Concept explainers
Basic
Koontz Company manufactures a number of products. The standards relating to one of these products are shown below, along with actual Cost data for May.
The production superintendent was pleased when he saw this report and commented: ‘This S0.08 excess cost is well within the 2 percent limit management has set for acceptable variances. Its obious that theres not much to worry about with this product.”
Actual production for the month was 12,000 units. Variable overhead cost is assigned to products on the basis of direct labor-hours. There were no beginning or ending inventories of materials.
Required:
1. Compute the following variances for May:
a. Materials price and quantity variances.
b. Labor rate and efficiency variances.
c. Variable overhead rate and efficiency variances.
2. How much of the $0.08 excess unit cost is traceabk to each of the variances computed in (1) above.
3. How much of the $0.08 excess limit cost is traceable to apparent inefficient use of labor time?
4. Do you agree that the excess unit cost is not of concern’.
1
Variances
A variance shows the difference between actual cost incurred by a company and the budgeted cost. A variance may either be favorable or unfavorable. It will be considered as favorable if budgeted cost is higher than the cost that is actually incurred.
To calculate: Various variances related to material, labor and overhead.
Answer to Problem 20P
Material price variance is $6,480 unfavorable and material quantity variance is 0.
Labor rate variance is $5,520 favorable and labor efficiency variance is $4,320 unfavorable.
Variable overhead rate variance is $5,520 favorable and variable overhead efficiency variance is $1,200 unfavorable.
Explanation of Solution
Calculation of material price and quantity variance:
Formula to calculate material price variance is
Here, standard price is given as $3.00, actual price is $3.30 and actual quantity is 21,600 (1.8 * 12,000). So, the variance will be:
Formula to calculate material quantity variance is
Here, actual quantity is 21,600, standard quantity is 21,600 (1.8 *12,000) and standard price is $3 per foot. So, the variance will be:
Calculation of labor rate and efficiency variances:
Formula to calculate labor rate variance is
Here, standard rate is $18.00, actual rate is $17.50 and actual hours are 11,040 (0.92 *12,000). So, the variance will be:
Formula to calculate labor efficiency variance is
Here, standard rate is $18 per hour, actual hours are 11,040 and standard hours are 10,800 (0.90 *12,000). So, variance will be:
Calculation of variable overhead rate and efficiency variance
Formula to calculate variable overhead rate variance is
Here, standard rate is $5 per hour, actual rate is $4.5 per hour and actual hours are 11,040 (0.92 *12,000). So, the variance will be:
Formula to calculate variable overhead efficiency variance is:
Here, standard rate is $ per hour, actual hours are 11,040 and standard hours are 10,800 (0.90 *12,000). So, the variance will be:
2
Excess unit cost
This cost represents the additional cost incurred by a company. It is traceable to all the variances.
To calculate: Standard cost allowed for 20,000 units.
Answer to Problem 20P
Amount that will be traceable to material variances is $0.54U,
Amount that will be traceable to labor variances is $0.10F and
Amount that will be traceable to variable overhead variances is $0.36 F.
Explanation of Solution
The excess unit cost of $0.08 would be traceable to variances in the following way
Particulars | Amount (in $) | Total (in $) |
Materials | ||
Efficiency variance (0/12,000) | 0 | |
Price variance ($6,480/12,000) | 0.54 U | 0.54 U |
Labor | ||
Efficiency variance ($4,320/12,000) | 0.36 U | |
Rate variance ($5,520/12,000) | 0.46 F | 0.10 F |
Variable overheads | ||
Efficiency variance ($1,200/12,000) | 0.10 U | |
Rate variance ($5,520/12,000) | 0.46 F | 0.36 F |
0.08U |
$0.54 Unfavorable will be traceable to material variance, $0.10 favorable will be traceable to labor variance and $0.36 favorable will be traceable to variable overheads variance. Total will be $0.08 unfavorable (0.54U + 0.10 F + 0.36 F).
