Chapter 22
Performance Evaluation Using Variances from Standard Costs
Study Guide
Do You Know…?
Learning Objective 1: Describe the types of standards and how they are established.
□
The difference between ideal and currently attainable standards? (See exercises 1–3)
Learning Objective 2: Describe and illustrate how standards are used in budgeting.
□
How to calculate the standard cost of a unit and if a variance in cost would be
considered favorable or unfavorable? (See exercises 4–6)
Learning Objective 3: Compute and interpret direct materials and direct labor
variances.
□
How to calculate a direct materials cost, price, and quantity variance? (See exercises
7–9)
□
How to calculate a direct labor cost, time, and rate variance? (See exercises 10–12)
Learning Objective 4: Compute and interpret factory overhead controllable and
volume variances.
□
How to calculate a variable factory overhead controllable variance? (See exercises 13,
16, and 19)
□
How to calculate a fixed factory overhead volume variance? (See exercises 14, 17, and
20)
□
If variances in factory overhead will cause the account to be overapplied or
underapplied? (See exercises 15, 18, and 21)
Learning Objective 5: Journalize the entries for recording standards in the accounts
and prepare an income statement that includes variances from standard.
□
The journal entries required to report standards and variances from the standard? (See
exercises 22–24)
□
How to prepare an income statement that includes variances from the standard? (See
exercises 25–27)
Learning Objective 6: Describe and provide examples of nonfinancial performance
measures.
□
If an item would be an input or output to a process in a company? (See exercises 28–30)
1
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2
Chapter 22
Fill-in-the-Blank Equations
1. ____________ = Standard price × Standard quantity
2. Direct materials price variable = (Actual price – Standard price) × ___________
3. _______________ = (Actual quantity – Standard quantity) × Standard price
4. Direct labor rate variance = (Actual rate per hour – _____________) × Actual hours
5. Direct labor time variance = (Actual direct labor hours – Standard direct labor hours) ×
_____________
6. ______________ = Budgeted factory overhead at normal capacity/Normal productive
capacity
7. Variable factory overhead rate = _________________/normal productive capacity
8. ______________ = Budgeted fixed overhead at normal capacity/normal productive
capacity
9. Variable factory overhead controllable variance = Actual variable factory overhead –
________________
10. Budgeted variable factory overhead = ______________ × Variable factory overhead rate
11. Fixed factory overhead volume variance = (Standard hours for 100% of normal capacity
– Standard hours for actual units produced) × _________________
12. Applied factory overhead = Standard hours for actual units produced ×
_______________
13. ____________________ = Actual factory overhead – Applied factory overhead
Exercises
1. A new machine at a manufacturing company has the ability to produce 1,000 finished
goods each work day if run continually. Would the standard of producing 1,000 finished
goods per day be an ideal or currently attainable standard?
2. Management notices that down time toward the end of the work day increases and
adjusts the production goals per day to reflect a decrease in productivity. Would the
new goal be an ideal or currently attainable standard?
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Performance Evaluation Using Variances from Standard Costs 3
3. When developing a sales goal for the month, management assumes workers take a 30minute lunch break each work day. Would the sales goal reflect ideal or currently
attainable standards?
4. Each chair by Rose Supply requires the costs shown. In the past month, the company
produced 1,200 chairs and incurred total costs of $60,000.
Cost
Standard Price
Direct materials
$7.50 per sq. yd.
Direct labor
$9.50 per hr.
Factory overhead $4.80 per hr.
Standard Quantity per Unit
2.5 sq. yds.
2.2 hrs.
2.2 hrs.
a. Calculate the standard cost per unit.
b. Determine if the company has a favorable or unfavorable cost variance for the
month.
5. The standards to produce one table at Rose Supply are shown below. In the past month,
the company produced 2,500 tables and incurred actual costs of $235,000, which
included direct materials, $160,000; direct labor, $47,900; and factory overhead,
$27,100.
Cost
Standard Price
Direct materials
$10.32 per sq. yd.
Direct labor
$9.00 per hr.
Factory overhead $4.80 per hr.
Standard Quantity per Unit
6 sq. yds.
2.15 hrs.
2.15 hrs.
a. Calculate the standard cost per unit.
b. Determine if the cost variance for each manufacturing cost is favorable or
unfavorable.
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4
Chapter 22
6. When producing 5,000 picture frames, Picture This incurred the following costs: direct
materials, $12,000; direct labor, $35,100; and factory overhead, $24,300. The standards
to produce one picture frame are:
Cost
Standard Price Standard Quantity per Unit
Direct materials
$2.50 per sq. yd. 1.1 sq. yds.
Direct labor
$9.50 per hr.
0.7 hrs.
Factory overhead $6.60 per hr.
0.7 hrs.
a. Calculate the standard cost per unit.
b. Determine if the cost variance for each manufacturing cost is favorable or
unfavorable.
