Revised Summer 2016 Exam Review

STANDARD COSTS AND VARIANCE

ANALYSIS

Key Topics to Know

• The nature of standards: what they are, how they are developed, why they are
important and the different types of standards used
• The nature of variances: what they are, how they arise, how they are calculated
and why they are important.
• Prepare journal entries to record actual and standard costs and the related
variances.
• Relationship between under and over-applied overhead in Job Costing and
overhead variances in Standard Costs.
• Be able to compute the following variances:
o Direct materials price and quantity variances
o Direct labor rate and efficiency variances
o Variable manufacturing overhead controllable variance
o Fixed overhead volume variance
• Remember that the direct materials price variance is based on the quantity of
materials purchased and the direct materials quantity variance is based on the
quantity of materials used. This is the only variance where this situation occurs. If
the direct materials inventory is different at the beginning and end of the
variance period, then the quantity purchased and the quantity used are not equal.
• Variances are based on the actual number of good units produced and sold
• Variances ignore the number of good units expected or budgeted for the period
• The standard quantity of inputs allowed is calculated as follows:
Actual good output in units * Standard quantity of inputs per unit of output
• Use denominator activity in computing a predetermined fixed overhead rate
• Predetermined overhead rate from Job Costing chapter is based on the total
budgeted overhead cost. The predetermined overhead rate may be divided into
variable overhead and fixed overhead components. These are the standard costs
or rates used in the variance analyses.

Estimated VARIABLE Estimated FIXED Estimated TOTAL

+ =
Overhead Cost Overhead Cost Overhead Cost
Estimated Activity Estimated Activity Estimated Activity

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• Calculate the material and labor variances using either the three-column method
or the equation method:

(1) (2) (3)

Actual Quantity of Actual Quantity of Standard Quantity of
Inputs at Actual Inputs at Standard Inputs Allowed for
Price/Rate Price/Rate Actual Output at
Standard Price/Rate
Actual costs incurred Costs debited to WIP

Price Variances Quantity Variances

(dollar-driven) (quantity-driven)
Column (1) – (2) Column (2) – (3)
Material Price Variance Material Quantity Variance
Labor Rate Variance Labor Efficiency Variance

Total Variance

Equations:
Price/Rate/Spending Variance Quantity/Efficiency Variances
AQ * (AP – SP) SP * (AQ - SQ)

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• Calculate the overhead variances using the following method:

Actual Overhead Budgeted Overhead

Actual Quantity of Standard Quantity of Inputs
Inputs at Actual Allowed for Actual Output at
Price/Rate: Variable Standard Price/Rate
Variable + Fixed Costs debited to WIP
Actual costs incurred + Budgeted Fixed Overhead

Controllable
Variance

Budgeted Fixed Overhead Applied to

Overhead Work In Process
Budgeted Standard Quantity of
Fixed Inputs Allowed for Actual
Overhead Output at Fixed Standard
Price/Rate
Costs debited to WIP

Volume Variance

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Problems
Problem #1

M Company is a manufacturer of men's hunting clothing. During May, the

company produced 4,800 units of product.

The actual and standard costs per unit for May were as follows:
Quantity Price
Direct materials Standard 4.0 yds $3.60
Actual 4.4 yds 3.35
Direct labor Standard 1.6 hours 4.50
Actual 1.4 hours 4.85
Variable overhead Standard 1.6 hours 1.80
Actual 1.4 hours 2.15
Fixed overhead Standard Per unit 9.00
Actual Per unit 9.10

Total costs for May were as follows:

Units Unit Cost Total Cost
Standard 4,800 $24.48 $117,504
Actual 4,800 24.54 117,792
Total variance (288)

There was no inventory of materials on hand at the beginning of May. During the
month, 21,120 yards of material were purchased at a cost of $70,752, all of which were
used during the month.

