# 8.7: Summary

## Section Summaries

### 8.1 Explain How and Why a Standard Cost Is Developed

• Standards are budgeted unit amounts for price paid and amount used.
• Variances are the difference between actual and standard amounts.
• A favorable variance is when the actual price or quantity is less than the standard amount.
• An unfavorable variance is when the actual price or amount is greater than the standard amount.

### 8.2 Compute and Evaluate Materials Variances

• There are two components to material variances: the direct materials price variance and the direct materials quantity variance.
• The direct materials price variance is caused by paying too much or too little for material.
• The direct materials quantity variance is caused by using too much or too little material.

### 8.3 Compute and Evaluate Labor Variances

• There are two labor variances: the direct labor rate variance and the direct labor time variance.
• The direct labor rate variance determines if the rate paid is greater than or less than the standard rate.
• The direct labor time variance determines if the actual hours used are greater than or less than the standards that should have been used.

### 8.4 Compute and Evaluate Overhead Variances

• There are two sets of overhead variances: variable and fixed.
• The variable variances are caused by the overhead application rate and the activity level against which the rate was applied.
• The variable overhead rate variance is the difference between the actual variable manufacturing overhead and the variable overhead that was expected given the number of hours worked.
• The variable overhead efficiency variance is driven by the difference between the actual hours worked and the standard hours expected for the units produced.
• There are two fixed overhead variances. One is caused by spending too much or too little on fixed overhead. The other is caused by actual production being above or below the expected production level.

### 8.5 Describe How Companies Use Variance Analysis

• The key to analyzing variances is to determine why the variance occurred.
• If a company cannot determine why there is a variance, it will not know if the variance is indicative of a problem or not.
• All firms—manufacturing, retail, and service—use standards and variances.

## Key Terms

attainable standard
level that may be reached with reasonable effort
direct labor rate variance
difference between the actual rate paid and the standard rate that should have been paid based on the actual hours worked
direct labor time variance
difference between the actual hours worked and the standard hours that should have been worked for the actual units produced
direct labor variance
measures how efficiently the company uses labor as well as how effective it is at pricing labor
direct materials price variance
difference between the actual price paid per unit for materials and what should have been paid per the standards
direct materials quantity variance
difference between the actual quantity of materials used and the standard materials that were expected to be used to make the actual units produced
direct materials variance
difference between the actual price or amount used and the standard amount
favorable variance
difference involving spending less, or using less, than the standard amount
flexible budget
measurement and prediction of estimated revenues and costs at varying levels of production
ideal standard
level that could be achieved if everything ran perfectly
standard
expectation for a component used in production
standard cost
cost expectation for price paid and amount (quantities) used
total direct labor variance
actual labor costs compared to standard labor costs
total direct materials cost variance
difference between actual materials cost and standard materials cost
total cost variance found by combining variable overhead rate variance and variable overhead efficiency variance
unfavorable variance
difference involving spending more or using more than the standard amount
difference between the actual hours worked and the standard hours expected for the units produced
difference between the actual variable manufacturing overhead and the variable overhead that was expected given the number of hours worked
variance
difference between standard and actual performance

## Multiple Choice

1

LO 8.1Why does a company use a standard costing system?

1. to identify variances from actual cost that assist them in maintaining profits
2. to identify nonperformers in the workplace
3. to identify what vendors are unreliable
4. to identify defective materials
2

LO 8.1This standard is set at a level that may be reached with reasonable effort.

1. ideal standard
2. attainable standard
3. unattainable standard
4. variance from standard
3

LO 8.1This standard is set at a level that could be achieved if everything ran perfectly.

1. ideal standard
2. attainable standard
3. unattainable standard
4. variance from standard
4

LO 8.1This variance is the difference involving spending more or using more than the standard amount.

1. favorable variance
2. unfavorable variance
3. no variance
4. variance
5

LO 8.1This variance is the difference involving spending less, or using less than the standard amount.

1. favorable variance
2. unfavorable variance
3. no variance
4. variance
6

LO 8.2What are some possible reasons for a material price variance?

1. substandard material
2. labor rate increases
3. labor rate decreases
4. labor efficiency
7

LO 8.2When is the material price variance unfavorable?

1. when the actual quantity used is greater than the standard quantity
2. when the actual quantity used is less than the standard quantity
3. when the actual price paid is greater than the standard price
4. when the actual price is less than the standard price
8

LO 8.2When is the material price variance favorable?