3
Excess unit cost
This is the cost that a company incurs in addition to budgeted or standard cost.
labor spending variance with the given figures.
Answer to Problem 20P
$0.36U is traceable to labor efficiency variance, $0.10U is traceable to overhead efficiency variance and $0.54 F would be due to other variances.
Explanation of Solution
When labor time is used inefficiently, both labor efficiency variance and overhead efficiency variance are affected. Traceability of cost to variances due to inefficient use is shown below:
Particulars | Amount (in $) | Total (in $) |
Excess of actual overhead cost | $0.08 U | |
Less: Portion traceable to labor efficiency variance (shown in sub part 2) | 0.36 U | |
Less: portion traceable to overhead efficiency variance (shown in sub part 2) | 0.10 U | 0.46 U |
Portion due to other variances | 0.54 F |
$0.36 U will be traceable to labor efficiency variance, $0.10 U will be due to variable overhead efficiency variance and amount that would be left (0.54F) will be due to other variances.
4
Excess unit cost
Excess unit cost represents the additional cost that a company incurs, in excess of the budgeted cost. It is calculated by deducting standard cost from the actual cost incurred by a company.
To explain:Whether the excess cost is important to be considered.
Explanation of Solution
Excess unit cost represents the additional expense that a company incurs. Standard cost represents the ideal cost that should be incurred in the production process. This cost represents the amount that a company incurs in addition to standard or ideal cost. The statement that it is not of concern is false. It is important to be considered and shown by all the companies.
This cost is important to be considered as it is attributable to or traceable to all the variances. Traceability of this cost to all the variances is identified and then important decisions are taken. It increases the cost for a company and hence, reduces the profit. Therefore, it should be identified, considered and it should be minimized to the best possible level.
Want to see more full solutions like this?
Chapter 9 Solutions
INTRO TO MANAGERIAL ACCT-CONNECT ACCESS
- Refer to the information for Cinturon Corporation on the previous page. Required: 1. Break down the total variance for labor into a rate variance and an efficiency variance using the columnar and formula approaches. 2. CONCEPTUAL CONNECTION As part of the investigation of the unfavorable variances, the plant manager interviews the production manager. The production manager complains strongly about the quality of the leather strips. He indicates that the strips are of lower quality than usual and that workers have to be more careful to avoid a belt with cracks and more time is required. Also, even with extra care, many belts have to be discarded and new ones produced to replace the rejects. This replacement work has also produced some overtime demands. What corrective action should the plant manager take?arrow_forwardRecompute the variances from the second Acme Inc. exercise using $0.0725 as the standard cost of the material and $14 as the standard labor cost per hour. How has your explanation of the variances changed?arrow_forwardData for Torleson Company are as follows: Required: 1. Calculate the sales price variance. 2. Calculate the sales volume variance. 3. Suppose that the product is in the introductory stage of the product life cycle. What information do these two variances provide to Torlesons managers?arrow_forward
- 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.arrow_forwardThe worksheet you have developed will handle most simple variance analysis problems. Try the problem below for Pscheidl, Inc.: Actual production for October was 11,500 units. Compute the direct materials and direct labor variances for Pscheidl, Inc. Be careful when entering your input because this problem presents the information in a different format from the McGrade Industries data. Save the file as PRIMEVAR4. Print the worksheet when done.arrow_forwardMarten Company has a cost-benefit policy to investigate any variance that is greater than 1,000 or 10% of budget, whichever is larger. Actual results for the previous month indicate the following: The company should investigate: a. neither the materials variance nor the labor variance. b. the materials variance only. c. the labor variance only. d. both the materials variance and the labor variance.arrow_forward
