Managerial accounting, 5th by jiambalvo test bank ch11

CHAPTER 11 Standard Costs and Variance Analysis Summary of Questions by Objectives and Bloom’s Taxonomy Item SO BT Item SO BT True-False Statements 1 K K K K K 10 1,6 K K 11 K K 12 K K 13 K K 14 K Multiple Choice Questions 32 K 58 K 33 K 59 K 34 K 60 C 35 K 61 AP 36 K 62 AP 37 C 63 2,3,4 AP 38 K 64 AP 39 K 65 AP 40 K 66 AP 41 K 67 AP 42 K 68 AP 43 K 69 2,3,4 C 44 K 70 C 45 C 71 C 46 C 72 AP 47 K 73 AP 48 C 74 AP 49 K 75 AP 50 AP 76 AP 51 AP 77 K 52 AP 78 C 53 AP 79 K 54 AP 80 K 55 AP 81 4,5 C 56 AP 82 4,5 K 57 1,6 K 83 4,5 K Matching 161 1,3,4 K Exercises 162 2-4 AP 166 AP 163 AP 167 2,3 AP 164 AP 168 2,3,4 AP 165 AP 169 2,3 AP Item SO BT 3 4 4 K C K C C C C 22 23 24 25 26 27 *28 6 5,7 6 A1 K K K C K C K *29 *30 *31 A1 A1 A1 K K K 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 *102 *103 *104 *105 *106 *107 *108 *109 4 4 2-4 4 4 4 4 7 A1 A1 A1 A1 A1 A1 A1 A1 K AP AP C K AP AP AP AP AP AP AP AP C C K C C K K K K C K K C *110 *111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 A1 A1 2 2 2 3 3 3 2 3 1-4 2 3 4 K K AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 *160 4,5 2 3 4 4,5 4 4,5 4,5 2-4 4 3 2 A1 AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP 170 171 172 173 AP AP AP AP 174 175 176 177 3 4 AN AP AP AP 15 16 17 18 19 20 21 Item SO BT Item SO BT 11-2 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition Challenge Exercises 178 EV 180 *179 A1 AP 181 Short-Answer Essays 184 K 186 185 K 187 AN AN 182 183 2-6 4,5 EV AP 4,5 AN C 188 189 C C 190 *191 A1 C C Chapter 11 Standard Costs and Variance Analysis 11-3 TRUE-FALSE In a standard costing system, manufactured goods are recorded at the variable cost that should have been incurred to produce the items Differences between standard and budgeted costs are referred to as standard cost variances The use of standard costs is limited to manufacturing companies Budgeted costs are the same as standard costs Ideal standards are developed under the assumption that no obstacles to the production process will be encountered For planning purposes, ideal standards are more useful than attainable standards A variance analysis generally involves decomposing the difference between standard and actual costs into three components—direct materials, direct labor, and manufacturing overhead Ideal standards are synonymous with favorable variances, while attainable standards are synonymous with unfavorable variances A material price variance measures whether more or less material was used in producing inventory 10 Unfavorable variances are red flags that a manager has performed poorly 11 The material quantity variance compares the actual quantity of material purchased with the quantity of material used 12 The material price variance is equal to the standard price per unit of material times the actual quantity of material used 13 The labor rate variance is also known as the labor efficiency variance 14 The labor rate variance measures whether the rate paid to employees is more or less than the company’s standard rate 15 The labor rate variance is equal to the difference between the actual number of labor hours worked and the standard labor hours allowed, times the standard labor wage rate 16 A favorable labor efficiency variance indicates that employees worked more quickly than expected 17 The total variance for manufacturing overhead is the difference between the flexible budget for overhead and actual overhead costs 18 An unfavorable controllable overhead variance indicates that more cost was incurred on overhead costs than allowed in the flexible budget 19 A favorable overhead volume variance is a signal that the actual quantity produced was greater than the quantity anticipated 11-4 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 20 An unfavorable overhead volume variance always indicates that overhead is overapplied during the period 21 The controllable variable overhead variance is inappropriately named, because managers are not expected to be able to control it 22 If a management by exception approach is used to investigate variances, only variances that cause costs to be more than expected are investigated 23 Variances that are large in absolute dollar value or as a percent of budgeted amounts are generally considered exceptional in a management by exception approach 24 In some instances, process improvement can lead to unfavorable variances 25 If actual demand is greater than anticipated, an overall favorable variance will exist for each of the three production costs 26 The materials storeroom clerk is responsible for material price variances 27 A purchasing manager might be tempted to buy inferior materials because it will create favorable material quantity variance *28 In a standard costing system, the cost transferred out of Work in Process inventory is equal to the standard cost per items produced time the number of completed units *29 A standard costing system simplifies accounting by carrying inventory at standard cost *30 All insignificant variances are closed to Cost of Goods Sold *31 A favorable material quantity variance is recorded with a credit to the Material Quantity Variance account Material from the appendix to the chapter is marked with an asterisk (*) Answers F F F F T F T 10 11 12 13 14 F F F F F F T 15 16 17 18 19 20 21 F T F T T F F 22 23 24 25 26 27 28 F T T F F F T 29 T 30 T 31 T Chapter 11 Standard Costs and Variance Analysis MULTIPLE CHOICE 32 Which of the following statements is true of standard cost? A It is equal to the actual cost of one unit of product B It is the amount management thinks that one unit of product should cost C It allows companies to generate more favorable than unfavorable variances D It is often calculated after production for the period is complete 33 What are standard cost variances? A Differences between standard and actual costs B Amounts that exceed budgeted amounts C Useful industry-developed amounts that can be used by companies to evaluate their performance D Differences between budgeted and standard amounts 34 The difference between standard and actual costs is A considered to be an ideal standard B