Module 22
Standard Costs and Performance
Reports
DISCUSSION QUESTIONS
Q22-1. Responsibility accounting is the structuring of performance reports addressed to
individual or group members of an organization in a manner that emphasizes the
factors controllable by them. Noncontrollable costs should be excluded from
performance reports because, if included, they would distract managers' attention from
controllable costs and, thereby, dilute efforts to deal with controllable items. Lower-
level managers may also become frustrated with the entire performance reporting
system if they believe upper-level managers expect them to control costs they cannot
influence.
Q22-2. Because the managers have so much pressure to perform at certain levels, they often
resort to unethical practices to compensate for unfavorable results. These actions
eventually end in results unfavorable to the organization.
Q22-3. Responsibility accounting reports must be expanded to include the nonfinancial areas
of productivity, quality, and innovative assessments. Examples of nonfinancial areas
include: machine-hours run per batch, customers served per hour, warranty claims per
1,000 units sold, and defective units per batch.
Q22-4. A cost center is a responsibility center whose manager is responsibility for managing
costs. Examples might include: manufacturing department, manufacturing plant, repair
activities, accounting, personnel department, shipping activities, computer center.
Q22-5. A cost center is different from either an investment center or a profit center in that it
does not recognize revenues nor compute any type of income figure.
©Cambridge Business Publishers, 2015
Solutions Manual, Module 22 22-1
,Q22-6. The use of tight standards often causes planning and behavioral problems.
Management expects to use more of the budgeted inputs than the standards allow;
accordingly, tight standards should not be used to budget input requirements or cash
flows. If employees find that a second set of standards are used in the real budget or
if they are constantly subjected to unfavorable performance reports, they may come to
distrust the entire budgeting and performance evaluation system, or they may quit
trying to achieve any of the organization's standards.
Q22-7. A standard cost variance is the computed difference between an actual cost number
and the related standard cost number. The objective of variance analysis is to identify
standard cost variances and to explain the reason(s) for their occurrence.
Q22-8. A price variance is caused by a difference between the actual price of inputs and the
standard price of inputs. A quantity variance is caused by a difference between the
actual quantity of inputs used and the allowed quantity of inputs.
Q22-9. 1. Possible causes for favorable materials price variances are:
a. Quantity discounts
b. Bargain purchases
c. Purchasing from a distressed seller
d. Purchasing lower quality materials than required
2. Possible causes for unfavorable materials price variances are:
a. Last minute or rush purchases
b. Purchasing higher quality materials than required
c. Vendors on strike, making sources scarce
d. Unexpected rises in inflation, driving up prices of goods
3. Possible causes for favorable materials quantity variances are:
a. Higher machine efficiency than anticipated
b. Higher worker efficiency than anticipated
c. Higher quality of materials than anticipated
d. Improved processing procedures
4. Possible causes for unfavorable materials quantity variances are:
a. Lower machine efficiency than anticipated
b. Lower worker efficiency than anticipated
c. Lower quality of materials than anticipated
d. Poor working conditions due to unexpected causes (i.e., weather)
e. New workers without proper training or experience
f. New products or procedures that workers are not use to
©Cambridge Business Publishers, 2015
22-2 Financial & Managerial Accounting for MBAs, 4th Edition
,Q22-10. Standard labor time is determined by evaluating how long it takes an employee to
perform an activity. It can be determined by either the engineering or empirical
observation approach. The first is the use of time and motion studies to evaluate how
long it takes to perform an activity. The second is the use of long-run observations
while operating under normal conditions. The average of the long-run observations is
used to set the standard time.
Q22-11. When a new labor contract is negotiated, the standards should be adjusted
accordingly. Otherwise, the managers will be held responsible for actual labor cost
charges for which they have no control.
Q22-12. The revenue variance is the difference between budgeted sales and actual sales. The
sales price variance is the difference between the budgeted sales price and the actual
sales price times the actual sales volume.
Q22-13. The net sales volume variance is computed as the difference between the actual and
the budgeted sales volumes times the budgeted unit contribution margin. It is also
equal to the sales volume variance less the differential standard costs. Its components
are the actual sales volume, the budgeted sales volume, and the budgeted unit
contribution margin.
