10.E: Exercises (part 2)

37. Standard Cost and Flexible Budget. Outdoor Products, Inc., produces extreme-weather sleeping bags. The company’s master budget shows the following standards information.

    Expected production for September	5,000 units
    Direct materials	8 yards per unit at $5 per yard
    Direct labor	3 hours per unit at $16 per hour
    Variable manufacturing overhead	3 direct labor hours per unit at $2 per hour

    Required:

    1. Calculate the standard cost per unit for direct materials, direct labor, and variable manufacturing overhead using the format shown in Figure 10.1.
    2. Assume Outdoor Products produced 5,100 sleeping bags during the month of September. Prepare a flexible budget for direct materials, direct labor, and variable manufacturing overhead using the format shown in Figure 10.2 "Flexible Budget for Variable Production Costs at Jerry’s Ice Cream".

38. Materials and Labor Variances. Outdoor Products, Inc., produces extreme-weather sleeping bags. (This is the same company as the previous exercise. This exercise can be assigned independently.)

    For direct materials, the standard price for 1 yard of material is $5 per yard. A standard quantity of 8 yards of material is expected to be used for each sleeping bag produced. During September, Outdoor Products, Inc., purchased 45,000 yards of material for $238,500 and used 39,000 yards to produce 5,100 sleeping bags.

    For direct labor, Outdoor Products, Inc., established a standard number of direct labor hours at three hours per sleeping bag. The standard rate is $16 per hour. A total of 14,700 direct labor hours were worked during September, at a cost of $238,140, to produce 5,100 sleeping bags.

    Required:

    1. Calculate the materials price variance and materials quantity variance using the format shown in Figure 10.4 "Direct Materials Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.
    2. Calculate the labor rate variance and labor efficiency variance using the format shown in Figure 10.6 "Direct Labor Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.

39. Variable Overhead Variances. Outdoor Products, Inc., produces extreme-weather sleeping bags. (This is the same company as the previous exercises. This exercise can be assigned independently.) The company applies variable manufacturing overhead at a standard rate of $2 per direct labor hour. The standard quantity of direct labor is three hours per unit. Variable overhead costs totaled $32,000 for the month of September. A total of 14,700 direct labor hours were worked during September to produce 5,100 sleeping bags.

    Required:

    Calculate the variable overhead spending variance and variable overhead efficiency variance using the format shown in Figure 10.8 "Variable Manufacturing Overhead Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.

40. Fixed Overhead Variance Analysis. Outdoor Products, Inc., produces extreme-weather sleeping bags. (This is the same company as the previous exercises. This exercise can be assigned independently.) The company applies fixed manufacturing overhead costs to products based on direct labor hours. Information for the month of September appears as follows. Outdoor Products expected to produce and sell 5,000 units for the month.

    

    Required:

    Calculate the fixed overhead spending variance and production volume variance using the format shown in Figure 10.13 "Fixed Manufacturing Overhead Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.

41. Journalizing Direct Materials and Direct Labor Transactions (Appendix). Outdoor Products, Inc., produces extreme-weather sleeping bags. (This is the same company as the previous exercises. This exercise can be assigned independently.)

    Direct materials and direct labor variances for the month of September are shown as follows.

    Materials price variance	$13,500 unfavorable
    Materials quantity variance	$(9,000) favorable
    Labor rate variance	$ 2,940 unfavorable
    Labor efficiency variance	$(9,600) favorable

    Required:

    1. The company purchased 45,000 yards of material during the month for $5.30 per yard. Assuming a standard price of $5 per yard, prepare a journal entry to record the purchase of raw materials for the month.
    2. The company used 39,000 yards of material in production for the month, and the flexible budget shows the company expected to use 40,800 yards. Assuming a standard price of $5 per yard, prepare a journal entry to record the usage of raw materials in production for the month.
    3. The company used 14,700 direct labor hours during the month with an actual rate of $16.20 per hour. The flexible budget shows the company expected to use 15,300 direct labor hours at a standard rate of $16 per hour. Prepare a journal entry to record direct labor costs for the month.

42. Investigating Variances. Tool Box, Inc., produces tool boxes sold at a variety of retail stores throughout the world. Standard cost information for each toolbox is presented as follows.

