Solution manual cost management measuring monitoring and motivating performance 1st by wolcott ch11

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Chapter 11
Standard Costs and Variance Analysis
LEARNING OBJECTIVES
Chapter 11 addresses the following questions:
Q1
Q2
Q3
Q4
Q5
Q6
Q7
Q8

How are standard costs established?
What is variance analysis, and how is it performed?
How are direct cost variances calculated?
How is direct cost variance information analyzed and used?
How are variable and fixed overhead variances calculated?
How is overhead variance information analyzed and used?
How are manufacturing cost variances closed?
Which profit-related variances are commonly analyzed? (Appendix 11A)

These learning questions (Q1 through Q8) are cross-referenced in the textbook to individual
exercises and problems.

COMPLEXITY SYMBOLS
The textbook uses a coding system to identify the complexity of individual requirements in the
exercises and problems.
Questions Having a Single Correct Answer:

No Symbol
This question requires students to recall or apply knowledge as shown in the
textbook.
This question requires students to extend knowledge beyond the applications
e
shown in the textbook.

Open-ended questions are coded according to the skills described in Steps for Better Thinking
(Exhibit 1.10):

Step 1 skills (Identifying)

Step 2 skills (Exploring)

Step 3 skills (Prioritizing)

Step 4 skills (Envisioning)


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11-2 Cost Management

QUESTIONS
11.1

Managers need information about the costs of direct materials and direct labor as well as
whether direct materials and labor have been used efficiently. If the price and efficiency
variances are combined, it is impossible to separate the causes of the variance into
potential changes in prices of direct materials (or the labor hourly wage) and changes in

the amount of materials (or labor hours) used to manufacture the product. Managers need
specific information to better monitor operations and investigate changes.

11.2

Utilities are considered fixed costs. These include phone service, natural gas, and
electricity. The use of natural gas and electricity is affected by weather patterns.
Because weather patterns change, these costs cannot be perfectly predicted. There may
be unanticipated price changes in the cost of utilities. In addition, employees could be
careless in their use of electricity or telephones. Therefore, variances occur regularly.

11.3

GAAP requires that revenues and expenses be matched. Revenues from the sales of units
must be matched to the costs of producing those same units. When a standard cost
system is used, production costs are recorded at standard rather than at actual costs. At
the end of the accounting period adjusting entries are made to close the variance accounts
and to distribute the amounts to inventory and cost of goods sold. These entries
simultaneously close the variance accounts and adjust inventory and cost of goods sold to
reflect actual costs for the period.

11.4

For a simple but meaningful variance report for costs, the following variances should be
calculated.
Price and efficiency variances for direct materials and direct labor provide
information about price changes, purchasing efficiencies and the use of materials.
Managers can correct some of these problems to insure cost-effective production.
The variable overhead spending variance and the fixed overhead budget variance
provide information about whether costs are being kept under control.

The efficiency variance for variable overhead and production volume variances
do not provide any incremental information about whether inputs were purchased
or used efficiently.

11.5

At the end of the accounting period, the following variances need to be recorded: direct
materials and direct labor price and efficiency variances, variable overhead spending
variance, fixed overhead budget variance, variable overhead efficiency variance, and
production volume variance. If the sum of these is immaterial, it is closed to cost of
goods sold. If the sum is material, it is prorated across inventory and COGS.

11.6

Managers monitor variances that are large and unexpected. Sometimes a minimum dollar
amount is set as a criteria so that only variances greater than that amount are investigated.
Managers make trade-offs between the costs of investigating and the benefit from
improving the process or standard. Trends in variances also may affect whether a


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Chapter 11: Standard Costs and Variance Analysis 11-3
variance is investigated. If accountants know a variance is increasing over time, they
may decide to investigate to identify ways to reverse a negative trend or to modify future
standards for a positive trend.
11.7

The cost categories that are measured and monitored in a given organization depend on
several factors, including the following:

Nature of goods or services: Manufacturers monitor input prices and efficiency
of labor and materials, whereas service organizations monitor cost per service
provided, which may not include materials. All organizations monitor fixed costs,
although the type of fixed costs varies widely with the type of business.
Cost accounting system used: The cost categories will be more precise with more
complex cost accounting systems. An organization with an ABC system that
separates costs into flexible and committed categories could develop standards
and measure variances for every activity performed. Alternatively, only broad
categories may be tracked, such as the traditional direct materials and direct labor
categories.
Costs that managers consider important: Overhead costs are often aggregated
together and include indirect costs such as oil for machine maintenance. While
these costs may not be individually important, they are often monitored as part of
the larger category of overhead costs.
Cost/benefit trade-off for monitoring individual costs: For those costs already
reported by the accounting system, such as direct labor in a job costing system,
the cost to develop standards and monitor variances is probably low, and the
benefit could be relatively high if such monitoring encourages labor to be more
efficient. However, other costs, indirect materials used during set-ups, may be
expensive to track. The benefit from tracking these costs may be low if only very
small amounts of materials are used per set-up. These costs are likely to be
aggregated into overhead.

11.8

Standard costs are often set using the most recent year’s data. Historical trends may be
analyzed and used. Sometimes industrial engineers develop standards by analyzing the
manufacturing or service delivery process.

11.9

Recurring favorable variances may indicate that some process has improved. These
should be investigated so that standard production practices reflect the process
improvements. Variances may also reflect opportunities to examine the manufacturing
process and quality of materials to determine improvements. Sometimes the standard is
wrong, and the monitoring process is improved by changing the standard to reflect
current operations.

