Solution manual accounting 25th edition warren chapter 23

DVORAK COMPANY Income Statement Through Gross Profit For the Year Ended December 31, 2014Less variances from standard cost: Factory overhead controllable PE23–3B 200 PE 23–7A Number of e

CHAPTER 23 PERFORMANCE EVALUATION USING VARIANCES

FROM STANDARD COSTS

DISCUSSION QUESTIONS

1 Standards are performance goals Manufacturing companies normally use standard cost for

each of the three following product costs:

a Direct materials

b Direct labor

c Factory overhead

Standard cost systems enable management to determine the following:

a How much a product should cost (standard cost)

b How much it does cost (actual cost)

2 Reporting by the “principle of exceptions” is the reporting of only variances (or

“exceptions”) between standard and actual costs to the individual responsible for cost

control This reporting allows management to focus on correcting cost variances

3 The two variances in direct materials cost are:

a Direct materials price

b Direct materials quantity

4 The offsetting variances might have been caused by the purchase of low-priced, inferior

materials The low price of the materials would generate a favorable materials price variance, while the inferior quality of the materials would cause abnormal spoilage and waste, thus

generating an unfavorable materials quantity variance

5 a The two variances in direct labor costs are:

(1) Direct labor rate

(2) Direct labor time

b The direct labor cost variance is usually under the control of the production supervisor.

6 No Even though the assembly workers are covered by union contracts, direct labor cost variances

still might result For example, direct labor rate variances could be caused by scheduling overtime

to meet production demands or by assigning higher-paid workers to jobs normally performed by lower-paid workers Likewise, direct labor time variances could result during the training of new workers or from a shortage of skilled employees

7 Standards can be very appropriate in repetitive service operations Fast-food restaurants can

use standards for evaluating the productivity of the counter and food preparation employees

In addition, standards could be used to plan staffing patterns around various times of the day(e.g., increasing staff during the lunch hour)

23-1

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DISCUSSION QUESTIONS (Continued)

8 a. The variable factory overhead controllable variance results from incurring a total amount

of variable factory overhead cost greater or less than the amount budgeted for the level of operations achieved The fixed factory overhead volume variance results from operating at

a level above or below 100% of normal capacity

b. The factory overhead cost variance report presents the standard factory overhead cost variance data (that is, the volume and the controllable variance)

9 Net unfavorable direct materials price variance.

10 Nonfinancial performance measures provide managers additional measures beyond the dollar

impact of decisions Nonfinancial considerations may help the organization include external customer perspectives about quality and service in performance measurements These bring added perspectives in evaluating performance

Variable Factory Overhead

Controllable Variance = $63,400 – [$3.50 × (3,500 units × 5 hrs.)] Variable Factory Overhead

Controllable Variance Variable Factory Overhead

Variable Factory Overhead

Controllable Variance = –$200 Favorable

PE 23–4A

–$900 favorable $1.80 × [17,000 hrs – (3,500 units × 5 hrs.)]

PE 23–4B

$300 unfavorable $0.60 × [3,500 hrs – (1,000 units × 3 hrs.)]

PE 23–5A

Less variances from standard cost:

DVORAK COMPANY Income Statement Through Gross Profit For the Year Ended December 31, 2014

Less variances from standard cost:

Factory overhead controllable (PE23–3B) 200

PE 23–7A

Number of employee errors……… Input

Number of times paper supply runs out……… Input

Copy machine downtime (broken)……… Input

Number of pages copied per hour……… Output

Number of customer complaints………Output Percent jobs done on time……… ……… Output

PE 23–7B

Number of times ingredients are missing………Input

Number of customer complaints………Output Number of hours kitchen equipment is down for repairs………Input

Number of server order mistakes………Input

Percent of meals prepared on time………Output Number of unexpected cook absences………Input

= $0.25 per bar

Ex 23–2

Fixed factory overhead……… $1.25 × 2.0 hrs 2.50

b A standard cost system provides Wood Designs’ management a cost control tool using the principle of management by exception Using this principle, costs that deviate significantly from standards can be investigated and corrected The standard cost system also can be used to motivate employees to work efficiently with their time, use of materials, and other factory overhead resources.

unfavorable factory overhead cost variance.