1. when the actual quantity used is greater than the standard quantity
2. when the actual quantity used is less than the standard quantity
3. when the actual price paid is greater than the standard price
4. when the actual price is less than the standard price
9

LO 8.2What are some reasons for a material quantity variance?

1. building rental charges increase
2. labor rate decreases
3. more qualified workers
4. labor efficiency increases
10

LO 8.2When is the material quantity variance favorable?

1. when the actual quantity used is greater than the standard quantity
2. when the actual quantity used is less than the standard quantity
3. when the actual price paid is greater than the standard price
4. when the actual price is less than the standard price
11

LO 8.2When is the material quantity unfavorable?

1. when the actual quantity used is greater than the standard quantity
2. when the actual quantity used is less than the standard quantity
3. when the actual price paid is greater than the standard price
4. when the actual price is less than the standard price
12

LO 8.3What are some possible reasons for a labor rate variance?

1. hiring of less qualified workers
2. an excess of material usage
3. material price increase
4. utilities usage change
13

LO 8.3When is the labor rate variance unfavorable?

1. when the actual quantity used is greater than the standard quantity
2. when the actual quantity used is less than the standard quantity
3. when the actual price paid is greater than the standard price
4. when the actual price is less than the standard price
14

LO 8.3When is the labor rate variance favorable?

1. when the actual quantity used is greater than the standard quantity
2. when the actual quantity used is less than the standard quantity
3. when the actual price paid is greater than the standard price
4. when the actual price is less than the standard price
15

LO 8.3What are some possible reasons for a direct labor time variance?

1. utility usage decrease
2. less qualified workers
3. office supplies spending
4. sales decline
16

LO 8.3When is the direct labor time variance favorable?

1. when the actual quantity used is greater than the standard quantity
2. when the actual quantity used is less than the standard quantity
3. when the actual price paid is greater than the standard price
4. when the actual price is less than the standard price
17

LO 8.3When is the direct labor time variance unfavorable?

1. when the actual quantity used is greater than the standard quantity
2. when the actual quantity used is less than the standard quantity
3. when the actual price paid is greater than the standard price
4. when the actual price is less than the standard price
18

LO 8.4A flexible budget ________.

1. predicts estimated revenues and costs at varying levels of production
2. gives actual figures for selling price
3. gives actual figures for variable and fixed overhead
4. is not used in overhead variance calculations
19

LO 8.4The variable overhead rate variance is caused by the sum between which of the following?

1. actual and standard allocation base
2. actual and standard overhead rates
3. actual and budgeted units
4. actual units and actual overhead rates
20

LO 8.4The variable overhead efficiency variance is caused by the difference between which of the following?

1. actual and budgeted units
2. actual and standard allocation base
3. actual and standard overhead rates
4. actual units and actual overhead rates
21

LO 8.4The fixed factory overhead variance is caused by the difference between which of the following?

1. actual and standard allocation base
2. actual and budgeted units
4. actual and standard overhead rates
22

LO 8.5Which of the following is a possible cause of an unfavorable material price variance?

3. hiring substandard workers
23

LO 8.5Which of the following is a possible cause of an unfavorable material quantity variance?

2. hiring higher-quality workers
3. paying more than should have for workers
24

LO 8.5Which of the following is a possible cause of an unfavorable labor efficiency variance?

1. hiring substandard workers
2. making too many units
4. paying too much for workers
25

LO 8.5Which of the following is a possible cause of an unfavorable labor rate variance?

1. hiring too many workers
2. hiring higher-quality workers at a higher wage
3. making too many units

## Questions

1

LO 8.1What two components are needed to determine a standard for materials?

2

LO 8.1What two components are needed to determine a standard for labor?

3

LO 8.1What elements require consideration before establishing an overhead standard?

4

LO 8.1What is a variance?

5

LO 8.2What causes the material price variance?

6

LO 8.2What causes the material quantity variance?

7

LO 8.2What are some possible causes of a material price variance?

8

LO 8.2What are some possible causes of a material quantity variance?

9

LO 8.3What is the direct labor rate variance?

10

LO 8.3What is the direct labor time variance?

11

LO 8.3What are some possible causes of a direct labor rate variance?

12

LO 8.3What are some possible causes of a direct labor time variance?

13

LO 8.3How is the total direct labor variance calculated?