a variance by exception C the budgeted cost of one item of product D a standard cost variance 35 What is the cost that management believes should be incurred to produce a product under anticipated conditions called? A Budgeted cost B Ideal cost C Actual cost D Standard cost 36 In what industries are standard costs used? A Manufacturing companies only B Service companies only C Both manufacturing and service companies D None of these answer options are correct 37 For which one of the following will standard costs be most useful? A A soft drink bottling company B A caterer C A cabinet manufacturer D An event planner 38 What is a standard cost? A The difference between an attainable standard and an ideal standard B The budgeted cost of the total number of budgeted units C The budgeted cost of a single unit D None of these answer choices are correct 39 Which one of the following is true concerning standard and budgeted costs? A Standard cost times the expected production level equals the budgeted cost B Standard cost times the predetermined overhead rate equals the budgeted cost C Total budgeted cost divided by actual units equals the standard cost D None of these answer choices are correct 11-5 11-6 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 40 The difference between standard costs and budgeted costs is that standard cost A refers to a single unit while budgeted costs refer to the cost, at standard, for the total number of budgeted units B is calculated under ideal conditions, while budgeted costs are calculated for attainable conditions C is calculated for raw material while budgeted costs are calculated for direct labor D is part of the management accounting system, while budgets are part of the financial accounting system 41 For which one of the following are standard production costs not developed? A Direct materials B Commission per unit C Manufacturing overhead D Fixed costs 42 Which one of the following is often used to determine a standard price for materials? A Time-and-motion studies B A union labor contract C Price lists provided by suppliers D Materials requisition forms 43 Which of the following is a method of determining the standard quantity of direct labor? A An analysis of past data regarding overhead required for various levels of production B Labor contract negotiated with the union employees C Time-and-motion studies conducted by industrial engineers D Suppliers’ estimates of labor quantities to be used 44 A company developed a standard cost for overhead Which of the following involves standard development procedures that are similar to developing overhead standard costs? A Standard costs for materials B Total number of units to be produced C Predetermined overhead rates D Budgeted direct labor costs 45 Management of Wilson, Inc developed standards under the assumption that a variety of factors may lead to less than perfect performance Which type of standard was developed? A Ideal standards B Actual standards C Attainable standards D Questionable standards 46 Which of the following is a reason that most managers support the use of attainable standards rather than ideal standards? A Attainable standards allow for an occasional equipment failure B Attainable standards recognize that suppliers must provide raw materials with no defects C Attainable standards are required in order to have zero variances D Attainable standards motivate employees to achieve perfection Chapter 11 Standard Costs and Variance Analysis 11-7 47 Which of the following may cause an unfavorable material variance? I More material was used than planned II A company paid a higher price for materials than expected III More materials were used than purchased A I and II B II and III C I and III D I, II, and III 48 What are the two most likely reasons an unfavorable total materials variance may exist? A Inflation caused an increase in the cost to acquire materials of the same quality, and due to this inflation, the company purchased fewer materials than used B The company used less material than it purchased, and the amount paid for the material was more than the standard price C The price paid was more than the standard price, and the quantity budgeted was less than quantity used D The price paid was more than the standard price, and the quantity used was less than the quantity budgeted 49 Lander Foods applied management by exception Which of the following would have occurred? A The company’s managers prepared a flexible budget B Management created a poorly conceived budget C Management forecasted its sales for the budget period D Management investigated all significant variances 50 Scotto Designs has the following standards for the production of scarves: Direct materials Direct labor Standard Quantity 1.2 yards per scarf 0.15 hours per scarf Standard Price $4.70 per yard $11.00 per hour The company used 985 yards of material in order to make 800 scarves in April The company purchased 1,100 yards at $4.60 per yard How much is the direct materials quantity variance? A $110 favorable B $118 unfavorable C $8 unfavorable D $705 unfavorable 51 Scotto Designs has the following standards to make one scarf: Direct materials Direct labor Standard Quantity 1.2 yards per scarf 0.15 hours per scarf Standard Price $4.70 per yard $11.00 per hour The company used 985 yards of material in order to make 800 scarves in April The company purchased 1,100 yards at $4.60 per yard How much is the direct materials price variance? A $110 favorable B $118 unfavorable C $8 unfavorable D $98.50 favorable 11-8 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 52 An automobile parts company has a standard material price of $2 per pound In October the company produced 4,500 units using 6,000 pounds of material The company experienced a favorable materials quantity variance of $1,200 How much is the standard quantity of materials per unit? A 1.20 pounds B pound C 2.4 pounds D 1.47 pounds 53 A manufacturing company has a standard quantity of direct materials of pounds per unit at a standard price of $2.20 per pound In April the actual material price was $2.40 per pound and the company produced 5,500 units If the