11.10 The contribution margin variance calculates the effects of changes in contribution
margins, given the actual level of sales. The contribution margin sales volume variance
calculates the effects of changes in units sold, given the standard contribution margins.
This information helps managers focus on the reason that the contribution margin is


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11-4 Cost Management
changing. Managers may want to focus on the underlying variable costs, or pricing, or
consider product emphasis. These variances help determine whether it’s a change in the
volume of sales, or change in the price or variable cost that causes the variance. When
sales are slow, prices could be lowered, which would be reflected in the contribution
margin variance. These types of changes should be investigated.
11.11 The sales price variance reflects the difference between standard and actual selling prices
for the volume of units actually sold. This variance is favorable if the actual selling price
exceeds the standard price, and it is unfavorable if the reverse is true. The revenue sales
quantity variance reflects the difference between the standard and actual quantity of units
sold at the standard selling price. This variance will be favorable when actual quantities
exceed standard quantities, and it will be unfavorable otherwise. These variances help
managers determine whether changes in revenues are driven by changes in selling price
or changes in quantities sold. To remedy any problems, this information is quite useful.

11.12 When the direct materials price variance is large and favorable while direct materials
efficiency variance is large and unfavorable, it is possible that lower quality materials are
being purchased. This could have a negative effect on the efficiency variance if defective
materials are being discarded. Both purchasing and production personnel should be
asked whether there has been a change in the quality of materials purchased. Production
personnel should also be asked to explain the unfavorable efficiency variances.
11.13 If the direct material price variance is recorded at the time of purchase, direct materials
are recorded in inventory at standard cost and do not need to be tracked by purchase date
and purchase price. This reduces bookkeeping time and effort and simplifies inventory
control. It also clarifies that the price variance occurs at the time of purchase rather than
at the time direct materials are used.


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Chapter 11: Standard Costs and Variance Analysis 11-5

EXERCISES
11.14 Kitchen Tile Company
A. This question requires a missing piece of information: the actual number of hours
worked. However, because the labor efficiency variance is given, the variance formula
can be used to solve for actual labor hours as follows:
Labor efficiency variance = (Standard hours – Actual hours)* Standard price
The variance amount is given as $6,720 Favorable, and the standard labor price is given
as $24.00 per hour. The number of standard labor hours is calculated as follows:
Actual production = 18,000 tiles
Standard efficiency is 6 tiles per labor hour
Standard number of labor hours for 18,000 tiles:
= 18,000 tiles/6 tiles per hour
= 3,000 hours

Now solve for actual labor hours using the variance formula:
$6,720 = $24.00 * (3,000 hours – Actual hours)
$6,720/$24 = 3,000 – Actual hours
280 = 3,000 – Actual hours
Actual hours = 3,000 – 280 = 2,720
Quicker approach: The efficiency variance represents the amount by which actual hours
exceed standard hours, times the standard price. This means that the efficiency variance
represents 280 hours ($6,720/$24). Because the variance was favorable, 280 fewer hours
were used than the standard required. For 18,000 tiles, standard labor hours are 3,000
(18,000/6). Therefore, actual hours are 3,000 – 280 = 2,720 hours.
B. The direct labor price variance is calculated using the following formula:
Actual labor hours * (Standard price – Actual price)
= 2,720 hours * ($24.00 - $24.50)
= $(1,360) Unfavorable
C. The fixed overhead budget (i.e., spending) variance is calculated by simply taking the
difference between standard and actual fixed costs:
Standard fixed costs – Actual fixed costs
= $60,000 - $58,720
= $1,280 Favorable


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11-6 Cost Management
11.15 Nakatani Enterprises
A. Standard costs for actual output of 15,342 units:
Direct materials (15,342 units x 0.8 lbs. x $2.00/lb.)
Direct labor (15,342 units x 0.2 hrs x $17.00/hour)
Total

$24,547.20
52,162.80
$76,710.00

B. Direct materials price variance
Standard cost for actual purchases ($2.00/lb x 11,000 lbs.)
Actual cost of purchases
Price variance

$22,000
21,730
270 F

$

C. Direct materials efficiency variance
Standard quantity of materials for actual output (15,342 x 0.8 lbs.) 12,273.6 lbs.
Actual quantity of materials used
13,252.0 lbs.
Variance in pounds
(978.4) lbs.
Times standard cost per pound
$2
Efficiency variance
$(1,956.80) U
D. Direct labor price variance
Standard cost for actual labor hours ($17 x 2,730 hours)
Actual labor cost
Price variance
E. Direct labor efficiency variance

Standard labor hours for actual output (15,342 x 0.2 hours)
Actual labor hours
Variance in hours
Times standard cost per hour
Efficiency variance

$

$46,410
47,000
(590) U

3,068.4
2,730.0
338.4 hours
$17
$5,752.80 F

F. If managers use 10% of total direct costs as the criteria for investigation, none of these
variances would be investigated. However, the direct labor efficiency variance is
relatively large compared to total direct labor cost at 11% ($5,752.80/$52,162.80). Some
managers may want to investigate this variance, especially if this company is concerned
about quality as a strategy. If quality has decreased as a result of this favorable variance,
defective or low quality units could affect Nakatani’s reputation and future revenues if
customers are disgruntled. If production processes have improved, and there is no
adverse change in quality, so managers might want to change the labor quantity standard.


