Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN: 9781305970663
Author: Don R. Hansen, Maryanne M. Mowen
Publisher: Cengage Learning
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Textbook Question
Chapter 9, Problem 16E

Refer to the data in Exercise 9.15.

Required:

  1. 1. Compute overhead variances using a two-variance analysis.
  2. 2. Compute overhead variances using a three-variance analysis.
  3. 3. Illustrate how the two- and three-variance analyses are related to the four-variance analysis.

Oerstman, Inc., uses a standard costing system and develops its overhead rates from the current annual budget. The budget is based on an expected annual output of 120,000 units requiring 480,000 direct labor hours. (Practical capacity is 500,000 hours.) Annual budgeted overhead costs total $787,200, of which $556,800 is fixed overhead. A total of 119,400 units using 478,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $230,600, and actual fixed overhead costs were $556,250.

Required:

  1. 1. Compute the fixed overhead spending and volume variances. How would you interpret the spending variance? Discuss the possible interpretations of the volume variance. Which is most appropriate for this example?
  2. 2. Compute the variable overhead spending and efficiency variances. How is the variable overhead spending variance like the price variances of direct labor and direct materials? How is it different? How is the variable overhead efficiency variance related to the direct labor efficiency variance?
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Chapter 9 Solutions

Cornerstones of Cost Management (Cornerstones Series)

