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

(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

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

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) [($33.25 14,400 gal.) ($34.00 14,000 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) [($30.50 17,700 hrs.) ($30.00 17,500 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) [($16.50 2,800 hrs.) ($17.00 3,000 hrs.)] $46,200 $51,000 22-3

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

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. ($3.50 + $1.80)] 92,750 Cost of goods sold at standard $1,093,750 22-5

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. ($1.40 + $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

EXERCISES Ex. 22 1 (FIN MAN); Ex. 7 1 (MAN) Ingredient Cocoa Sugar Milk Total cost Quantity Price Total 650 lbs. $0.90 per lb. $ 585 200 lbs. $1.50 per lb. 300 150 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. 22 2 (FIN MAN); Ex. 7 2 (MAN) a. Direct labor $18.00 2.0 hrs. $ 36.00 Direct materials $15.00 20 bd. ft. 300.00 Variable factory overhead $2.75 2.0 hrs. 5.50 Fixed factory overhead $1.25 2.0 hrs. 2.50 Total cost per unit $344.00 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

Ex. 22 3 (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 (600,000 100) $10,800 $8.25 (600,000 100) $49,500 $0.50 (600,000 100) $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 3,050 410 Total manufacturing cost $61,800 $64,355 $(2,555) $1.80 (610,000 100) $10,980 $8.25 (610,000 100) $50,325 $0.50 (610,000 100) $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

Ex. 22 4 (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

Ex. 22 5 (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 * $2,925 450 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

Ex. 22 6 (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 ($1,000 100 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

Ex. 22 7 (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. 3.00 per gal. 660 Corn syrup 20 gal. 12.00 per gal. 240 Salt 80 lbs. 3.00 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. 3.00 per gal. 30 U 18 gal. 20 gal. (2) gal. 12.00 per gal. 24 F 75 lbs. 80 lbs. (5) lbs. 3.00 per lb. 15 F $89 U 22-12

Ex. 22 8 (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. 22-13

Ex. 22 9 (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 $ 16.00 Standard direct labor cost $12,800 22-14

Ex. 22 10 (FIN MAN); Ex. 7 10 (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

Ex. 22 10 (FIN MAN); Ex. 7 10 (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. 22-16

Ex. 22 11 (FIN MAN); Ex. 7 11 (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 140 350 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) 157.50 hours] $15 per hour $37.50 or $2,400 [from (a)] $2,362.50 2 $37.50 1 Standard direct labor rate: $15 60 min. $0.25 per min. 2 Standard labor cost at actual volume: Productive time (9,450 60) $15 $2,362.50 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. 22-17

Ex. 22 12 (FIN MAN); Ex. 7 12 (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 $ 525 22-18

Ex. 22 13 (FIN MAN); Ex. 7 13 (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 $14.00 25,200 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.) $1.25 750 U $34,500 $1.25 27,600 lbs. $33,750 $1.25 27,000 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 $14.00 1,750 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

Ex. 22 14 (FIN MAN); Ex. 7 14 (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 57,600 3 64,000 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 $443,600 1 18,000 ($180,000 20,000) 2 18,000 ($12,000 20,000) 3 18,000 ($64,000 20,000) 22-20

Ex. 22 15 (FIN MAN); Ex. 7 15 (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* $ 10.50 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. 22-21

Ex. 22 16 (FIN MAN); Ex. 7 16 (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 $2,000 22-22

Ex. 22 16 (FIN MAN); Ex. 7 16 (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

Ex. 22 17 (FIN MAN); Ex. 7 17 (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 $ 5,000 3 1 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 [($6.00 + $2.40) 92,500 hrs.] $5,000 22-24

Ex. 22 17 (FIN MAN); Ex. 7 17 (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 * [($6.00 + $2.40) 92,500] 22-25

Ex. 22 18 (FIN MAN); Ex. 7 18 (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

Ex. 22 18 (FIN MAN); Ex. 7 18 (MAN) (Concluded) Alternative Computation of Overhead Variances Factory Overhead Actual costs 952,000 Applied costs 963,600 ($458,000 + $494,000) [($3.50 + $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

Ex. 22 19 (FIN MAN); Ex. 7 19 (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.) $5.20 15,600 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. 22-28