7. One widget requires 0.75 pounds of Material X, which has a standard price of $4 per
pound. The company uses 2,450 pounds of Material X, which costs $10,000 to produce
3,300 widgets. Calculate the following variances and determine if each is favorable or
unfavorable:
a. Direct materials price variance
b. Direct materials quantity variance
c. Direct materials cost variance
8. For the month of May, a company has a $4,500 unfavorable direct materials variance to
produce 5,000 finished goods. The company purchased and used 2,200 pounds of direct
materials for $22,000. The standard to produce one finished good is 0.5 pounds of direct
materials. Calculate the following and determine if variances are favorable or
unfavorable:
a. Direct materials price variance
b. Direct materials quantity variance
c. Standard price of direct materials per unit
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Performance Evaluation Using Variances from Standard Costs 5
9. To produce one finished good, a manufacturer uses a standard of 4 square feet. During
the month of September, the company pays $45,000 to purchase 10,000 square feet of
materials. The company incurs a $5,000 favorable direct materials price variance and a
$2,000 unfavorable quantity variance. Calculate the following and determine if
variances are favorable or unfavorable:
a. Direct materials cost variance
b. Standard cost per square foot of direct materials
c. Number of units produced
10. Each lamp manufactured at Bright Light uses a standard of 0.75 hours to produce.
Production employees are paid a $9 hourly wage. The company incurred 5,000 direct
labor hours at a cost of $47,500 to produce 6,700 lamps. Calculate the following
variances and determine if it is considered favorable or unfavorable:
a. Direct labor rate variance
b. Direct labor time variance
c. Direct labor cost variance
11. To produce one finished good, RPC Corporation sets a standard of 0.9 hours at a rate of
$10 per hour. When producing 10,000 finished goods, the company incurs a $5,000
favorable time variance, although the company actually paid employees an hourly rate
of $10.50. Calculate the following and determine if variances are favorable or
unfavorable:
a. Direct labor rate variance
b. Direct labor cost variance
c. Number of actual hours
12. Employees at WFU Corporation are paid at an hourly rate of $9.75. The company incurs
direct labor costs of $20,000 when employees were paid $10 per hour during a period.
The company’s direct labor cost variance is unfavorable by $4,400. Calculate the
following and determine if variances are favorable or unfavorable:
a. Direct labor rate variance
b. Direct labor time variance
c. Standard hours per unit if 8,000 units are made
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6
Chapter 22
13. Deacon Corporation uses direct labor hours to allocate factory overhead. During the
period, the company produced 5,100 units and incurred variable factory overhead costs
of $21,000, Use the information below to determine the following (round dollars to the
nearest cent):
Deacon Corporation
Factory Overhead Cost Budget
For the Three Months Ending March 31, 2015
Percent of normal capacity
90%
100%
Units produced
4,500
5,000
Direct labor hours (0.75 hr. per unit)
3,375
3,750
Budgeted factory overhead:
Variable costs:
Indirect factory labor
$ 8,100
$ 9,000
Indirect materials
3,600
4,000
Utilities
6,750
7,500
Total variable cost
$18,450
$20,500
Fixed costs:
Supervisor salaries
$12,000
$12,000
Depreciation
8,000
8,000
Total fixed cost
$20,000
$20,000
Total factory overhead cost
$38,450
$40,500
110%
5,500
4,125
$ 9,900
4,400
8,250
$22,550
$12,000
8,000
$20,000
$42,550
a. Variable factory overhead rate
b. Variable factory overhead controllable variance
c. Is the variable factory overhead controllable variance favorable or unfavorable?
14. Use the information in Exercise 13 to determine the following for Deacon Corporation
(round dollars to the nearest cent):
a. Fixed factory overhead rate
b. Fixed factory overhead volume variance
c. Is the fixed factory overhead volume variance favorable or unfavorable?
15. Use the information in Exercises 13 and 14 to determine the total factory overhead cost
variance by comparing actual and applied factory overhead. Is the variance favorable or
unfavorable?
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Performance Evaluation Using Variances from Standard Costs 7
16. RPC Corporation incurs $22,000 of variable overhead costs for 8,000 units. Use the
information below to calculate the following if the company allocates factory overhead
by machine hours:
RPC Corporation
Factory Overhead Cost Budget
For the Three Months Ending December 31, 2015
Percent of normal capacity
75%
100%
125%
Units produced
7,500
10,000
12,500
Machine hours (0.5 hr. per unit)
3,750
5,000
6,250
Budgeted factory overhead:
Variable costs:
Indirect factory labor
$ 7,500 $10,000
$12,500
Indirect materials
5,250
7,000
8,750
Utilities
6,750
9,000
11,250
Total variable cost
$26,000
$32,500
$19,500
Fixed costs:
Supervisor salaries
$18,200 $18,200
$18,200
Depreciation
12,500
12,500
12,500
Total fixed cost
$30,700 $30,700
$30,700
Total factory overhead cost
$50,200 $56,700
$63,200
a. Variable factory overhead rate
b. Variable factory overhead controllable variance
c. Is the variable factory overhead controllable variance favorable or unfavorable?
