Summary Business Accounting

CHAPTER 23
PERFORMANCE EVALUATION USING VARIANCES
FROM STANDARD COSTS

DISCUSSION QUESTIONS

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
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).




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, CHAPTER 23 Performance Evaluation Using Variances from Standard
Costs
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 (that is, the volume and the controllable variance).
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.




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, CHAPTER 23 Performance Evaluation Using Variances from Standard
Costs
PRACTICE EXERCISES
PE 23–1A
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 23–1B
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 23–2A
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 23–2B
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


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, CHAPTER 23 Performance Evaluation Using Variances from Standard
Costs
PE 23–3A
Variable Factory Overhead
= $63,400 – [$3.50 × (3,500 units × 5 hrs.)]
Controllable Variance
Variable Factory Overhead
Controllable Variance = $63,400 – $61,250
Variable Factory Overhead
Controllable Variance = $2,150 Unfavorable



PE 23–3B

Variable Factory Overhead
= $4,000 – [$1.40 × (1,000 units × 3.0 hrs.)]
Controllable Variance
Variable Factory Overhead
= $4,000 – $4,200
Controllable Variance Variable
Factory Overhead
= –$200 Favorable
Controllable Variance



PE 23–4A
–$900 favorable $1.80 × [17,000 hrs. – (3,500 units × 5 hrs.)]


PE 23–4B
$300 unfavorable $0.60 × [3,500 hrs. – (1,000 units × 3 hrs.)]




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