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Chapter 11: Standard Costs and Variance Analysis 11-7
11.16 Nell Company
A.
Direct material price variance [($0.20 - $0.17) x 100,000]
Direct material efficiency variance [(5 * 10,000 - 60,000) x $0.20]
Direct labor price variance [($7.00 - $7.20) x 3,900]
Direct labor efficiency variance [(0.4 * 10,000 - 3,900) x $7.00]
B. Journal entries:
Raw materials inventory (100,000 lbs at $0.20/lb.)
Direct materials price variance
Accounts payable
Work in process inventory (5*10,000*$0.20)
Direct materials efficiency variance
Raw materials inventory (60,000 * $0.20)
Work in process inventory (0.4*10,000*$7.00)
Direct labor price variance
Direct labor efficiency variance
Wages payable (3,900 * $7.20)

$3,000 F
2,000 U
780 U
700 F

$20,000
$3,000
$17,000
$10,000
$2,000
$12,000

$28,000
$780
$700
$28,080

11.17 Derf Company
Standard fixed overhead is $135,000 x 0.20 = $27,000
Standard variable overhead is $135,000 x 0.80 = $108,000
The standard fixed overhead allocation rate is $27,000/(9,000 x 2) = $1.50 per hour
The standard variable overhead allocation rate is $108,000/(9,000 x 2) = $6.00 per hour
A. The variable overhead spending variance is:
[$6.00 – ($108,500/17,200)] x 17,200 = $5,300 U
B. The variable overhead efficiency variance is:
[8,500 * 2 - 17,200] x $6 = $1,200 U
C. The fixed overhead spending (budget) variance is:
$27,000 - $28,000 = $1,000 U
D. The fixed production volume variance is:
$1.50 x [(8,500 x 2) – (9,000 x 2)] = $1,500 U


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11-8 Cost Management
E. Journal entries
Variable overhead cost control (actual cost)
Accounts payable and other accounts
Work in Process inventory (8,500 x 2 hrs x $6/hr)
Variable overhead cost control
Variable overhead spending variance
Variable overhead efficiency variance

Variable overhead cost control

$108,500
$108,500
102,000
102,000
$5,300
$1,200
$6,500

Fixed overhead cost control
Accounts payable and other accounts

$28,000

WIP inventory (8,500 x 2 x $1.50)
Fixed overhead cost control

$25,500

$28,000

$25,500

Fixed overhead spending (budget) variance
Production volume variance
Fixed overhead cost control

$1,000
$1,500

Ending WIP, finished goods, and/or COGSa
Variable overhead spending variance
Variable overhead efficiency variance
Fixed overhead spending (budget) variance
Production volume variance

$9,000

a

$2,500

$5,300
$1,200
$1,000
$1,500

The total variance of $9,000 would be prorated based on the ending balances in
work-in-process inventory, finished goods inventory, and cost of goods sold.

11.18 Mitchellville Products Company
A. Revenue budget variance = $60,000 – $53,200 = $6,800 Unfavorable
B. Sales price variance:
Standard unit price = $60,000/4,000 = $15
Actual unit price = $14
Sales price variance = ($15 - $14) x 3,800 = $3,800. Unfavorable
C. Revenue sales quantity variance = (4,000 – 3,800) x $15 = $3,000 Unfavorable

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Chapter 11: Standard Costs and Variance Analysis 11-9
D. The standard contribution margin is
Sales
Less:
Variable manufacturing
Variable selling and administration
Contribution margin

$60,000
16,000
8,000
$36,000

Because contribution margin represents 4,000 units, the contribution margin per unit
must be $36,000/4,000 = $9. Then, the contribution margin sales volume variance is
$9 x (4,000 - 3,800) = $1,800 U

11.19 Metropolitan Motors
A. The contribution margin budget variance is the difference between the standard
contribution margin and the actual contribution margin.
First, calculate the contribution margin at budget:
Economy
Family
Luxury

(10*$400)
(20*$800)
(5*$1,300)

$ 4,000
16,000
6,500
$26,500

The average contribution margin per sale is $26,500/35 = $757.14
The actual contribution margin is
Economy
Family
Luxury
Total

25
10
3
38

$ 5,625
7,500
4,200
$17,325

The average contribution margin per sale is $17,325/38 = $455.92
Contribution margin budget variance = $9,175 U because the contribution margin is less
than standard.


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11-10 Cost Management
B. The contribution margin variance reflects the effects of the change in contribution
margin, given the actual level of sales.
First calculate what the contribution margin would have been at actual sales and standard
contribution margin:
Economy
Family
Luxury

25 x $400
10 x $800
3 x $1,300
38

$10,000
8,000
3,900
$21,900

The average contribution margin at actual sales mix, standard contribution margin
is $21,900/38 = $576.32
Then take the difference between this and the actual contribution margin.
Contribution margin variance = $21,900 - $17,325 = $4,575 U
The contribution margin sales volume variance is the difference between the standard
volume, mix, and contribution margin and the actual mix and volume at standard
contribution margin or
$21,900 - $26,500 = $4,600 U
Check: The two variances should equal the contribution margin budget variance.
$9,175U = $4,575 U + $4,600 U
C. The contribution margin sales quantity variance is the difference in actual quantity sold

and the standard quantity, given the standard sales mix and standard contribution margin.
The average contribution margin at standard sales mix and standard contribution margin
was calculated above in part A.
(35 - 38) * $757.14 = $2,271.42 F
The contribution margin sales mix variance is the difference between the standard sales
mix and the actual sales mix given actual sales at standard contribution margin. This can
be calculated two different ways. The actual units and actual sales mix at standard
contribution margin total is $21,900. The actual units at standard sales mix and standard
contribution margin is $757.14 * 38 = $28,771.32. So the total variance = $21,900 $28,771 = $6,871.32 U. Alternatively, the averages from above can be used as follows
Contribution margin sales mix variance = ($757.14 - $576.32)*38 = $6,871.16 U
These two variances should sum to the contribution margin sales volume variance of
$4,600, and they do ($6,871 - $2,271 = $4,600).