Ex. 22 19 (FIN MAN); Ex. 7 19 (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

Ex. 22 20 (FIN MAN); Ex. 7 20 (MAN) a. Materials 1 118,825 Price Variance 2 8,575 Accounts Payable 3 127,400 1 2,450 $48.50 2 2,450 $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 92,150 1 200 10 units $48.50 2 (2,000 units 1,900 units) $48.50 3 1,900 $48.50 Ex. 22 21 (FIN MAN); Ex. 7 21 (MAN) Mar. 31 Work in Process 1 198,000 Time Variance 9,000 Rate Variance 4,600 Wages Payable 2 202,400 1 5,000 2.20 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

Ex. 22 22 (FIN MAN); Ex. 7 22 (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 100,800 225,800 Income from operations $ 88,840 Other expense: Interest expense 2,940 Income before income tax $ 85,900 22-31

Ex. 22 23 (FIN MAN); Ex. 7 23 (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. 22-32

Ex. 22 24 (FIN MAN); Ex. 7 24 (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. 22-33

PROBLEMS Prob. 22 1A (FIN MAN); Prob. 7 1A (MAN) a. Standard Materials and Labor Cost per Faucet Direct materials ($22.00 2.6 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: $4,762.50 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 $4,762.50 + $12,100.00 $7,337.50 Unfavorable 22-34

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

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 7.25 1.40 Variance $ 0.08 $ (0.05) Actual quantity 140,300 188,000 Direct materials price variance $ 11,224 U $ (9,400) F $1,824 U Quantity variance: Actual quantity used 140,300 188,000 Standard quantity 1 140,000 190,000 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 1,015,000 266,000 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 $7.33 140,300 lbs. $253,800 $1.35 188,000 lbs. 3 $1,015,000 $7.25 140,000 lbs. $266,000 $1.40 190,000 lbs. 22-36

Prob. 22 2A (FIN MAN); Prob. 7 2A (MAN) (Concluded) 1. b. Dark Light Variance Rate variance: Actual rate Chocolate $ 15.25 Chocolate $ 15.80 Total Standard rate 15.50 15.50 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 $ 15.50 $ 15.50 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 2,500 0.50 hr. 5,000 actual production of dark chocolate 6,000 0.60 hr. 10,000 actual production of dark chocolate 2 $35,990 2,360 hrs. $15.25 $96,696 6,120 hrs. $15.80 3 $38,750 2,500 hrs. $15.50 $93,000 6,000 hrs. $15.50 2. 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. 22-37

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

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

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. $4.00 22-40

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 ($4.00 + $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

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 18,250 530 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. 22-42

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 ($8.00 + $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. $8.50 22-43

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). 22-44

Prob. 22 1B (FIN MAN); Prob. 7 1B (MAN) a. Standard Materials and Labor Cost per Unit Direct materials ($5.00 5.0 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

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

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 2.00 8.00 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 95,520 682,560 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 $1.90 48,000 lbs. $697,820 $8.20 85,100 yds. 3 $95,520 $2.00 47,760 lbs. $682,560 $8.00 85,320 yds. 22-47

Prob. 22 2B (FIN MAN); Prob. 7 2B (MAN) (Concluded) 1. b. Women's Men's Variance Rate variance: Actual rate Coats $ 14.10 Coats $ 13.30 Total Standard rate $ 14.00 $ 13.00 Variance $ 0.10 $ 0.30 Actual time 1,825 2,800 Direct labor rate variance $182.50 U $ 840 U $1,022.50 U Time variance: Actual time 1,825 2,800 Standard time 1 1,760 2,900 Variance 65 (100) Standard rate $ 14.00 $ 13.00 Direct labor time variance $ 910 U $ (1,300) F (390) F Total direct labor cost variance $ 632.50 U Alternatively, total direct labor cost variance: Actual cost 2 $25,732.50 $37,240 Standard cost 3 24,640 37,700 Total direct labor cost variance $ 1,092.50 U $ (460) F $ 632.50 U 1 1,760 0.40 hr. 4,400 actual production of women s coats 2,900 0.50 hr. 5,800 actual production of men s coats 2 $25,732.50 1,825 hrs. $14.10 $37,240.00 2,800 hrs. $13.30 3 $24,640.00 1,760 hrs. $14.00 $37,700.00 2,900 hrs. $13.00 2. 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. 22-48