M Company reported the following information regarding fixed overhead during May:

Quantity Units Unit Cost

Standard 1.6 hours 5,000 $9.00
Actual 1.4 hours 4,800 9.10

Required: a) Compute the material price and quantity variances

b) Compute the labor rate and efficiency variances.
c) Prepare the journal entries to record the direct materials and
direct labor variances.
d) Compute the controllable variable overhead variance and the fixed
overhead volume variance.

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Problem #2

P Company produces a single product and uses a standard cost system. Overhead is
applied to production based on machine hours.

According to the company's flexible budget, the following costs should have been
incurred at an activity level of 18,000 machine hours (the denominator activity level):

Variable overhead $31,500

Fixed overhead 72,000
Total overhead 103,500

During the year, the following operating results were recorded:

Actual machine hours 15,000
Standard machine hours allowed 16,000
Actual variable overhead costs incurred $26,500
Actual fixed overhead costs incurred 70,000

At year-end, the Manufacturing Overhead account showed the following activity:

Manufacturing Overhead
96,500 92,000
4,500

Management would like to determine the cause of the $4,500 under-applied

overhead.

Required: a) Compute the predetermined or standard rate for the year for
variable, fixed and total overhead.
b) Show how the applied overhead cost was computed
c) Compute the controllable variable overhead variance and the fixed
overhead volume variance.
d) Reconcile the $4,500 underapplied balance in the overhead
account to the variances calculated in c) above.

Problem #3
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F Company makes a product with the following standard costs:

Standard Standard Cost Standard Cost

Quantity per Unit
Direct materials 7.1 pounds $5.00 per pound $35.50
Direct labor .8 hours $17.00 per hour 13.60
Variable overhead .8 hours $7.00 per hour 5.60
Fixed overhead .8 hours $9.00 per hour 7.20

The company reported the following results concerning this product in July.

Originally budgeted output 4,700 units

Actual output 4,500 units
Raw materials used 34,150 pounds
Actual direct labor hours 3,610 hours
Purchases of raw materials 36,500 pounds
Actual price of raw materials $5.10 per pound
Actual direct labor rate $18.10 per hour
Actual variable overhead cost $25,187
Actual fixed overhead cost $33,333
Budgeted fixed overhead $33,840

The materials price variance is recognized when materials are purchased. Variable
overhead is applied on the basis of direct labor-hours.

Required: a) Compute the materials quantity variance.

b) Compute the materials price variance.
c) Compute the labor efficiency variance.
d) Compute the labor rate variance.
e) Compute the controllable overhead variance.
f) Compute the overhead volume variance.

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Multiple Choice Questions

1. L Company’s direct labor costs for the month of January were as follows:

Actual total direct labor hours 20,000

Standard total direct labor hours allowed 21,000
Direct labor rate variance (unfavorable) $3,000
Total direct labor cost $126,000

What was the direct labor efficiency variance?

a) $6,000 F
b) $6,150 F
c) $6,300 F
d) $6,450 F

The next 7 questions refer to the following information.

T Company makes a single product which has the following standards:

Direct materials 2 kilograms $4.30 per kilogram

Direct labor 3 hours $6.00 per hour
Variable overhead 3 hours $6.50 per hour
Fixed overhead 3 hours $9.00 per hour

The following data pertain to June’s operations:

• Direct labor was $820,500 for 147,000 hours worked
• Direct material purchases were 110,000 kilograms for $485,000
• Variable manufacturing overhead incurred was $986,000
• Fixed manufacturing overhead incurred was $1,154,500
• 93,000 kilograms of direct materials were used
• The company sold 42,000 units at $130 each
• Variable manufacturing overhead is applied based on direct labor hours
• 46,000 units were produced during the year
• Budgeted production was 45,000 units
• At the beginning of June there were no inventories.