Note to Instructors: The budget prepared in part (a) at the beginning of the month

should not be used in the budget performance report because actual volumes

were greater than planned (610,000 vs 600,000).

TIME IN A BOTTLE COMPANY Manufacturing Cost Budget For the Month Ended May 31, 2014

Standard Cost at Planned Volume (600,000 Bottles)

Ex 23–4

a Price variance:

Direct Materials

Price Variance Direct Materials

Price Variance Direct Materials

b The direct materials price variance should normally be reported to the

Purchasing Department, which may or may not be able to control this variance

If materials of the same quality were purchased from another supplier at a price higher than the standard price, the variance was controllable However, if the variance resulted from a market-wide price increase, the variance was not

subject to control.

The direct materials quantity variance should be reported to the proper level of operating management For example, if lower amounts of direct materials had been used because of production efficiencies, the variance would be reported

to the production supervisor However, if the favorable use of raw materials had been caused by the purchase of higher-quality raw materials, the variance

should be reported to the Purchasing Department.

The total materials cost variance should be reported to senior plant management, such as the plant manager or materials manager.

= (Actual Price – Standard Price) × Actual Quantity

= ($6.50 per unit* – $6.90 per unit) × 450

= (Actual Quantity – Standard Quantity) × Standard Price

= (450 units – 430 units) × $6.90 per unit

Quantity Variance = $138 Unfavorable

Total direct materials cost variance:

Ex 23–6

Standard finished product for direct materials used

Deficiency of finished product for materials used……… (100) units

Standard cost for direct materials:

Quantity variance divided by deficiency of product

for materials used ($1,000 ÷ 100 units)……… $10.00 per unit

Alternate solution:

Materials used……… ÷ 3,000 lbs.

Price variance per lb., unfavorable……… $ 0.50

Less price variance (unfavorable) per lb (from above)……… (0.50)

Standard direct materials cost per unit of product………… $10.00

Proof:

Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity

= ($5.50 – $5.00) × 3,000

= $1,500 Unfavorable Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity)

× Standard Price

= (3,000 lbs – 2,800 lbs.) × $5.00

= $1,000 Unfavorable

Standard Quantity ×

Standard

Standard Cost per Batch

Whole tomatoes……… 3,360 lbs $ 0.50 per lb $1,680

Quantity Difference ×

Standard

Materials Quantity Variance 3,556 lbs.

$89 U

= (Actual Direct Labor Hours – Standard Direct Labor Hours)

× Standard Rate per Hour

b Debit to Work in Process: $12,800

Ex 23–10 (Concluded)

(2) Sewing Department

Rate variance:

Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours

Direct Labor

=

Direct Labor Rate Variance

Time varianc e :

Direct Labor

Time Variance

= $1,185 Unfavorable

= (Actual Direct Labor Hours – Standard Direct Labor Hours)

× Standard Rate per Hour

Direct Labor Time Variance

= –$190 Favorable

b The two departments have opposite results The Cutting Department has a

favorable rate and an unfavorable time variance, resulting in a total unfavorable cost variance of $792 In contrast, the Sewing Department has an unfavorable rate variance, but has a favorable time variance, resulting in a total favorable cost

variance of $190 The causes of this disparity are worthy of investigation There are many possible causes including tight or loose standards, inferior or superior operating methods, and inappropriate or appropriate use of overtime Combining both departments, the overall operation shows an unfavorable cost variance of $602 ($792 – $190), as a result of the weak performance in the Cutting Department.

a Actual weekly expenditure: 4 people × $15.00 per hour × 40 hrs per week = $2,400

b Standard time used for the volume of admissions:

c Actual productive minutes available

(4 employees × 40 hrs × 60 min.) 9,600 minutes

Less standard minutes used at actual volume 9,450 minutes

Time difference from standard 150 minutes

× Standard rate per minute 1 $ 0.25

Direct labor time variance—unfavorable $37.50

Standard direct labor rate:

$15 ÷ 60 min = $0.25 per min.