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

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

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. $4.00 22-51

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 ($4.00 + $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

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 179,550 178,500 (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.) $8.00 12,000 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. 22-53

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 ($16.30 + $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. $8.00 22-54

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 $ 759 5. 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. 22-55

COMPREHENSIVE PROBLEM 5 Part A 1. Variable Cost per Unit Difference in Total Cost Difference in Production $740 $600 Variable Cost per Unit $0.20 per case 1,200 cases 500 cases Total Cost (Variable Cost per Unit Units of Production) + Fixed Cost At the high point: At the low point: $740 ($0.20 1,200 units) + Fixed Cost $600 ($0.20 500 units) + Fixed Cost Fixed Cost $500 Fixed Cost $500 2. Selling price $100.00 Less variable costs per case: Direct materials $17.00 Direct labor 7.20 Utilities [see part (1)] 0.20 Selling expenses 20.00 Total variable costs per case 44.40 Contribution margin per case $ 55.60 3. Total fixed costs: Utilities [see part (1)] $ 500 Facility lease 14,000 Equipment depreciation 4,300 Supplies 660 $19,460 4. Break-Even Sales (units) Fixed Costs Unit Contribution Margin Break-Even Sales (units) $19,460 $55.60 350 cases 22-56

COMPREHENSIVE PROBLEM 5 (Continued) Part B 5. GENUINE SPICE INC. Production Budget For the Month Ended August 31, 2014 Cases Expected cases to be sold 1,500 Plus desired ending inventory 175 Total 1,675 Less estimated beginning inventory 300 Total units to be produced 1,375 6. GENUINE SPICE INC. Purchases Budget For the Month Ended August 31, 2014 Cream Natural Base Oils Bottles Total (ozs.) (ozs.) (bottles) Units required for production 137,500 41,250 16,500 Plus desired ending inventory 1,000 360 240 Less estimated beginning inventory (250) (290) (600) Direct materials to be purchased 138,250 41,320 16,140 Unit price $0.02 $0.30 $0.50 Total direct materials to be purchased $2,765 $12,396 $8,070 $23,231 1 2 3 1 Cream base: 1,375 cases 100 ozs. 137,500 ozs. 2 Natural oils: 1,375 cases 30 ozs. 41,250 ozs. 3 Bottles: 1,375 cases 12 bottles 16,500 bottles 7. GENUINE SPICE INC. Budget For the Month Ended August 31, 2014 Mixing Filling Total Hours required for production of: Hand and body lotion 1 458 2 115 Hourly rate $18.00 $14.40 Total direct labor cost $8,244 $1,656 $9,900 1 Mixing: (1,375 cases 20.00 min.) 60 min. 458 hrs. 2 Filling: (1,375 cases 5.00 min.) 60 min. 115 hrs. 22-57

COMPREHENSIVE PROBLEM 5 (Continued) 8. GENUINE SPICE INC. Factory Overhead Budget For the Month Ended August 31, 2014 Fixed 1 Variable 2 Total Factory overhead: Utilities $ 500 $275 $ 775 Facility lease 14,000 14,000 Equipment depreciation 4,300 4,300 Supplies 660 660 Total $19,460 $275 $19,735 1 Fixed costs [from part (3)] 2 Variable utility cost: $0.20 1,375 cases $275 9. GENUINE SPICE INC. Budgeted Income Statement For the Month Ended August 31, 2014 Sales 1 $150,000 Finished goods inventory, August 1 $ 12,000 Direct materials inventory, August 1 2 $ 392 Direct materials purchases [from part (6)] 23,231 Less direct materials inventory, August 31 3 248 Cost of direct materials for production $23,375 Direct labor [from part (7)] 9,900 Factory overhead [from part (8)] 19,735 53,010 Less finished goods inventory, August 31 7,000 Cost of goods sold 58,010 Gross profit $ 91,990 Selling expenses 4 30,000 Income before income tax $ 61,990 1 Sales: 1,500 cases $100 per case $150,000 2 Direct materials inventory, August 1: (250 $0.020) + (290 $0.300) + (600 $0.500) $392 3 Direct materials inventory, August 31: (1,000 $0.020) + (360 $0.300) + (240 $0.500) $248 4 Selling expenses: 1,500 cases $20 per case $30,000 22-58

