CHAPTER 22 (FIN MAN); CHAPTER 7 (MAN) PERFORMANCE EVALUATION USING VARIANCES FROM STANDARD COSTS

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1 (FIN MAN); CHAPTER 7 (MAN) PERFORMANCE EVALUATION USING VARIANCES FROM STANDARD COSTS 1. Standards are performance goals. Manufacturing companies normally use standard cost for each of the three following product costs: a. Direct materials b. Direct labor c. Factory overhead Standard cost systems enable management to determine the following: a. How much a product should cost (standard cost) b. How much it does cost (actual cost) 2. Reporting by the principle of exceptions is the reporting of only variances (or exceptions ) between standard and actual costs to the individual responsible for cost control. This reporting allows management to focus on correcting cost variances. 3. The two variances in direct materials cost are: a. Direct materials price b. Direct materials quantity DISCUSSION QUESTIONS 4. The offsetting variances might have been caused by the purchase of low-priced, inferior materials. The low price of the materials would generate a favorable materials price variance, while the inferior quality of the materials would cause abnormal spoilage and waste, thus generating an unfavorable materials quantity variance. 5. a. The two variances in direct labor costs are: (1) Direct labor rate (2) Direct labor time b. The direct labor cost variance is usually under the control of the production supervisor. 6. No. Even though the assembly workers are covered by union contracts, direct labor cost variances still might result. For example, direct labor rate variances could be caused by scheduling overtime to meet production demands or by assigning higher-paid workers to jobs normally performed by lower-paid workers. Likewise, direct labor time variances could result during the training of new workers or from a shortage of skilled employees. 7. Standards can be very appropriate in repetitive service operations. Fast-food restaurants can use standards for evaluating the productivity of the counter and food preparation employees. In addition, standards could be used to plan staffing patterns around various times of the day (e.g., increasing staff during the lunch hour). 22-1

2 DISCUSSION QUESTIONS (Continued) 8. a. The variable factory overhead controllable variance results from incurring a total amount of variable factory overhead cost greater or less than the amount budgeted for the level of operations achieved. The fixed factory overhead volume variance results from operating at a level above or below 100% of normal capacity. b. The factory overhead cost variance report presents the standard factory overhead cost variance data, including the volume and controllable variances. 9. Net unfavorable direct materials price variance. 10. Nonfinancial performance measures provide managers additional measures beyond the dollar impact of decisions. Nonfinancial considerations may help the organization include external customer perspectives about quality and service in performance measurements. These bring added perspectives in evaluating performance. 22-2

3 PRACTICE EXERCISES PE 22 1A (FIN MAN); PE 7 1A (MAN) a. Direct materials price $10,800 [($33.25 $34.00) 14,400 gal.] variance (favorable) b. Direct materials quantity $13,600 [(14,400 gal. 14,000 gal.) $34.00] variance (unfavorable) c. Direct materials cost $2,800 ( $10,800 + $13,600) or variance (unfavorable) [($ ,400 gal.) ($ ,000 gal.)] $478,800 $476,000 PE 22 1B (FIN MAN); PE 7 1B (MAN) a. Direct materials price $2,250 [($3.00 $2.50) 4,500 lbs.] variance (unfavorable) b. Direct materials quantity $1,250 [(4,500 lbs. 5,000 lbs.) $2.50] variance (favorable) c. Direct materials cost $1,000 ($2,250 $1,250) or variance (unfavorable) [($3.00 4,500 lbs.) ($2.50 5,000 lbs.)] $13,500 $12,500 PE 22 2A (FIN MAN); PE 7 2A (MAN) a. Direct labor rate $8,850 [($30.50 $30.00) 17,700 hrs.] variance (unfavorable) b. Direct labor time $6,000 [(17,700 hrs. 17,500 hrs.) $30.00] variance (unfavorable) c. Direct labor cost $14,850 ($8,850 + $6,000) or variance (unfavorable) [($ ,700 hrs.) ($ ,500 hrs.)] $539,850 $525,000 PE 22 2B (FIN MAN); PE 7 2B (MAN) a. Direct labor rate $1,400 [($16.50 $17.00) 2,800 hrs.] variance (favorable) b. Direct labor time $3,400 [(2,800 hrs. 3,000 hrs.) $17.00] variance (favorable) c. Direct labor cost $4,800 ( $1,400 $3,400) or variance (favorable) [($ ,800 hrs.) ($ ,000 hrs.)] $46,200 $51,

4 PE 22 3A (FIN MAN); PE 7 3A (MAN) Variable Factory Overhead Controllable Variance Variable Factory Overhead Controllable Variance Variable Factory Overhead Controllable Variance $63,400 [$3.50 (3,500 units 5 hrs.)] $63,400 $61,250 $2,150 Unfavorable PE 22 3B (FIN MAN); PE 7 3B (MAN) Variable Factory Overhead Controllable Variance $4,000 [$1.40 (1,000 units 3.0 hrs.)] Variable Factory Overhead Controllable Variance $4,000 $4,200 Variable Factory Overhead Controllable Variance $200 Favorable PE 22 4A (FIN MAN); PE 7 4A (MAN) $900 favorable $1.80 [17,000 hrs. (3,500 units 5 hrs.)] PE 22 4B (FIN MAN); PE 7 4B (MAN) $300 unfavorable $0.60 [3,500 hrs. (1,000 units 3 hrs.)] 22-4

5 PE 22 5A (FIN MAN); PE 7 5A (MAN) Work in Process (14,000* gal. $34.00) 476,000 Quantity Variance** 13,600 Materials (14,400 gal. $34.00) 489,600 * 3,500 units 4 standard gal. per unit ** [(14,400 gal. 14,000 gal.) $34.00] PE 22 5B (FIN MAN); PE 7 5B (MAN) Work in Process (5,000* lbs. $2.50) 12,500 Quantity Variance** 1,250 Materials (4,500 lbs. $2.50) 11,250 * 1,000 units 5 standard lbs. per unit ** [(4,500 lbs. 5,000 lbs.) $2.50] PE 22 6A (FIN MAN); PE 7 6A (MAN) GIOVANNI COMPANY Income Statement Through Gross Profit For the Year Ended December 31, 2014 Sales (3,500 units $400) $1,400,000 Cost of goods sold at standard* 1,093,750 Gross profit at standard $ 306,250 Favorable Unfavorable Less variances from standard cost: Direct materials price (PE22 1A; PE7 1A) $10,800 Direct materials quantity (PE22 1A; PE7 1A) $13,600 Direct labor rate (PE22 2A; PE7 2A) 8,850 Direct labor time (PE22 2A; PE7 2A) 6,000 Factory overhead controllable (PE22 3A; PE7 3A) 2,150 Factory overhead volume (PE22 4A; PE7 4A) 900 (18,900) Gross profit $ 287,350 * Direct materials (3,500 units 4 gal. $34.00) $ 476,000 Direct labor (3,500 units 5 hrs. $30.00) 525,000 Factory overhead [3,500 units 5 hrs. ($ $1.80)] 92,750 Cost of goods sold at standard $1,093,