company experienced a favorable material quantity variance of $6,600 during the month, how much was the actual quantity of material used? A 35,500 pounds B 32,542 pounds C 38,500 pounds D 41,500 pounds 54 Blue Box Beach Chairs has the following standards to make beach chairs: Direct materials Direct labor Standard Quantity 2.2 pounds of polywood per chair 0.65 hours per chair Standard Price $3.50 per pound $13.00 per hour The static budget was based on the production of 6,200 beach chairs The company used 13,000 pounds of polywood in order to make 6,000 chairs in April The company purchased 7,000 pounds of polywood at a total cost of $24,150 How much is the direct materials quantity variance? A $700 favorable B $2,240 favorable C $350 favorable D $1,050 favorable 55 Blue Box Beach Chairs has the following standards to make beach chairs: Direct materials Direct labor Standard Quantity 2.2 pounds of polywood per chair 0.65 hours per chair Standard Price $3.50 per pound $13.00 per hour The static budget was based on the production of 6,200 beach chairs The company used 13,000 pounds of polywood in order to make 6,000 chairs in April The company purchased 7,000 pounds of polywood at a total cost of $24,150 How much is the direct materials price variance? A $700 favorable B $2,240 favorable C $350 favorable D $1,050 favorable Chapter 11 Standard Costs and Variance Analysis 11-9 56 Last month, Investly Widgets purchased 16,400 pounds of material and used 16,600 pounds in the production of 4,200 widgets The actual cost per pound of the material was $7.80 and the standard price was $7.75 per pound The company budgeted 4,500 widgets for production How much is the material quantity variance? A $820 unfavorable B $730 favorable C $1,550 favorable D More information is needed to determine the answer 57 Which variances are most important to investigate? A Variable costs variances, because they are controllable B Those that are material in amount C Those that are immaterial in amount D Those that are unfavorable 58 Which one of the following determines the material price variance? A The difference between actual price per unit and standard price per unit times the quantity of material purchased from suppliers B The difference between actual price per unit and standard price per unit times standard quantity of material used for the achieved level of production C The difference between actual quantity of material purchased and the actual quantity of material used times the standard price of material per unit D The difference between actual quantity of material purchased and the actual quantity of material used times the actual price of material per unit purchased 59 What will result if the actual price per unit of material is greater than the standard price? A A favorable material price variance B An unfavorable material quantity variance C An unfavorable material price variance D A favorable material quantity variance 60 If the material quantity variance is favorable, the A material price variance will be unfavorable B material price variance must also be favorable C quantity purchased is less than the quantity used D actual quantity used is less than the standard quantity allowed 61 Electric Zero produces relay units for generators Each relay has a standard material cost of $67 Standards call for two relays per generator In July, the company purchased 120 relays for $7,560 The company used 104 relays in the production of 50 generators, with relays damaged in the installation process The standard quantity of labor is 20 hours per generator, with a standard wage rate of $23 The company incurred 1,020 labor hours at a cost of $22,950 How much is the material price variance? A $480 favorable B $268 unfavorable C $1,340 unfavorable D $592 unfavorable 11-10 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 62 Electric Zero produces relay units for generators Each relay has a standard material cost of $67 Standards call for two relays per generator In July, the company purchased 120 relays for $7,560 The company used 104 relays in the production of 50 generators, with relays damaged in the installation process The standard quantity of labor is 20 hours per generator, with a standard wage rate of $23 The company incurred 1,020 labor hours at a cost of $22,950 How much is the material quantity variance? A $480 favorable B $268 unfavorable C $1,340 unfavorable D $592 unfavorable 63 Siggy Inc budgeted 12,000 and produced 11,000 tape dispensers during June Resin used to make the dispensers is purchased by the pound Manufacturing overhead is applied based on units produced Manufacturing standards and actual costs follow: Standards Materials pounds @ $5.00 a pound Labor 0.25 hours @ $15.00 per hour Variable overhead $39,000 Fixed overhead $1.50 per dispenser How much is the standard cost of a tape dispenser? A $18.50 B $13.75 C $24.75 D $18.80 Actual 20,900 pounds @ $4.90 per pound 2,700 hours @ $15.30 per hour $36,500 $17,250 64 Master Auto Parts has a standard labor rate of $10.50 per hour In September, the company produced 10,000 gears using 24,000 labor hours The company experienced a favorable labor rate variance of $18,000 during September How much is Master Auto Parts’ actual labor rate per hour? A $9.75 B $11.25 C $13.50 D $7.50 65 Blue Box Beach Chairs has the following standards to make beach chairs: Direct materials Direct labor Standard Quantity 2.2 pounds of polywood per chair 0.65 hours per chair Standard Price $3.50 per pound $13.00 per hour The static budget was based on the production of 6,200 beach chairs The company used 13,000 pounds of polywood in order to make 6,000 chairs in April The company purchased 7,000 pounds of polywood at a total cost of $24,150 It also used 3,840 labor hours at a cost of $12.70 per hour How much is the direct labor efficiency variance? A $1,932 unfavorable B $1,152 favorable C $780 favorable D $2,470 favorable 11-36 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 159 Harris Manufacturing produces white sauce It uses units as the cost driver for overhead The following information was provided concerning its standard cost system for 2014 : Budgeted