COMPREHENSIVE PROBLEM 5 (Continued) Part C 10. Price Variance: Actual price $ 0.016 $ 0.32 $ 0.42 Standard price 0.020 0.30 0.50 Difference $ (0.004) $ 0.02 $ (0.08) Actual quantity (units)* 153,000 ozs. 46,500 ozs. 18,750 btls. Direct materials price variance $ (612) F $ 930 U $ (1,500) F * Actual quantity: Cream base: 1,500 cases 102 ozs. 153,000 ozs. Natural oils: 1,500 cases 31 ozs. 46,500 ozs. Bottles: 1,500 cases 12.5 bottles 18,750 bottles Cream Base Natural The fluctuation in market prices caused the direct material price variances. Prices increased for natural oils compared to standard and declined for cream base and bottles compared to standard. Oils Bottles 22-59

COMPREHENSIVE PROBLEM 5 (Continued) Quantity Variance: Actual quantity 1 153,000 ozs. 46,500 ozs. 18,750 btls. Standard quantity 2 150,000 45,000 18,000 Difference 3,000 ozs. 1,500 ozs. 750 btls. Standard price $ 0.020 $ 0.300 $ 0.500 Direct materials quantity variance $ 60 U $ 450 U $ 375 U Note: All the direct materials quantity variances were unfavorable, indicating some material losses, scrap, and quality rejections. All the quantity variances were unfavorable because the standards were set at ideal quantity amounts. Thus, only unfavorable variances were possible. The standard quantities were ideal standards for 12 8-ounce bottles per case (96 ozs. total), as shown below. 1 Actual quantity: Cream base: 1,500 cases 102 ozs. 153,000 ozs. Natural oils: 1,500 cases 31 ozs. 46,500 ozs. Bottles: 1,500 cases 12.5 bottles 18,750 bottles 2 Standard quantity: Cream base: 1,500 cases 100 ozs. 150,000 ozs. Natural oils: 1,500 cases 30 ozs. 45,000 ozs. Bottles: 1,500 cases 12 bottles 18,000 bottles Cream Base Natural Oils Bottles 22-60

COMPREHENSIVE PROBLEM 5 (Continued) 11. Rate Variance: Actual rate $18.20 $ 14.00 Standard rate 18.00 14.40 Difference $ 0.20 $ (0.40) Actual time (hours) 1 488 140.00 Direct labor rate variance $97.60 U $ (56.00) F The Mixing Department has an unfavorable direct labor rate variance from using a higher classification of labor. The higher labor classification cost an additional $0.20 per hour. The Filling Department has a favorable direct labor rate variance due to using a lower classification of labor. The lower labor classification saved $0.40 per hour. Time Variance: Mixing Department Filling Department Actual time (hours) 1 488 140 Standard time (hours) 2 500 125 Difference (12) 15 Standard rate $ 18 $14.40 Direct labor time variance $(216) F $216 U 1 Actual time: Mixing: (1,500 units 19.50 min.) 60 min. 488 hrs. Filling: (1,500 units 5.60 min.) 60 min. 140 hrs. 2 Standard time: Mixing: (1,500 units 20.00 min.) 60 min. 500 hrs. Filling: (1,500 units 5.00 min.) 60 min. 125 hrs. Mixing Department Filling Department The Mixing Department is producing at a labor time that is slightly better than standard, thus producing a favorable direct labor time variance. This may be the result of using a higher grade of labor. The net impact for the Mixing Department is favorable by $118.40 ($97.60 $216). The Filling Department had an unfavorable direct labor time variance. This may be the result of using a lower grade of labor in the department. The net impact for the department is unfavorable by $160.00 ($216.00 $56.00). Thus, the savings in the labor rate from using a lower grade classification of labor was insufficient to offset the loss of efficiency from such labor. 22-61

COMPREHENSIVE PROBLEM 5 (Continued) 12. Factory Overhead Controllable Variance: Actual variable overhead $305 Variable overhead at standard cost* 300 Factory overhead controllable variance $ 5 U * Variance overhead (utility cost) at standard cost: $0.20 1,500 cases $300 13. Factory Overhead Volume Variance: Normal volume (cases) 1,600 Actual volume (cases) 1,500 Difference 100 Fixed factory overhead rate* $ 12.1625 $1,216.25 U * Fixed factory overhead rate: $19,460** 1,600 cases $12.16 per case ** Total fixed factory overhead shown in part (8) The unfavorable volume variance indicates the cost of underused capacity of 100 cases per month. 22-62