2. The material price variance is:

a) $89,400 F
b) $89,400 U
c) $12,000 F
d) $12,000 U

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3. The material quantity variance is:

a) $77,400 U
b) $77,400 F
c) $4,300 F
d) $4,300 U

4. The labor rate variance is:

a) $61,500 U
b) $61,500 F
c) $54,000 U
d) $54,000 F

5. The labor efficiency variance is:

a) $61,500 U
b) $61,500 F
c) $54,000 U
d) $54,000 F

6. The controllable overhead variance was:

a) $28,500 U
b) $89,000 U
c) $28,500 F
d) $89,000 F

7. The fixed overhead volume variance was:

a) $28,500 U
b) $27,000 U
c) $27,000 F
d) $28,500 F

8. The total variance for T Company was:

a) $10,800 U
b) $37,800 U
c) $11,200 F
d) $99,800 U

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9. Information on D Company’s manufacturing overhead costs for last period is

given below:
Actual direct labor hours worked 40,000 hours
Standard hours allowed 38,000 hours
Denominator hours 35,000 hours
Predetermined overhead rate $4 per DLH
Actual overhead costs incurred $150,000
D Company uses a standard cost system and applies manufacturing overhead
cost to units of product on the basis of direct labor hours. The under- or
overapplied overhead cost for the period would be:
a) $10,000 overapplied
b) $2,000 overapplied
c) $10,000 underapplied
d) $2,000 underapplied

The next 2 questions refer to the following information.

E Company uses standard costing and applied manufacturing overhead cost
to units of product on the basis of direct labor hours (DLHs). Budgeted and
actual data relating to manufacturing overhead for last year appear below:
Applied fixed overhead cost $38,900
Denominator activity 20,000 DLH
Standard hours allowed for one unit 1.2 DLH
Units produced 17,000
Fixed overhead volume variance $1,300 U

10. The budgeted fixed factory overhead cost was:

a) $24,000
b) $38,900
c) $40,200
d) $37,600

11. The standard direct labor hours allowed for the output was:
a) 14,167 hrs
b) 19,600 hrs
c) 20,000 hrs
d) 20,400 hrs

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The next 2 questions refer to the following information.

H Company uses standard costing. Last period, it spent $145,000 for labor.
The direct labor rate variance was $5,000 favorable, and the direct labor
efficiency variance was $6,000 unfavorable.

Standards for Product W require 2 pounds of materials at $13 per pound and 3
hours of labor at $10 per hour. Budgeted production last period was 5,000
units, and actual production was 4,800 units. Last period, M Company
purchased and used 9,800 pounds of materials for $135,000, and used 15,000
labor hours costing $145,000.

12. What is the journal entry to record the use of materials?

A. Work in Process 135,000

Raw materials inventory 135,000
B. Work in Process 124,800
Materials quantity variance 2,600
Raw materials inventory 127,400
C. Cost of goods sold 127,400
Materials quantity 2,600
variance
Raw materials inventory 124,800
D. Cost of goods sold 124,800
Raw materials inventory 124,800
a) A
b) B
c) C
d) D

13. What is the journal entry to record direct labor costs?

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A. Work in process 144,000

Labor rate variance 6,000
Labor efficiency variance 5,000
Wages payable 145,000
B. Work in process 144,000
Wages payable 144,000
C. Work in process 144,000
Labor efficiency variance 6,000
Labor rate variance 5,000
Wages payable 145,000
D. Cost of goods sold 145,000
Wages payable 145,000
a) A
b) B
c) C
d) D

The next 2 questions refer to the following information.

J Company uses a standard cost system in which direct materials inventory is
carried at standard cost. Jackson has established the following standards for
one unit of product.

Standard Standard Price or Standard

Quantity Rate Cost
Direct materials 5 pounds $3.60 per pound $18.00
Direct labor 1.25 hours $12.00 per hour $15.00

During May, J Company purchased 125,000 pounds of direct material at a total

cost of $475,000. The total factory wages for May were $364,000, 90 percent
of which were for direct labor. J Company manufactured 22,000 units of
product during May using 108,000 pounds of direct material and 28,000 direct
labor-hours.