6 PE 22 6B (FIN MAN); PE 7 6B (MAN) DVORAK COMPANY Income Statement Through Gross Profit For the Year Ended December 31, 2014 Sales (1,000 units $90) $90,000 Cost of goods sold at standard* 69,500 Gross profit at standard $20,500 Favorable Unfavorable Less variances from standard cost: Direct materials price (PE22 1B; PE7 1B) $2,250 Direct materials quantity (PE22 1B; PE7 1B) $1,250 Direct labor rate (PE22 2B; PE7 2B) 1,400 Direct labor time (PE22 2B; PE7 2B) 3,400 Factory overhead controllable (PE23 3B; PE7 3B) 200 Factory overhead volume (PE23 4B; PE7 4B) 300 3,700 Gross profit $24,200 * Direct materials (1,000 units 5 lbs. $2.50) $12,500 Direct labor (1,000 units 3 hrs. $17.00) 51,000 Factory overhead [1,000 units 3 hrs. ($ $0.60)] 6,000 Cost of goods sold at standard.. $69,500 PE 22 7A (FIN MAN); PE 7 7A (MAN) Number of employee errors Input Number of times paper supply runs out Input Copy machine downtime (broken) Input Number of pages copied per hour Output Number of customer complaints Output Percent jobs done on time.. Output PE 22 7B (FIN MAN); PE 7 7B (MAN) Number of times ingredients are missing Input Number of customer complaints Output Number of hours kitchen equipment is down for repairs Input Number of server order mistakes Input Percent of meals prepared on time Output Number of unexpected cook absences Input 22-6

7 EXERCISES Ex (FIN MAN); Ex. 7 1 (MAN) Ingredient Cocoa Sugar Milk Total cost Quantity Price Total 650 lbs. $0.90 per lb. $ lbs. $1.50 per lb gals. $2.10 per gal. 315 $1,200 Standard direct materials cost per bar of chocolate: $1,200 per batch 4,800 bars $0.25 per bar Ex (FIN MAN); Ex. 7 2 (MAN) a. Direct labor $ hrs. $ Direct materials $ bd. ft Variable factory overhead $ hrs Fixed factory overhead $ hrs Total cost per unit $ b. A standard cost system provides Wood Designs management a cost control tool using the principle of management by exception. Using this principle, costs that deviate significantly from standards can be investigated and corrected. The standard cost system also can be used to motivate employees to work efficiently with their time, use of materials, and other factory overhead resources. 22-7

8 Ex (FIN MAN); Ex. 7 3 (MAN) a. Standard Cost at Planned Volume (600,000 Bottles) Manufacturing costs: Direct labor $10,800 Direct materials 49,500 Factory overhead 3,000 Total $63,300 $1.80 (600, ) $10,800 $8.25 (600, ) $49,500 $0.50 (600, ) $3,000 TIME IN A BOTTLE COMPANY Manufacturing Cost Budget For the Month Ended May 31, 2014 Note: The cost standards are expressed as per 100 bottles. b. TIME IN A BOTTLE COMPANY Manufacturing Costs Budget Performance Report For the Month Ended May 31, 2014 Standard Cost at Actual Actual Volume (Favorable) Costs (610,000 Bottles) Unfavorable Manufacturing costs: Direct labor $ 9,890 $10,980 $(1,090) Direct materials 48,450 50,325 (1,875) Factory overhead 3,460 3, Total manufacturing cost $61,800 $64,355 $(2,555) $1.80 (610, ) $10,980 $8.25 (610, ) $50,325 $0.50 (610, ) $3,050 c. Time in a Bottle Company s actual costs were $2,555 less than budgeted. Favorable direct labor and direct material cost variances more than offset a small unfavorable factory overhead cost variance. Note to Instructors: The budget prepared in part (a) at the beginning of the month should not be used in the budget performance report because actual volumes were greater than planned (610,000 vs. 600,000). 22-8

9 Ex (FIN MAN); Ex. 7 4 (MAN) a. Price variance: Price Variance (Actual Price Standard Price) Actual Quantity Price Variance ($2.60 per lb. $2.50 per lb.) 53,500 lbs. Price Variance Quantity variance: Quantity Variance $5,350 Unfavorable (Actual Quantity Standard Quantity) Standard Price Quantity Variance (53,500 lbs. 55,120 lbs.) $2.50 per lb. Quantity Variance $4,050 Favorable Total direct materials cost variance: Price Variance + Quantity Variance $5,350 $4,050 $1,300 Unfavorable b. The direct materials price variance should normally be reported to the Purchasing Department, which may or may not be able to control this variance. If materials of the same quality were purchased from another supplier at a price higher than the standard price, the variance was controllable. However, if the variance resulted from a market-wide price increase, the variance was not subject to control. The direct materials quantity variance should be reported to the proper level of operating management. For example, if lower amounts of direct materials had been used because of production efficiencies, the variance would be reported to the production supervisor. However, if the favorable use of raw materials had been caused by the purchase of higher-quality raw materials, the variance should be reported to the Purchasing Department. The total materials cost variance should be reported to senior plant management, such as the plant manager or materials manager. 22-9

10 Ex (FIN MAN); Ex. 7 5 (MAN) Price variance: Price Variance (Actual Price Standard Price) Actual Quantity Price Variance ($6.50 per unit* $6.90 per unit) 450 Price Variance $180 Favorable * $2, units $6.50 per unit Quantity variance: Quantity Variance Quantity Variance (Actual Quantity Standard Quantity) Standard Price (450 units 430 units) $6.90 per unit Quantity Variance $138 Unfavorable Total direct materials cost variance: Price Variance + Quantity Variance $180 + $138 $42 Favorable 22-10

11 Ex (FIN MAN); Ex. 7 6 (MAN) Product finished 1,400 units Standard finished product for direct materials used (3,000 lbs. 2 lbs.) 1,500 Deficiency of finished product for materials used (100) units Standard cost for direct materials: Quantity variance divided by deficiency of product for materials used ($1, units) $10.00 per unit Alternate solution: Price variance, unfavorable $1,500 Materials used 3,000 lbs. Price variance per lb. $ 0.50 Unit price of direct materials $ 5.50 Less price variance (unfavorable) per lb (from above). (0.50) Standard price per lb. $ 5.00 Pounds per unit of product 2 Standard direct materials cost per unit of product $10.00 Proof: Price Variance Quantity Variance (Actual Price Standard Price) Actual Quantity ($5.50 $5.00) 3,000 $1,500 Unfavorable (Actual Quantity Standard Quantity) Standard Price (3,000 lbs. 2,800 lbs.) $5.00 $1,000 Unfavorable 22-11