COMPREHENSIVE PROBLEM 5 (Concluded) Alternative Computation of Overhead Variances Factory Overhead Actual costs 19,765.00 Applied costs 18,543.75 ($19,460 + $305) [1,500 ($12.1625 + $0.20)] Balance (underapplied) 1,221.25 Actual Factory Overhead Budgeted Factory Overhead for Amount Produced Applied Factory Overhead $19,765.00 Variable cost (1,500 $0.20) $ 300 $18,543.75 Fixed cost 19,460.00 Total $19,760.00 $5 U $1,216 U Controllable Volume Variance Variance $1,221.25 U Total Factory Overhead 14. The production volume of 1,375 cases determined in part (5) was planned at the beginning of August. The variances compare the actual cost and the standard cost of actual production for the month. Thus, the standard cost must be based on the 1,500 units of actual production. This amount is compared with an actual cost also based on 1,500 units. The variable costs of the budget must flex to the actual production volume so that variances are compared across the same production volume. 22-63

CASES & PROJECTS CP 22 1 (FIN MAN); CP 7 1 (MAN) The use of ideal standards is a legitimate concern for Henry. It is likely that such standards are too tight and do not include the necessary fatigue factors that are likely in this type of operation. It seems as though Henry is arguing for practical standards that can be attained if the operation is running well. Maybe some standard in between is warranted, but that is not the issue. The issue is Dash s method of operation. Dash has effectively agreed to have this dispute arbitrated with a senior official. However, Dash is trying to seal the fate of the argument behind the scenes, before the issue is discussed openly, as agreed. Moreover, Dash is attributing poor motives to Henry behind his back. Dash may have short-term success with this method of operation, but in the long term he will likely alienate himself within the organization. He may create a distrustful environment that would eventually hamper his ability to provide open, honest feedback. People may eventually avoid him and hide the truth from him. CP 22 2 (FIN MAN); CP 7 2 (MAN) Although the Tungston Company performance measurement system uses both financial and nonfinancial measures, there may still be some serious performance omissions. The financial measures are good measures of financial performance. Likewise, employee satisfaction should be measured, since satisfied employees may lead to overall business success. There is, however, at least one major shortcoming to the proposed measures. None of the three measures has a customer orientation. The management of Tungston Company should also select a performance measure that reflects how well the business is performing from a customer s perspective. Thus, measures about customer satisfaction, product quality, warranty experience, or on-time delivery would be excellent additions to the three measures already proposed. 22-64

CP 22 3 (FIN MAN); CP 7 3 (MAN) This is a case where there is strong evidence that the poor performance that is occurring inside the Assembly Department may be the result of behaviors outside of the department. This is one of the classic problems with variance analysis. Often, the variances reflect causes outside of the responsibility center manager s control. That is what appears to be happening here. The Assembly supervisor complains that both the purchased parts and incoming material from the Fabrication Department have been giving trouble. A review of performance reports reveals the following: (1) the materials price variance is very favorable; (2) the Fabrication Department s labor time variance is also very favorable. A possible explanation is that the Purchasing Department found a low-price supplier. The low price translated into a favorable variance. Unfortunately, it appears the company is getting what it paid for. Specifically, it appears that the quality of the purchased parts has gone down, thus making assembly much more difficult in the Assembly Department. The Fabrication Department may be performing work faster than standard again, resulting in a favorable labor time variance. It may be that the department is working too fast. Specifically, the speed is resulting in poor fabrication quality. Again, the Assembly Department is bearing the cost of poorly fabricated parts. The problem in both instances is that the variances measure only productivity and price savings but not quality. As a result, there are strong incentives to purchase from lowest bidders, work fast, cut corners, and push work on through. Unfortunately, the company is worse off, as a whole, due to this set of situations. The sum of the unfavorable variances in Assembly exceeds the favorable variances in the other departments. The analyst will need to confirm these suspicions. If they are supported, the company may wish to introduce quality measures in addition to the variance information in order to avoid the counterproductive behaviors in Purchasing and Fabrication. 22-65