14. The materials quantity variance for May is:

a) $7,200 U
b) $7,600 F
c) $5,850 U
d) $7,200 F

15. The materials price variance for May is:

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a) $25,000 U
b) $21,600 U
c) $25,000 F
d) $21,600 F

16. W Company standard cost card for its product follows:

Direct materials (4 yards $5 per yard) $20

Direct labor (1.5 hours $10 per hour) $15
Variable manufacturing overhead (1.5 hrs $4 per hour) $6

During a recent period the company produced 1,200 units of product. Various
costs associated with the production of these units are given below:

Direct materials purchased (6,000 yards) $28,500

Direct materials used in production 5,000 yards
Direct labor cost incurred (2,100 hours) $17,850
Variable manufacturing overhead cost incurred $10,080

All variances are recorded at the earliest possible point in time. Variable
manufacturing overhead costs are applied to products on the basis of standard
direct labor-hours. The labor rate variance for the period is:
a) $3,150 U
b) $2,700 F
c) $2,700 U
d) $3,150 F

The next 2 questions refer to the following information.

Y Company produced 100,000 units of product during the year. Actual
overhead costs incurred were $262,000 of variable and $90,000 of fixed. At
the productive capacity of 15,000 direct labor hours, the total overhead rate
was $25 per dlh and the variable overhead rate was $19 per dlh. For the year,
both the actual hours worked and the standard hours allowed were 14,000.

17. The overhead controllable variance for the year was:

a) $4,000 U
b) $6,000 U
c) $6,000 F
d) $4,000 F

18. The fixed overhead volume variance for the year was:
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a) $4,000 U
b) $6,000 U
c) $6,000 F
d) $4,000 F

The next 2questions refer to the following information.

K Company’s budgeted and actual overhead costs for the year were:

Budget Actual
Variable $540,000 $524,000
Fixed 240,000 230,000
Total $780,000 $754,000

The budget was based on productive capacity of 100,000 machine hours.

94,000 standard hours were allowed for the actual units produced, but only
93,000 actual hours were used.

19. The overhead controllable variance for the year was:

a) $20,800 U
b) $5,400 F
c) $10,000 F
d) $6,400 U

20. The fixed overhead volume variance for the year was:
a) $14,400 U
b) $14,400 F
c) $10,000 F
d) $20,800 U

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Solutions to Problems
Problem #1

a) Direct Materials Variances:

AQ X AP AQ X SP SQ X SP
21,120 yds X $3.35 21,120 yds X $3.60 4 yds X X $3.60
4,800 units
$70,752 $76,032 $70,752

Rate Variance $5,280 F Efficiency Variance $6,912 U

Total Variance $1,632 U

b) Direct Labor Variances

AQ X AP AQ X SP SQ X SP
6,720 hrs X $4.85 6,720 hrs X $4.50 7,680 hrs X $4.50
$32,592 $30,240 $32,592

Rate Variance $2,352 U Efficiency Variance $4,320 F

Total Variance $1,968 F

Actual hours: 4,800 units X 1.4 hours per unit = 6,720 hours
Standard hours: 4,800 units X 1.6 hours per unit = 7,680 hours

c) Journal Entries

Raw Materials (21,120 yards @ $3.60) 76,032

Materials Price Variance (21,120 yards @.25 F) 5,280
Accounts Payable (21,120 yards @ $3.35) 70,752

Work in Process (19,200 yards @ $3.60) 69,120

Materials Quantity Variances (1,920 yards U @ $3.60) 6,912
Raw Materials (21,120 yards @ $3.60) 76,032

Work in Process (7,680 hrs @ $4.50) 34,560

Labor Rate Variance (6,720 hrs @ $.35 U) 2,352
Labor Efficiency Variance (960 hrs F @ $4.50) 4,320
Wages Payable (6,720 hrs @ $4.85) 32,592

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d) Overhead Variances:

Actual Overhead Budgeted Overhead

$2.15 x 6,720 hrs Variable $1.80 x 7,680 hrs
= $14,448 = $13,824
+ +
$9.10 x 4,800 units Fixed $9.00 x 5,000 units
= $43,680 = $45,000
$696 F
Controllable
Variance