14

LO 8.4What causes the variable overhead rate variance?

15

LO 8.4What causes the variable overhead efficiency variance?

16

LO 8.4What is the main difference between a flexible budget and a master budget?

17

LO 8.5What causes a favorable variance?

18

LO 8.5What causes an unfavorable variance?

19

LO 8.5When might a favorable variance not be a good outcome?

20

LO 8.5When might an unfavorable variance be a good outcome?

21

LO 8.5Identify several causes of a favorable material price variance.

22

LO 8.5Identify several causes of an unfavorable material price variance.

23

LO 8.5Identify several causes of a favorable material quantity variance.

24

LO 8.5Identify several causes of an unfavorable material quantity.

25

LO 8.5Identify several causes of a favorable labor rate variance.

26

LO 8.5Identify several causes of an unfavorable labor rate variance.

27

LO 8.5Identify several causes of a favorable labor efficiency variance.

28

LO 8.5Identify several causes of an unfavorable labor efficiency variance.

## Exercise Set A

EA1

LO 8.1Moisha is developing material standards for her company. The operations manager wants grade A widgets because they are the easiest to work with and are the quality the customers want. Grade B will not work because customers do not want the lower grade, and it takes more time to assemble the product than with grade A materials. Moisha calls several suppliers to get prices for the widget. All are within $0.05 of each other. Since they will use millions of widgets, she decides that the$0.05 difference is important. The supplier who has the lowest price is known for delivering late and low-quality materials. Moisha decides to use the supplier who is $0.02 more but delivers on time and at the right quality. This supplier charges$0.48 per widget. Each unit of product requires four widgets. What is the standard cost per unit for widgets?

EA2

LO 8.1Rene is working with the operations manager to determine what the standard labor cost is for a spice chest. He has watched the process from start to finish and taken detailed notes on what each employee does. The first employee selects and mills the wood, so it is smooth on all four sides. This takes the employee 1 hour for each chest. The next employee takes the wood and cuts it to the proper size. This takes 30 minutes. The next employee assembles and sands the chest. Assembly takes 2 hours. The chest then goes to the finishing department. It takes 1.5 hours to finish the chest. All employees are cross-trained so they are all paid the same amount per hour, $17.50. 1. What are the standard hours per chest? 2. What is the standard cost per chest for labor? EA3 LO 8.1Fiona cleans offices. She is allowed 5 seconds per square foot. She cleans building A, which is 3,000 square feet, and building B, which is 2,460 square feet. Will she finish these two buildings in an 8-hour shift? Will she have time for a break? EA4 LO 8.1Use the information provided to create a standard cost card for production of one glove box switch. To make one switch it takes 16 feet of plastic-coated copper wire and 0.5 pounds of plastic material. The plastic material can usually be purchased for$20.00 per pound, and the wire costs $2.50 per foot. The labor necessary to assemble a switch consists of two types. The first type of labor is assembly, which takes 3.5 hours. These workers are paid$27.00 per hour. The second type of labor is finishing, which takes 2 hours. These workers are paid $29.00 per hour. Overhead is applied using labor hours. The variable overhead rate is$14.90 per labor hour. The fixed overhead rate is $15.60 per hour. EA5 LO 8.2Sitka Industries uses a cost system that carries direct materials inventory at a standard cost. The controller has established these standards for one ladder (unit): Sitka Industries made 3,000 ladders in July and used 8,800 pounds of material to make these units. Smith Industries bought 15,500 pounds of material in the current period. There was a$250 unfavorable direct materials price variance.

1. How much in total did Sitka pay for the 15,500 pounds?
2. What is the direct materials quantity variance?
3. What is the total direct material cost variance?
4. What if 9,500 pounds were used to make these ladders, what would be the direct materials quantity variance?
5. If there was a $340 favorable direct materials price variance, how much did Sitka pay for the 15,500 pounds of material? EA6 LO 8.2Use the information provided to answer the questions. All material purchased was used in production. 1. What is the standard price paid for materials? 2. What is the direct materials quantity variance? 3. What is the total direct materials cost variance? 4. If the direct materials price variance was unfavorable, what would be the standard price? EA7 LO 8.2Dog Bone Bakery, which bakes dog treats, makes a special biscuit for dogs. Each biscuit uses 0.75 cup of pure semolina flour. They buy 4,000 cups of flour at$0.55 per cup. They use 3,550 cups of flour to make 4,750 biscuits. The standard cost per cup of flour is $0.53. 1. What are the direct materials price variance, the direct materials quantity variances, and the total direct materials cost variance? 2. What is the standard cost per biscuit for the semolina flour? EA8 LO 8.3Queen Industries uses a standard costing system in the manufacturing of its single product. It requires 2 hours of labor to produce 1 unit of final product. In February, Queen Industries produced 12,000 units. The standard cost for labor allowed for the output was$90,000, and there was an unfavorable direct labor time variance of $5,520. 1. What was the standard cost per hour? 2. How many actual hours were worked? 3. If the workers were paid$3.90 per hour, what was the direct labor rate variance?
EA9