12 Ex (FIN MAN); Ex. 7 7 (MAN) a. Standard Quantity Standard Price Standard Cost per Batch Whole tomatoes 3,360 lbs. $ 0.50 per lb. $1,680 Vinegar 220 gal per gal. 660 Corn syrup 20 gal per gal. 240 Salt 80 lbs per lb. 240 $2,820 Pounds per batch 1,880 lbs. $ 1.50 per lb. b. Actual Quantity for Batch K-54 Standard Quantity per Quantity Standard Batch Difference Price Materials Quantity Variance 3,556 lbs. 3,360 lbs. 196 lbs. $ 0.50 per lb. $98 U 230 gal. 220 gal. 10 gal per gal. 30 U 18 gal. 20 gal. (2) gal per gal. 24 F 75 lbs. 80 lbs. (5) lbs per lb. 15 F $89 U 22-12

13 Ex (FIN MAN); Ex. 7 8 (MAN) a. Rate variance: Rate Variance Rate Variance Rate Variance Time variance: Time Variance Time Variance Time Variance (Actual Rate per Hour Standard Rate per Hour) Actual Hours ($20.00 $20.40) 4,050 hours $1,620 Favorable (Actual Hours Standard Hours) Standard Rate per Hour (4,050 hrs. 4,000 hrs.) $20.40 per hour $1,020 Unfavorable Total direct labor cost variance: Rate Variance + Time Variance $1,620 Favorable + $1,020 Unfavorable $600 Favorable b. The employees may have been less experienced workers who were paid less than more experienced workers, or poorly trained, thereby resulting in a lower labor rate than planned. The lower level of experience or training may have resulted in less efficient performance. Thus, the actual time required was more than standard. Fortunately, the lost efficiency is more than offset by the lower labor rate

14 Ex (FIN MAN); Ex. 7 9 (MAN) a. Rate variance: Rate Variance Rate Variance Rate Variance Time variance: Time Variance Time Variance Time Variance * 2.00 hrs. 400 units (Actual Rate per Hour Standard Rate per Hour) Actual Hours ($15.60 $16.00) 850 hrs. $340 Favorable (Actual Hours Standard Hours) Standard Rate per Hour (850 hrs. 800 hrs.*) $16.00 per hour $800 Unfavorable Total direct labor cost variance: Rate Variance + Time Variance $340 Favorable + $800 Unfavorable $460 Unfavorable b. Debit to Work in Process: $12,800 Standard hours at actual production 800 Standard rate $ Standard direct labor cost $12,

15 Ex (FIN MAN); Ex (MAN) a. (1) Cutting Department Rate variance: Rate Variance (Actual Rate per Hour Standard Rate per Hour) Actual Hours Rate Variance Rate Variance Time variance: Time Variance Time Variance Time Variance ($10.90 $11.00) 6,380 hours $638 Favorable (Actual Hours Standard Hours) Standard Rate per Hour (6,380 hrs. 6,250 hrs.*) $11.00 per hour $1,430 Unfavorable * 0.25 hr. 25,000 units Total direct labor cost variance: Rate Variance + Time Variance $638 Favorable + $1,430 Unfavorable $792 Unfavorable 22-15

16 Ex (FIN MAN); Ex (MAN) (Concluded) (2) Sewing Department Rate variance: Rate Variance (Actual Rate per Hour Standard Rate per Hour) Actual Hours Rate Variance Rate Variance Time variance: Time Variance ($11.12 $11.00) 9,875 hours $1,185 Unfavorable (Actual Hours Standard Hours) Standard Rate per Hour Time Variance (9,875 hrs. 10,000 hrs.*) $11.00 per hour Time Variance $1,375 Favorable * 0.40 hr. 25,000 units Total direct labor cost variance: Rate Variance + Time Variance $1,185 Unfavorable $1,375 Favorable $190 Favorable b. The two departments have opposite results. The Cutting Department has a favorable rate and an unfavorable time variance, resulting in a total unfavorable cost variance of $792. In contrast, the Sewing Department has an unfavorable rate variance but has a favorable time variance, resulting in a total favorable cost variance of $190. The causes of this disparity are worthy of investigation. There are many possible causes including tight or loose standards, inferior or superior operating methods, and inappropriate or appropriate use of overtime. Combining both departments, the overall operation shows an unfavorable cost variance of $602 ($792 $190), as a result of the weak performance in the Cutting Department

17 Ex (FIN MAN); Ex (MAN) a. Actual weekly expenditure: 4 people $15.00 per hour 40 hrs. per week $2,400 b. Standard time used for the volume of admissions: Unscheduled Scheduled Total Number of admissions Standard time 30 min. 15 min. Total 4,200 min. 5,250 min. 9,450 min. or (157.5 hrs 60 min.) c. Actual productive minutes available (4 employees 40 hrs. 60 min.) 9,600 minutes Less standard minutes used at actual volume 9,450 minutes Time difference from standard 150 minutes Standard rate per minute 1 $ 0.25 Direct labor time variance unfavorable $37.50 or [(4 40 hours) hours] $15 per hour $37.50 or $2,400 [from (a)] $2, $ Standard direct labor rate: $15 60 min. $0.25 per min. 2 Standard labor cost at actual volume: Productive time (9,450 60) $15 $2, The Admissions Department was less efficient than standard by 150 minutes, or 2.5 hours. This is equal to $37.50 at the standard rate of $15 per hour

18 Ex (FIN MAN); Ex (MAN) a. Standard Sorts per Minute Standard Minutes per Hour Standard Sorts per Hour (per employee) 120 sorts per min. 60 min. per hr. 7,200 standard sorts per hr. Pieces of Mail Standard Sorts per Hour Number of Hours Planned 41,472,000 letters 7,200 sorts per hr. 5,760 hrs. planned Number of Hours Planned Hours per Temporary Employee per Month Number of Hires 5,760 hrs. 160 hrs. 36 temporary hires for December b. Actual pieces sorted 41,220,000 Actual Pieces of Mail Sorted Standard Sorts per Hour Standard Number of Hours for Actual Production 41,220,000 7,200 standard sorts per hr. 5,725 standard hrs. for actual production Actual hours staffed 5,760 Standard hours for actual production 5,725 Excess of actual over standard hours 35 Standard hourly rate $ 15 Direct labor time variance unfavorable $