    

    Tool Box produced and sold 100,000 toolboxes for the year and encountered the following production variances:

    

    Required:

    Company policy is to investigate all unfavorable variances above 5 percent of the flexible budget amount for direct materials, direct labor, and variable overhead.

    1. Identify the variances that should be investigated according to company policy. Show calculations to support your answer.
    2. What recommendations would you make for the company’s current policy?

43. Variance Analysis with Activity-Based Costing. Assume Hillside Hats, LLC, uses activity-based costing to allocate variable manufacturing overhead costs to products. The company identified three activities with the following information for last month.

    Activity	Standard Rate	Standard Quantity per Unit Produced	Actual Costs	Actual Quantity
    Purchase orders	$50 per order	0.10 order per unit	$65,000	1,600 orders
    Product testing	$2 per test minute	0.50 minutes per unit	$17,000	8,000 test minutes
    Indirect labor	$3 per direct labor hour	1 hour per unit	$43,000	13,000 direct labor hours

    Required:

    Assume Hillside Hats produced 15,000 units last month. Prepare a variance analysis using the format shown in Figure 10.11 "Variable Overhead Variance Analysis for Jerry’s Ice Cream Using Activity-Based Costing". Clearly label each variance as favorable or unfavorable.

44. Closing Variance and Overhead Accounts (Appendix). Shasta Company had the following balances at the end of its fiscal year.

    	Debit	Credit
    Materials price variance		$8,000
    Materials quantity variance		2,000
    Labor rate variance	$12,000
    Labor efficiency variance		5,000
    Manufacturing overhead		4,000

    Required:

    1. Prepare a journal entry to close the variance and manufacturing overhead accounts. Assume the balances are not significant and thus are closed to cost of goods sold.
    2. Assume all products were sold and the company has no ending inventories. After making the entry in requirement a, does the balance of cost of goods sold on the income statement reflect standard costs or actual costs? Explain.

Problems

45. Variance Analysis for Direct Materials, Direct Labor, and Variable Overhead. Rain Gear, Inc., produces rain jackets. The master budget shows the following standards information and indicates the company expected to produce and sell 28,000 units for the year.

    Direct materials	4 yards per unit at $3 per yard
    Direct labor	2 hours per unit at $10 per hour
    Variable manufacturing overhead	2 direct labor hours per unit at $4 per hour

    Rain Gear actually produced and sold 30,000 units for the year. During the year, the company purchased 130,000 yards of material for $429,000 and used 118,000 yards in production. A total of 65,000 labor hours were worked during the year at a cost of $637,000. Variable overhead costs totaled $231,000 for the year.

    Required:

    1. Calculate the materials price variance and materials quantity variance using the format shown in Figure 10.4 "Direct Materials Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.
    2. Calculate the labor rate variance and labor efficiency variance using the format shown in Figure 10.6 "Direct Labor Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.
    3. Calculate the variable overhead spending variance and variable overhead efficiency variance using the format shown in Figure 10.8 "Variable Manufacturing Overhead Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.
    4. Company policy is to investigate all variances greater than 10 percent of the flexible budget amount for each of the three variable production costs: direct materials, direct labor, and variable overhead. Identify which of the six variances calculated in requirements a through c should be investigated.
    5. Provide two possible explanations for each variance identified in requirement d.

46. Fixed Overhead Variance Analysis. (This problem is a continuation of the previous problem but can also be worked independently.) Rain Gear, Inc., produces rain jackets and applies fixed manufacturing overhead costs to products based on direct labor hours. Information for the year appears as follows. Rain Gear expected to produce and sell 28,000 units for the year.

    

    Required:

    1. Calculate the fixed overhead spending variance and production volume variance using the format shown in Figure 10.13 "Fixed Manufacturing Overhead Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.
    2. Company policy is to investigate all variances greater than 5 percent of the flexible budget amount. Identify whether either of the two fixed overhead variances calculated in requirement a should be investigated.
    3. Provide one possible explanation for variance(s) identified in requirement b.

47. Journalizing Direct Materials, Direct Labor, and Overhead Transactions (Appendix). Complete the following requirements for Rain Gear, Inc., using your solutions to the previous two problems.