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Chapter 11: Standard Costs and Variance Analysis 11-11
D. No, management would not be pleased. It appears that the bonus induced the salespeople
to put more effort into selling the low margin economy cars at the expense of the higher
markup lines. Further, the price variance implies that the salespeople also accepted lower
prices on the already narrow markups for the economy cars.

11.20 Plush Pet Toys
[Note: This problem requires knowledge of decision making from Chapter 4.]
A. Direct materials variances
Direct material price variance
= ($2.00 per yard*30,000 yards) - $62,000
= $60,000 - $62,000
= $2,000 unfavorable because the company paid more than standard
Direct material efficiency standard

= 15 yards per lot * 2,400 lots – 34,000 yards)*$2.00 per yard
= (36,000 yards – 34,000 yards)*$2.00 per yard
= $4,000 favorable because the company used fewer yards than at standard
Direct labor variances:
Direct labor price variance
= $10 per hours x 4,200 hours - $39,000)
= $42,000 - $39,000
= $3,000 favorable
Direct labor efficiency variance
= (2 hrs per lot * 2,400 lots – 4,200 hours)*$10 per hour
= (4,800 hours – 4,200 hours)*$10
= $6,000 favorable because the company used fewer hours than at
standard
Variable overhead spending variance
= ($5 per lot*2,400 lots - $12,000)
= $12,000 - $12,000 = $0
There is no spending variance for variable overhead.
Fixed overhead budget variance
= $24,000 - $24,920
= $920 unfavorable because the company spent more than standard


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11-12 Cost Management
The preceding are the commonly used variances for cost control. Some organizations
also compute and monitor the following variances:
Variable overhead efficiency variance
= [(1,000 lots – 2,400 lots)*$2]
= $2,800 unfavorable because the company allocated more overhead than

at standard
Production volume variance
Given that fixed overhead is allocated using the following rate:
$24,000/1,000 = $24/lot
= [(1,000 lots – 2,400 lots)*$24/lot]
= $33,600 favorable because lots were produced than expected
B.
1.
Reduction in labor hours (2.0 hours – 1.5 hours)
Times cost per hour
Cost savings per lot

0.5 hours per lot
$10 per hour
$5.00 per lot

2.
Cost savings per month = (1,000 lots * $5.00 per lot) = $5,000
Cost savings over 5 years = ($5,000 per month * 60 months) = $300,000
The maximum price the company would be willing to pay for the new equipment is
$300,000. This is equal to the expected labor cost savings over 5 years (ignoring the
time value of money).

11.21 Fine Products Manufacturing Company
A. Total variances = $7,900 unfavorable. Because anything greater than $5,000 is
considered material, the total variance amount is material.
B. Total WIP, FG, and COGS = $32,000.
Each inventory and COGS account gets a portion of the variance:
Work in Process ($2,000/$32,000 x $7,900)
Finished goods ($6,000/$32,000 x $7,900)

Cost of goods sold ($24,000/$32,000 x $7,900)
Total

$ 494
1,481
5,925
$7,900


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Chapter 11: Standard Costs and Variance Analysis 11-13
Journal Entry:
Work in process inventory
Finished goods inventory
Cost of goods sold
Direct materials efficiency variance
Variable overhead spending variance
Direct materials price variance
Labor price variance
Labor efficiency variance
Fixed overhead budget variance
Variable overhead efficiency variance

494
1,481
5,925
1,500
1,000
2,000

5,000
2,000
200
1,200

11.22 Pet Toys, Inc.
A.

Frisbee
Plush toys
Total

Actual Unit Sales
at Standard Prices
95,000 x $3
$285,000
40,000 x $3
120,000
135,000
$405,000

Standard
Contribution Margin
95,000 x $1.25
$118,750
40,000 x $2.00
80,000
$198,750

Revenue budget variance ($450,000 - $409,500) =$40,500 U

Revenue sales quantity variance ($450,000 - $405,000) = $45,000 U
Sales price variance ($409,500 - $405,000) = $ 4,500 F
B.
Standard units sold
At standard sales mix
And standard CM
(100,00x$1.25+50,000 x $2)
$225,000

Actual units sold at actual
sales mix and standard CM
(95,000x$1.25 + 40,000x$2)
$198,750

CM sales volume variance
($225,000 – $198,750)
= $26,250 U

Actual units sold at actual
sales mix and actual CM
(95,000x$1.55+40,000x$1.40)
$203,250

Contribution margin variance
($198,750 - $203,250)
= $4,500 F

Contribution margin budget variance
($225,000 - $203,250)
= $21,750 U

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11-14 Cost Management
C.