LO 8.3Penny Company manufactures only one product and uses a standard cost system. The following information is from Penny’s records for May:

During May, the company used 12.5% more hours than the standard allowed.

1. What were the total standard hours allowed for the units manufactured during the month?
2. What were the actual hours worked?
3. How many actual units were produced during May?
EA10

LO 8.4ThingOne Company has the following information available for the past year. They use machine hours to allocate overhead.

What is the variable overhead efficiency variance?

EA11

LO 8.4A manufacturer planned to use $78 of variable overhead per unit produced, but in the most recent period, it actually used$76 of variable overhead per unit produced. During this same period, the company planned to produce 500 units but actually produced 540 units. What is the variable overhead spending variance?

EA12

LO 8.5Acme Inc. has the following information available:

1. Compute the material price and quantity, and the labor rate and efficiency variances.
2. Describe the possible causes for this combination of favorable and unfavorable variances.
EA13

LO 8.5Acme Inc. has the following information available:

1. Compute the material price and quantity, and the labor rate and efficiency variances.
2. Describe the possible causes for this combination of favorable and unfavorable variances.
EA14

LO 8.5Acme Inc. has the following information available:

1. Compute the material price and quantity, and the labor rate and efficiency variances.
2. Describe the possible causes for this combination of favorable and unfavorable variances.

## Exercise Set B

EB1

LO 8.1Bristol is developing material standards for her company. The operations manager wants grade A plastic tops because they are the easiest to work with and are the quality the customers want. Grade B will not work because customers do not want the lower grade, and it takes more time to assemble the product than with grade A materials. Bristol calls several suppliers to get prices for the plastic top. All are within $0.10 of each other. Since the company will use millions of the plastic tops, she decides that the$0.10 difference is important. The supplier who has the lowest price is known for delivering late and low-quality materials. Bristol decides to use the supplier who is $0.04 more but delivers on time and at the right quality. This supplier charges$0.52 per plastic top. Each unit of product requires six plastic tops. What is the standard cost per unit for plastic tops?

EB2

LO 8.1Salley is developing material and labor standards for her company. She finds that it costs $0.55 per pound of material per widget. Each widget requires 6 pounds of material per widget. Salley is also working with the operations manager to determine what the standard labor cost is for a widget. Upon observation, Salley notes that it takes 3 hours in the assembly department and 1 hour in the finishing department to complete one widget. All employees are paid$10.50 per hour.

1. What is the standard materials cost per unit for a widget?
2. What is the standard labor cost per unit for a widget?
EB3

LO 8.1Use the following information to create a standard cost card for production of one photography drone from Drone Experts.

To make one drone it takes 2 pounds of plastic material. The material can usually be purchased for $25.00 per pound. The labor necessary to build a drone consists of two types. The first type of labor is assembly, which takes 10.5 hours. These workers are paid$21.00 per hour. The second type of labor is finishing, which takes 7 hours. These workers are paid $25.00 per hour. Overhead is applied using labor hours. The variable overhead rate is$14.00 per labor hour. The fixed overhead rate is $16.00 per hour. EB4 LO 8.1Mateo makes gizmos. He would like to set up a system to help him manage his business. The gizmos are made in a standard process. There is a certain amount of material and labor that goes into each gizmo. The only difference between the gizmo is the color of the material. What information should Mateo collect, how should he format it, and what kind of reports should he prepare to help him run his business? EB5 LO 8.2Smith Industries uses a cost system that carries direct materials inventory at a standard cost. The controller has established these standards for the cost of one basket (unit): Smith Industries made 3,000 baskets in July and used 15,500 pounds of material to make these units. Smith Industries paid$39,370 for the 15,500 pounds of material.