2

Standard labor cost at actual volume:

Productive time (9,450 ÷ 60) × $15 = $2,362.50

The Admissions Department was less efficient than standard by 150 minutes,

or 2.5 hours This is equal to $37.50 at the standard rate of $15 per hour.

Ex 23–12

Standard Minutes per Hour =

Standard Sorts per Hour (per employee)

120 sorts per min × 60 min per hr = 7,200 standard sorts per hr.

Pieces of Mail ÷

Standard Sorts per Hour

= Number of Hours Planned

41,472,000 letters ÷ 7,200 sorts per hr = 5,760 hrs planned

Number of Hours Planned ÷ Hours per Temporary Employee per Month

= Number of Hires

5,760 hrs ÷ 160 hrs = 36 temporary hires for December

b Actual pieces sorted = 41,220,000

Actual Pieces of Mail Sorted ÷

Standard Sorts per Hour =

Standard Number of Hours

for Actual Production

41,220,000 ÷ 7,200 standard sorts per hr = 5,725 standard hrs for actual

production

Standard hours for actual production……… 5,725

× Standard hourly rate……… $ 15 Direct labor time variance—unfavorable……… $ 525

Step 1: Determine the standard direct materials and direct labor per unit.

Standard direct materials quantity per unit:

Direct materials lbs budgeted for June:

= 1.5 standard lbs per unit

Standard direct labor time per unit:

Direct labor hrs budgeted for June:

= 0.10 standard direct labor hr per unit

Step 2: Using the standard quantity and time rates in step 1, determine the

standard costs for the actual June production.

Standard direct materials at actual volume:

18,000 units × 1.5 lbs per unit × $1.25……… $33,750 Standard direct labor at actual volume:

18,000 units × 0.10 direct labor hr per unit × $14.00……… 25,200

Step 3: Determine the direct materials quantity and direct labor time variances,

assuming no direct materials price or direct labor rate variances.

Actual direct materials used in production……… $34,500

Direct materials quantity variance—unfavorable*……… $ 750

* (27,600 lbs – 27,000 lbs.) × $1.25 = 750 U

$34,500 ÷ $1.25 = 27,600 lbs.

$33,750 ÷ $1.25 = 27,000 lbs.

Standard direct labor (step 2)……… 25,200 Direct labor time variance—favorable**……… $ (700)

** 18,000 units × 0.10 hr = 1,800 standard hrs.

$24,500 ÷ $14.00 = 1,750 actual hrs.

(1,750 hrs – 1,800 hrs.) × $14.00 = –$700 F

LENO MANUFACTURING COMPANY Factory Overhead Cost Budget—Press Department For the Month Ended November 30, 2014

Variable overhead cost:

Fixed factory overhead cost:

Ex 23–15

a.

b Overhead applied at actual production:

× Overhead application rate*……… $ 10.50

* Total factory overhead rate to be applied to production:

Variable factory overhead……… $ 4.50

Total……… $10.50

$60,000

10,000 hrs.

Note: The fixed factory overhead rate is determined at normal production.

WIKI WIKI COMPANY Monthly Factory Overhead Cost Budget—Fabrication Department

Variable factory overhead controllable variance:

Actual variable factory overhead cost incurred……… $262,000

Budgeted variable factory overhead for 14,000 hrs.

[14,000 × ($25.00 – $6.00)]……… 266,000

Fixed factory overhead volume variance:

× Standard fixed factory overhead rate………

Variance—unfavorable………

$6.00

6,000 Total factory overhead cost variance—unfavorable*……… $ 2,000

* Actual Overhead – Applied Overhead = Total Overhead Variance:

($262,000 + $90,000) – $350,000 = $2,000

Applied Factory Overhead

Standard hours at actual production……… 92,500

× Variable factory overhead rate 1 ………… $6.00

Standard variable factory overhead………… 555,000

Less standard hours……… 92,500

Factory Overhead

In determining the volume variance, the productive capacity overemployed (2,000

hours) should be multiplied by the standard fixed factory overhead rate of $3.80

($7.30 – $3.50) to yield a favorable variance of $7,600 The variance analysis

provided by the chief cost accountant incorrectly multiplied the 2,000 hours by the

total factory overhead rate of $7.30 per hour and reported it as unfavorable.