and Standard Data Actual Data Material 1/4 lb @ $14 per pound Produced 6,200 units Labor 1.4 hrs @ $16 per hour Materials purchased 1,600 lbs for $13.70/pound Total fixed overhead $84,000 Materials used 1,520 lbs Variable overhead $6.50 per unit Labor worked 8,740 hrs costing $15.90/hour Production 6,000 units Total overhead $122,000 How much the direct material quantity variance for 2014? A $456 favorable B $480 favorable C $900 favorable D $420 favorable *160 Eli uses a standard costing system At the end of the fiscal year, only the following variance accounts had balances: Material Price Variance Material Quantity Variance Labor Efficiency Variance $260 (debit) $35 (credit) $65 (credit) Assuming these amounts are not considered significant, which one of the following will be part of the journal entry to close these accounts? A Credit to Cost of Goods Sold for $160 B Debit to Manufacturing Overhead Variances for $260 C Debit to Cost of Goods Sold for $160 D Credit to Manufacturing Overhead Control for $160 Material from the appendix to the chapter is marked with an asterisk (*) Chapter 11 Standard Costs and Variance Analysis Answers 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 B A D D C A C A A B C C C C A A C D B A D A 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 A C D B A C D A B A A C B A C B B D B C A B 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 A A B C A B A A B A B B A B C D C B A A B D 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 B C A A C D D D C B A A B D A B C C C A A B 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 D C A B B B C B B A B A A D B A C D B A D C 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 C B A A A B A D B C D D B A A C B D C 11-37 11-38 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition MATCHING 161 Match each of the following terms with the phrase that most closely describes it Each answer may be used only once _ Attainable standard _ Budgeted cost _ Overhead controllable variance _ Favorable variances _ Ideal standard _ Labor efficiency variance _ Labor rate variance _ Overhead volume variance _ Standard cost _ 10 Unfavorable variances A B C D E F G H I J Answers J G A Difference between the actual amount of overhead and the amount of overhead that would be included in the flexible budget for the actual level of production The cost that should be incurred to produce a good under anticipated conditions Standards developed under the assumption that no obstacles will be encountered Difference between the actual hours worked and the standard hours allowed for the number of units produced times the standard labor wage rate Difference between the amount of overhead in the flexible budget and the amount of overhead applied to production using the standard overhead rate Variances where the actual prices or quantities are less than the standard The cost, at standard, for the total number of units scheduled to be produced Difference between the actual wage rate and the standard wage rate times the actual number of hours worked Variance where the actual prices or quantities are greater than standard Standards which allow for expected deviations F C D H E B 10 I Chapter 11 Standard Costs and Variance Analysis 11-39 EXERCISES 162 Beale Acid Company produces muriatic acid in ½ gallon containers Its accounting system uses standard costs The standards per half gallon can of acid call for 0.70 gallons of material and 2.0 hours of labor The material needed to produce a 0.5 gallon can of product due to evaporation is 0.70 gallons of material The standard cost per gallon of material is $5.35 The standard cost per hour for labor is $12.00 Overhead is applied at the rate of $8.95 per can Expected production is 18,000 cans with fixed overhead per year of $35,100, and variable overhead of $7.00 per half gallon can During 2014, 19,000 cans were produced; 15,000 gallons of material were purchased at a cost of $87,750; 14,000 gallons of material were used in production The cost of direct labor incurred in 2014 was $465,300 based on an average actual wage rate of $11.75 per hour Actual overhead for 2014 was $170,000 Determine the standard cost of each ½ gallon of muriatic acid Answer Material (0.70 gallon  $5.35) Labor (2 hours  $12.00) Variable overhead Fixed overhead ($35,100 ÷ 18,000) Total unit cost 163 $ 3.75 24.00 7.00 1.95 $36.70 Best Chocolates uses standard costing During 2014, the company estimated the following standard costs for one of its major products, cocoa bars Direct materials Direct labor Standard quantity 0.10 pounds 0.05 hours Standard price $30 per pound $15 per hour Best purchased 500 pounds of cocoa at a cost of $32 per pound It produced and sold 5,000 chocolate bars using 490 pounds of cocoa and 250 direct manufacturing labor hours at an average wage of $15.25 per hour Calculate the material price variance and material quantity variance, and indicate whether each variance is favorable or unfavorable Answer Material price variance = ($32.00 – $30.00) × 500 = $1,000 unfavorable Material quantity variance = [($30 × 5,000) × 0.10] – [490 × $30.00] = $300 favorable 164 Reconly Company’s standards for the production of one handbag include hours of direct labor at a cost of $15.00 per hour Last month, Reconly produced 24,200 handbags Employees were paid $2,553,600 for working a total of 168,000 hours Calculate Reconly’s labor rate variance and labor efficiency variance and indicate whether each variance is favorable or unfavorable Answer Actual rate = $2,553,600 ÷ 168,000 = $15.20 per hour Labor rate variance = ($15.20 – $15.00) × 168,000 = $33,600 unfavorable Labor efficiency variance = [168,000 – (24,200 × 7)] × $15.00 = $21,000 favorable 11-40 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 165 Eval Industries employs a standard cost system and uses the following standards for the production of one vase: Direct materials: pounds @ $3.60/pound Direct labor: 1¼ hour @ $12.00/hour Eval budgeted 21,600 vases for May In addition, it purchased 125,000 pounds of direct material at a total cost of $475,000 The total factory wages for May were $327,600 The company manufactured 22,000 units of product