19 Ex (FIN MAN); Ex (MAN) Step 1: Determine the standard direct materials and direct labor per unit. Standard direct materials quantity per unit: Direct materials lbs. budgeted for June: $36,000 $1.25 per lb. Standard pounds per unit: 28,800 lbs. 19,200 units Standard direct labor time per unit: Direct labor hrs. budgeted for June: $26,880 $14.00 per hr. Standard direct labor hrs. per unit: 1,920 hrs. 19,200 units 28,800 lbs. Step 2: Using the standard quantity and time rates in step 1, determine the standard costs for the actual June production. Standard direct materials at actual volume: 18,000 units 1.5 lbs. per unit $1.25 $33,750 Standard direct labor at actual volume: 18,000 units 0.10 direct labor hr. per unit $ ,200 Total $58,950 Step 3: Determine the direct materials quantity and direct labor time variances, assuming no direct materials price or direct labor rate variances. Actual direct materials used in production $34,500 Standard direct materials (step 2) 33,750 Direct materials quantity variance unfavorable* $ 750 * (27,600 lbs. 27,000 lbs.) $ U $34,500 $ ,600 lbs. $33,750 $ ,000 lbs. 1,920 direct labor hrs. Actual direct labor $24,500 Standard direct labor (step 2) 25,200 Direct labor time variance favorable** $ (700) ** 18,000 units 0.10 hr. 1,800 standard hrs. $24,500 $ ,750 actual hrs. (1,750 hrs. 1,800 hrs.) $14.00 $700 F 1.5 standard lbs. per unit 0.10 standard direct labor hr. per unit 22-19

20 Ex (FIN MAN); Ex (MAN) LENO MANUFACTURING COMPANY Factory Overhead Cost Budget Press Department For the Month Ended November 30, 2014 Direct labor hours 18,000 20,000 22,000 Variable overhead cost: Indirect factory labor 1 $162,000 $180,000 $198,000 Power and light 2 10,800 12,000 13,200 Indirect materials 57, ,000 70,400 Total variable factory overhead $230,400 $256,000 $281,600 Fixed factory overhead cost: Supervisory salaries $ 80,000 $ 80,000 $ 80,000 Depreciation of plant and equipment 50,000 50,000 50,000 Insurance and property taxes 32,000 32,000 32,000 Total fixed factory overhead $162,000 $162,000 $162,000 Total factory overhead $392,400 $418,000 $443, ,000 ($180,000 20,000) 2 18,000 ($12,000 20,000) 3 18,000 ($64,000 20,000) 22-20

21 Ex (FIN MAN); Ex (MAN) a. WIKI WIKI COMPANY Monthly Factory Overhead Cost Budget Fabrication Department Direct labor hours 9,000 10,000 11,000 Variable factory overhead cost $ 40,500 $ 45,000 $ 49,500 Fixed factory overhead cost 60,000 60,000 60,000 Total factory overhead $100,500 $105,000 $109,500 b. Overhead applied at actual production: Actual hours 9,000 Overhead application rate* $ Factory overhead applied $94,500 * Total factory overhead rate to be applied to production: Variable factory overhead $ 4.50 Fixed factory overhead** 6.00 Total $10.50 ** Fixed factory overhead rate: $60,000 10,000 hrs. $6.00 per hr. Note: The fixed factory overhead rate is determined at normal production

22 Ex (FIN MAN); Ex (MAN) Variable factory overhead controllable variance: Actual variable factory overhead cost incurred $262,000 Budgeted variable factory overhead for 14,000 hrs. [14,000 ($25.00 $6.00)] 266,000 Variance favorable $(4,000) Fixed factory overhead volume variance: Productive capacity at 100% 15,000 hrs. Standard for amount produced 14,000 hrs. Productive capacity not used 1,000 hrs. Standard fixed factory overhead rate $6.00 Variance unfavorable 6,000 Total factory overhead cost variance unfavorable* $ 2,000 * Actual Overhead Applied Overhead Total Overhead Variance: ($262,000 + $90,000) $350,000 $2,

23 Ex (FIN MAN); Ex (MAN) (Concluded) Alternative Computation of Overhead Variances Factory Overhead Actual costs 352,000 Applied costs 350,000 Balance (underapplied) 2,000 Actual Factory Overhead Budgeted Factory Overhead for Amount Produced Applied Factory Overhead $352,000 Variable cost [14,000 ($25.00 $6.00)] $266,000 $350,000 Fixed cost 90,000 Total $356,000 $4,000 F $6,000 U Controllable Volume Variance Variance $2,000 U Total Factory Overhead 22-23

24 Ex (FIN MAN); Ex (MAN) a. Controllable variance: Actual variable factory overhead ($782,000 $240,000) $542,000 Standard variable factory overhead at actual production: Standard hours at actual production 92,500 Variable factory overhead rate 1 $6.00 Standard variable factory overhead 555,000 Controllable variance favorable $(13,000) b. Volume variance: Volume at 100% of normal capacity 100,000 Less standard hours 92,500 Idle capacity 7,500 Fixed overhead rate 2 $2.40 Volume variance unfavorable 18,000 Total factory overhead cost variance unfavorable $ 5, Variable factory overhead rate: $540,000 90,000 hrs. $6.00 per hour 2 $240,000 Fixed factory overhead rate: $2.40 per hour 100,000 hrs. 3 Actual Overhead Applied Overhead Total Overhead Variance: $782,000 [($ $2.40) 92,500 hrs.] $5,

25 Ex (FIN MAN); Ex (MAN) (Concluded) Alternative Computation of Overhead Variances Factory Overhead Actual costs 782,000 Applied costs 777,000 * Balance (underapplied) 5,000 Actual Factory Overhead $782,000 Budgeted Factory Overhead for Amount Produced Applied Factory Overhead Variable cost (92,500 $6.00) $555,000 $777,000* Fixed cost 240,000 Total $795,000 $13,000 F Controllable Variance $18,000 U Volume Variance $5,000 U Total Factory Overhead * [($ $2.40) 92,500] 22-25

26 Ex (FIN MAN); Ex (MAN) In determining the volume variance, the productive capacity overemployed (2,000 hours) should be multiplied by the standard fixed factory overhead rate of $3.80 ($7.30 $3.50) to yield a favorable variance of $7,600. The variance analysis provided by the chief cost accountant incorrectly multiplied the 2,000 hours by the total factory overhead rate of $7.30 per hour and reported it as unfavorable. A correct determination of the factory overhead cost variances is as follows: Variable factory overhead controllable variance: Actual variable factory overhead cost incurred $458,000 Budgeted variable factory overhead for 132,000 hours (132,000 $3.50) 462,000 Variance favorable $ (4,000) Fixed factory overhead volume variance: Productive capacity at 100% 130,000 hrs. Standard for amount produced 132,000 hrs. Productive capacity overemployed (2,000) hrs. Standard fixed factory overhead rate $3.80 Variance favorable (7,600) Total factory overhead cost variance favorable $(11,600) 22-26

27 Ex (FIN MAN); Ex (MAN) (Concluded) Alternative Computation of Overhead Variances Factory Overhead Actual costs 952,000 Applied costs 963,600 ($458,000 + $494,000) [($ $3.80) 132,000] Balance (overapplied) 11,600 Actual Factory Overhead Budgeted Factory Overhead for Amount Produced Applied Factory Overhead $952,000 Variable cost (132,000 $3.50) $462,000 $963,600 Fixed cost 494,000 Total $956,000 $4,000 F $7,600 F Controllable Volume Variance Variance $11,600 F Total Factory Overhead 22-27

