CHAPTER 24

STANDARD COST SYSTEMS

OVERVIEW OF EXERCISES, PROBLEMS, CASES,

AND INTERNET ASSIGNMENT
Learning
Exercises Topic Objectives Characteristics
24–1 Terminology 1–5 Conceptual
24–2 Variance relationships 3 Mechanical, analytical
24–3 Computing variances 3 Mechanical
24–4 Computing and interpreting materials 1, 3 Mechanical, conceptual
variances
24–5 Computing and interpreting labor 1, 3 Mechanical, conceptual
variances
24–6 Computing and interpreting labor 1, 3 Mechanical, conceptual
variances
24–7 Elements of materials variances 3 Mechanical, analytical
24–8 Interpreting variances 5 Conceptual, analytical
24–9 Understanding overhead variances 3, 4 Mechanical, conceptual
24–10 Computing overhead variances 3, 4 Mechanical
24–11 Overhead cost variances 3, 4, 5 Mechanical, conceptual
24–12 Understanding overhead variances 3, 4 Mechanical, analytical
24–13 Computing materials and labor variances 3 Mechanical
24–14 Causes of variances 1, 3, 5 Conceptual

Problems
24–1 Understanding materials variances 1, 3, 5 Mechanical, conceptual
24–2 Understanding materials variances 1, 3 Mechanical, analytical
24–3 Computing and journalizing variances 1, 3, 4 Mechanical
24–4 Computing and journalizing variances 1, 3, 4 Mechanical
24–5 Comprehensive variance problem 1, 3, 4 Mechanical, analytical
24–6 Comprehensive variance problem 1, 3, 4 Mechanical, analytical
24–7 Comprehensive variance problem 1, 3, 4 Mechanical, analytical
24–8 Comprehensive variance problem 1, 3, 4, 5 Mechanical, analytical
24–9 Variance relationships with missing data 1, 3, 4 Analytical, mechanical
24–10 Variance relationships with missing data 1, 3, 4 Analytical mechanical
24–11 Understanding variances 3, 4 Mechanical, conceptual

Cases
24–1 Variances and determining responsibility 1, 3, 4, 5 Conceptual
24–2 Determining and using standard costs 1, 3, 4, 5 Mechanical, analytical

Business Week
Assignment
24–3 Business Week assignment: U.S. Navy’s 2, 5 Conceptual, group
M1 Tanks

248 © The McGraw-Hill Companies, Inc., 2005

 Internet Learning
Assignment Topic Objectives Characteristics
24–1 Spending variances 4, 5 Mechanical, conceptual

DESCRIPTIONS OF PROBLEMS, CASES,

AND INTERNET ASSIGNMENT
Below are brief descriptions of each problem, case, and the Internet assignment. These descriptions are
accompanied by the estimated time (in minutes) required for completion and by a difficulty rating. The time
estimates assume use of the partially filled-in working papers.

Problems
24–1 Brown Pharmaceuticals 15 Medium
Students are required to compute materials variances and determine the
importance of controlling usage variances in the pharmaceutical industry.

24–2 Wilson’s 25 Strong

Materials variances must be computed with missing data. The problem
requires an understanding of relationships among variances.

24–3 AgriChem Industries 30 Medium

Compute cost variances for direct materials, direct labor, and overhead, and
prepare journal entries to record manufacturing costs in a standard cost
system.

24–4 American Hardwood Products 25 Medium

Prepare journal entries to record cost variances and the costs incurred in the
Work in Process account. Also record cost of units completed and cost of units
sold. Compute fixed manufacturing overhead.

24–5 Sven Enterprises 45 Strong

A comprehensive problem requiring knowledge of all variances and corre-
sponding journal entries.

24–6 Slick Corporation 45 Strong

A comprehensive problem requiring knowledge of all variances and corre-
sponding journal entries

24–7 Polyglaze, Inc. 40 Strong

Compute cost variances and prepare journal entries to record the flow of
manufacturing costs through a standard cost accounting system.

24–8 Heritage Furniture Co. 40 Strong

A comprehensive standard cost problem. Requires computation of cost
variances, journal entries, and an analysis of the company’s strengths and
weaknesses.

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24–9 PuzzCo Corporation 60 Strong
This is a comprehensive problem with missing data. An analytical approach is
required. This would be an excellent problem to assign to small groups or to
teams of students.

24–10 Ripley Corporation 60 Strong

This is a comprehensive problem with missing data. An analytical approach is
required. This would be an excellent problem to assign to small groups or to
teams of students.

24–11 The Anton Company 45 Medium

Given budget items and a variance report, the student is asked to solve for
various actual amounts. Also, the meaning of favorable and unfavorable
variances must be applied. A good comprehensive review problem well suited
for a group assignment.

Cases
24–1 It’s Not My Fault 25 Strong
In a company using standard costs and a responsibility cost accounting system,
who should be charged with the responsibility for unfavorable labor rate
variances incurred when the production department works overtime to fill
“rush” orders?

24–2 Armstrong Chemical 50 Strong

Evaluate arguments given by the president of a company against the revision
of standard costs and the value assigned to inventory. Assuming that standards
for the year just ended should be revised, determine the value of ending
inventory using revised standard costs.

Business Week Assignment

24–3 Business Week Assignment: U.S. Navy’s M1 Tanks 15 Easy
With a partner, students consider the impact of changing technology on an M1
tank’s standard cost.

Internet Assignment
24–1 Delta and Continental Airlines 30 Medium
Students are given a budgeted amount for an airline ticket to a given
destination. Using actual ticket prices obtained from the airlines’ web sites
they are to calculate a current spending variance. Factors that might affect the
reasonability of the budgeted amount are also discussed.