1. What was the direct materials price variance for July?
2. What was the direct materials quantity variance for July?
3. What is the total direct materials cost variance?
4. If Smith Industries used 15,750 pounds to make the baskets, what would be the direct materials quantity variance?
EB6

LO 8.2Lizbeth, Inc., makes ice cream. The toffee coffee ice cream takes 4 quarts of cream, 3 cups of sugar, 2 tablespoons of toffee flavoring, and 1.5 tablespoons of coffee flavoring per gallon. The standard prices are $2.00 per quart of cream,$0.40 per cup of sugar, $0.50 per tablespoon of toffee flavoring, and$0.75 per tablespoon of coffee flavoring.

1. What is the standard material cost for a gallon of toffee coffee ice cream?
2. If Lizbeth makes 35 gallons of toffee coffee ice cream, how much of each of the ingredients should she use?
3. If Lizbeth uses 105 quarts of cream to make 25 gallons of ice cream, what would be the cream (direct materials) quantity variance?
4. If Lizbeth uses 45 tablespoons of toffee flavoring to make 25 gallons of ice cream, what would be the toffee flavoring (direct materials) quantity variance?
EB7

LO 8.2Woodpecker manufactures sawmill equipment. They use a standard costing system and recognize material price variance at the time of material purchases. They use carbide to make the teeth on their band-saw blades. They received an order for 250 band-saw blades, but they did not have any carbide in stock. They purchased 3,500 pounds of carbide for $14,875 but should have spent$16,275. Each saw blade has a standard carbide direct materials quantity of 7.8 pounds.

1. If they used 8 pounds per blade, what would be the direct materials quantity variance?
2. If they used 7.5 pounds per blade, what would be the direct materials quantity variance?
3. Compute the direct materials price variance based on 7.5 pounds of carbide per blade actually used.
EB8

LO 8.3Case made 24,500 units during June, using 32,000 direct labor hours. They expected to use 31,450 hours per the standard cost card. Their employees were paid $15.75 per hour for the month of June. The standard cost card uses$15.50 as the standard hourly rate.

1. Compute the direct labor rate and time variances for the month of June, and also calculate the total direct labor variance.
2. If the standard rate per hour was $16.00, what would change? EB9 LO 8.3Eagle Inc. uses a standard cost system. During the most recent period, the company manufactured 115,000 units. The standard cost sheet indicates that the standard direct labor cost per unit is$1.50. The performance report for the period includes an unfavorable direct labor rate variance of $3,700 and a favorable direct labor time variance of$10,275.
What was the total actual cost of direct labor incurred during the period?

EB10

LO 8.4A manufacturer planned to use $45 of variable overhead per unit produced, but in the most recent period, it actually used$47 of variable overhead per unit produced. During this same period, the company planned to produce 200 units but actually produced 220 units. What is the variable overhead spending variance?

EB11

LO 8.4Fitzgerald Company manufactures sewing machines, and they produced 2,500 this past month. The standard variable manufacturing overhead (MOH) rate used by the company is $6.75 per machine hour. Each sewing machine requires 13.5 machine hours. Actual machine hours used last month were 33,500, and the actual variable MOH rate last month was$7.00.

Calculate the variable overhead rate variance and the variable overhead efficiency variance.

EB12

LO 8.5Acme Inc. has the following information available:

1. Compute the material price and quantity, and the labor rate and efficiency variances.
2. Describe the possible causes for this combination of favorable and unfavorable variances.
EB13

LO 8.5Acme Inc. has the following information available:

1. Compute the material price and quantity, and the labor rate and efficiency variances.
2. Describe the possible causes for this combination of favorable and unfavorable variances.
EB14

LO 8.5Acme Inc. has the following information available:

1. Compute the material price and quantity, and the labor rate and efficiency variances.
2. Describe the possible causes for this combination of favorable and unfavorable variances.

## Problem Set A

PA1

LO 8.1The comptroller wants to set the standards according to a study done by a consulting firm for a company. The consulting firm used the following assumptions: The machines never break down. Workers never take a break. The material used is perfect. The material arrives on time. No one takes a day off. Workers are well trained. Workers do not make defective units. What kinds of standards are these? Will the workers be motivated to achieve these standards?