during May using 108,000 pounds of direct material and 28,000 direct labor hours Estimated fixed manufacturing overhead for May was $54,000 Actual total overhead was $70,000 The variable overhead rate is $0.80 per unit, and the fixed overhead rate is $2.50 per unit Determine the material price variance and the material quantity variance for May Indicate whether each variance is favorable or unfavorable Answer Actual price = $475,000 ÷ 125,000 = $3.80 per pound Material price variance = ($3.80 – $3.60) × 125,000 = $25,000 unfavorable Material quantity variance = (108,000 – (5 × 22,000) × $3.60 = $7,200 favorable 166 Watson Chemical Company produces a chemical used in dry cleaning Its accounting system uses standard costs The standards per half gallon can of chemical call for 0.70 gallons of material and 2.0 hours of labor The material needed to produce a 0.5 gallon can of product due to evaporation is 0.70 gallons of material The standard cost per gallon of material is $5.35 The standard cost per hour for labor is $12.00 Overhead is applied at the rate of $8.95 per can Expected production is 18,000 cans with fixed overhead per year of $35,100, and variable overhead of $7.00 per unit (a half gallon can) During 2014, 19,000 cans were produced; 15,000 gallons of material were purchased at a cost of $87,750; 14,000 gallons of material were used in production The cost of direct labor incurred in 2014 was $465,300 based on an average actual wage rate of $11.75 per hour Actual overhead for 2014 was $170,000 Calculate the material variances Answer Actual price = $87,750 ÷ 15,000 gallons = $5.85 per gallon Standard quantity = 19,000  70 gallons = 13,300 gallons Material price variance = ($5.85 − $5.35)  15,000 = $7,500 unfavorable Material quantity variance = (14,000 – 13,300)  $5.35 = $3,745 unfavorable Chapter 11 Standard Costs and Variance Analysis 167 11-41 Palm Time Inc budgeted 6,000 step stools for June under its standard costing system Each stool is sold for $22 Actual production for June was 6,300 stools The company uses units of product as the cost driver for overhead Standards and actual costs follow for June: Budgeted and Standard Direct materials 1.1 linear feet @ $2.40 a foot Direct labor Variable overhead Fixed overhead 0.10 hours @ $14.00 per hour $16,800 total $15.00 per DLH Actual 6,400 feet purchased for $15,040; 6,450 feet used 620 hours @$14.30 per hour $18,400 $9,200 Calculate the material price variance, material quantity variance, labor rate variance and labor efficiency variance Indicate if each of the variances is favorable or unfavorable Answer Material price per linear foot = $15,040 ÷ 6,400 = $2.35 per linear foot Material price variance = ($2.35 – $2.40) × 6,400 = $320 favorable Material quantity variance = [6,450 – (6,300 × 1.1)] × $2.40 = $1,152 favorable Labor rate variance = ($14.30 – $14.00) × 620 = $186 unfavorable Labor efficiency variance = [620 – (6,300 × 0.10 hrs.)] × $14.00 = $140 favorable 168 Palm Time, Inc budgeted 6,000 step stools for June under its standard costing system Each stool is sold for $22 Actual production for June was 6,300 stools The company uses units of product as the cost driver for overhead Standards and actual costs follow for June: Budgeted and Standard Direct materials 1.1 linear feet @ $2.40 a foot Direct labor 0.10 hours @ $14.00 per hour Variable overhead $16,800 total Fixed overhead $15.00 per stool Show the calculation of the standard cost of one step stool Answer Direct materials (1.1 × $2.40) Direct labor (0.10 hr × $14) Variable overhead ($16,800 ÷ 6,000) Fixed overhead Standard cost $ 2.64 1.40 2.80 15.00 $21.84 Actual 6,400 feet purchased for $15,040; 6,450 feet used 620 hours @$14.30 per hour $18,400 $9,200 11-42 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 169 Germ Free produces hand sanitizer It uses units as the cost driver for overhead and employs a standard costing system The following information was provided by the company’s controller: Actual Data 14,400 units 4,600 lbs for a total of Materials purchased $32,660 Standard and Budgeted Data Budgeted units 14,200 units Budgeted materials 0.35 lb @ $7.00 per lb Materials used Budgeted labor 0.5 hours @ $12.10 per hour Produced Labor worked Actual overhead a b Answer a b 170 4,560 lbs 7,520 hrs costing $91,368 Fixed $51,800; Variable $38,100 Budgeted variable overhead Budgeted fixed overhead $39,050 $51,120 Calculate the material price and quantity variances and indicate if each is favorable or unfavorable Calculate the labor rate and efficiency variances and indicate if each is favorable or unfavorable Material price = 4,600 × ($7.10 – $7.00) = $460 unfavorable Material quantity = $7.00 × (4,560 – (14,400 × 0.35)) = $3,360 favorable Labor rate variance = 7,520 × ($12.15 – $12.10) = $376 unfavorable Labor efficiency variance = $12.10 × (7,520 – (14,400 × 0.50 hr.) = $3,872 unfavorable Germ Free produces hand sanitizer It uses units as the cost driver for overhead and employs a standard costing system The following information was provided by the company’s controller: Actual Data 14,400 units 4,600 lbs for a total of Materials purchased $32,660 Standard and Budgeted Data Budgeted units 14,200 units Budgeted materials 0.35 lb @ $7.00 per lb Materials used 4,560 lbs Budgeted labor 0.5 hours @ $12.10 per hour Labor worked 7,520 hrs costing $91,368 Produced Actual overhead $89,900 Budgeted variable overhead Budgeted fixed overhead $39,050 $51,120 Calculate the controllable overhead variance and the overhead volume variances and indicate if each is favorable or unfavorable Answer Applied variable overhead = ($39,050 ữ 14,200) ì 14,400 = $39,600 Applied fixed overhead = ($51,120 ữ 14,200) ì 14,400 = $51,840 Total overhead applied = $39,600 + $51,840 = $91,440 Controllable overhead variance = $89,900 – [($2.75 ×14,400) + $51,120] = $820 favorable Overhead volume variance = [($2.75 ×14,400) + $51,120] – $91,440 = $720 favorable Chapter 11 Standard Costs and Variance Analysis 171 11-43 At the start of the year, ChillerIce estimated that the company would produce 480 portable ice makers during the year (40 per month) Annual fixed overhead costs were estimated