – SP)
= 260,000 ($4.70 - $5.00)
= $78,000 F
MQV = SP (AQused - SQ)
= $5.00 (320,000 – 300,000)
= $100,000 U
 Materials usage variance is more controllable.

 Production manager is generally responsible for materials usage variance

o Minimize scrap, waste and rework to ensure that standards are met

 Materials price variance:

o Price of materials determined by market forces, thus beyond control

o BUT price variance can be influenced by factors such as quality,

quantity discounts, distance of the source from the plant etc., which

are under the control of the purchasing agent.

o But generally less controllable
Req 2
AR = $1,066,000 / 82,000 hrs = $13/hr
AH = 82,000 hrs
SR = $12/hr
SH = 1.6 hrs/unit x 50,000 units = 80,000 hrs

• LRV = AH (AR – SR)

= 82,000 ($13 - $12)
= $82,000 U

• LEV = SR (AH – SH)

= $12 (82,000 – 80,000)
= $24,000 U
Production manager usually responsible
for the labor efficiency variance
Possible causes:
o Mismatch of skill level to tasks
o Lack of motivation
o Poor quality of production supervision
o Inadequate training provided to
employees
Req 3

MPV = $78,000 F
MQV = $100,000 U
LRV = $82,000 U
LEV = $24,000 U

Net savings/loss = $78,000 - $100,000 - $72,000 - $24,000

= $128,000 U
• Net loss of $128,000 due to total material variances & total labor variances.

• Should discontinue usage of cheaper raw material.

• Material price & Labor rate less controllable, since they are usually determined

by external market forces.

o Material price (AP – SP = $0.30)

o Labor rate (AR – SR = $1)

• Need to revise standards for:

o Material standard quantity (AQused – SQ = 20,000 lbs)

o Labor standard hours (AH – SH = 2,000 hrs)

 More significant differences

• Material quantity & Labor hour standards may have been set too high, resulting

in large variances.
Req 4

Dr Raw Materials $1,300,000*

Cr MPV (F) $78,000
Cr Accounts Payable $1,222,000**

Calculations:
*AQpurchased x SP
= 260,000 lbs x $5.00/lbs
= $1,300,000

**AQpurchased x AP
= 260,000 lbs x $4.70/lbs
= $1,222,000
Dr Work-in-process $1,500,000*
Dr MQV (U) $100,000
Cr Raw Materials $1,600,000**

Calculations:
*SQ x SP
= 300,000 lbs x $5.00/lbs
= $1,500,000

** AQused x SP
= 320,000 lbs x $5.00/lbs
= $1,600,000
Dr Work-in-process $960,000*
Dr LRV (U) $82,000
Dr LEV (U) $24,000
Cr Wages payable $1,066,000**

Calculations:
*SR x SH = $12/hr x 80,000hrs = $960,000

**AR x AH = $13/hr x 82,000hrs = $1,066,000

Dr Work-in-process $600,000
Cr Manufacturing Overhead $600,000*

Calculations:
Standard overhead rates = $12 / 1.6hrs = $7.50/hr
* Manufacturing overhead cost = $7.50/hr x 1.6 hrs x 50,000
units = $600,000
Question 6
Part 1
i. By developing unit price and quantity standards, an overall
variance can be decomposed into price variance and a usage
or efficiency variance.
This allows Edward Golding to know if the variance is
favourable or unfavourable.

By the standard cost system, Edward will know whether the

variance is attributed to discrepancies between planned usage
and actual usage or both. Hence, it provides specific signals
regarding the need for corrective action and where the action
should be focused. As a result, it improves the operational
control of Crunchy Chips.
Question 6
Part 1

ii. Standard cost system helps to have greater capacity

for control of product costing. It provides readily
available unit cost information that can be used for
pricing decisions at any time throughout the period
because actual costs (direct or indirect) do not need
to be known.
 2. Discuss
2. D iscuss the
the President’s
President’s concern
concern about
about using
using the
the result
result of
of the
the
engineering
engineering study
study to
to set
set the
the labour
labour standards.
standards. What
What standards
standards
would
would you
you recommend?
recommend?

The engineering study may reveal the ideal standards

(peak/maximum output) which can only be achieved if
everything operates perfectly. Hence, the President should
set currently attainable standards which can only be
achieved under efficient operating conditions.

This implies that the standards should be set at hours that

are 10% higher than the ideal standards revealed by the
engineering study.

