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MANAGEMENT ACCOUNTING - Solutions Manual CHAPTER 16 STANDARD COSTS AND OPERATING PERFORMANCE MEASURES I Questions Standard costs are superior to past data for comparison with actual costs because they ask the question “Is present performance better than the past?” 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 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 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 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 Four criteria for selecting a volume base are: 16-1 Chapter 16 Standard Costs and Operating Performance Measures 1) 2) 3) 4) Cause of cost variability Adequacy of control over the base Independence of activity unit Ease of understanding 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 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 Under management by exception, managers focus their attention on operating results that deviate from expectations It is assumed that results that meet expectations 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 16-2 Standard Costs and Operating Performance Measures Chapter 16 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 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 16 A quantity standard indicates how much of an input should be used to make a unit of output A price standard indicates how much the input should cost 17 Chronic inability to meet a standard is likely to be demoralizing and may result in decreased productivity 18 A variance is the difference between what was planned or expected and what was actually accomplished A standard cost system has at least two types of variances A price variance focuses on the difference between the standard price and the actual price of an input A quantity variance is concerned with the difference between the standard quantity of the input allowed for the actual output and the actual amount of the input used II Matching Type E G C H A D J B I 10 F III Exercises Exercise (Setting Standards; Preparing a Standard Cost Card) 16-3 Chapter 16 Standard Costs and Operating Performance Measures Requirement Cost per kilogram container P6,000.00 Less: 2% cash discount 120.00 Net cost P5,880.00 Add freight cost per kilogram container (P1,000 ÷ 10 containers) 100.00 Total cost per 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 Beta ML12 required per capsule as per bill of materials 6.00 grams Add allowance for material rejected as unsuitable (6 grams ÷ 0.96 = 6.25 grams; 6.25 grams – 6.00 grams = 0.25 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 Item Beta ML12 Standard Quantity per Capsule 6.50 grams Standard Price per Gram P2.99 Standard Cost per Capsule P19.435 Exercise (Material Variances) Requirement Number of chopping blocks 4,000 Number of board feet per chopping block × 2.5 Standard board feet allowed 10,000 16-4 Standard Costs and Operating Performance Measures Chapter 16 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 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 = P18,000 Quantity Variance, P1,800 U Price Variance, P1,100 F Total Variance, P700 U 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 (Labor and Variable Overhead Variances) Requirement 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 16-5 Chapter 16 Standard Costs and Operating Performance Measures Actual direct labor cost P49,300 Standard direct labor cost 48,000 P 1,300 Total variance—unfavorable Requirement 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 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 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: 16-6 Standard Costs and Operating Performance Measures Chapter 16 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 (Working Backwards from Labor Variances) Requirement 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) 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 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 Exercise (Direct Labor Variances) 16-7 Chapter 16 Standard Costs and Operating Performance Measures Number of meals prepared Standard direct labor-hours per meal Total direct labor-hours allowed Standard direct labor cost per hour Total standard direct labor cost 6,000 × 0.20 1,200 × P9.50 P11,400 Actual cost incurred Total standard direct labor cost (above) Total direct labor variance P11,500 11,400 P 100 Unfavorable Actual Hours of Input, at the Actual Rate (AH×AR) 1,150 hours × P10.00 per hour = P11,500 Actual Hours of Input, at the Standard Rate (AH×SR) 1,150 hours × P9.50 per hour = P10,925 Standard Hours Allowed for Output, at the Standard Rate (SH×SR) 1,200 hours × P9.50 per hour = P11,400 Rate Variance, P575 U Efficiency Variance, P475 F Total Variance, P100 U Alternatively, the variances can be computed using the formulas: Labor rate