to be $600,000 ($50,000 per month), and estimated variable overhead costs were estimated to be $500 per unit Standard cost per unit was set at $3,450: Standard material cost Standard labor cost Standard overhead rate per unit Total $1,200 500 1,750 $3,450 During the year, the company experienced stiff competition and ended up producing and selling only 400 ice makers Budgeted annual total production costs were $1,656,000, and actual production costs were $1,616,400 The standard cost variances were as follows: Material price variance Material quantity variance Labor rate variance Labor efficiency variance Controllable overhead variance Overhead volume variance Total $ 2,200 unfavorable 11,500 unfavorable (2,300) favorable 4,800 unfavorable 2,000 unfavorable 100,000 unfavorable $118,200 unfavorable Suppose you are the CFO of ChillerIce and you have decided to investigate variances which exceed a threshold of 1/2 percent of the total budgeted production cost Which variance(s) will you investigate? Explain the basis for your answer Answer Percent of Budgeted Variance Amount Production Cost Material price variance $ 2,200 0.13% Material quantity variance 11,500 0.69 Labor rate variance 2,300 0.14 Labor efficiency variance 4,800 0.29 Controllable overhead variance 2,000 0.12 Overhead volume variance 100,000 6.04 The overhead volume variance does not need to be investigated There is an obvious explanation —the company produced only 400 units instead of the planned 480 units The only other variance that exceeds 1/2 percent is the material quantity variance, which should be investigated 172 The standard labor cost in the production of a pair of Crocs is 0.40 hours at $15 per hour During the month of June, 13,000 pairs were produced Actual labor costs were $76,735 for 5,150 hours Compute the labor rate and labor efficiency variances for the month of June Answer Actual wage rate = $76,735 ÷ 5,150 hours = $14.90 per hour Standard hours = 13,000 × 0.40 hours per pair = 5,200 hours Labor rate variance = ($14.90 – $15.00) × 5,150 = $515 favorable Labor efficiency variance = (5,150 – 5,200) × $15.00 = $750 favorable 11-44 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 173 Caffeine Depot is a chain of coffee shops The standard amount of ground coffee per cup is 0.80 ounces During the month of September, the company sold 350,000 cups of coffee and used 18,600 pounds of coffee Also during September, the company purchased 19,000 pounds of coffee at a cost of $290,700 The standard price per pound is $15 The company views variances greater than 0.8% of the flexible budget amount to be considered significant a b Answer a b 174 Compute the material variances Do either or both of the variances warrant investigation? Explain why or why not Actual price = $290,700 ÷ 19,000 pounds = $15.30 per pound Material price variance = ($15.30 – $15.00) ×19,000 = $5,700 unfavorable Standard quantity = 350,000  0.80 ounce ÷ 16 ounces = 17,500 pounds Material quantity variance = (18,600 – 17,500) × $15 = $16,500 unfavorable The amount paid per pound was 2% higher than the standard price ($15.00 compared to $15.30) It may be that the standard price reflects an estimate of the annual average price and seasonal fluctuations are expected Coffee used was approximately 6.3% more than standard This should be investigated for possible causes (e.g., pilferage, waste, or use of more coffee per cup than the company’s recipe requires) Shining Car Wash is a mobile car washing services that provides car washes wherever a customer desires On average it takes 1.8 hours for travel and washing each vehicle During November, employees spent 1,064 labor hours to wash 560 cars at a total labor cost of $13,300 During December, 960 labor hours were used to wash 480 cars at a total labor cost of $11,520 The wage rate standard is $12.40 per hour a Calculate the labor rate and efficiency variances for each month and indicate if each is favorable or unfavorable b What trends can you spot regarding the variances over November and December? What might be a cause for the labor rate variance? What might be a cause for the labor efficiency variance? Answer a November: Labor rate variance = ($12.50 – $12.40) × 1,064 = $106 unfavorable Labor efficiency variance = [1,064 – (560 × 1.8)] × $12.40 = $694 unfavorable December: Labor rate variance = ($12.00 – $12.40) × 960 = $384 favorable Labor efficiency variance = [960 – (480 × 1.8)] × $12.40 = $1,190 unfavorable b The actual labor rate declined from $12.50 to $12.00 which may be caused by hiring new, unskilled employees This is supported by the fact that in December, there was a significant unfavorable labor efficiency variance implying the employees worked more slowly than in November Chapter 11 Standard Costs and Variance Analysis 175 11-45 Watson Chemical Company produces a chemical used in dry cleaning Its accounting system uses standard costs The standards per half gallon can of chemical call for 0.70 gallons of material and 2.0 hours of labor (0.70 gallons of material are needed to produce a 0.5 gallon can of product due to evaporation.) The standard cost per gallon of material is $5.35 The standard cost per hour for labor is $12.00 Overhead is applied at the rate of $8.95 per can Expected production is 18,000 cans with fixed overhead per year of $35,100, and variable overhead of $7.00 per unit (a half gallon can) During 2014, 19,000 cans were produced; 15,000 gallons of material were purchased at a cost of $87,750; 14,000 gallons of material were used in production The cost of direct labor incurred in 2014 was $465,300 based on an average actual wage rate of $11.75 per hour Actual overhead for 2014 was $170,000 Calculate the labor variances Answer Actual hours = $465,300 ÷ $11.75 per hour = 39,600 hours Standard hours = 19,000 cans  hours per can = 38,000 hours Labor rate variance = ($11.75 – $12.00) × 39,600 = $9,900 favorable Labor efficiency variance = (39,600 – 38,000) × $12 = $19,200 unfavorable 176 Orlando East Hospital is interested in analyzing overhead related to laundry services The hospital administrator estimated that monthly fixed costs would be $68,000 and variable costs would