Standard units sold at standard
sales mix and standard CM
$225,000

Actual units sold at standard
sales mix and standard CM
[(130,000 x .67 x
$1.25)+(130,000 x .33 x $2)]
$194,675

CM sales quantity variance
($225,000 - $194,675)
= $30,325 U

Actual units at actual sales
mix and standard CM
(95,000x$1.25 + 40,000 x $2)
$198,750

Contribution margin sales mix variance
($194,675 - $198,750)
= $4,075 F

Contribution margin sales volume variance
($30,325 U + $4,075 F)
= $26,250 U


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Chapter 11: Standard Costs and Variance Analysis 11-15

PROBLEMS
11.23 Raging Sage Coffee
A. For a coffee cart business, workers are scheduled with more help available when the shop
is busy, such as in the morning. Although each worker’s hours vary, the schedule
remains fairly fixed, so the cost structure includes a high proportion of fixed cost.
B. In this business, workers need to be at the cart regardless of the number of customers.
Therefore, the direct labor efficiency variance is meaningless and should not be
calculated because it would be measuring whether the clerks sold as many cups of coffee
per labor hour as was expected. Labor costs are fixed, so the computation would reflect a
revenue variance, rather than a labor efficiency variance.
C. Price variance for coffee beans:
Standard cost of actual coffee beans purchased (240 lbs. x $6.00 per lb)
Actual cost of coffee beans purchased
Price variance
$
Efficiency variance for coffee beans:
Coffee beans at standard lbs. (0.04 lbs per cup x 8,260 cups)
Actual beans
Variance in pounds
Standard cost per pound
Efficiency variance

$1,440
1,800
(360) U

330.4 lbs
224.0 lbs.
106.4 lbs.
$6.00
$638.40 F

D. The quantity standard for direct labor implies that 20 cups should be sold per hour of
clerk/brewer time:
0.05 hours per cup x 60 minutes per hour = 3 minutes per cup
In 60 minutes, 20 cups are expected to be made and sold
Expected sales volume (600 clerk/brewer hours x 20 cups per hour)
Actual sales volume
Difference between expected volume and actual volume

12,000 cups
8,260 cups
(3,740) cups

E. There is an unfavorable coffee bean price variance, a favorable coffee bean efficiency
variance, and sales were off by about 32% (3,740 cups/12,000 cups). These variances
might be related. One possibility is that the higher cost of coffee beans caused the
clerks/brewers to reduce the quantity of coffee beans used per cup. This would have
resulted in weaker coffee, which might have caused customers to go elsewhere.
The following are other possible explanations for the unfavorable sales volume variance:
* A competing coffee business opened nearby.

* A nearby employer went out of business or launched a major lay-off of
employees.


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11-16 Cost Management
*
*
*

There was employee turnover. A clerk/brewer who was well-liked by customers
left and was replaced by a clerk/brewer who was often impolite to customers.
There was road construction nearby, disrupting traffic to the shopping center.
Nearby competitors decreased their selling prices.

F. Instead of basing a bonus based on cost variance measures, give employees a bonus
based on profitability. This provides them motivation to encourage customers to return,
increasing revenue, and also to contain costs.

11.24 Sunglass Guys
A. Standard overhead rate per direct labor hour:
Calculate total estimated overhead at normal production volume:
Estimated overhead = (4,300 x $8.15) + (1,400 x $12.32) + $235,707 = $288,000
Calculate estimated labor hours at normal production volume:
Estimated hours = 0.2 x 4,300 + 0.3 x 1,400 = 1,280 hours
Calculate standard rate by dividing estimated cost by estimated hours:
Rate = $288,000/1,280 = $225 per direct labor hour
B. This method would be useless for monitoring and control because the fixed and variable
overhead costs are not separated. When the production volume variance is commingled

with the fixed overhead budget variance and variable overhead spending variances,
spending variances cannot be calculated, so no information is available about cost
control.
C. The recommendation is to separate fixed and variable overhead costs into separate
standards. Only the spending variances will be useful for monitoring and controlling
overhead costs.
Using normal monthly volume, the fixed overhead budget variance is:
Estimated fixed overhead cost (i.e., static budget)–Actual fixed overhead cost
= $235,707 - $237,859 = $2,152 U
The variable overhead spending variance (using units of production as the allocation
base):
Standard variable overhead for actual production–Actual variable overhead cost
= ($8.15 * 4,500 Regular units) + ($12.32 * 1,300 Deluxe units) - $54,238
= $36,675 + $16,016 - $54,238
= $1,547 U


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Chapter 11: Standard Costs and Variance Analysis 11-17
D. To calculate the production volume variance, first determine what the fixed overhead
standard rate would have been if it had been calculated separately from the variable
overhead standard rate: (See computation of normal labor hours in the solution to Part
A.)
Standard fixed overhead costs/Normal number of direct labor hours
= $235,707 / 1,280
= $184.15 per labor hour
Production volume variance:
Standard labor hours for actual production
(0.2 * 4,500 Regular + 0.3 * 1,300 Deluxe)

Normal labor hours
Volume variance in labor hours
Times the standard overhead rate
Production volume variance

1,290 hours
1,280 hours
10 hours
$184.14
$1,841 F

Double-check the fixed overhead variance calculations in Parts C and D as follows:
Standard fixed overhead cost allocated to actual production:
Regular sunglasses: [($184.15*0.2) * 4,500]
Deluxe sunglasses: [($184.15*0.3) * 1,300]
Total fixed overhead allocated
Less actual fixed overhead costs
Total fixed overhead variance

$

$ 165,735
71,819
237,554
237,859
(305) U

Sum of individual variances: [$(2,152) U + $1,841 F]
$
(311) U

Difference due to rounding
To calculate the variable overhead efficiency variance, the standard volume of allocation
base for actual output is compared to the actual volume of allocation base. Because
variable overhead is allocated using actual units, an efficiency variance never arises
(actual volume of units always equals actual volume of units). Therefore, the efficiency
variance will be $0.
E. If labor hours and costs are fixed, they do not vary with production. Therefore, labor
hours provide a poor allocation base for variable overhead cost. A better option would be
to allocate variable overhead using units produced because the variable overhead costs
are more related to units than to labor.