variance = AH(AR – SR) = 1,150 hours (P10.00 per hour – P9.50 per hour) = P575 U Labor efficiency variance = SR(AH – SH) = P9.50 per hour (1,150 hours – 1,200 hours) = P475 F Exercise (Variable Overhead Variances) Number of items shipped Standard direct labor-hours per item Total direct labor-hours allowed Standard variable overhead cost per hour Total standard variable overhead cost 16-8 140,000 × 0.04 5,600 × P2.80 P15,680 Standard Costs and Operating Performance Measures Chapter 16 Actual variable overhead cost incurred Total standard variable overhead cost (above) Total variable overhead variance Actual Hours of Input, at the Actual Rate (AH×AR) 5,800 hours × P2.75 per hour* = P15,950 P15,950 15,680 P 270 Unfavorable Actual Hours of Input, at the Standard Rate (AH×SR) 5,800 hours × P2.80 per hour = P16,240 Standard Hours Allowed for Output, at the Standard Rate (SH×SR) 5,600 hours × P2.80 per hour = P15,680 Variable overhead spending variance, P290 F Variable overhead efficiency variance, P560 U Total variance, P270 U *P15,950÷ 5,800 hours =P2.75 per hour Alternatively, the variances can be computed using the formulas: Variable overhead spending variance: AH(AR – SR) = 5,800 hours (P2.75 per hour – P2.80 per hour) = P290 F Variable overhead efficiency variance: SR(AH – SH) = P2.80 per hour (5,800 hours – 5,600 hours) = P560 U IV Problems Problem (Comprehensive Variance Analysis) Requirement 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 16-9 Chapter 16 Standard Costs and Operating Performance Measures 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, P500 F * 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 Actual Hours of Input, at the Standard Rate 16-10 Standard Hours Allowed for Output, at the Standard Rate Standard Costs and Operating Performance Measures Chapter 16 (AH × AR) P4,320 (AH × SR) 1,800 hours × P2 per hour (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 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 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 16-11 Chapter 16 Standard Costs and Operating Performance Measures 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 The two most significant variances are the materials price variance and the labor efficiency variance Possible causes of the variances include: Materials Price Variance: Outdated standards, uneconomical quantity purchased, higher quality materials, highcost method of transport Labor Efficiency Variance: Poorly trained workers, poor quality materials, faulty equipment, work interruptions, inaccurate standards, insufficient demand Problem 1,000 units 25,000 lbs P2.01 per lb 14,900 lbs 3,100 hours P3.98 per hour Problem 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 16-12 Standard Costs and Operating Performance Measures Chapter 16 (10,000 x 0.36**) Unfavorable yield variance ** Standard Material Cost 3,600 P 360 = P 720 2,000 = P0.36 Problem (Comprehensive Variance Analysis; Journal Entries) Requirement 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 16-13 Chapter 16 Standard Costs and Operating Performance Measures 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 a Actual Hours of Input, at the Actual Rate (AH × AR) 6,720 hours* x P4.85 per hour = P32,592 Actual Hours of Input, at the Standard Rate (AH × SR) 6,720 hours x P4.50 per hour = P30,240 Standard Hours Allowed for Output, at the Standard Rate (SH × SR) 7,680 hours** x P4.50 per hour = 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 16-14 Standard Costs and Operating Performance Measures Chapter 16 Requirement 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) 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 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 P5,280 F 6,912 U P1,632 U 2,352 U 4,320 F 1,968 F 2,352 U 16-15 Chapter 16 Standard Costs and Operating Performance Measures Efficiency variance Net unfavorable variance 1,728 F 624 U P 288 U Requirement 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 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 C C A B A B C 11 12 13 14 15 16 17 B A B C A D D 21 22 23 24 25 26 27 16-16 A C C C C D E 31 32 33 34 35 36 37 A B B D B B C 41 42 43 44 45 B C D A B Standard Costs and Operating Performance Measures Chapter 16 C B 10 B 18 19 20 A D B 28 29 30 16-17 B B A 38 39 40 D D A ... × 2.5 Standard board feet allowed 10,000 16- 4 Standard Costs and Operating Performance Measures Chapter 16 Standard cost per board foot × P1.80 Total standard cost ... Actual Hours of Input, at the Standard Rate 16- 10 Standard Hours Allowed for Output, at the Standard Rate Standard Costs and Operating Performance Measures Chapter 16 (AH × AR) P4,320 (AH × SR)... 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 16- 5 Chapter 16 Standard Costs and Operating
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