be $2.50 per patient day During the month of September, the hospital had 15,800 patient days Total laundry costs were $108,400 Calculate the controllable overhead variance Analyze laundry costs for the month of September Answers Controllable Overhead Variance = $108,400 – [$68,000 + ($2.50  15,800)] = $900 unfavorable The hospital spent $900 more on overhead costs than allowed in the budget, which is about 0.84% of the budgeted amount This amount should not be investigated as it is insignificant 177 Watson Chemical Company produces a chemical used in dry cleaning Its accounting system uses standard costs The standards per half gallon can of chemical call for 0.70 gallons of material and 2.0 hours of labor (0.70 gallons of material are needed to produce a 0.5 gallon can of product due to evaporation.) The standard cost per gallon of material is $5.35 The standard cost per hour for labor is $12.00 Overhead is applied at the rate of $8.95 per can Expected production is 18,000 cans with fixed overhead per year of $35,100, and variable overhead of $7.00 per unit (a half gallon can) During 2014, 19,000 cans were produced; 15,000 gallons of material were purchased at a cost of $87,750; 14,000 gallons of material were used in production The cost of direct labor incurred in 2014 was $465,300 based on an average actual wage rate of $11.75 per hour Actual overhead for 2014 was $170,000 Calculate the overhead variances and indicate if each is favorable or unfavorable Answer Overhead controllable variance = $170,000 – $168,100 = $1,900 unfavorable Overhead volume variance = $168,100 – $170,050 = $1,950 favorable 11-46 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition CHALLENGE EXERCISES 178 Winston Woolies provided the following summary of variances for the year ended December 31, 2014: Material price variance $4,200 Favorable Material quantity variance (3,300) Unfavorable Labor rate variance 400 Favorable Labor efficiency variance (2,220) Unfavorable Controllable overhead variance (1,400) Unfavorable Overhead volume variance 900 Favorable Total ($1,420) Unfavorable At Winston Woolies, the ending balance in Finished Goods inventory is $80,000; the ending balance in Work in Process inventory is $20,000, and the balance in Cost of Goods Sold is $700,000 Winston Woolies considers the total variance to be material and as such, should apportion it among Finished Goods inventory, Work in Process inventory, and Cost of Goods Sold Prepare a journal entry to close the variance accounts at Winston Woolies Answer Finished Goods Work in Process Cost of Goods Sold Total $ 80,000 20,000 700,000 $800,000 Apportionment of Variances Finished Goods Work in Process Cost of Goods Sold Total $ 142.00 35.50 1,242.50 $1,420.00 Finished Goods Work in Process Cost of Goods Sold Material Price Variance Labor Rate Variance Overhead Volume Variance Material Quantity Variance Labor Efficiency Variance Controllable Overhead Variance 10.0% 2.5% 87.5% 100.0% 10.0% × $1,420 = $142.00 2.5% × $1,420 = $35.50 87.5% × $1,420 = $1,242.50 100% 142.00 35.50 1,242.50 4,200.00 400.00 900.00 3,300.00 2,220.00 1,400.00 Chapter 11 Standard Costs and Variance Analysis 179 11-47 Gifts Galore, Inc reported the following amounts for 2014: Actual labor cost Budgeted labor cost $265,100 $268,500 Labor rate variance Labor efficiency variance $3,210 U $3,250 F The company employs management by exception and has a 1.2% materiality threshold based on the budgeted allowance Should the labor variances be investigated? Support your answer with calculations, and briefly justify why or why not Answer 1.2% × $268,500 = $3,222 The labor efficiency variance should be investigated because the variance exceeds the materiality threshold of $3,222 by $28 The labor rate variance should not be investigated because the variance is less than the materiality threshold of $3,222 by $12 180 Martinez Bakery has prepared the following flexible budget analysis for October: Cost Materials Labor Flexible Budget $11,000 45,000 Price Variance $430 U 470 F Quantity Variance $780 F 150 U Martinez Bakery purchased the same amount of units of materials as it used in production The number of pounds of materials used totaled 2,130 Each unit of product requires a ½ pound of material The standard cost per unit was $5.50 per pound a How much is the actual cost of materials used? b How much did the company spend per pound of material? c How many pounds of material were allowed in the flexible budget? d How many units of product did the company produce? Answer a $11,000 – $780 + $430 = $10,650 b $10,650 ÷ 2,130 pounds = $5.00 per pound c $11,000 ÷ $5.50 = 2,000 pounds allowed d $2,000 ÷ 0.50 pounds = 4,000 units 181 Martinez Bakery has prepared the following flexible budget analysis for October: Cost Materials Labor Flexible Budget $11,000 45,000 Price Variance $430 U 300 F Quantity Variance $780 F 150 U The actual labor rate per hour was $13.00 The standard labor time is minutes per unit a How much is the actual cost of labor incurred? b How much is the actual number of hours used? c How much is the standard labor rate allowed in the flexible budget? d How many units of product did the company produce? Answer a $45,000 + $150 – $300 = $44,850 b $44,850 ÷ $13 = 3,450 hours c ($44,850 + $300) ÷ 3,450 = $13.09 d $45,000 ÷ $13.09 = 3,438 units 11-48 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 182 Select the one variance that would most likely result from each of the cases presented by printing the letter of your choice in the answer space provided If no variance would likely result directly from any case listed, print ‘None’ in the answer space Variances A favorable materials price variance G favorable labor efficiency variance B unfavorable materials price variance H unfavorable labor efficiency variance C favorable materials quantity variance I favorable overhead controllable variance D unfavorable materials quantity variance J unfavorable overhead controllable variance E favorable labor rate variance K favorable overhead volume variance F unfavorable labor rate variance L unfavorable overhead volume variance Case Answer The company purchased more materials