11.25 The Mighty Morphs
A. Documentation price variance for MMMs:
Actual quantity x (standard price per unit – actual price per unit)
= [1,005 books x ($3 - $2.95)] +[(825 books x ($5 - $4.75)]
= $50.25 F + $206.25 F = $256.50 F


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11-18 Cost Management

B. Efficiency variance for DVDs
(Standard quantity – actual quantity) x standard price
= [(1.03 books per unit x 1,000 units) – 1,005 books] x $3
+ [(1.03 books per unit x 800 units) – 825 books] x $5
= (1,030 – 1,005) x $3 + (824 – 825) x $5
= $75 F + $5 U = $70 F
C. Labor price variance for both games:
(Standard price – actual price) x actual labor hours

= ($15 - $795/55) * 55
Labor efficiency variance for both games:
(Standard hours for actual output – actual hours) x standard price
= [(0.01 x 1,000) + (0.03 x 800) – 55] x $15
= [(10 + 24) – 55] x $15
Total labor variance

$ 30 F

315 U
$285 U

D. If there were no waste, the company would incur costs for only one DVD and one
documentation book per game produced. Thus, the cost of waste is equal to the number
of DVDs and documentation books used in excess of one per unit, valued at standard
cost:
Waste for DVDs:
[Actual DVDs used – (1,000 + 800)] x $0.35
= (2,025 – 1,800) x $0.35
$ 78.75
Waste for documentation books:
(Actual Power Puffs books used – 1,000) x $3
+ (Actual MMM books used – 800) x $5
= [(1,005 – 1,000) x $3] + [(825 – 800) x $5]
140.00
Total waste
$218.75
E. Pros:
It may be less costly to allow waste in the standard than to inspect incoming
materials or to pay for higher quality materials.

The company has done it this way a long time, and change might be difficult for
employees.
Cons:
Several waste-related opportunity costs arise from defective units. As waste
increases, it is likely that the number of defective units sold increases. Greater
defect rates reduce customer satisfaction and reduce sales. By eliminating waste
altogether, this cost is avoided.
The company would have saved $218.75, although no information is given about
the amount of investment required to save this amount.


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Chapter 11: Standard Costs and Variance Analysis 11-19
11.26 Baker Street Animal Clinic
A. The technicians have argued that the cost variance was caused by the price increase.
Thus, the total variance can be separated into a price variance and an efficiency variance.
Normally, the price variance is calculated using the purchase quantity. However, no
information is given about the quantity purchased. Also, the problem presents total cost
for serum used of $2,270, which results in a $(270) total variance. However, the serum
for 2,000 injections costs $105 per 1,000cc. Following are calculations for the price
variance.
Price variance for serum:
Standard quantity of serum for actual injections
Times amount of price increase per cc:
[($100/1,000 cc) – ($105/1,000 cc)]
= ($.10 - $.105) per cc
Serum Price Variance (20,000 cc * $.005)

20,000 cc

(.005) per cc
$(100) U

Efficiency variance for serum:
The efficiency variance cannot be calculated using the usual method because the
quantity of serum used is unknown. However, the efficiency variance can be
calculated by subtracting the price variance from the total serum cost variance.
Total variance (given in the problem)
Price variance
Serum Efficiency Variance

$(270) U
(100) U
$(170) U

B. The unfavorable efficiency variance represents the cost of wasted serum. To see this,
consider the formula for the efficiency variance:
Efficiency Variance = Standard cost * (Standard quantity – Actual quantity)
The difference between the standard quantity and the actual quantity is the amount of
serum wasted. At a standard cost of $.10 per cc, the volume of wasted serum is estimated
to be 1,700 cc ($170 unfavorable efficiency variance/$.10 per cc).
Is this a significant amount of waste? This is a matter of judgment. Below are several
ways to quantity the significance.
Waste, relative to standard quantity of serum:
Standard quantity of serum = 2,000 injections * 10 cc
Percent serum waste (1,700 cc/20,000 cc)

20,000
8.5%

Note: The waste could also have been calculated using percent of standard cost:
$170 efficiency variance/$2,000 standard cost = 8.5%
Number of additional injections that could have been given:
Waste of 1,700 cc / 10 cc per injection

170 injections


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11-20 Cost Management

Following are possible issues to discuss when answering this question:
The percent waste (8.5%) might or might not be considered a significant cost.
Given the nature of operations at the Baker Street Animal Clinic, it would be
reasonable for waste to be very close to zero.
Had there been zero waste, 8.5% or 170 more injections could have been given.
Perhaps the waste is a sign that the technicians are wasteful in other areas, too.
There could be a significant larger problem.
C. The manager would probably be concerned about the unfavorable efficiency variance.
The manager could ask the technicians to review their procedures and to identify how and
where waste is occurring. Once the reasons for waste are identified, the manager could
help the technicians establish new procedures to minimize or eliminate the waste.
If the technicians are unable to provide reasonable explanations for the waste, the
manager might become concerned that someone is stealing serum and then selling or
using it elsewhere. If the manager considered the cost to be sufficiently large, he/she
might institute new procedures for monitoring the physical use of serum. However, this
type of approach might cost more than the benefit.
Perhaps the easiest and most cost-effective solution would be to provide the technicians

with incentives based on the efficiency variance. The efficiency variance could be used
as part of the technicians’ performance evaluation. This would encourage them to seek
efficiency improvements on their own.