28 Ex (FIN MAN); Ex (MAN) TANNIN PRODUCTS INC. Factory Overhead Report Trim Department For the Month Ended July 31, 2014 Productive capacity for the month Actual productive capacity used for the month 25,000 hrs. 22,000 hrs. Budget (at actual Variances production) Actual Favorable Unfavorable Variable factory overhead costs: 1 Indirect factory labor $ 50,600 $ 49,700 $ (900) Power and light 13,200 13,000 $ (200) Indirect materials 22,000 24,000 $ 2,000 Total variable factory overhead cost $ 85,800 $ 86,700 Fixed factory overhead costs: Supervisory salaries $ 54,500 $ 54,500 Depreciation of plant and equipment 40,000 40,000 Insurance and property taxes 35,500 35,500 Total fixed factory overhead cost $130,000 $130,000 Total factory overhead cost $215,800 $216,700 Total controllable variances $(1,100) $ 2,000 Net controllable variance unfavorable $ 900 Volume variance unfavorable: Idle hours at the standard rate for fixed factory overhead 2 : (25,000 hrs. 22,000 hrs.) $ ,600 Total factory overhead cost variance unfavorable $16,500 1 The budgeted variable factory overhead costs are determined by multiplying 22,000 hours by the variable factory overhead cost rate for each variable cost category. These rates are determined by dividing each budgeted amount (estimated at the beginning of the month) by the planned (budgeted) volume of 20,000 hours. Thus, for example: $50,600 ($46,000 20,000 hrs.) 22,000 hrs. $13,200 ($12,000 20,000 hrs.) 22,000 hrs. $22,000 ($20,000 20,000 hrs.) 22,000 hrs. 2 Fixed factory overhead rate: $130,000 25,000 hrs. $5.20 per hr

29 Ex (FIN MAN); Ex (MAN) (Concluded) Alternative Computation of Overhead Variances Factory Overhead Actual costs 216,700 Applied costs 200,200 Balance (underapplied) 16,500 [22,000 ($3.90* + $5.20)] Actual Factory Overhead Budgeted Factory Overhead for Amount Produced Applied Factory Overhead $216,700 Variable cost (22,000 $3.90) $ 85,800 $200,200 Fixed cost 130,000 Total $215,800 $900 U $15,600 U Controllable Volume Variance Variance $16,500 U Total Factory Overhead *$78,000 20,000 hours budgeted at the beginning of the month 22-29

30 Ex (FIN MAN); Ex (MAN) a. Materials 1 118,825 Price Variance 2 8,575 Accounts Payable 3 127, ,450 $ ,450 $3.50 ($52.00 $48.50) 3 2,450 $52.00 b. Work in Process 1 97,000 Quantity Variance 2 4,850 Materials 3 92, units $ (2,000 units 1,900 units) $ ,900 $48.50 Ex (FIN MAN); Ex (MAN) Mar. 31 Work in Process 1 198,000 Time Variance 9,000 Rate Variance 4,600 Wages Payable 2 202, , hrs. $18.00 Direct labor time variance: (11,500 11,000) $18.00 $9,000 U Direct labor rate variance: ($17.60 $18.00) 11,500 $4,600 F 2 11,500 hours $17.60 per hour 22-30

31 Ex (FIN MAN); Ex (MAN) GRIGGS COMPANY Income Statement For the Month Ended December 31, 2014 Sales $868,000 Cost of goods sold at standard 550,000 Gross profit at standard $318,000 Favorable Unfavorable Less variances from standard cost: Direct materials price $ $ 1,680 Direct materials quantity 560 Direct labor rate 1,120 Direct labor time 490 Variable factory overhead controllable 210 Fixed factory overhead volume 3,080 3,360 Gross profit $314,640 Operating expenses: Selling expenses $125,000 Administrative expenses 100, ,800 Income from operations $ 88,840 Other expense: Interest expense 2,940 Income before income tax $ 85,

32 Ex (FIN MAN); Ex (MAN) a. and b. Input Measure Output Measure Explanation Average computer response X A measure of the speed of the time to customer clicks ordering process. If the speed is too slow, we may lose customers. Dollar amount of returned X An important measure of customer goods satisfaction with the final product that was ordered. Elapsed time between X An important overall measure of customer order and product process responsiveness. If the delivery company is too slow in providing product, we may lose customers. Maintenance dollars divided X A driver of the ordering system s by hardware investment reliability and downtime. The maintenance dollars should be divided by the amount of hardware in order to facilitate comparison across time. Number of customer X An extreme measure of customer complaints divided by the dissatisfaction with the ordering number of orders process. Number of misfilled orders X Incorrectly filled orders reduce the divided by the number of orders customer s satisfaction with the order process. A measure of output quality of the process. Number of orders per X This measure is related to the warehouse employee capacity of the warehouse relative to the demands placed upon it. This relationship will impact the delivery cycle time. Number of page faults or X The page errors will negatively errors due to software impact the customer s ordering programming errors experience. It s a measure of process output quality. Number of software fixes X Software bugs reduce the per week effectiveness of the order fulfillment system; thus, fixes are an input that will improve the performance of the order fulfillment system. Server (computer) downtime X A measure of computer system reliability. Training dollars per programmer X Trained programmers should enhance the software s responsiveness and reliability

33 Ex (FIN MAN); Ex (MAN) a. Possible Input Measures Registration staffing per student Technology investment per period for registration process Training hours per registration personnel Amount of faculty staffing Amount of technology capacity (size of computer, number of input lines) for registration process Maintenance dollars spent on the registration system Employee satisfaction score Number of hours per day registration is available Possible Output Measures Cycle time for a student to register for classes Number of times a course is unavailable Number of separate registration events or steps (log-ons or line waits) per student Number of times a replacement course was used by a student Number of registration errors Student satisfaction score with the registration process Number of student complaints about registration process Number of registration rework steps per student Cost of registration per student Number of personnel overtime hours during registration Labor time variance for registration process (standard hours less actual hours at standard labor rate) Number of computer registration failures b. Alpha University is interested in not only the efficiency of the process but also the quality of the process. This means that the process must meet multiple objectives. The college wants this process to meet the needs of students, which means it should not pose a burden to students. Students should be able to register for classes quickly, get the courses they want, and avoid registration errors, hassles, and problems. Thus, the nonfinancial measures are used to balance the need for a cost-efficient process with one that will meet the needs of the student

34 PROBLEMS Prob. 22 1A (FIN MAN); Prob. 7 1A (MAN) a. Standard Materials and Labor Cost per Faucet Direct materials ($ lbs.) $57.20 Direct labor [$16.80 (15 min. 60 min.)] 4.20 $61.40 b. Price variance: Price Variance Price Variance (Actual Price Standard Price) Actual Quantity ($21.85 per lb. $22.00 per lb.) 31,750 lbs. Price Variance Quantity variance: $4, Favorable Quantity Variance Quantity Variance Quantity Variance (Actual Quantity Standard Quantity) Standard Price (31,750 lbs. 31,200 lbs.*) $22.00 per lb. $12,100 Unfavorable * 12,000 units 2.6 lbs. Total direct materials cost variance: Price Variance + Quantity Variance $4, $12, $7, Unfavorable 22-34