Q22-14. The actual costs are simply the total actual costs of all the items that make up the
overhead category. The standard cost of actual inputs is found by multiplying the
actual overhead base activity level by the standard cost of each unit of activity (cost
driver).
Q22-15. The net sales volume variance measures the expected variance from budgeted
contribution margin caused by a variance in sales volume from the budgeted sales
volume. The net sales volume variance is used in evaluating the performance of the
sales department in a company when the department is treated as a profit center.
©Cambridge Business Publishers, 2015
Solutions Manual, Module 22 22-3
, MINI EXERCISES
M22-16.
a. The performance report inappropriately compares the actual costs of manufacturing
30,000 units with the budgeted costs of manufacturing 28,000 units. The result is a
series of unfavorable variances for variable manufacturing costs. The actual variable
costs of manufacturing 30,000 units are expected to exceed the budgeted variable costs
for 28,000 units. This is because variable costs change in proportion to changes in
volume.
b. A comparison should be made between the actual costs of manufacturing 30,000 units
and the costs allowed in a flexible budget drawn up for this level of activity. Prior to
developing such a budget, the standard variable costs per unit must be determined.
Budget Units Standard Variable Costs
Direct materials $ 84,000 ÷ 28,000 = $3.00
Direct labor 140,000 ÷ 28,000 = 5.00
Variable overhead 56,000 ÷ 28,000 = 2.00
NEWPORT COMPANY
Production Department Performance Report
For the Month of January
Flexible Flexible
Budget Flexible Budget
Formula Actual Budget Variance
Volume 30,000 30,000
Manufacturing costs:
Direct materials $3.00/unit $ 90,000 $ 90,000 $ 0
Direct labor 5/unit 165,000 150,000 15,000 U
Variable overhead 2/unit 62,000 60,000 2,000 U
Fixed overhead 28,000 27,000 28,000 1,000 F
Total $344,000 $328,000 $16,000 U
©Cambridge Business Publishers, 2015
22-4 Financial & Managerial Accounting for MBAs, 4th Edition
Standard Costs and Performance
Reports
DISCUSSION QUESTIONS
Q22-1. Responsibility accounting is the structuring of performance reports addressed to
individual or group members of an organization in a manner that emphasizes the
factors controllable by them. Noncontrollable costs should be excluded from
performance reports because, if included, they would distract managers' attention from
controllable costs and, thereby, dilute efforts to deal with controllable items. Lower-
level managers may also become frustrated with the entire performance reporting
system if they believe upper-level managers expect them to control costs they cannot
influence.
Q22-2. Because the managers have so much pressure to perform at certain levels, they often
resort to unethical practices to compensate for unfavorable results. These actions
eventually end in results unfavorable to the organization.
Q22-3. Responsibility accounting reports must be expanded to include the nonfinancial areas
of productivity, quality, and innovative assessments. Examples of nonfinancial areas
include: machine-hours run per batch, customers served per hour, warranty claims per
1,000 units sold, and defective units per batch.
Q22-4. A cost center is a responsibility center whose manager is responsibility for managing
costs. Examples might include: manufacturing department, manufacturing plant, repair
activities, accounting, personnel department, shipping activities, computer center.
Q22-5. A cost center is different from either an investment center or a profit center in that it
does not recognize revenues nor compute any type of income figure.
©Cambridge Business Publishers, 2015
Solutions Manual, Module 22 22-1
,Q22-6. The use of tight standards often causes planning and behavioral problems.
Management expects to use more of the budgeted inputs than the standards allow;
accordingly, tight standards should not be used to budget input requirements or cash
flows. If employees find that a second set of standards are used in the real budget or
if they are constantly subjected to unfavorable performance reports, they may come to
distrust the entire budgeting and performance evaluation system, or they may quit
trying to achieve any of the organization's standards.
Q22-7. A standard cost variance is the computed difference between an actual cost number
and the related standard cost number. The objective of variance analysis is to identify
standard cost variances and to explain the reason(s) for their occurrence.
Q22-8. A price variance is caused by a difference between the actual price of inputs and the
standard price of inputs. A quantity variance is caused by a difference between the
actual quantity of inputs used and the allowed quantity of inputs.