11.27 Damson Products
[Note: This problem requires students to know about normal versus abnormal waste (see
Chapters 5 and 6).]
A. Most of the variances are immaterial and can be closed to cost of goods sold. However,
three of them need attention. The $13,000 for materials lost should be accounted for as a
flood loss; similarly, the $9,000 in labor should be accounted for as flood loss. This
leaves $12,600 - $13,000 = $400 F and $9,700 - $9,000 = $700 U, respectively, in the
material efficiency and labor efficiency variances to be closed to cost of goods sold.
Note, that variable overhead must not have been allocated on the basis of labor;
otherwise, there would be a large unfavorable variable overhead quantity variance.
The production volume variance should also be split into two amounts. The $10,200 due
to down time during the flood should be part of the flood loss. The remaining $200
should be debited to cost of good sold.
B.

Using the recommendations made in Part A, the journal entries would be
Cost of Goods Sold
$ 658
Material Price Variance

$ 658


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Chapter 11: Standard Costs and Variance Analysis 11-21

Flood Loss
Cost of Goods Sold
Material Efficiency Variance

$13,000
$ 400
12,600

Labor Price Variance
Cost of Goods Sold

$ 376
$ 376

Flood Loss
Cost of Goods Sold
Labor Efficiency Variance

$ 9,000
700
$ 9,700

Variable Overhead Spending Variance
Cost of Goods Sold

$ 507
$ 507

Cost of Goods Sold

Variable Overhead Quantity Variance

$ 412

Fixed Overhead Budget Variance
Cost of Goods Sold

$ 782

Cost of Goods Sold
Flood Loss
Production Volume Variance

$ 412

$ 782
$

200
10,200
$10,400

C. The finished goods inventory is unaffected; its balance remains at $34,000.
The net effect of all of the adjustments is a decrease of $95 in cost of goods sold, so the
adjusted balance in cost of goods sold is $304,905 ($305,000 – 95).

11.28 Data Processors
[Note: This problem assumes knowledge of ABC (Chapter 7).]
A.
Activity

Processing transactions
Issuing statements
Issuing credit cards
Resolving disputes

Estimated Cost Estimated Activity
ABC Rate
$2,000,000
5,000,000 $0.40
1,000,000
250,000
$4.00
500,000
100,000
$5.00
90,000
3,000
$30.00


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11-22 Cost Management
B. The flexible budget in the following statement is calculated by multiplying the actual
activity level times the ABC allocation rate (Part A).
Activity
Processing transactions
Issuing statements
220,000 U
Issuing credit cards

Resolving disputes

Static
Budget

Actual
Flexible
Actual
Activity
Budget
Cost
Variance
$2,000,000 5,800,000 $2,320,000 $2,200,000
$120,000 F
1,000,000 270,000
1,080,000
1,300,000 500,000
110,000
90,000
3,500
$3,590,000

550,000
400,000 150,000 F
105,000
100,000
5,000 F
$4,055,000 $4,000,000 $

55,000 F

C. The spending variance for processing transactions is calculated in Part B as $120,000 F.
D. Budget (i.e., spending) variance for fixed processing costs:
At standard (estimated cost)
Actual cost
Fixed budget variance
Spending variance for variable processing costs:
Actual activity x standard activity rate
(5,800,000 x $1,000,000/5,000,000)
Actual cost
Variable spending variance
Total spending/budget variance for processing costs

$1,000,000
1,300,000
$300,000 U

$1,160,000
900,000
260,000 F
$ 40,000 U

E. Fixed costs might have increased if new equipment or software was purchased that has
not been reflected in the standard. Costs could be out of control. Variable costs might
have been reduced if new equipment resulted in more efficient operations. The processes
might have been improved somehow. The variance could also reflect normal fluctuations
of processing activities.
F. There is no one answer to this part. Sample solutions and a discussion of typical student
responses will be included in assessment guidance on the Instructor’s web site for the
textbook (available at www.wiley.com/college/eldenburg).

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Chapter 11: Standard Costs and Variance Analysis 11-23
11.29 Software Development Company
[Note: This problem assumes knowledge of budgeting from Chapter 10.]
A. Standard pretax income
Standard sales
Games
40,000 @ $16
Business
2,000 @ $55
Educational
10,000 @ $20
Total sales
Standard variable costs 52,000 @ $2
Standard fixed costs
Standard pretax income

$640,000
110,000
200,000
950,000
(104,000)
(535,000)
$311,000

Average contribution margin per unit per master budget:
40,000 x $14 + 2,000 x $53 + 10,000 x $18

52,000

= $16.269231

Average standard contribution margin per unit for actual sales:
35,000 x $14 + 4,000 x $53 + 11,000 x $18
50,000