35 Prob. 22 1A (FIN MAN); Prob. 7 1A (MAN) (Concluded) c. Rate variance: Rate Variance Rate Variance (Actual Rate per Hour Standard Rate per Hour) Actual Hours ($17.00 $16.80) 3,200 hrs.* Rate Variance $640 Unfavorable * 80 employees 40 hrs. Time variance: Time Variance Time Variance Time Variance (Actual Hours Standard Hours) Standard Rate per Hour (3,200 hrs.* 3,000 hrs.**) $16.80 per hour $3,360 Unfavorable * 80 employees 40 hrs. ** 12,000 units (15 min. 60 min.) Total direct labor cost variance: Rate Variance + Time Variance $640 + $3,360 $4,000 Unfavorable 22-35

36 Prob. 22 2A (FIN MAN); Prob. 7 2A (MAN) 1. a. Variance Price variance: Cocoa Sugar Total Actual price $ 7.33 $ 1.35 Standard price Variance $ 0.08 $ (0.05) Actual quantity 140, ,000 Direct materials price variance $ 11,224 U $ (9,400) F $1,824 U Quantity variance: Actual quantity used 140, ,000 Standard quantity 1 140, ,000 Variance 300 (2,000) Standard price $7.25 $1.40 Direct materials quantity variance $ 2,175 U $ (2,800) F (625) F Total direct materials cost variance $1,199 U Alternatively, total direct materials cost variance: Actual cost 2 $1,028,399 $253,800 Standard cost 3 1,015, ,000 Total direct materials cost variance $ 13,399 U $ (12,200) F $1,199 U 1 140,000 (12 lbs. 5,000 actual production of dark chocolate) + (8 lbs. 10,000 actual production of light chocolate) 190,000 (10 lbs. 5,000 actual production of dark chocolate) + (14 lbs. 10,000 actual production of light chocolate) 2 $1,028,399 $ ,300 lbs. $253,800 $ ,000 lbs. 3 $1,015,000 $ ,000 lbs. $266,000 $ ,000 lbs

37 Prob. 22 2A (FIN MAN); Prob. 7 2A (MAN) (Concluded) 1. b. Dark Light Variance Rate variance: Actual rate Chocolate $ Chocolate $ Total Standard rate Variance $ (0.25) $ 0.30 Actual time 2,360 6,120 Direct labor rate variance $ (590) F $ 1,836 U $1,246 U Time variance: Actual time 2,360 6,120 Standard time 1 2,500 6,000 Variance (140) 120 Standard rate $ $ Direct labor time variance $ (2,170) F $ 1,860 U (310) F Total direct labor cost variance $ 936 U Alternatively, total direct labor cost variance: Actual cost 2 $35,990 $96,696 Standard cost 3 38,750 93,000 Total direct labor cost variance $ (2,760) F $ 3,696 U $ 936 U 1 2, hr. 5,000 actual production of dark chocolate 6, hr. 10,000 actual production of dark chocolate 2 $35,990 2,360 hrs. $15.25 $96,696 6,120 hrs. $ $38,750 2,500 hrs. $15.50 $93,000 6,000 hrs. $ The variance analyses should be based on the standard amounts at actual volumes. The budget must flex with the volume changes. If the actual volume is different from the planned volume, as it was in this case, then the budget used for performance evaluation should reflect the amount of direct materials and direct labor that will be required for the actual production. In this way, spending from volume changes can be separated from efficiency and price variances

38 Prob. 22 3A (FIN MAN); Prob. 7 3A (MAN) a. Price variance: Price Variance Price Variance (Actual Price Standard Price) Actual Quantity ($12.50 per lb. $12.00 per lb.) 3,500 lbs. Price Variance Quantity variance: Quantity Variance $1,750 Unfavorable (Actual Quantity Standard Quantity) Standard Price Quantity Variance Quantity Variance (3,500 lbs. 3,700 lbs.) $12.00 per lb. $2,400 Favorable Total direct materials cost variance: Price Variance + Quantity Variance $1,750 $2,400 $650 Favorable 22-38

39 Prob. 22 3A (FIN MAN); Prob. 7 3A (MAN) (Continued) b. Rate variance: Rate Variance (Actual Rate per Hour Standard Rate per Hour) Actual Hours Rate Variance ($20.40 $20.00) 4,200 hrs. Rate Variance $1,680 Unfavorable Time variance: Time Variance Time Variance Time Variance (Actual Hours Standard Hours) Standard Rate per Hour (4,200 hrs. 4,300 hrs.) $20.00 per hour $2,000 Favorable Total direct labor cost variance: Time Variance + Rate Variance $1,680 $2,000 $320 Favorable 22-39

40 Prob. 22 3A (FIN MAN); Prob. 7 3A (MAN) (Continued) c. Factory Overhead Variable factory overhead controllable variance: Actual variable factory overhead cost incurred $16,800 Budgeted variable factory overhead for 4,300 hrs.* 17,200 ** Variance favorable $(400) Fixed factory overhead volume variance: Normal capacity at 100% 4,500 hrs. Standard for amount produced 4,300 Productive capacity not used 200 hrs. Standard fixed factory overhead cost rate $ 3.00 Variance unfavorable 600 Total factory overhead cost variance unfavorable $ 200 * 10,750 units 0.4 hour per unit ** 4,300 hrs. $

41 Prob. 22 3A (FIN MAN); Prob. 7 3A (MAN) (Concluded) Alternative Computation of Overhead Variances Factory Overhead Actual costs 30,300 Applied costs 30,100 ($16,800 + $13,500) [4,300 ($ $3.00)] Balance (underapplied) 200 Actual Factory Overhead Budgeted Factory Overhead for Amount Produced Applied Factory Overhead $30,300 Variable cost (4,300 $4.00) $17,200 $30,100 Fixed cost 13,500 Total $30,700 $400 F $600 U Controllable Volume Variance Variance $200 U Total Factory Overhead 22-41