Q22-9. 1. Possible causes for favorable materials price variances are:
a. Quantity discounts
b. Bargain purchases
c. Purchasing from a distressed seller
d. Purchasing lower quality materials than required
2. Possible causes for unfavorable materials price variances are:
a. Last minute or rush purchases
b. Purchasing higher quality materials than required
c. Vendors on strike, making sources scarce
d. Unexpected rises in inflation, driving up prices of goods
3. Possible causes for favorable materials quantity variances are:
a. Higher machine efficiency than anticipated
b. Higher worker efficiency than anticipated
c. Higher quality of materials than anticipated
d. Improved processing procedures
4. Possible causes for unfavorable materials quantity variances are:
a. Lower machine efficiency than anticipated
b. Lower worker efficiency than anticipated
c. Lower quality of materials than anticipated
d. Poor working conditions due to unexpected causes (i.e., weather)
e. New workers without proper training or experience
f. New products or procedures that workers are not use to
©Cambridge Business Publishers, 2015
22-2 Financial & Managerial Accounting for MBAs, 4th Edition
,Q22-10. Standard labor time is determined by evaluating how long it takes an employee to
perform an activity. It can be determined by either the engineering or empirical
observation approach. The first is the use of time and motion studies to evaluate how
long it takes to perform an activity. The second is the use of long-run observations
while operating under normal conditions. The average of the long-run observations is
used to set the standard time.
Q22-11. When a new labor contract is negotiated, the standards should be adjusted
accordingly. Otherwise, the managers will be held responsible for actual labor cost
charges for which they have no control.
Q22-12. The revenue variance is the difference between budgeted sales and actual sales. The
sales price variance is the difference between the budgeted sales price and the actual
sales price times the actual sales volume.
Q22-13. The net sales volume variance is computed as the difference between the actual and
the budgeted sales volumes times the budgeted unit contribution margin. It is also
equal to the sales volume variance less the differential standard costs. Its components
are the actual sales volume, the budgeted sales volume, and the budgeted unit
contribution margin.
Q22-14. The actual costs are simply the total actual costs of all the items that make up the
overhead category. The standard cost of actual inputs is found by multiplying the
actual overhead base activity level by the standard cost of each unit of activity (cost
driver).
Q22-15. The net sales volume variance measures the expected variance from budgeted
contribution margin caused by a variance in sales volume from the budgeted sales
volume. The net sales volume variance is used in evaluating the performance of the
sales department in a company when the department is treated as a profit center.
©Cambridge Business Publishers, 2015
Solutions Manual, Module 22 22-3
, MINI EXERCISES
M22-16.
a. The performance report inappropriately compares the actual costs of manufacturing
30,000 units with the budgeted costs of manufacturing 28,000 units. The result is a
series of unfavorable variances for variable manufacturing costs. The actual variable
costs of manufacturing 30,000 units are expected to exceed the budgeted variable costs
for 28,000 units. This is because variable costs change in proportion to changes in
volume.
b. A comparison should be made between the actual costs of manufacturing 30,000 units
and the costs allowed in a flexible budget drawn up for this level of activity. Prior to
developing such a budget, the standard variable costs per unit must be determined.
Budget Units Standard Variable Costs
Direct materials $ 84,000 ÷ 28,000 = $3.00
Direct labor 140,000 ÷ 28,000 = 5.00
Variable overhead 56,000 ÷ 28,000 = 2.00
NEWPORT COMPANY
Production Department Performance Report
For the Month of January
Flexible Flexible
Budget Flexible Budget
Formula Actual Budget Variance
Volume 30,000 30,000
Manufacturing costs:
Direct materials $3.00/unit $ 90,000 $ 90,000 $ 0
Direct labor 5/unit 165,000 150,000 15,000 U
Variable overhead 2/unit 62,000 60,000 2,000 U
Fixed overhead 28,000 27,000 28,000 1,000 F
Total $344,000 $328,000 $16,000 U
©Cambridge Business Publishers, 2015
22-4 Financial & Managerial Accounting for MBAs, 4th Edition
