Solution manual managerial accounting by cabrera 2010 chapter 16 answer

MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual

CHAPTER 16
STANDARD COSTS AND OPERATING
PERFORMANCE MEASURES
I.

Questions
1. Standard costs are superior to past data for comparison with actual
costs because they ask the question “Is present performance better than
the past?”.
2. No. Cost control and cost reduction are not the same, but cost
reduction does affect the standards which are used as basis for cost
control. Cost reduction means finding ways to achieve a given result
through improved design, better methods, new layouts and so forth.
Cost reduction results in setting new standards. On the other hand,
cost control is a process of maintaining performance at or as new
existing standards as is possible.
3. Managerial judgment is the basis for deciding whether a given variance
is large enough to warrant investigation. For some items, a small
amount of variance may spark scrutiny. For some items, 5%, 10% or
25% variances from standard may call for follow-up. Management may
also derive the standard deviation based on past cost data.
4. The techniques for overhead control differ because
1) The size of individual overhead costs usually does not justify
elaborate individual control systems;
2) The behavior of individual overhead item is either impossible or
difficult to trace to specific lots or operations; and
3) Various overhead items are the responsibility of different people.
5. In the year-to-year planning of fixed costs, managers must consider:
1) the projected maximum and minimum levels of activity,

2) prices of cost factors, and
3) changes in facilities and organization.
6. Four criteria for selecting a volume base are:
1) Cause of cost variability.
2) Adequacy of control over the base.
3) Independence of activity unit.
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Chapter 16 Standard Costs and Operating Performance Measures

4) Ease of understanding.
7. Non-volume factors which cause costs to vary are:
1) Changes in plant and equipment.
2) Changes in products made, materials used, or methods of
manufacturing.
3) Changes in prices paid for cost factors.
4) Changes in managerial policy toward costs.
5) Lag between cost incurrence and measurement of volume.
8. A budget is usually expressed in terms of total pesos, whereas a
standard is expressed on a per unit basis. A standard might be viewed
as the budgeted cost for one unit.
9. Under management by exception, managers focus their attention on
operating results that deviate from expectations. It is assumed that
results that meet expectations do not require investigation.
10. Separating an overall variance into a price variance and a quantity
variance provides more information. Moreover, prices and quantities
are usually the responsibilities of different managers.
11. The materials price variance is usually the responsibility of the
purchasing manager. The materials quantity variance is usually the

responsibility of the production managers and supervisors. The labor
efficiency variance generally is also the responsibility of the production
managers and supervisors.
12. If used as punitive tools, standards can breed resentment in an
organization and undermine morale. Standards must never be used as
an excuse to conduct witch-hunts, or as a means of finding someone to
blame for problems.
13. Several factors other than the contractual rate paid to workers can
cause a labor rate variance. For example, skilled workers with high
hourly rates of pay can be given duties that require little skill and that
call for low hourly rates of pay, resulting in an unfavorable rate
variance. Or unskilled or untrained workers can be assigned to tasks
that should be filled by more skilled workers with higher rates of pay,
resulting in a favorable rate variance. Unfavorable rate variances can
also arise from overtime work at premium rates.
14. Poor quality materials can unfavorably affect the labor efficiency
variance. If the materials create production problems, a result could be
excessive labor time and therefore an unfavorable labor efficiency

16-2


Standard Costs and Operating Performance Measures Chapter 16

variance. Poor quality materials would not ordinarily affect the labor
rate variance.
15. If labor is a fixed cost and standards are tight, then the only way to
generate favorable labor efficiency variances is for every workstation
to produce at capacity. However, the output of the entire system is
limited by the capacity of the bottleneck. If workstations before the

bottleneck in the production process produce at capacity, the bottleneck
will be unable to process all of the work in process. In general, if
every workstation is attempting to produce at capacity, then work in
process inventory will build up in front of the workstations with the
least capacity.
II. Matching Type
1. E
2. G

3. C
4. H

5. A
6. D

7. J
8. B

9. I
10. F

III. Exercises
Exercise 1 (Setting Standards; Preparing a Standard Cost Card)
Requirement 1
Cost per 2 kilogram container...................................................................................
P6,000.00
Less: 2% cash discount..............................................................................................
120.00
Net cost.......................................................................................................................
P5,880.00