PA2

LO 8.1Stan is opening a coffee shop next to Big State University. He knows that controlling his costs will be important to the success of the shop. He will not be able to work all the hours the shop is open, so the employees will need some guidelines to perform their jobs correctly. After talking to an accounting professor, he decides he needs a standard cost system for his shop. Describe the process Stan should follow in setting his standards for materials and labor.

PA3

LO 8.1What makes a variance favorable? Give an example of a favorable variance involving materials. What makes a variance unfavorable? Give an example of an unfavorable variance involving labor.

PA4

LO 8.2April Industries employs a standard costing system in the manufacturing of its sole product, a park bench. They purchased 60,000 feet of raw material for $300,000, and it takes 5 feet of raw materials to produce one park bench. In August, the company produced 10,000 park benches. The standard cost for material output was$100,000, and there was an unfavorable direct materials quantity variance of $6,000. 1. What is April Industries’ standard price for one unit of material? 2. What was the total number of units of material used to produce the August output? 3. What was the direct materials price variance for August? PA5 LO 8.2Ed Co. manufactures two types of O rings, large and small. Both rings use the same material but require different amounts. Standard materials for both are shown.  Large Small Rubber 3 feet at$0.25 per foot 1.25 feet at $0.25 per foot Connector 1 at$0.03 1 at $0.03 At the beginning of the month, Ed Co. bought 25,000 feet of rubber for$6,875. The company made 3,000 large O rings and 4,000 small O rings. The company used 14,500 feet of rubber.

1. What are the direct materials price variance, the direct materials quantity variance, and the total direct materials cost variance?
2. If they bought 10,000 connectors costing $310, what would the direct materials price variance be for the connectors? 3. If there was an unfavorable direct materials price variance of$125, how much did they pay per foot for the rubber?
PA6

LO 8.2The Whizbang Company makes a special type of toy. Each top takes 6 ounces of a special material that costs $3 per ounce. Whizbang bought 4,000 ounces of the material at a cost of$11,300. They used 3,400 ounces to make 534 toys. Compute the direct materials price variance, the direct materials quantity variance, and the total direct materials cost variance.

PA7

LO 8.3Ellis Company’s labor information for September is as follows:

1. Compute the standard direct labor rate per hour.
2. Compute the direct labor time variance.
3. Compute the standard direct labor rate if the direct labor rate variance was $2,712.50 (unfavorable). PA8 LO 8.3Breakaway Company’s labor information for May is as follows: 1. What is the actual direct labor rate per hour? 2. What is the standard direct labor rate per hour? 3. What was the total standard direct labor cost for May? 4. What was the direct labor rate variance for May? PA9 LO 8.3Power Co.’s labor information for June is as follows: 1. What was the actual labor rate per hour? 2. What was the standard labor rate per hour? 3. What was the total standard labor cost for units produced in June? 4. What was the direct labor time variance for June? PA10 LO 8.4Prepare a flexible budget for overhead based on the following data: PA11 LO 8.4Reddy Corporation has collected the following data for the month of June: What is the variable overhead efficiency variance? PA12 LO 8.4ABC Inc. spent a total of$48,000 on factory overhead. Of this, $28,000 was fixed overhead. ABC Inc. had budgeted$27,000 for fixed overhead. Actual machine hours were 5,000. Standard hours for units made were 4,800. The standard variable overhead rate was $4.10. What is the variable overhead rate variance? PA13 LO 8.5Recompute the variances from the second Acme Inc. exercise using$0.0725 as the standard cost of the material and $14 as the standard labor cost per hour. How has your explanation of the variances changed? ## Problem Set B PB1 LO 8.1Sameerah is trying to determine the standard hours to make one unit. She has studied the manufacturing process and is trying to determine what portion of the employees’ time should be included in the standard time to make the product. She knows that the actual time the worker is assembling, cutting, and painting should be part of the standard hours. She is questioning whether setup, down time, rest periods, and cleanup should be part of the standard hours. Explain why you would or would not include these times. PB2 LO 8.1Carl cleans offices. He has the following buildings to clean every day: building A, which is 12,500 square feet; building B, which is 24,500 square feet; building C, which is 10,500 square feet; and building D, which is 6,700 square feet. He is allowed 5 seconds per square foot. Each employee is allowed one 30-minute lunch per shift. How many employees will he need to hire? PB3 LO 8.1Freidrich is working with the operations manager to determine what the standard material cost is for a spice chest. He has watched the process from start to finish and taken detailed notes on what material is used. The easiest material to measure is the wood. Each chest uses 5 board feet and produces 1.5 feet of scrap. He is not sure what to do with the scrap that is produced; the company cannot buy the boards in any other dimensions. What amount of materials should be included in the standard for material costs? PB4 LO 8.2A company bought 45,000 pounds of plastic pellets to make DVDs at a cost of$9,900. The standard cost per pound for the pellets is 20.5 cents. Some of these pellets were used in three jobs. The first job called for 7,500 pounds but used 7,250 pounds. The second job called for 8,800 pounds but used 9,000 pounds. The third job called for 2,300 pounds but used 2,250 pounds. Compute the direct materials price variance and the direct materials quantity variance for each job and in total. Why would you want to calculate the direct materials quantity variance for each job?