17. Use the information in Exercise 16 to determine the following for RPC Corporation:
a. Fixed factory overhead rate
b. Fixed factory overhead volume variance
c. Is the fixed factory overhead volume variance favorable or unfavorable?
18. Compare the actual and applied factory overhead for RPC Corporation (information in
Exercises 16 and 17) to determine the total factory overhead cost variance. Also use the
sum of the controllable variance and volume variance as a check. Is the total factory
overhead cost variance favorable or unfavorable?
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8
Chapter 22
19. During the period, Greener Gardens produced 12,000 finished goods and incurred
$17,500 of variable overhead factory costs. The company uses direct labor hours to
allocate overhead. Use the information below to determine the following:
Greener Gardens
Factory Overhead Cost Budget
For the Three Months Ending December 31, 2015
Percent of normal capacity
80%
100%
120%
Units produced
10,000 12,500 15,000
Direct labor hours (0.8 hr. per unit)
8,000 10,000 12,000
Budgeted factory overhead:
Variable costs:
Indirect factory labor
$ 5,625 $ 7,500 $ 9,375
Indirect materials
3,750
5,000
6,250
Utilities
4,500
6,000
7,500
Total variable cost
$13,875 $18,500 $23,125
Fixed costs:
Supervisor salaries
$12,000 $12,000 $12,000
Depreciation
8,800
8,800
8,800
Total fixed cost
$20,800 $20,800 $20,800
Total factory overhead cost
$34,675 $39,300 $43,925
a. Variable factory overhead rate
b. Variable factory overhead controllable variance
c. Is the variable factory overhead controllable variance favorable or unfavorable?
20. Use the information for Greener Gardens in Exercise 19 to determine the following:
a. Fixed factory overhead rate
b. Fixed factory overhead volume variance
c. Is the fixed factory overhead volume variance favorable or unfavorable?
21. Compare the actual and applied factory overhead for Greener Gardens to determine the
total factory overhead cost variance using the information in Exercises 19 and 20. Also
use the sum of the controllable variance and volume variance as a check. Is the total
factory overhead cost variance favorable or unfavorable?
22. Prepare the journal entries to record the direct materials price and quantity variance as
of the end of the month in Exercise 8.
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Performance Evaluation Using Variances from Standard Costs 9
23. Prepare the journal entries required to record the direct labor time and rate variance as
of the end of April in Exercise 10.
24. Prepare the journal entries required to record the direct labor time and rate variance as
of the end of March in Exercise 12.
25. Prepare an income statement that includes variances for the 2015 calendar year end for
Bright Light using the information shown and the direct labor variances calculated in
Exercise 10. The company sold all goods produced during the period at a selling price of
$75 each.
Standard costs per unit:
Direct materials
$10.00
Fixed factory overhead
6.50
Variable factory overhead
4.50
Direct labor
9.00
Total
$30.00
Variances:
Direct materials price
$(1,900)
Direct materials quantity
$2,750
Factory overhead controllable
$6,700
Factory overhead volume
$(2,100)
Selling expenses
$23,500
Administrative expenses
$27,900
26. Prepare an income statement that includes variances for the three months ending
December 31, 2015, for the managers of RPC Corporation using the information found
in Exercises 16-18 and the information shown below. Assume the company sold all units
produced at a sales price of $40 each.
Standard costs per unit:
Direct materials
$7.50
Fixed factory overhead
3.07
Variable factory overhead
2.60
Direct labor
9.00
Total
$22.17
Variances:
Direct materials price
$2,200
Direct materials quantity
$(550)
Direct labor time
$5,000
Selling expenses
$21,000
Administrative expenses
$26,500
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10
Chapter 22
27. Use the information in Exercise 8 and the information below for WFU Corporation to
prepare an income statement for the month of May. Assume the company sold all
goods produced at a sales price of $50 each. The standard cost of goods sold per unit is
$24.
Actual factory overhead
$10,000
Applied factory overhead
8,500
Variances:
Direct labor cost
$900
Direct labor rate
1,400
Factory overhead controllable
2,100
Selling expenses
16,700
Administrative expenses
$20,500
28. Determine if each of the following would be an activity input or output for a repair at a
car repair shop.
a. Availability of parts
b. Time until repair completed
c. Experience with type of repair
29. Would each of the following be an input or output for the delivery service of a pizza
restaurant?
a. Freshness upon arrival
b. Number of delivery employees available
c. Cooking time
30. Determine if each activity would be an input or output for the service at a concession
stand at a movie theater.
a. Number of movies playing
b. Wait time
c. Orders of popcorn sold
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