42 Prob. 22 4A (FIN MAN); Prob. 7 4A (MAN) TIGER EQUIPMENT INC. Factory Overhead Report Welding Department For the Month Ended May 31, 2014 Normal capacity for the month Actual production for the month 8,400 hrs. 8,860 hrs. Variable costs: 1 Variances Budget Actual Favorable Unfavorable Indirect factory wages $ 31,896 $ 32,400 $ 504 Power and light 21,264 21,000 $(264) Indirect materials 17,720 18, Total variable cost $ 70,880 $ 71,650 Fixed costs: Supervisory salaries $ 20,000 $ 20,000 Depreciation of plant and equipment 36,200 36,200 Insurance and property taxes 15,200 15,200 Total fixed cost $ 71,400 $ 71,400 Total factory overhead cost $142,280 $143,050 Total controllable variances $(264) $ 1,034 Net controllable variance unfavorable $ 770 Volume variance favorable: Excess hours used over normal at the standard rate for fixed factory overhead 2 : (8,400 hrs. 8,860 hrs.) $8.50 (3,910) Total factory overhead cost variance favorable $(3,140) 1 The budgeted variable costs are determined by multiplying the 8,860 actual hours by the variable overhead rate (the May budget divided by 8,400 hours for each variable overhead cost). Thus, Indirect factory wages, $31,896 8,860 hrs. ($30,240 8,400 hrs.) Power and light, $21,264 8,860 hrs. ($20,160 8,400 hrs.) Indirect materials, $17,720 8,860 hrs. ($16,800 8,400 hrs.) 2 Fixed factory overhead rate: $71,400 8,400 hrs. $8.50 per hr

43 Prob. 22 4A (FIN MAN); Prob. 7 4A (MAN) (Concluded) Alternative Computation of Overhead Variances Factory Overhead Actual costs 143,050 Applied costs* 146,190 [8,860 ($ $8.50)] Balance (overapplied) 3,140 Actual Factory Overhead Budgeted Factory Overhead for Amount Produced Applied Factory Overhead $143,050 Variable cost (8,860 $8.00) $ 70,880 $146,190 Fixed cost 71,400 Total $142,280 $770 U $3,910 F Controllable Volume Variance Variance $3,140 F Total Factory Overhead * $67,200 8,400 hrs. $8.00 $71,400 8,400 hrs. $

44 Prob. 22 5A (FIN MAN); Prob. 7 5A (MAN) 1. Actual hours provided (5 40 hrs.) 200 Standard hours required for the original plan* 186 Labor time difference 14 Standard labor rate $ 32 Direct labor time variance unfavorable $ 448 4,650 lines * 186 hrs. 25 lines per hr. 2. Actual hours provided (5 40 hrs.) 200 Standard hours required for the actual results* 226 Labor time difference (26) Standard labor rate $ 32 Direct labor time variance favorable $ (832) 5,650 lines * 226 hrs. 25 lines per hr. 3. Actual labor rate $ 40 Standard labor rate 32 Difference $ 8 Actual hours provided (5 40 hrs.) 200 Direct labor rate variance unfavorable $1,600 The labor cost variance is $768 unfavorable [ $832 favorable time variance + $1,600 unfavorable rate variance]. 4. The labor rate and time variances fail to consider the number of errors in the code from programmer fatigue. A program that has many errors will require significant time for debugging at a later date. In addition, hidden errors can cause possible field failures with customers. Thus, managers should consider not only the efficiency of doing the work, but also the quality of the work. 5. Actual hours provided (6 40 hrs.) 240 Standard hours required for the actual results* 226 Labor time difference 14 Standard labor rate $32 Direct labor time variance unfavorable $448 * From part (2) above 6. Hiring an extra employee is less costly than the bonus by $320. The direct labor cost variance for paying the bonus was $768 unfavorable, which is the sum of the rate variance and the time variance ( $832 F + $1,600 U) shown in parts (2) and (3) above. The cost variance that would result from hiring another employee would have been $448 unfavorable, shown in part (5) above. Thus, the net benefit for hiring another employee over paying the bonus is $320 ($768 U $448 U)

45 Prob. 22 1B (FIN MAN); Prob. 7 1B (MAN) a. Standard Materials and Labor Cost per Unit Direct materials ($ yds.) $25.00 Direct labor [$12.00 (12 min. 60 min.)] 2.40 $27.40 b. Price variance: Price Variance Price Variance (Actual Price Standard Price) Actual Quantity ($5.10 per yd. $5.00 per yd.) 26,200 yds. Price Variance Quantity variance: Quantity Variance Quantity Variance $2,620 Unfavorable (Actual Quantity Standard Quantity) Standard Price (26,200 yds. 26,100 yds.*) $5.00 per yd. Quantity Variance $500 Unfavorable * 5,220 units 5.0 yds. Total direct materials cost variance: Price Variance + Quantity Variance $2,620 + $500 $3,120 Unfavorable 22-45

46 Prob. 22 1B (FIN MAN); Prob. 7 1B (MAN) (Concluded) c. Rate variance: Rate Variance (Actual Rate per Hour Standard Rate per Hour) Actual Hours Rate Variance ($11.80 $12.00) 1,000 hrs.* Rate Variance $200 Favorable * 25 employees 40 hrs. Time variance: Time Variance Time Variance Time Variance (Actual Hours Standard Hours) Standard Rate per Hour (1,000 hrs. 1,044 hrs.*) $12.00 per hour $528 Favorable * (12 min. 60 min.) 5,220 Total direct labor cost variance: Rate Variance + Time Variance $200 $528 $728 Favorable 22-46

47 Prob. 22 2B (FIN MAN); Prob. 7 2B (MAN) 1. a. Variance Price variance: Filler Liner Total Actual price $ 1.90 $ 8.20 Standard price Variance $ (0.10) $ 0.20 Actual quantity 48,000 85,100 Direct materials price variance $ (4,800) F $ 17,020 U $12,220 U Quantity variance: Actual quantity used 48,000 85,100 Standard quantity used 1 47,760 85,320 Variance 240 (220) Standard price $2.00 $8.00 Direct materials quantity variance $ 480 U $ (1,760) F (1,280) F Total direct materials cost variance $10,940 U Alternatively total direct materials cost variance: Actual cost 2 $91,200 $697,820 Standard cost 3 95, ,560 Total direct materials cost variance $ (4,320) F $ 15,260 U $10,940 U 1 47,760 (4.0 lbs. 4,400 actual production of women's coats) + (5.2 lbs. 5,800 actual production of of men s coats) 85,320 (7.0 yds. 4,400 actual production of women's coats) + (9.4 yds. 5,800 actual production of men s coats) 2 $91,200 $ ,000 lbs. $697,820 $ ,100 yds. 3 $95,520 $ ,760 lbs. $682,560 $ ,320 yds

48 Prob. 22 2B (FIN MAN); Prob. 7 2B (MAN) (Concluded) 1. b. Women's Men's Variance Rate variance: Actual rate Coats $ Coats $ Total Standard rate $ $ Variance $ 0.10 $ 0.30 Actual time 1,825 2,800 Direct labor rate variance $ U $ 840 U $1, U Time variance: Actual time 1,825 2,800 Standard time 1 1,760 2,900 Variance 65 (100) Standard rate $ $ Direct labor time variance $ 910 U $ (1,300) F (390) F Total direct labor cost variance $ U Alternatively, total direct labor cost variance: Actual cost 2 $25, $37,240 Standard cost 3 24,640 37,700 Total direct labor cost variance $ 1, U $ (460) F $ U 1 1, hr. 4,400 actual production of women s coats 2, hr. 5,800 actual production of men s coats 2 $25, ,825 hrs. $14.10 $37, ,800 hrs. $ $24, ,760 hrs. $14.00 $37, ,900 hrs. $ The variance analyses should be based on the standard amounts at actual volumes. The budget must flex with the volume changes. If the actual volume is different from the planned volume, as it was in this case, then the budget used for performance evaluation should reflect the change in direct materials and direct labor that will be required for the actual production. In this way, spending from volume changes can be isolated from efficiency and price variances