Question 6
Part 2
 3.
3. Develop
Develop aa standard
standard cost
cost sheet
sheet for
for Crunchy
Crunchy Chips’
Chips’ plain
plain potato
potato chips
chips

Manufacturing Processes Original Standard Hours New Standard Hours*

Raw Potato Inspection 3200 3520

Finished Chip Inspections 12000 13200

Frying Monitor 6300 6930

Boxing 16600 18260
Machine Operators 6300 6930

*New Standard Hours = Original Standard Hours X (100 + 10)%

Question 6
Part 3
Direct Materials
Direct Cost / $ Amount Used Per Cost Used Per Bag
Materials Bag of Chips of Chips/ $

Potatoes 0.245 / pound (4 X 4.25 X 0.0625) = (0.245 X 1.0625) =

1.0625 pound 0.260

Cooking Oil 0.04 / ounce 3.3 ounce (0.04 X 3.3) = 0.132

Bags 0.11 / bag 1 bag 0.11

Boxes 0.52 / box 1/15 box (0.52 X 1/150) =
0.0347

Total Cost Per Bag 0.537*

* Do not forget about the potato pieces that are sold to the animal feed producers
Direct Materials
Amount of Potatoes used to produce one bag of chips
= 4.25 X 4
= 17 ounce

Amount of Potatoes used in one bag of chips = 16.3 ounce

Hence, rejected amount of potatoes per bag of chips

= 17 -16.3
= 0.7 ounce

Cash received for selling off rejected amount of potatoes per bag
= 0.7 X 0.0625 X $0.16
= $0.007
Direct Materials
Direct Cost / $ Amount Used Per Cost Used Per Bag of
Materials Bag of Chips Chips/ $

Potatoes 0.245 / pound (4 X 4.25 X 0.0625) = (0.245 X 1.0625) = 0.260

1.0625 pound

Cooking Oil 0.04 / ounce 3.3 ounce (0.04 X 3.3) = 0.132

Bags 0.11 / bag 1 bag 0.11

Boxes 0.52 / box 1/15 box (0.52 X 1/150) = 0.0347

Rejected 0.16 / pound (0.0625 X 0.7 ) = 0.007

amount of 0.04375
- Potato Pieces
Total Cost Per 0.530
= Bag
Direct Labour
Direct Labour Hours Needed Cost per hour / $ Cost / $
Raw Potato 3520 15.20 53,504
Inspection
Finished Chip 13200 10.30 135,960
Inspection
Frying Monitor 6930 14.00 97,020
Boxing 18260 11.00 200,860
Machine Operators 6930 13.00 90,090
Total Cost 577,434

Direct Labour Cost per bag of chips

= $577,434 / (8.8 X 106)
= $0.0656
OVERHEAD
Variable Overhead
= (116/100) X $577,434
= $669,823.44

Fixed Overhead = $1,135,216

Total Overhead Cost = Variable OH + Fixed OH

= $669,823.44 + $1,135,216
= $1,805,039.44

Overhead Cost per bag of chips

= $1,805,039.44 / (8.8 X 106)
= $0.205
Standard Unit Cost
DM per bag = $0.530
DL per bag = $0.0656
Overhead per bag = $0.205

Standard Unit Cost

= DM + DL + OH
= $0.530 + $0.0656 + $0.205
= $0.80
 4.
4. Suppose
Suppose that
that the
the level
level of
of production
production waswas 8.8
8.8 million
million bags
bags of
of potato
potato
chips
chips for
for the
the year
year as
as planned.
planned. IfIf 9.5
9.5 million
million pounds
pounds ofof potatoes
potatoes were
were used,
used,
compute
compute thethe material
material usage
usage variance
variance for
for potatoes
potatoes

Standard Quantity (SP)

= 8.8 X 106 X 17 X 0.0625
= 9.35 X 106 pounds

Material Usage Variance (MUV) = (AP – SQ)SP

= (9.5 X 106 – 9.35 X 106) (0.245)
= (150000)(0.245)
= $36750 U
Qn 7. Supplement Question
Req 1
• “Rigged” standard costs by setting standards too low, so as to produce
favorable variances
o Overstate favorable variances
o Understate COGS
o Overstate net operating income

Req 2
• Should not be permitted to continue this practice
• Violates ethical standards of competence, integrity & credibility.
o Financial reporting regulations forbid carrying variances forward from one year to the next
o Will falsely inflate profits of company. Lack of accountability towards investors
Req 3

• Standards rigged by Preston Lansing, Vice President of Home Security

Division.

• Gary Farber, assistant controller, said that Lansing’s practice was

common knowledge

• President of Merced Home Products aware and claims that the board of
directors was aware too.

Report to the board of directors in case the president was lying.

Initiate a confidential discussion with an IMA Ethics Counselor or other

impartial advisor to obtain a better understanding of possible courses of
actions