Add freight cost per 2 kilogram container
(P1,000 ÷ 10 containers)........................................................................................
100.00
Total cost per 2 kilogram container (a).....................................................................
P5,980.00
Number of grams per container
(2 kilograms × 1000 grams per kilogram) (b).......................................................
2,000
Standard cost per gram purchased (a) ÷ (b)..............................................................
P
2.99

Requirement 2
Beta ML12 required per capsule as per bill of materials.........................................
6.00 grams
Add allowance for material rejected as unsuitable
0.25 grams
(6 grams ÷ 0.96 = 6.25 grams;
16-3


Chapter 16 Standard Costs and Operating Performance Measures

6.25 grams – 6.00 grams = 0.25 grams)................................................................
Total............................................................................................................................
6.25 grams
Add allowance for rejected capsules
(6.25 grams ÷ 25 capsules)....................................................................................
0.25 grams
Standard quantity of Beta ML12 per salable capsule..............................................

6.50 grams
Requirement 3

Item
Beta ML12

Standard Quantity
per Capsule
6.50 grams

Standard Price
per Gram
P2.99

Standard Cost
per Capsule
P19.435

Exercise 2 (Material Variances)
Requirement 1
Number of chopping blocks.......................................................................................
4,000
Number of board feet per chopping block................................................................
× 2.5
Standard board feet allowed......................................................................................
10,000
Standard cost per board foot.....................................................................................
× P1.80
Total standard cost.....................................................................................................
P18,000

Actual cost incurred...................................................................................................
P18,700
Standard cost above...................................................................................................
18,000
Total variance—unfavorable.....................................................................................
P 700

Requirement 2
Actual Quantity of Inputs, at Actual Quantity of Inputs, at Standard Quantity Allowed for
Actual Price
Standard Price
Output, at Standard Price
(AQ × AP)
(AQ × SP)
(SQ × SP)
P18,700
11,000 board feet ×
10,000 board feet ×
P1.80 per board foot
P1.80 per board foot

= P19,800
Price Variance,
P1,100 F

= P18,000
Quantity Variance,
P1,800 U

16-4

Total Variance, P700 U


Standard Costs and Operating Performance Measures Chapter 16

Alternatively:
Materials Price Variance = AQ (AP – SP)
11,000 board feet (P1.70 per board foot* – P1.80 per board foot) =
P1,100 F
* P18,700 ÷ 11,000 board feet = P1.70 per board foot.
Materials Quantity Variance = SP (AQ – SQ)
P1.80 per board foot (11,000 board feet – 10,000 board feet) = P1,800 U
Exercise 3 (Labor and Variable Overhead Variances)
Requirement 1
Number of units manufactured..................................................................................
20,000
×
  0.4*
Standard labor time per unit......................................................................................
Total standard hours of labor time allowed..............................................................
8,000
×   P6
Standard direct labor rate per hour...........................................................................
Total standard direct labor cost.................................................................................
P48,000
*24 minutes ÷ 60 minutes per hour = 0.4 hour
Actual direct labor cost.............................................................................................
P49,300
Standard direct labor cost..........................................................................................
48,000

P 1,300
Total variance—unfavorable.....................................................................................
Requirement 2
Actual Hours of Input, at
the Actual Rate
(AH × AR)
P49,300

Actual Hour of Input, at
Standard Rate
(AH × SR)
8,500 hours × P6 per hour

Standard Hours Allowed for
Output, at the Standard Rate
(SH × SR)
8,000 hours* × P6 per hour

= P51,000

= P48,000

Efficiency Variance,
P3,000 U

Rate Variance,
P1,700 F

Total Variance, P1,300 U
*20,000 units × 0.4 hour per unit = 8,000 hours

16-5


Chapter 16 Standard Costs and Operating Performance Measures

Alternative Solution:
Labor Rate Variance = AH (AR – SR)
8,500 hours (P5.80 per hour* – P6.00 per hour) = P1,700 F
*P49,300 ÷ 8,500 hours = P5.80 per hour
Labor Efficiency Variance = SR (AH – SH)
P6 per hour (8,500 hours – 8,000 hours) = P3,000 U
Requirement 3
Actual Hours of Input, at
the Actual Rate
(AH × AR)
P39,100