    Required:

    1. Prepare a journal entry to record the purchase of raw materials.
    2. Prepare a journal entry to record the use of raw materials.
    3. Prepare a journal entry to record direct labor costs.
    4. Prepare a journal entry to record actual variable and fixed manufacturing overhead expenditures.
    5. Prepare a journal entry to record variable and fixed manufacturing overhead applied to products.
    6. Based on the entries shown in requirements a through e, prepare a journal entry to transfer all work-in-process inventory costs to finished goods inventory.
    7. Assume all finished goods are sold during the period. Prepare a journal entry to transfer all finished goods inventory costs to cost of goods sold.
    8. Based on the entries shown in requirements a through g, close manufacturing overhead and all variance accounts to cost of goods sold.

48. Variance Analysis for Direct Materials, Direct Labor, and Variable Overhead; Journalizing Direct Materials and Direct Labor Transactions (Includes Appendix). Prefab Pools Company produces large prefabricated in-ground swimming pools made of a specialized plastic material. The master budget shows the following standards information and indicates the company expected to produce and sell 600 units for the month of April.

    Direct materials	500 pounds per unit at $7 per pound
    Direct labor	46 hours per unit at $12 per hour
    Variable manufacturing overhead	46 direct labor hours per unit at $30 per hour

    Prefab Pools actually produced and sold 580 units for the month. During the month, the company purchased 330,000 pounds of material for $2,277,000 and used 295,800 pounds in production. A total of 25,520 labor hours were worked during the month at a cost of $313,896. Variable overhead costs totaled $790,000 for the month.

    Required:

    1. Calculate the materials price variance and materials quantity variance using the format shown in Figure 10.4 "Direct Materials Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.
    2. Calculate the labor rate variance and labor efficiency variance using the format shown in Figure 10.6 "Direct Labor Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.
    3. Calculate the variable overhead spending variance and variable overhead efficiency variance using the format shown in Figure 10.8 "Variable Manufacturing Overhead Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.
    4. Company policy is to investigate all variances at or above 2 percent of the flexible budget for direct materials and 4 percent for direct labor and variable overhead. Identify which of the six variances calculated in requirements a through c should be investigated.
    5. Provide two possible explanations for each variance identified in requirement d.
    6. Based on your answer to requirement a, prepare a journal entry to record the purchase of raw materials.
    7. Based on your answer to requirement a, prepare a journal entry to record the usage of raw materials.
    8. Based on your answer to requirement b, prepare a journal entry to record direct labor costs.

49. Fixed Overhead Variance Analysis. (This problem is a continuation of the previous problem but can be worked independently.) Prefab Pools Company produces prefabricated in-ground swimming pools and applies fixed manufacturing overhead costs to products based on direct labor hours. Information for the month of April appears as follows. Prefab Pools expected to produce and sell 600 units for the month.

    

    Required:

    1. Calculate the fixed overhead spending variance and production volume variance using the format shown in Figure 10.13 "Fixed Manufacturing Overhead Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.
    2. Company management has asked you to investigate the cause of the fixed overhead spending variance calculated in requirement a. Provide one possible explanation for this variance.

50. Variance Analysis for Direct Materials, Direct Labor, Variable Overhead, and Fixed Overhead. Equipment Products, Inc., produces large ladders made of a specialized metal material. The master budget shows the following standards information and indicates the company expected to produce and sell 4,000 units for the month of May.

    Direct materials	60 pounds per unit at $3 per pound
    Direct labor	8 hours per unit at $14 per hour
    Variable manufacturing overhead	8 direct labor hours per unit at $6 per hour

    Equipment Products actually produced and sold 4,400 units for the month. During the month, the company purchased 300,000 pounds of material for $960,000 and used 286,000 pounds in production. A total of 30,800 labor hours were worked during the month at a cost of $462,000. Variable overhead costs totaled $195,000 for the month.

    With regards to fixed manufacturing overhead, the company also applies these overhead costs to products based on direct labor hours. Fixed manufacturing overhead information for the month of May appears as follows.