PB5

LO 8.2Illinois Company is a medium-sized company that makes dresses. During the month of June, 8,575 dresses were made. All material purchases were used to make the dresses. The company had this information: standard per dress of 6 yards of material at $6.20 per yard. The actual quantity was 52,000 yards at a cost of$325,520. Compute the direct materials price variance, the direct materials quantity variance, and the total direct materials cost variance.

PB6

LO 8.2Corolla Manufacturing has a standard cost for steel of $20 per pound for a product that uses 4 pounds of steel. During September, Corolla purchased and used 4,200 pounds of steel to make 1,040 units. They paid$20.75 per pound for the steel. Compute the direct materials price variance, the direct materials quantity variance, and the total direct materials cost variance for the month of September. What would change if Corolla had made 2,200 units?

PB7

LO 8.3Marymount Company makes one product. In the month of April, it made 3,500 units. Workers were paid $32 per hour for labor, for a total of$718,848. The standard hours per unit are 6.4, and the standard labor wage rate is $38.40 per hour. 1. What are the actual hours worked? 2. What are the standard hours for the units made? 3. What is the direct labor rate variance for April? 4. What is the direct labor time variance for April? 5. What is the total direct labor variance for April? PB8 LO 8.3Adam Inc.’s records for May include the following information: 1. What are Adam’s standard labor hours for the units made? 2. What is Adam’s total standard labor cost for the units made? PB9 LO 8.3Ribco’s labor cost information for making its only product for March is as follows: 1. What is the direct labor rate variance? 2. What is the direct labor time variance? 3. What is the total direct labor variance? PB10 LO 8.5Use the following standard cost card for 1 gallon of ice cream to answer the questions. Actual direct costs incurred to make 50 gallons of ice cream: • 275 quarts of cream at$1.05 per quart
• 832 ounces of sugar at $0.075 per ounce • 165 minutes of labor at$37 per hour

All material used was bought during the current period.

1. Compute the material and labor variances.
2. Comment on the results and possible causes of the variances.
PB11

LO 8.5Use the following standard cost card for 1 gallon of ice cream to answer the questions.

Actual direct costs incurred to make 50 gallons of ice cream:

• 275 quarts of cream at $1.05 per quart • 832 ounces of sugar at$0.075 per ounce
• 165 minutes of labor at \$37 per hour

All materials used were bought during the current period.

1. Compute the material and labor variances.
2. Comment on the results and possible causes of the variances.

## Thought Provokers

TP1

LO 8.1How do you balance a firm’s need to succeed and the need for not asking the workers for perfection?

TP2

LO 8.1What type of firm would use standard costing? What type of firm would not use standard costing?

TP3

LO 8.2You started your own construction business and need to determine the cost of materials used to build one house, and how many materials you will need to do so.

• Where would you begin to determine the standard price and quantity needs to build one house?
• What would produce a difference between the standard cost to build a house and the actual cost? What would cause a favorable outcome? What would cause an unfavorable outcome?
• What action might your company take if you had an unfavorable total direct materials cost variance?
TP4

LO 8.3Is labor a true variable cost?

TP5

LO 8.4Why would managers use a flexible budget? What information does it provide that a regular budget does not?

TP6

LO 8.4Fill in the blanks in the following flexible budget:

TP7

LO 8.4Before automation became more prevalent, overhead was often calculated and allocated as a function of direct labor costs or direct labor hours. Why was this the case, and has this pattern changed?

TP8

LO 8.5In your opinion, is it important that an organization set standards and measure them monthly? Why or why not?