Actual Hour of Input, at
Standard Rate
(AH × SR)
8,500 hours × P4 per hour

Standard Hours Allowed for
Output, at the Standard Rate
(SH × SR)
8,000 hours × P4 per hour

= P34,000

= P32,000

Spending Variance,
P5,100 U

Efficiency Variance,
P2,000 U

Total Variance, P7,100 U

Alternative Solution:
Variable Overhead Spending Variance = AH (AR – SR)
8,500 hours (P4.60 per hour* – P4.00 per hour) = P5,100 U
*P39,100 ÷ 8,500 hours = P4.60 per hour
Variable Overhead Efficiency Variance = SR (AH – SH)
P4 per hour (8,500 hours – 8,000 hours) = P2,000 U
Exercise 4 (Working Backwards from Labor Variances)
Requirement 1
If the total variance is P330 unfavorable, and if the rate variance is P150
favorable, then the efficiency variance must be P480 unfavorable, since the
rate and efficiency variances taken together always equal the total
variance.
Knowing that the efficiency variance is P480 unfavorable, one approach to
the solution would be:
Efficiency Variance = SR (AH – SH)
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Standard Costs and Operating Performance Measures Chapter 16

P6 per hour (AH – 420 hours*) = P480 U

P6 per hour × AH – P2,520 = P480**
P6 per hour × AH = P3,000

AH = 500 hours

* 168 batches × 2.5 hours per batch = 420 hours
** When used with the formula, unfavorable variances are positive and
favorable variances are negative.
Requirement 2
Knowing that 500 hours of labor time were used during the week, the
actual rate of pay per hour can be computed as follows:
Rate Variance = AH (AR – SR)
500 hours (AR – P6 per hour) = P150 F
500 hours × AR – P3,000 = –P150*
500 hours × AR = P2,850
AR = P5.70 per hour
*

When used with the formula, unfavorable variances are positive and
favorable variances are negative.

IV. Problems
Problem 1 (Comprehensive Variance Analysis)
Requirement 1
a.
Actual Quantity of Inputs, at Actual Quantity of Inputs, at Standard Quantity Allowed for
the Actual Price
Standard Price
Output, at the Standard Price
(AQ × AP)

(AQ × SP)
(SQ × SP)
25,000 pounds x
25,000 pounds x
20,000 pounds* x
P2.95 per pound
P2.50 per pound
P2.50 per pound

= P73,750

= P62,500

= P50,000

Price Variance,
P11,250 U
19,800 pounds x P2.50 per
pound
= P49,500
Quantity Variance,
16-7

P500 F


Chapter 16 Standard Costs and Operating Performance Measures

* 5,000 metal molds × 4.0 pounds per metal mold = 20,000 pounds

Alternatively:
Materials Price Variance = AQ (AP – SP)
25,000 pounds (P2.95 per pound – P2.50 per pound) = P11,250 U
Materials Quantity Variance = SP (AQ – SQ)
P2.50 per pound (19,800 pounds – 20,000 pounds) = P500 F
b.
Actual Hours of Input, at
the Actual Rate
(AH × AR)
3,600 hours x
P8.70 per hour

Actual Hours of Input, at
the Standard Rate
(AH × SR)
3,600 hours x
P9.00 per hour

Standard Hours Allowed for
Output, at the Standard Rate
(SH × SR)
3,000 hours* x
P9.00 per hour

= P31,320

= P32,400

= P27,000

Efficiency Variance,
P5,400 U

Rate Variance,
P1,080 F

Total Variance, P4,320 U
* 5,000 metal molds × 0.6 hour per metal mold = 3,000 hours

Alternatively:
Labor Rate Variance = AH (AR – SR)
3,600 hours (P8.70 per hour – P9.00 per hour) = P1,080 F
Labor Efficiency Variance = SR (AH – SH)
P9.00 per hour (3,600 hours – 3,000 hours) = P5,400 U
c.
Actual Hours of Input, at
the Actual Rate
(AH × AR)
P4,320

Actual Hours of Input, at
the Standard Rate
(AH × SR)
1,800 hours × P2 per hour

Standard Hours Allowed for
Output, at the Standard Rate
(SH × SR)
1,500 hours* × P2 per hour

= P3,600

= P3,000

Spending Variance,
P720 U

Efficiency Variance,
P600 U

Total Variance, P1,320 U
*5,000 metal molds × 0.3 hours per metal mold = 1,500 hours