    

    Required:

    1. Calculate the materials price variance and materials quantity variance using the format shown in Figure 10.4 "Direct Materials Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.
    2. Calculate the labor rate variance and labor efficiency variance using the format shown in Figure 10.6 "Direct Labor Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.
    3. Calculate the variable overhead spending variance and variable overhead efficiency variance using the format shown in Figure 10.8 "Variable Manufacturing Overhead Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.
    4. Company policy is to investigate all variances greater than 10 percent of the flexible budget amount for each of the 3 variable production costs: direct materials, direct labor, and variable overhead. Identify which of the six variances calculated in requirements a through c should be investigated.
    5. Provide two possible explanations for each variance identified in requirement d.
    6. Calculate the fixed overhead spending variance and production volume variance using the format shown in Figure 10.13 "Fixed Manufacturing Overhead Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.

51. Journalizing Direct Labor and Overhead Transactions (Appendix). Complete the following requirements for Equipment Products, Inc., using your solutions to the previous problem.

    Required:

    1. Prepare a journal entry to record direct labor costs.
    2. Prepare a journal entry to record actual variable and fixed manufacturing overhead expenditures.
    3. Prepare a journal entry to record variable and fixed manufacturing overhead applied to products.

52. Variance Analysis with Activity-Based Costing. Assume Spindle Company uses activity-based costing to allocate variable manufacturing overhead costs to products. The company identified three activities with the following information for last quarter.

    Activity	Standard Rate	Standard Quantity per Unit Produced	Actual Costs	Actual Quantity
    Indirect materials	$5 per yard	14 yards per unit	$4,850,000	990,000 yards
    Product testing	$3 per test minute	10 minutes per unit	$2,000,000	650,000 test minutes
    Indirect labor	$9 per direct labor hour	6 hours per unit	$3,800,000	410,000 direct labor hours

    Required:

    1. Assume Spindle Company produced 70,000 units last quarter. Prepare a variance analysis using the format shown in Figure 10.11 "Variable Overhead Variance Analysis for Jerry’s Ice Cream Using Activity-Based Costing". Clearly label each variance as favorable or unfavorable.
    2. Company policy is to investigate all variances above 5 percent of the flexible budget amount for each activity. Identify the variances that should be investigated according to company policy. Show calculations to support your answer.

One Step Further: Skill-Building Cases

53. Variance Analysis and Fraud. Refer to Note 10.47 "Business in Action 10.4" and to Note 10.52 "Business in Action 10.5" Explain how cost variance analysis might help detect fraud.

54. Group Activity: Setting Standards. Form groups of two to four students. Each group is to complete the following requirements.

    Required:

    1. Define and discuss the differences between ideal standards and attainable standards.
    2. Assume your group works for a company that produces wood desks and you are in the process of creating attainable direct material and direct labor standards. Provide specific examples of the items that might be included in (1) the standard quantity and standard price for direct materials and (2) the standard hours and standard rate for direct labor. Explain where this information might be obtained, and identify specific production inefficiencies your group included in creating these standards that would not be included in ideal standards.
    3. Discuss the findings of your group with the class. (Optional: your instructor may ask you to submit your findings in writing.)
55. Internet Project: Standard Costs and Cost Variances. Systems Applications and Products (SAP) is the world’s largest business software company with 38,000 customers worldwide. Go to the SAP Web site at http://www.sap.com and find the search feature. Type in “standard costing” or “cost variance” and find an article that discusses standard costs and/or cost variances (there are several articles to choose from). Summarize the article in a one-page report, and submit a printed copy of the article with your report.

56. Ethics and Setting Standards. Wilkes Golf, Inc., produces golf carts that are sold throughout the world. The company’s management is in the process of establishing the standard hours of direct labor required to complete one golf cart. Assume you are the production supervisor, and you receive a bonus for each quarter that shows a favorable labor efficiency variance. That is, you receive a bonus for each quarter showing actual direct labor hours that are fewer than budgeted direct labor hours.

    The management has asked for your input in establishing the standard number of direct labor hours required to complete one golf cart.

    Required:

    1. As the production supervisor, describe the ethical conflict you face when asked to help with establishing direct labor hour standards.
    2. How might the management of Wilkes Golf, Inc., avoid this conflict and still achieve the goal of obtaining reliable direct labor hour information?

57. Using Excel to Perform Budget Versus Actual Analysis. The management of Home Products, Inc., prepared the following budgeted income statement for the year ending December 31, 2012.

    

    At the end of 2012, the company prepared the following income statement showing actual results:

    

    Required:

    Prepare an Excel spreadsheet comparing the actual results to budgeted amounts using the format shown as follows, and comment on the results.