= $18.00

Master budget pretax income
Sales quantity variance
(52,000 - 50,000)*$16.269231
Contrib. margin sales mix variance ($16.269231 - $18)*50,000
Flexible budget pretax income
Sales price variance:
Games
($16 - $616,000/35,000)*35,000
Business
($55 - $198,000/4,000)*4,000
Material price variance
($2 - $106,575/50,750)*50,750
Material quantity variance
(50,000 - 50,750)*$2
Fixed cost budget variance
($535,000 - $533,500)
Actual pretax income

$311,000.00
(32,538.46)

86,538.46
365,000.00
56,000.00
(22,000.00)
(5,075.00)
(1,500.00)
1,500.00
$393,925.00

B.
1. The sales manager should be held responsible for only those variances related to
activities under his or her control. Therefore, the production-related variances
(material price and material quantity) should be excluded. The fixed cost budget
variance should be considered only to the extent that the fixed costs are under the
sales manager’s control. The sales manager is mostly likely responsible for some
fixed costs, so a budget variance for those costs should be separated from the budget
variance for other costs. The group of sales-related variances, considered together,
provides information to evaluate whether the sales managers’ changes to prices and
sales effort are benefiting the company. Although individual variances such as sales
quantity and sales price may be negative, the important question is whether the sales
manager’s new strategies are increasing the company’s profits.


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11-24 Cost Management

2. The manager should be praised. The net effect of the manager's changes can be seen
in the sales mix, quantity, and price variances. These variances total to an $88,000
favorable variance ($32,538.46 U + $86,538.46 F + $56,000.00 F + $22,000.00 U).

C. Sales
Games
(55,000*35,000/50,000) @ $17.60
Business
(55,000*4,000/50,000) @ $49.50
Educational
(55,000*11,000/50,000) @ $20.00
Total sales
Variable costs
55,000 @ $1.80
Fixed costs
Pretax income

$ 677,600
217,800
242,000
1,137,400
99,000
535,000
$ 503,400

D. The managers cannot know for certain whether there will be changes in customer
preferences that affect the demand estimates. They also cannot know for certain when
prices of inputs will increase. Although they can build known price changes into the
budget, even vendors may not anticipate their own price increases up to a year in the
future. The managers cannot know their costs for services such as electricity and
transportation because these prices are affected by weather and gas and oil costs. There
are many uncertainties that cannot be perfectly predicted; these are just a few examples.

11.30 Professor Grader

A. It is not possible to develop a perfect system for measuring student performance in a
course. To know for certain the amount of effort put forth, and the understanding that
each student acquires, a professor would have to monitor all of their actions related to the
course, no matter where the student was. This is impossible. Even if it were possible to
perfectly observe all student actions, uncertainty would still exist about how best to
measure individual course performance. Should students be graded based on the
improvement in their knowledge and other competencies during the course? Should they
be graded based on an absolute standard for the course? Should grades be measured
relative to other students in the same section or several sections taught by the professor?
B. There is probably wider variation in exam results than any of the other measures, but
because some students have access to the exam, variation is reduced. There is probably
very little variation in attendance because it is rarely monitored. There is probably little
variation in the term paper because it is graded on quantity, not quality, and the quantity
standards are known by all students. There is probably little variation on the take-home
exam because students have two weeks to work on it, and judging from other aspects of
this professor’s performance evaluation systems, it is likely that all of the questions have
single correct answers because they are easy to grade.
C. As a performance measurement system, the grading system is faulty for several reasons.
The performance standard appears to be very low. Students will not be motivated
to work hard to learn the subject matter of the course.


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Chapter 11: Standard Costs and Variance Analysis 11-25

The performance measurement for the term paper does not seem to be consistent
with the goals of the course. Measuring length instead of content would normally
not measure whether students understood the subject matter of the course.
There is no feedback on the midterm exam. Consequently, students are not

apprised of whether they are meeting the standards of the course. They have no
basis for changing their actions to improve future performance.
The performance measure is unfair to the extent that some students have access to
the midterm exam and others do not.
It is questionable whether a student’s performance on the final exam provides
information about overall performance. The potential for manipulation (having
someone else work the final) is high.
The defects in the performance measure are so severe that one should not attempt to use
grades earned in this course as a measure of students' comprehension of the subject
matter.
D. Professor Grader has a responsibility to students and to others who directly finance
students (such as parents and spouses) to grade in a manner that is consistent with
university and program policies and also with the grading system set forth in the course
syllabus. The professor is also responsible for establishing a grading system that is fair to
students in the course and that measures student learning (although how to do this is
uncertain, as described in Part A). This group of stakeholders often considers grades as
signals about student effort and/or ability. If the grades do not measure student effort or
ability, even with error, these stakeholders do not have adequate information about the
student’s progress.
Professor Grader has responsibilities toward the recruiters who hire the university’s
graduates. Recruiters want to identify students who work hard and learn new things
quickly. Grades measure these skills and abilities, although with error. Without
appropriate measurement, recruiters cannot identify students that might best suit their
needs, and they may no longer use the university for recruiting.
Professor Grader is responsible to the university, which expects professors to ensure that
graduating students have met outcomes specified by the university, such as the ability to
think critically, communicate effectively, be an effective team member, and are
knowledgeable within their respective majors. Universities rely on professors and their
evaluation systems to maintain standards.
Professor Grader is responsible to other professors at the university, who rely on their

colleagues to grade fairly so that students develop a better understanding of expectations
and are do not become unhappy about discrepancies in grades across courses or sections
of courses.