16-8


Standard Costs and Operating Performance Measures Chapter 16

Alternatively:
Variable Overhead Spending Variance = AH (AR – SR)
1,800 hours (P2.40 per hour* – P2.00 per hour) = P720 U
* P4,320 ÷ 1,800 hours = P2.40 per hour
Variable Overhead Efficiency Variance = SR (AH – SH)
P2.00 per hour (1,800 hours – 1,500 hours) = P600 U
Requirement 2
Summary of variances:
Material price variance..............................................................................................
P11,250 U
Material quantity variance.........................................................................................
500 F

Labor rate variance....................................................................................................
1,080 F
Labor efficiency variance..........................................................................................
5,400 U
Variable overhead spending variance........................................................................
720 U
Variable overhead efficiency variance......................................................................
600 U
Net variance................................................................................................................
P16,390 U
The net unfavorable variance of P16,390 for the month caused the plant’s
variable cost of goods sold to increase from the budgeted level of P80,000
to P96,390:
Budgeted cost of goods sold at P16 per metal mold................................................
P80,000
Add the net unfavorable variance (as above)...........................................................
16,390
Actual cost of goods sold..........................................................................................
P96,390
This P16,390 net unfavorable variance also accounts for the difference
between the budgeted net operating income and the actual net loss for the
month.
Budgeted net operating income.................................................................................
P15,000
Deduct the net unfavorable variance added to cost of goods
sold for the month..................................................................................................
16,390
Net operating loss......................................................................................................
P(1,390)
Requirement 3

The two most significant variances are the materials price variance and the
labor efficiency variance. Possible causes of the variances include:
Materials Price

Outdated standards, uneconomical quantity
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Chapter 16 Standard Costs and Operating Performance Measures

Variance:
Labor Efficiency
Variance:

purchased, higher quality materials, highcost method of transport.
Poorly trained workers, poor quality
materials, faulty equipment, work
interruptions, inaccurate standards,
insufficient demand.

Problem 2
1. 1,000 units
2. 25,000 lbs.
3. P2.01 per lb.

4. 14,900 lbs.
5. 3,100 hours
6. P3.98 per hour

Problem 3

Material mix variance:
Actual quantity x Standard price
Material A (8,000 x P0.30)
P2,400
Material B (2,400 x P0.20)
480
Material C (2,800 x P0.425)
1,190
Less: Total actual input x Average
Standard price (13,200 x 0.30*)
Unfavorable Mix Variance
P 720
* Average Standard price = 2,400
=

P4,070
3,960
P 110
P0.30

Material yield variance:
Total actual input at Average Standard price
P3,960
Less: Total actual output at Standard raw material cost
(10,000 x 0.36**)
3,600
Unfavorable yield variance
P 360
** Standard Material Cost

=

P 720
2,000

=

P0.36

Problem 4 (Comprehensive Variance Analysis; Journal Entries)
Requirement 1
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Standard Costs and Operating Performance Measures Chapter 16

a.
Actual Quantity of Inputs, at Actual Quantity of Inputs, at Standard Quantity Allowed for
Actual Price
Standard Price
Output, at Standard Price
(AQ × AP)
(AQ × SP)
(SQ × SP)
21,120 yards x
21,120 yards x
19,200 yards* x
P3.35 per yard
P3.60 per yard
P3.60 per yard

= P70,752

= P76,032
Price Variance,
P5,280 F

= P69,120
Quantity Variance,
P6,912 U

Total Variance, P1,632 U
* 4,800 units × 4.0 yards per unit = 19,200 yards

Alternatively:
Materials Price Variance = AQ (AP – SP)
21,120 yards (P3.35 per yard – P3.60 per yard) = P5,280 F
Materials Quantity Variance = SP (AQ – SQ)
P3.60 per yard (21,120 yards – 19,200 yards) = P6,912 U
Raw Materials (21,120 yards @ P3.60 per yard).....................................................
76,032
Materials Price Variance
(21,120 yards @ P0.25 per yard F)...............................................................
5,280
Accounts Payable
(21,120 yards @ P3.35 per yard)..................................................................
70,752
Work in Process (19,200 yards @ P3.60 per
yard)........................................................................................................................
69,120