- Sommers Company uses the following rule to determine whether materials usage variances should be investigated: A materials usage variance will be investigated anytime the amount exceeds the lesser of 12,000 or 10% of the standard cost. Reports for the past 5 weeks provided the following information: Required: 1. Using the rule provided, identify the cases that will be investigated. 2. CONCEPTUAL CONNECTION Suppose investigation reveals that the cause of an unfavorable materials usage variance is the use of lower-quality materials than are normally used. Who is responsible? What corrective action would likely be taken? 3. CONCEPTUAL CONNECTION Suppose investigation reveals that the cause of a significant unfavorable materials usage variance is attributable to a new approach to manufacturing that takes less labor time but causes more material waste. Examination of the labor efficiency variance reveals that it is favorable and larger than the unfavorable materials usage variance. Who is responsible? What action should be taken?arrow_forwardMadison Company uses the following rule to determine whether direct labor efficiency variances ought to be investigated. A direct labor efficiency variance will be investigated anytime the amount exceeds the lesser of 12,000 or 10 percent of the standard labor cost. Reports for the past five weeks provided the following information: Required: 1. Using the rule provided, identify the cases that will be investigated. 2. Suppose that investigation reveals that the cause of an unfavorable direct labor efficiency variance is the use of lower quality direct materials than are usually used. Who is responsible? What corrective action would likely be taken? 3. Suppose that investigation reveals that the cause of a significant favorable direct labor efficiency variance is attributable to a new approach to manufacturing that takes less labor time but causes more direct materials waste. Upon examining the direct materials usage variance, it is discovered to be unfavorable, and it is larger than the favorable direct labor efficiency variance. Who is responsible? What action should be taken? How would your answer change if the unfavorable variance were smaller than the favorable?arrow_forwardUsing variance analysis and interpretation Last year, Wrigley Corp. adopted a standard cost system. Labor standards were set on the basis of time studies and prevailing wage rates. Materials standards were determined from materials specifications and the prices then in effect. On June 30, the end of the current fiscal year, a partial trial balance revealed the following: Standards set at the beginning of the year have remained unchanged. All inventories are priced at standard cost. What conclusions can be drawn from each of the four variances shown in Wrigleys trial balance?arrow_forward
- Basic Variance Analysis; the Impact of Variances on Unit Costs Koontz Company manufactures a number of products. The standards relating to one of these products are shown below, along with actual cost data for May. The production superintendent was pleased when he saw this report and commented: “This $0.08 excess cost is well within the 2 percent limit management has set for acceptable variances. It’s obvious that there’s not much to worry about with this product.” Actual production for the month was 12,000 units. Variable overhead cost is assigned to products on the basis of direct labor-hours. There were no beginning or ending inventories of materials. Required: 1. Compute the following variances for May: a. Materials price and quantity variances. b. Labor rate and efficiency variances. c. Variable overhead rate and efficiency variances. 2. How much of the $0.08 excess unit cost is traceable to each of the variances computed in (1) above. 3. How much of the $0.08 excess unit cost is…arrow_forwardLMN Inc. has the following information available: 1 Compute the material price and quantity, and the labor rate and efficiency variances. 2 Describe the possible causes for this combination of favorable and unfavorable variances. Actual price paid for material 1.00 Standard price for material 1.10 Actual quantity purchased & used in production 100.00 Standard quantity for units produced 110.00 Actual labor rate per hour 15.00 Standard labor rate per hour 14.00 Actual hours 200 Standard hours for units produced 190arrow_forwardShow transcribed image text 15.What activity variances would Adger report with respect to each of its expenses? (Indicate the effect of each variance by selecting F for favorable, U for unfavorable, and None for no effect (i.e., zero variance). Input all amounts as positive values.) [The following information applies to the questions displayed below.] Adger Corporation is a service company that measures its output based on the number of customers served. The company provided the following fixed and variable cost estimates that it uses for budgeting purposes and the actual results for May as shown below: When preparing its planning budget the company estimated that it would serve 30 customers per month; however, during May the company actually served 35 customers.arrow_forward
- Principles of Cost AccountingAccountingISBN:9781305087408Author:Edward J. Vanderbeck, Maria R. MitchellPublisher:Cengage LearningCornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubExcel Applications for Accounting PrinciplesAccountingISBN:9781111581565Author:Gaylord N. SmithPublisher:Cengage LearningPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College