A correct determination of the factory overhead cost variances is as follows:

Variable factory overhead controllable variance:

Actual variable factory overhead cost incurred……… $458,000

Budgeted variable factory overhead for 132,000

Fixed factory overhead volume variance:

Standard for amount produced……… 132,000 hrs.

× Standard fixed factory overhead rate……… × $3.80

Factory Overhead

TANNIN PRODUCTS INC.

Factory Overhead Cost Variance Report—Trim Department

For the Month Ended July 31, 2014

Actual productive capacity used for the month 22,000 hrs.

Budget (at actual

Variances

Variable factory overhead costs: 1

Total fixed factory

The budgeted variable factory overhead costs are determined by multiplying

22,000 hours by the variable factory overhead cost rate for each variable cost

category These rates are determined by dividing each budgeted amount

(estimated at the beginning of the month) by the planned (budgeted) volume

of 20,000 hours Thus, for example:

= $5.20 per hr.

Applied Factory

Cost Variance

*$78,000 ÷ 20,000 hours budgeted at the beginning of the month

1

5,000 × 2.20 hrs × $18.00

Direct labor time variance: (11,500 – 11,000) × $18.00 = $9,000 U

Direct labor rate variance: ($17.60 – $18.00) × 11,500 = $4,600 F

2 11,500 hours × $17.60 per hour

Ex 23–22

GRIGGS COMPANY Income Statement For the Month Ended December 31, 2014

Favorable Unfavorable Less variances from standard cost:

a and b.

Input Measure

Output

Average computer response

time to customer “clicks”

ordering process If the speed is too slow, we may lose customers Dollar amount of returned

goods

satisfaction with the final product that was ordered.

Elapsed time between

customer order and product

delivery

process responsiveness If the company is too slow in providing product, we may lose customers Maintenance dollars divided

by hardware investment

reliability and downtime The maintenance dollars should be divided by the amount of hardware

in order to facilitate comparison across time.

Number of customer

complaints divided by the

number of orders

dissatisfaction with the ordering process.

Number of misfilled orders

divided by the number of orders

customer’s satisfaction with the order process A measure of output quality of the process.

Number of orders per

warehouse employee

capacity of the warehouse relative

to the demands placed upon it This relationship will impact the delivery cycle time.

Number of page faults or

errors due to software

programming errors

impact the customer’s ordering experience It’s a measure of process output quality.

Number of software fixes

per week

effectiveness of the order fulfillment system; thus, fixes are

an input that will improve the performance of the order fulfillment system.

reliability.

enhance the software’s responsiveness and reliability.

Ex 23–24

a Possible Input Measures

Registration staffing per student

Technology investment per period for registration process

Training hours per registration personnel

Amount of faculty staffing

Amount of technology capacity (size of computer, number of input lines)

for registration process

Maintenance dollars spent on the registration system

Employee satisfaction score

Number of hours per day registration is available

Possible Output Measures

Cycle time for a student to register for classes

Number of times a course is unavailable

Number of separate registration events or steps (log-ons or line waits)

per student

Number of times a replacement course was used by a student

Number of registration errors

Student satisfaction score with the registration process

Number of student complaints about registration process

Number of registration rework steps per student

Cost of registration per student

Number of personnel overtime hours during registration

Labor time variance for registration process (standard hours less actual

hours at standard labor rate)

Number of computer registration failures

b Alpha University is interested in not only the efficiency of the process but

also the quality of the process This means that the process must meet multiple objectives The college wants this process to meet the needs of students,

which means it should not pose a burden to students Students should be able

to register for classes quickly, get the courses they want, and avoid registration errors, hassles, and problems Thus, the nonfinancial measures are used to balance the need for a cost-efficient process with one that will meet the needs

of the student.

Prob 23–1A

Materials and Labor Cost

Direct Materials Cost Variance

= (Actual Price – Standard Price) × Actual Quantity

Cost Variance

= –$4,762.50 + $12,100.00

= $7,337.50 Unfavorable