Materials Quantity Variance
(1,920 yards U @ P3.60 per yard).........................................................................
6,912
Raw Materials (21,120 yards @ P3.60 per
yard)................................................................................................................
76,032
Requirement 2
a.
Actual Hours of Input, at
the Actual Rate
(AH × AR)
6,720 hours* x
P4.85 per hour

Actual Hours of Input, at
the Standard Rate
(AH × SR)
6,720 hours x
P4.50 per hour

16-11

Standard Hours Allowed for
Output, at the Standard Rate
(SH × SR)
7,680 hours** x
P4.50 per hour


Chapter 16 Standard Costs and Operating Performance Measures

= P32,592

= P30,240

= P34,560

Efficiency Variance,
P4,320 F

Rate Variance,
P2,352 U

Total Variance, P1,968 F

* 4,800 units × 1.4 hours per unit = 6,720 hours
** 4,800 units × 1.6 hours per unit = 7,680 hours

Alternatively:
Labor Rate Variance = AH (AR – SR)
6,720 hours (P4.85 per hour – P4.50 per hour) = P2,352 U
Labor Efficiency Variance = SR (AH – SH)
P4.50 per hour (6,720 hours – 7,680 hours) = P4,320 F
Work in Process (7,680 hours @ P4.50 per
hour)........................................................................................................................
34,560
Labor Rate Variance
(6,720 hours @ P0.35 per hour U)........................................................................
2,352
Labor Efficiency Variance
(960 hours F @ P4.50 per hour)....................................................................

4,320
Wages Payable (6,720 hours @ P4.85 per
hour)................................................................................................................
32,592
Requirement 3
Actual Hours of Input, at
the Actual Rate
(AH × AR)
6,720 hours x
P2.15 per hour

Actual Hours of Input, at
the Standard Rate
(AH × SR)
6,720 hours x
P1.80 per hour

Standard Hours Allowed for
Output, at the Standard Rate
(SH × SR)
7,680 hours x
P1.80 per hour

P14,448

= P12,096

= P13,824

Spending Variance,

P2,352 U

Efficiency Variance,
P1,728 F

Total Variance, P624 U

Alternatively:
Variable Overhead Spending Variance = AH (AR – SR)
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Standard Costs and Operating Performance Measures Chapter 16

6,720 hours (P2.15 per hour – P1.80 per hour) = P2,352 U
Variable Overhead Efficiency Variance = SR (AH – SH)
P1.80 per hour (6,720 hours – 7,680 hours) = P1,728 F
Requirement 4
No. This total variance is made up of several quite large individual
variances, some of which may warrant investigation. A summary of
variances is shown on the next page.
Materials:
Price variance
Quantity variance
Labor:
Rate variance
Efficiency variance
Variable overhead:
Spending variance
Efficiency variance

Net unfavorable variance

P5,280 F
6,912 U

P1,632 U

2,352 U
4,320 F

1,968 F

2,352 U
1,728 F

624 U
P 288 U

Requirement 5
The variances have many possible causes. Some of the more likely causes
include:
Materials variances:
Favorable price variance: Fortunate buy, inaccurate standards, inferior
quality materials, unusual discount due to quantity purchased, drop in
market price.
Unfavorable quantity variance: Carelessness, poorly adjusted machines,
unskilled workers, inferior quality materials, inaccurate standards.
Labor variances:
Unfavorable rate variance: Use of highly skilled workers, change in wage
rates, inaccurate standards, overtime.

Favorable efficiency variance: Use of highly skilled workers, high quality
materials, new equipment, inaccurate standards.
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Chapter 16 Standard Costs and Operating Performance Measures

Variable overhead variances:
Unfavorable spending variance: Increase in costs, inaccurate standards,
waste, theft, spillage, purchases in uneconomical lots.
Favorable efficiency variance: Same as for labor efficiency variance.
V. Multiple Choice Questions
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

C
C
A
B
A
B
C

C
B
B

11.
12.
13.
14.
15.
16.
17.
18.
19.
20.

B
A
B
C
A
D
D
A
D
B

21.
22.
23.
24.

25.
26.
27.
28.
29.
30.

16-14

A
C
C
C
C
D
E
B
B
A

31.
32.
33.
34.
35.
36.
37.
38.
39.
40.

A
B
B
D
B
B
C
D
D
A

41.
42.
43.
44.
45.

B
C
D
A
B