Budgeted Fixed Overhead Applied

Overhead to Work In Process
$45,000 $9.00 x 4,800 units
= $43,200
$1,800 U
Volume Variance

Summary of Variances
Direct Materials Price Variance $5,280 F
Quantity Variance 6,912 U $1,632 U

Direct Labor Rate Variance 2,352 U

Efficiency Variance 4,320 F 1,968 F

Overhead Controllable Variance 696 F

Volume variance 1,800 U 1,104 U

Total Variance – Unfavorable $ 768 U

Problem #2

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a) Predetermined overhead rate:

Variable overhead rate: $31,500 / 18,000 hours = $1.75 per machine hour
Fixed overhead rate: $72,000 / 18,000 hours = $4.00 per machine hour
Total overhead rate: $103,500 / 18,000 hours = $5.75 per machine hour

b) Applied cost = 16,000 standard hours allowed X $5.75 = $92,000

Actual Overhead Budgeted Overhead

Variable + Fixed $1.75 x 16,000 dlh =
$26,500 $28,000
+ +
$70,000 72,000
$96,500 $100,000
$3,500 F
Controllable
Variance

Budgeted Fixed Overhead Applied

Overhead to Work In Process
$72,000 $4.00 x 16,000 dlh =
$64,000
$8,000 U
Volume Variance

Summary of Overhead Variances:

Controllable Variable overhead $3,500 F
variance
Fixed Overhead Volume variance 8,000 U
Total underapplied overhead $4,500 U

Problem #3

Direct Materials Variances:

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AQ X AP AQ X SP SQ X SP
36,500 lbs X $5.10 36,500 lbs X $5.00
$ $76,032

Rate Variance $3,650 U

AQ X SP SQ X SP
34,150 lbs X $5.00 4,500 x 7.1 X $5.00
lbs
$ $

Quantity Variance $11,000 U

Total Variance $14,650 U

a)
Direct Labor Variances

AQ X AP AQ X SP SQ X SP
3,610 hrs X $18.10 3,610 hrs X $17.00 4,500 x .8 hrs X $17.00
$65,341 $61,370 $61,200

Rate Variance $3,971 U Efficiency Variance $170 U

Total Variance $4,141 U F

a) SQ = 4,500 units × 7.1 pounds per unit = 31,950 pounds

Materials quantity variance = (AQ - SQ) × SP
= (34,150 pounds - 31,950 pounds) × $5.00 per pound)
= (2,200 pounds) × $5.00 per pound)
= $11,000 U

b) Materials price variance = AQ × (AP - SP)

= 36,500 pounds × ($5.10 per pound - $5.00 per pound)
= 36,500 pounds × ($0.10 per pound)
= $3,650 U

c) SH = 4,500 units × 0.8 hours per unit = 3,600 hours

Labor efficiency variance = (AH - SH) × SR
= (3,610 hours - 3,600 hours) × $17.00 per hour
= (10 hours) × $17.00 per hour
= $170 U

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d) Labor rate variance = AH × (AR - SR)

= 3,610 hours × ($18.10 per hour - $17.00 per hour)
= 3,610 hours × ($1.10 per hour)
= $3,971 U

Actual
Budgeted Overhead
Overhead
Variable + Fixed $7.00 x 4,500 units x .8 dlh =
$25,187 $25,200
+ +
$33,333 33,840
$58,520 $59,040
$520 F
Controllable
Variance

Budgeted Fixed Overhead Applied

Overhead to Work In Process
$33,840 $9.00 x 4,500 units x .8
dlh =
$32,400
$1,440 U
Volume Variance

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Solutions to Multiple Choice Questions

1. B
2. D
3. D
4. B
5. C
6. A
7. C
8. A
9. B
10. C
11. D
12. B
13. C
14. D
15. A
16. D
17. D
18. B
19. D
20. A

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