Ch. 9 - Prob. 11DQCh. 9 - What is the cause of an unfavorable volume...Ch. 9 - Prob. 13DQCh. 9 - Explain how the two-, three-, and four-variance...Ch. 9 - Prob. 15DQCh. 9 - Prob. 1CECh. 9 - Direct Materials Usage Variance Refer to...Ch. 9 - Refer to Cornerstone Exercise 9.1. Guillermos Oil...Ch. 9 - Kavallia Company set a standard cost for one item...Ch. 9 - Yohan Company has the following balances in its...Ch. 9 - Standish Company manufactures consumer products...Ch. 9 - Variances Refer to Cornerstone Exercise 9.6....Ch. 9 - Standish Company manufactures consumer products...Ch. 9 - Mangia Pizza Company makes frozen pizzas that are...Ch. 9 - Mangia Pizza Company makes frozen pizzas that are...Ch. 9 - Refer to Cornerstone Exercise 9.9. Required: 1....Ch. 9 - Quincy Farms is a producer of items made from farm...Ch. 9 - During the year, Dorner Company produced 280,000...Ch. 9 - Zoller Company produces a dark chocolate candy...Ch. 9 - Oerstman, Inc., uses a standard costing system and...Ch. 9 - Refer to the data in Exercise 9.15. Required: 1....Ch. 9 - Chypre, Inc., produces a cologne mist using a...Ch. 9 - Refer to Exercise 9.17. Chypre, Inc., purchased...Ch. 9 - Delano Company uses two types of direct labor for...Ch. 9 - Jameson Company produces paper towels. The company...Ch. 9 - Madison Company uses the following rule to...Ch. 9 - Laughlin, Inc., uses a standard costing system....Ch. 9 - Responsibility for the materials price variance...Ch. 9 - Which of the following is true concerning labor...Ch. 9 - A company uses a standard costing system. At the...Ch. 9 - Relevant information for direct labor is as...Ch. 9 - Which of the following is the most likely...Ch. 9 - Haversham Corporation produces dress shirts. The...Ch. 9 - Plimpton Company produces countertop ovens....Ch. 9 - Algers Company produces dry fertilizer. At the...Ch. 9 - Misterio Company uses a standard costing system....Ch. 9 - Petrillo Company produces engine parts for large...Ch. 9 - Business Specialty, Inc., manufactures two...Ch. 9 - Vet-Pro, Inc., produces a veterinary grade...Ch. 9 - Refer to the data in Problem 9.34. Vet-Pro, Inc.,...Ch. 9 - Energy Products Company produces a gasoline...Ch. 9 - Nuevo Company produces a single product. Nuevo...Ch. 9 - Ingles Company manufactures external hard drives....Ch. 9 - As part of its cost control program, Tracer...Ch. 9 - Aspen Medical Laboratory performs comprehensive...Ch. 9 - Leather Works is a family-owned maker of leather...
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  • In all of the exercises involving variances, use F and U to designate favorable and unfavorable variances, respectively. E8-1 through E8-5 use the following data: The standard operating capacity of Tecate Manufacturing Co. is 1,000 units. A detailed study of the manufacturing data relating to the standard production cost of one product revealed the following: 1. Two pounds of materials are needed to produce one unit. 2. Standard unit cost of materials is 8 per pound. 3. It takes one hour of labor to produce one unit. 4. Standard labor rate is 10 per hour. 5. Standard overhead (all variable) for this volume is 4,000. Each case in E8-1 through E8-5 requires the following: a. Set up a standard cost summary showing the standard unit cost. b. Analyze the variances for materials and labor. c. Make journal entries to record the transfer to Work in Process of: 1. Materials costs 2. Labor costs 3. Overhead costs (When making these entries, include the variances.) d. Prepare the journal entry to record the transfer of costs to the finished goods account. Standard unit cost; variance analysis; journal entries 1,000 units were started and finished. Case 1: All prices and quantities for the cost elements are standard, except for materials cost, which is 8.50 per pound. Case 2: All prices and quantities for the cost elements are standard, except that 1,900 lb of materials were used.
    The normal capacity of a manufacturing plant is 30,000 direct labor hours or 20,000 units per month. Standard fixed costs are 6,000, and variable costs are 12,000. Data for two months follow: For each month, make a single journal entry to charge overhead to Work in Process, to close Factory Overhead, and to record variances. Indicate the types of variances and state whether each is favorable or unfavorable. (Hint: You must first compute the flexible-budget and production-volume variances.)
    Georgia Gasket Co. budgets 8,000 direct labor hours for the year. The total overhead budget is expected to amount to 20,000. The standard cost for a unit of the companys product estimates the variable overhead as follows: The actual data for the period follow: Using the four-variance method, calculate the overhead variances. (Hint: First compute the budgeted fixed overhead rate.)
  • The management of Golding Company has determined that the cost to investigate a variance produced by its standard cost system ranges from 2,000 to 3,000. If a problem is discovered, the average benefit from taking corrective action usually outweighs the cost of investigation. Past experience from the investigation of variances has revealed that corrective action is rarely needed for deviations within 8% of the standard cost. Golding produces a single product, which has the following standards for materials and labor: Actual production for the past 3 months follows, with the associated actual usage and costs for materials and labor. There were no beginning or ending raw materials inventories. Required: 1. What upper and lower control limits would you use for materials variances? For labor variances? 2. Compute the materials and labor variances for April, May, and June. Identify those that would require investigation by comparing each variance to the amount of the limit computed in Requirement 1. Compute the actual percentage deviation from standard. Round all unit costs to four decimal places. Round variances to the nearest dollar. Round variance rates to three decimal places so that percentages will show to one decimal place. 3. CONCEPTUAL CONNECTION Let the horizontal axis be time and the vertical axis be variances measured as a percentage deviation from standard. Draw horizontal lines that identify upper and lower control limits. Plot the labor and material variances for April, May, and June. Prepare a separate graph for each type of variance. Explain how you would use these graphs (called control charts) to assist your analysis of variances.
    Cortez Manufacturing, Inc. has the following flexible budget formulas and amounts: Actual results for May for the production and sale of 5,000 units were as follows: Prepare a performance report for May that includes the identification of the favorable and unfavorable variances.
    The standard specifications for an electric motor manufactured by XYZ Electric Co. follow: Factory overhead rates are based on a normal 70% capacity and use the following flexible budget: The actual production was 2,500 motors, and factory overhead costs totaled $29,750. Required: Calculate the factory overhead variances using the two-variance method and the diagram format.
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    What is variance analysis?; Author: Corporate finance institute;https://www.youtube.com/watch?v=SMTa1lZu7Qw;License: Standard YouTube License, CC-BY