CP 22 4 (FIN MAN); CP 7 4 (MAN) The plant manager is placing pressure on the controller because the controllable variance is very unfavorable. The claim is that these costs are not really variable at all. This is a very difficult claim to accept. This is a small company, so it purchases its power from the outside. The power and light bill is variable to the amount of energy used in the plant. Energy usage is likely a function of the number of units produced except for the power required to keep the business open. Likewise, the supplies are likely variable to machine usage, which is also related to the number of units produced. However, these two costs are not where the problem lies. The problem is with the indirect factory wages. The indirect wages may not be completely variable. However, the variance is $8,500, or 28% higher than the standard. This is much greater than the 10% difference between the existing production volume and full capacity. In other words, even granting the plant manager s position on the indirect wages still does not explain the overall size of the variance. More is being spent on indirect wages than would be implied by even 100% production. Something appears amiss. The controller should discuss these matters with the plant manager and attempt to discover why the indirect labor costs are so completely out of line with the standards. The plant manager has not complained about the standards yet but may do so in the future. It s very common for the standards to be criticized as too tight. 22-66

CP 22 5 (FIN MAN); CP 7 5 (MAN) Use this activity to compare performance measures from different groups and their selected cities. The following are examples of performance measures from Worcester, Massachusetts: ECONOMIC DEVELOPMENT Indicator Outcome Type Measured As Growth of commercial and Performance Change in total assessed value residential tax base over time Job growth Performance Jobs created (and lost) by category Amount of private investment Performance Total annual new construction, business expansion, and R&D investment PUBLIC SAFETY Indicator Outcome Type Measured As All measured both citywide and by neighborhood Level of crime Performance Crime rate and clearance rate by type of crime Police community relations Performance Responses to annual citizen survey questions, performance of personnel on tests of courtesy, professionalism, and respect Allegations of police misconduct Performance The annual number of complaints of excessive force received by the police department Level of fire activity Performance # of structure fires; # of fire inspections performed; # of arson cases Responses to fire calls Performance # of fire calls answered as a % of total calls for service, average response time, % of responses < 5 minutes 22-67

CP 22 5 (FIN MAN); CP 7 5 (MAN) (Continued) IMPROVED MUNICIPAL SERVICES Indicator Outcome Type Measured As Cleanliness of streets Performance Responses to questions on the annual citizen survey, objective resident ratings Cleanliness of streets Efficiency Cost per mile of street swept Snow clearance Performance Miles of road cleared to pavement within 6 hours of a snowstorm Condition of streets and roads Performance Responses to questions on the annual citizen survey, Pavement Condition Index (PCI) Effectiveness of recycling program Performance % of trash recycled Effectiveness of anti-graffiti Performance # of graffiti incident responses, response program time from call for service to cleanup Cost effectiveness of solid Efficiency Cost per ton of waste collected waste collection Library usage Performance Circulation per capita Citizen involvement (citywide Performance % of eligible voters registered; and by neighborhood) % of registered voters voting EDUCATION Indicator Outcome Type Measured As Student and school achievement Performance MCAS test scores Graduation rate Performance Percent graduating Dropout rate Performance Percent dropouts Employer satisfaction with Performance Employer survey graduates Post-graduate plans Percent of graduates going to college; percent going to work Parent involvement in schools Performance Attendance at parent-teacher conferences; survey of parents, teachers, and principals 22-68

CP 22 5 (FIN MAN); CP 7 5 (MAN) (Concluded) IMPROVED YOUTH SERVICES Indicator Outcome Type Measured As Presence of at risk youth Performance Responses to questions from the Youth Risk Behavior Survey (includes questions on drug and alcohol use and violent behavior) by high school Extent of juvenile crime Performance Juvenile crime rate, citywide and by neighborhood Teen pregnancies Performance Teen pregnancy rate Infant mortality Performance Infant mortality rate Teen youth services Program availability Number of programs and participation rates (by race, ethnicity, and gender) by neighborhood Source: Benchmarking Municipal Performance: A Tool for Streamlining Municipal Government ; Michael D. Goodman and Roberta R. Schaefer, Worcester Municipal Research Bureau. 22-69