49 Prob. 22 3B (FIN MAN); Prob. 7 3B (MAN) a. Price variance: Price Variance Price Variance (Actual Price Standard Price) Actual Quantity ($6.50 per lb. $6.40 per lb.) 101,000 lbs. Price Variance Quantity variance: $10,100 Unfavorable Quantity Variance (Actual Quantity Standard Quantity) Standard Price Quantity Variance Quantity Variance (101,000 lbs. 100,000 lbs.) $6.40 per lb. $6,400 Unfavorable Total direct materials cost variance: Price Variance + Quantity Variance $10,100 Unfavorable + $6,400 Unfavorable $16,500 Unfavorable 22-49

50 Prob. 22 3B (FIN MAN); Prob. 7 3B (MAN) (Continued) b. Rate variance: Rate Variance (Actual Rate per Hour Standard Rate per Hour) Actual Hours Rate Variance ($15.40 $15.75) 2,000 hrs. Rate Variance $700 Favorable Time variance: Time Variance Time Variance Time Variance (Actual Hours Standard Hours) Standard Rate per Hour (2,000 hrs. 2,080 hrs.) $15.75 per hour $1,260 Favorable Total direct labor cost variance: Rate Variance + Time Variance $700 $1,260 $1,960 Favorable 22-50

51 Prob. 22 3B (FIN MAN); Prob. 7 3B (MAN) (Continued) c. Factory Overhead Variable factory overhead controllable variance: Actual variable factory overhead cost incurred $8,200 Budgeted variable factory overhead for 2,080 hrs.* 8,320** Variance favorable $(120) Fixed factory overhead volume variance: Normal capacity at 100% 2,000 hrs. Standard for amount produced 2,080 Productive capacity not used (80) hrs. Standard fixed factory overhead cost rate $ 6.00 Variance favorable (480) Total factory overhead cost variance favorable $(600) * 4,160 units 0.5 hr. ** 2,080 hrs. $

52 Prob. 22 3B (FIN MAN); Prob. 7 3B (MAN) (Concluded) Alternative Computation of Overhead Variances Factory Overhead Actual costs 20,200 Applied costs 20,800 ($8,200 + $12,000) [2,080 ($ $6.00)] Balance (overapplied) (600) Actual Factory Overhead Budgeted Factory Overhead for Amount Produced Applied Factory Overhead $20,200 Variable cost (2,080 $4.00) $ 8,320 $20,800 Fixed cost 12,000 Total $20,320 $120 F $480 F Controllable Volume Variance Variance $600 F Total Factory Overhead 22-52

53 Prob. 22 4B (FIN MAN); Prob. 7 4B (MAN) FEELING BETTER MEDICAL INC. Factory Overhead Report Assembly Department For the Month Ended October 31, 2014 Normal capacity for the month Actual production for the month 30,000 hrs. 28,500 hrs. Variable costs: 1 Variances Budget Actual Favorable Unfavorable Indirect factory wages $235,125 $234,000 $(1,125) Power and light 179, ,500 (1,050) Indirect materials 49,875 50,600 $ 725 Total variable cost $464,550 $463,100 Fixed costs: Supervisory salaries $126,000 $126,000 Depreciation of plant and equipment 70,000 70,000 Insurance and property taxes 44,000 44,000 Total fixed cost $240,000 $240,000 Total factory overhead cost $704,550 $703,100 Total controllable variances $(2,175) $ 725 Net controllable variance favorable $ (1,450) Volume variance unfavorable: Idle hours at the standard rate for fixed factory overhead 2 (30,000 hrs. 28,500 hrs.) $ ,000 Total factory overhead cost variance unfavorable $10,550 1 The budgeted variable costs are determined by multiplying 28,500 actual hours by the variable overhead rate (the October budget divided by 30,000 hours for each variable overhead cost). Thus, Indirect factory wages, $235,125 28,500 hrs. ($247,500 30,000 hrs.) Power and light, $179,550 28,500 hrs. ($189,000 30,000 hrs.) Indirect materials, $49,875 28,500 hrs. ($52,500 30,000 hrs.) 2 Fixed factory overhead rate: $240,000 30,000 hrs. $8.00 per hr

54 Prob. 22 4B (FIN MAN); Prob. 7 4B (MAN) (Concluded) Alternative Computation of Overhead Variances Factory Overhead Actual costs 703,100 Applied costs* 692,550 Balance (underapplied) 10,550 [28,500 ($ $8.00)] Actual Factory Overhead Budgeted Factory Overhead for Amount Produced Applied Factory Overhead $703,100 Variable cost (28,500 $16.30) $464,550 $692,550 Fixed cost 240,000 Total $704,550 $1,450 F $12,000 U Controllable Volume Variance Variance $10,550 U Total Factory Overhead * $489,000 30,000 hrs. $16.30 $240,000 30,000 hrs. $

55 Prob. 22 5B (FIN MAN); Prob. 7 5B (MAN) 1. Actual hours provided (3 40 hrs.) 120 Standard hours required for the original plan* 117 Labor time difference 3 Standard labor rate $ 23 Direct labor time variance unfavorable $ 69 81,900 lines * 117 hrs. 700 lines per hr. 2. Actual hours provided (3 40 hrs.) 120 Standard hours required for the actual results* 127 Labor time difference (7) Standard labor rate $ 23 Direct labor time variance favorable $(161) 88,900 lines * 127 hrs. 700 lines per hr. 3. Actual labor rate $ 30 Standard labor rate 23 Difference $ 7 Actual hours provided (3 40 hrs.) 120 Direct labor rate variance unfavorable $ 840 The labor cost variance is $679 unfavorable [ $161 favorable time variance + $840 unfavorable rate variance]. 4. Actual hours provided (4 40 hrs.) 160 Standard hours required for the actual results 127 Labor time difference 33 Standard labor rate $ 23 Direct labor time variance unfavorable $ The bonus is the better approach by $80. The direct labor cost variance for paying the bonus was $679 unfavorable which is the sum of the time variance and rate variance from parts (2) and (3) above ( $161 F + $840 U). The cost variance that would result from hiring another employee would have been $759 unfavorable from part (4) above. Thus, the net benefit for paying the bonus over hiring another employee is $80 ($679 U $759 U). 6. The labor rate and time variances fail to consider the number of errors in the report from typist fatigue. A report that has many errors will require significant time for correction at a later date. In addition, report errors can cause doctors to draw incorrect conclusions from the test analyses. Thus, managers should consider not only the efficiency of doing the work but also the quality of the work

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