than it used during the period Employees used more indirect materials than expected Employees worked more slowly than expected The purchasing manager skillfully negotiated a better price for higher quality materials The company produced fewer units than budgeted Answer 183 None J H A L Andros Company produces ladders It uses direct labor hours as the cost driver for overhead The following information was provided concerning its standard cost system for 2014: Budgeted and Standard Data Direct material 0.8 lbs @ $6.40 per lb Direct labor 0.9 hrs @ $15 per hr Fixed overhead $8.20 per labor hour Variable overhead $11,700 Production 2,000 ladders Actual Data Produced 2,130 ladders Materials purchased 1,700 lbs for $11,135 Direct materials used 1,740 lbs Direct labor worked 2,010 hrs costing $16,093 Variable overhead $11,620 Fixed overhead $16,620 Calculate all the overhead variances and indicate if each is favorable or unfavorable Answer Variable overhead rate = $11,700 ữ (0.90 ì 2,000) = $6.50 per direct labor hour Total budgeted fixed overhead = (0.90 × 2,000) × $8.20 = $14,760 Total applied overhead = ($8.20 + $6.50) × 2,130 × 0.9 = $28,180 Overhead controllable variance = ($11,620 + $16,620) − [$14,760 + ($6.50 × 2,130 × 0.9)] = $1,019.50 unfavorable Overhead volume variance = – [$14,760 + ($6.50 × 2,130 × 0.9)] – $28,180 = $959 favorable Chapter 11 Standard Costs and Variance Analysis 11-49 SHORT-ANSWER ESSAYS 184 How are the standards for direct materials, direct labor, and manufacturing overhead determined? Answer The standard quantity for materials is set by engineering plans, recipes, or formulas The standard price is often determined from price lists from suppliers The standard quantity for labor can be determined by time-and-motion studies or analyzing past data The labor rate is set by management or by union contract Standard costs for overhead are determined by estimating the amount of overhead that will be incurred and the anticipated overhead base 185 What is the difference between ideal standards and attainable standards? Answer Ideal standards are developed under the assumption that no obstacles to the production process will be encountered They are the standards that would occur in a perfect environment Attainable standards allow for an occasional equipment failure, inexperienced workers, and other conditions that are not ideal 186 A purchasing agent has found a new supplier for one of the company’s raw materials This supplier charges more for the raw material, but the material is of higher quality and less will be wasted in the manufacturing process If raw materials are purchased from this supplier, what is likely to happen to the material price variance and the material quantity variance? Answer It is likely that the material price variance will be unfavorable because the supplier is charging more for each unit of the raw material It is likely that the material quantity variance will be favorable because less raw material will be required since less will be wasted 187 What signal is provided by the overhead volume variance? Answer The overhead volume variance signals that the quantity of production was greater or less than what was anticipated when the standard overhead rate was determined 188 Frank Enterprises management claims, “We investigate all variances!” Is this a good management policy? Why or why not? Answer Frank’s policy is probably not a good one It is wasting resources by investigating variances that are not significant It would be better to use a management by exception policy, where only those variances that are exceptional in terms of amount or percentage are investigated However, both favorable and unfavorable variances should be investigated 11-50 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 189 Give an example of a favorable variance that might be indicative of a poor management decision Answer A company may buy raw materials at a price that is lower than standard, creating a favorable price variance However, if the material has more defects than normal, or if it causes problems with equipment, or is otherwise difficult to work with, it may cause unfavorable variances for material quantity or for labor 190 Explain how a focus on variances for performance analysis might lead to overproduction in a non-bottleneck production department Answer The department should slow production to the level of the bottlenecked department However, if direct labor cannot be immediately eliminated, slowing production will result in unfavorable direct labor variances Thus, managers might be tempted to produce faster than the bottleneck can to avoid the unfavorable labor efficiency variance *191 JT Engines uses a standard costing system When are each of the variances recorded and how are the variance accounts closed at the end of the period? Answer The material price variance is recorded when the purchase of the raw materials is recorded The material quantity variance is recorded when the raw materials are issued into production The labor rate variance and labor efficiency variance are recorded when the labor costs are added to Work in Process The overhead volume variance and the controllable overhead variance are identified and recorded when the entry to close out Manufacturing Overhead is recorded Unless the variances are significant, and the balances in Work in Process and Finished Goods are large in comparison with Cost of Goods Sold, the variance accounts are closed directly to Cost of Goods Sold Favorable variances are closed with debits and unfavorable variances are closed with credits Material from the appendix to the chapter is marked with an asterisk (*) ... budgeted cost divided by actual units equals the standard cost D None of these answer choices are correct 11-5 11-6 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 40 The difference... actual quantity produced was greater than the quantity anticipated 11-4 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 20 An unfavorable overhead volume variance always indicates...11-2 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition Challenge Exercises 178 EV 180 *179 A1 AP 181 Short-Answer