Tutorial Solutions

CHAPTER 10

STANDARD COSTS FOR CONTROL: DIRECT

MATERIAL AND DIRECT LABOUR
ANSWERS TO QUESTIONS

10.13 A favourable variance could be due to loose or inaccurate standards that are encouraging inefficient
practices. Favourable variances can also occur due to unfavourable practices such as using inferior quality
inputs, which lead to poor quality outputs and loss of sales.

10.15 Interaction between variances refers to situations where actions or decisions that impact one variance also
impact other variances. This can make it difficult to assign specific responsibility for particular variances
to individual managers. As an example, if poor quality material is purchased at a lower than budgeted price,
there will be a favourable material price variance. However poor quality materials can lead to an increase
in scrapped material (creating an unfavourable quantity variance), rejected finished units (increasing all
costs per good unit), be difficult to handle so take longer to produce units of finished goods (causing an
unfavourable labour efficiency variance and an unfavourable overhead efficiency variance), and reduce the
quality of the output (ultimately affecting sales variances).

10.19 Budgets are plans for the use of resources. The cost of resources that are used in producing products can
be estimated in advance, based on the level of output required to meet predetermined objectives. The
estimate of the cost of each unit of production, which includes the cost of materials, labour and overhead
resources, is called the standard cost per unit. It is derived from the expected (i.e. standard) consumption
of the resources per unit (e.g. how much material, how many labour hours per unit of output), and the
expected cost per unit of the resource (again this is called the standard rate or price).
In addition to providing the means to prepare complete budgets of resources required during a future period,
the standard costs enable an analysis of performance during and after that period to assist cost management
and identify efficient and effective processes or managers. This analysis depends on the comparison of
actual resource consumption and costs with standard consumption and costs, since the standards are an
indication of what the consumption and costs were expected to be for that level of activity.

EXERCISE 10.25 (15 minutes) Journal entries under standard costing: manufacturer

1 (a) Raw materials inventory 216 000

Direct material price variance 7 200
Accounts payable 223 200
(b) Work in process inventory 180 000
Direct material quantity variance 9 000
Raw materials inventory 189 000

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 (c) Work in process inventory 412 500
Direct labour rate variance 19 500
Direct labour efficiency variance 16 500
Wages payable 448 500
(d) Cost of goods sold 52 200
Direct material price variance 7 200
Direct material quantity variance 9 000
Direct labour rate variance 19 500
Direct labour efficiency variance 16 500

2
Raw Materials Inventory Direct Material Price Variance

216 000 189 000 7 200 7 200

Work in Process Inventory Direct Material Quantity

Variance

180 000 9 000 9 000

412 500

Accounts Payable Direct Labour Rate Variance

223 200 19 500 19 500

Wages Payable Direct Labour Efficiency

Variance

448 500 16 500 16 500

Cost of Goods Sold

52 200

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EXERCISE 10.27 (25 minutes) Direct material and direct labour variances: service firm
1 Using an Excel spreadsheet to calculate variances for May:
Standard costs for the spraying service

Quantity Unit cost

Direct material 8 $3.50 $28.00

Direct labour 2 $40.00 $80.00

Standard cost per box $108.00

(a)

Direct material price variance (May)

Actual quantity of material purchased 160 000 kg

Actual cost of materials purchased $608 000.00

Standard material cost, based on actual qty

purchased $560 000.00

Direct material price variance $48 000.00 Unfavourable

(b)

Direct material quantity variance

Actual number of jobs completed 40

Standard quantity per job (kg) 8

Standard quantity for actual output 320

Actual quantity used 400

Variance (kg) 80

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 Standard price $3.50

Direct material quantity variance $280.00

Variance type U

(c)

Direct labour rate variance

Actual hours worked 90

Standard labour rate $40.00

Actual labour rate paid $ 44.44*

Direct labour rate variance $400.00

Variance type U

*
$44.44 = (0.4 × $10 000)/90

(d)

Direct labour efficiency variance

Actual number of jobs completed 40

Standard hours per job 2

Standard hours, based on actual output 80

Actual hours worked 90

Variance (hours) 10.00

Standard labour rate $40.00

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Direct labour efficiency variance $400

Variance type U

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2 (a) When the standard direct labour rate increases to $50 per hour, the direct labour rate variance would
improve from an unfavourable $400 to a favourable $500. On the other hand, the direct labour
efficiency variance would increase from unfavourable $400 to unfavourable $500. Calculations as
shown as follows:

Direct labour rate variance

Actual hours worked 90

Standard labour rate $50.00

Actual labour rate paid* $44.44

Direct labour rate variance ($500.00)

Variance type F

* $44.44 = (0.4 × $10 000)/90

Direct labour efficiency variance

Actual number of jobs completed 40

Standard hours per job 2

Standard hours, based on actual outputs 80

Actual hours worked 90

Variance (hours) 10.00

Standard labour rate $50.00

Direct labour efficiency variance $500

Variance type U

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(b) When standard direct material quantity decreases to 7 kilograms, the direct material
quantity variance would deteriorate from unfavourable $280 to unfavourable $420.
Calculations as shown as follows:

Direct material quantity variance

Actual number of jobs completed 40

Standard quantity per job (kg) 7

Standard quantity for actual output 280

Actual quantity used 400

Variance (kg) 120

Standard price $3.50

Direct material quantity variance $420.00

Variance type U

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