    

Comprehensive Cases

58. Variable Production Cost Variance Analysis. Iron Products, Inc., produces prefabricated iron fencing used in commercial construction. Variable overhead is applied to products based on direct labor hours. The company uses a just-in-time production system and thus has insignificant inventory levels at the end of each month. The income statement for the month of November comparing actual results with the flexible budget based on actual sales of 2,000 units is shown as follows.

    

    Iron Products is disappointed with the actual results and has hired you as a consultant to provide further information as to why the company has been struggling to meet budgeted net profit. Your review of the previously presented budget versus actual analysis identifies variable cost of goods sold as the main culprit. The unfavorable variance for this line item is $67,400.

    After further research, you are able to track down the following standard cost information for variable production costs:

    

    Actual production information related to variable cost of goods sold for the month of November is as follows:

    • 2,000 units were produced and sold.
    • 110,000 pounds of material were purchased and used at a total cost of $528,000.
    • 5,600 direct labor hours were used during the month at a total cost of $134,400.
    • Variable overhead costs totaled $205,000.

    Required:

    1. Calculate the materials price variance and materials quantity variance using the format shown in Figure 10.4 "Direct Materials Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.
    2. Calculate the labor rate variance and labor efficiency variance using the format shown in Figure 10.6 "Direct Labor Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.
    3. Calculate the variable overhead spending variance and variable overhead efficiency variance using the format shown in Figure 10.8 "Variable Manufacturing Overhead Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.
    4. List each of the six variances calculated in requirements a, b, and c, and total the variances to show one net variance. Clearly label the net variance as favorable or unfavorable. Explain how this net variance relates to variable cost of goods sold on the income statement.
    5. Identify the highest favorable variance and highest unfavorable variance from the six listed in requirement d, and provide one possible cause of each variance.

59. Variable Production Cost Variance Analysis and Performance Evaluation. Fast Sleds, Inc., produces snow sleds used for winter recreation. Variable overhead is applied to products based on machine hours. The company uses a just-in-time production system, and thus has insignificant inventory levels at the end of each month. The income statement for the month of January comparing actual results with the flexible budget is shown in the following based on actual sales of 10,000 units.

    

    Fast Sleds is disappointed with the actual results and has hired you as a consultant to provide further information as to why the company has been struggling to meet budgeted net income. Your review of the budget presented previously versus actual analysis identifies variable cost of goods sold as the main culprit. The unfavorable variance for this line item is $8,700.

    After further research, you are able to track down the standard cost information for variable production costs:

    

    Actual production information related to variable cost of goods sold for the month of January is as follows:

    • 10,000 units were produced and sold.
    • 150,000 pounds of material was purchased and used at a total cost of $67,500.
    • 1,900 direct labor hours were used during the month at a total cost of $30,400.
    • 1,200 machine hours were used during the month.
    • Variable overhead costs totaled $10,800.

    Required:

    1. Calculate the materials price variance and materials quantity variance using the format shown in Figure 10.4 "Direct Materials Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.
    2. Calculate the labor rate variance and labor efficiency variance using the format shown in Figure 10.6 "Direct Labor Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.
    3. Calculate the variable overhead spending variance and variable overhead efficiency variance using the format shown in Figure 10.8 "Variable Manufacturing Overhead Variance Analysis for Jerry’s Ice Cream". Clearly label each variance as favorable or unfavorable.
    4. List each of the six variances calculated in requirements a, b, and c, and total the variances to show one net variance. Clearly label the net variance as favorable or unfavorable. Explain how this net variance relates to variable cost of goods sold on the income statement.
    5. Identify the highest favorable variance and highest unfavorable variance from the six listed in requirement d, and provide one possible cause of each variance.
    6. Sue Mays, the manager at Fast Sleds, Inc., reviewed the company’s variance analysis report for the month of January. The materials price variance of $(7,500) was the most significant favorable variance for the month, and the materials quantity variance of $15,000 was the most significant unfavorable variance. Sue would like to reward the company’s purchasing agent for achieving such substantial savings by giving him a $2,000 bonus while not providing any bonus for the production manager.
    1. Do you agree with Sue’s approach to awarding bonuses? Explain.
    2. What circumstances might lead to the conclusion that the purchasing agent should not receive a bonus for the month of January?