250 © The McGraw-Hill Companies, Inc., 2005

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1. Standard costs are predetermined estimates of what it should cost to produce a product or to perform
a particular operation under normal conditions. The use of a standard cost helps management plan
(preparing a budget, for example) and control, which requires the establishment of performance
standards. The essence of control is the comparison of actual results (costs incurred, for example) with
the performance standards and the taking of corrective action when actual results do not measure up to
standards.
2. The statement is incorrect because job order and process are the names of cost accounting systems in
which costs may be compiled on either an actual cost basis or a standard cost basis. In other words,
standard costs may be used in connection with either a job order cost system or a process cost system.
3. Standard costs are developed from a set of assumptions about future (budgeted) prices, wages,
production methods, and normal production levels. If unexpected changes in prices, such as the costs
of direct materials or wage rates occur, the standard costs should be revised to reflect the new existing
conditions. Also, standard costs should be revised if significant changes are made in production
methods or in the normal volume of production.
4. Variances from standard cost that are generally computed are:
Direct materials: price and quantity variances.
Direct labor: rate and efficiency variances.
Manufacturing overhead: spending and volume variances.
5. The production manager exercises a degree of control over the quantities of materials used in the
production process and is therefore responsible for the materials quantity variance. However, the price
paid for materials is negotiated by the purchasing department, not by the production manager.
Therefore, the production manager should not be held responsible for the materials price variance.
6. A favorable labor efficiency variance indicates that the actual number of labor hours worked in
achieving a given level of production was less than the standard number of hours for that production
level. The labor efficiency variance is equal to the difference between the standard and the actual labor
hours multiplied by the standard hourly rate.
7. The amount of fixed manufacturing overhead included in the standard unit cost is computed under the
assumption of a normal volume of production. Whenever actual production is below normal volume,
the fixed manufacturing overhead costs charged to production (standard fixed overhead per unit
times units produced) will be less than actual fixed manufacturing overhead costs, resulting in an
unfavorable volume variance. A favorable volume variance will occur whenever actual production
exceeds normal volume.
8. A basic principle in evaluating the performance of department managers is that managers should be
evaluated based only upon events under their control. An unfavorable volume variance results
automatically whenever the actual volume of production is less than the “normal” level assumed in
developing the standard unit cost. The level of production scheduled in a given month may be affected
by many factors that are not controllable by the production manager, such as seasonal demand for the
product or the company’s desire to reduce the size of its inventories. Thus, as long as the production
department produces the desired (scheduled) number of units, the production manager has no control
over the resulting volume variance.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 251
 SOLUTIONS TO EXERCISES

Ex. 24–1 a. Standard costs

b. Labor efficiency variance
c. Volume variance
d. Materials quantity variance
e. Spending variance
f. Materials price variance
g. Labor rate variance

Ex. 24–2 Actual costs incurred:

Direct materials: Standard cost ($90,000), plus unfavorable price variance
($4,500), less favorable quantity variance ($2,700) ............................................... $ 91,800
Direct labor: Standard cost ($180,000), less favorable rate variance ($1,800),
plus unfavorable efficiency variance ($5,400)........................................................ $183,600
Manufacturing overhead: Standard cost ($270,000), less favorable spending
variance ($3,600) and favorable volume variance ($2,400) .................................. $264,000

Ex. 24–3 Actual quantity used Actual quantity used Standard quantity
at actual price at standard price at standard price
20,800 lbs. × $2.05/lb.* 20,800 lbs. × $2.00/lb. 20,000 lbs. × $2.00/lb.
$42,640 $41,600 $40,000

Price Variance Quantity Variance

$1,040 Unfavorable $1,600 Unfavorable

Total Materials Variance: $2,640 Unfavorable

Alternative solution:
Materials Price Variance = Actual Quantity × (Standard Price − Actual Price)
= 20,800 lbs. × ($2.00/lb. − $2.05/lb.*)
= −$1,040 (or $1,040 Unfavorable)
Materials Quantity Variance = Standard Price × (Standard Quantity − Actual Quantity)
= $2.00/lb. × (20,000 lbs. − 20,800 lbs.)
= − $1,600 (or $1,600 Unfavorable)
*Actual materials cost, $42,640, divided by actual quantity, 20,800 lbs., equals actual unit
cost, $2.05/lb.

252 © The McGraw-Hill Companies, Inc., 2005

Ex. 24–4 a. Gumchara’s materials price variance is computed as follows:
Materials Price Variance = Actual Quantity Used × (Standard Price − Actual Price)
= 2,800 grams × ($1.25 − $1.40*)
= −$420 (or $420 Unfavorable)
*Actual Price per Gram = $3,920 ÷ 2,800 grams = $1.40/gram

b. Gumchara’s materials quantity variance is computed as follows:

Materials Quantity Variance = Standard Price × (Standard Quantity − Actual Quantity)
= $1.25 per gram × (2,080 grams* − 2,800 grams)
= −$900 (or $900 Unfavorable)
*Standard Quantity Allowed = 520 units × 4 grams/unit = 2,080 grams

c. Gumchara’s overhead volume variance will be unfavorable because its actual output
for the period (520 units) was less than “normal” output (550 units).

Ex. 24–5 a. $8.80 per hour ($24,464 ÷ 2,780 hrs.)

b. Labor Rate Variance = Actual Hours × (Standard Hourly Rate − Actual Hourly Rate)
= 2,780 hrs. × [$8.25/hr. − $8.80/hr. (determined in part a)]
= −$1,529 (or $1,529 Unfavorable)

Labor Efficiency Variance = Standard Hourly Rate × (Standard Hours − Actual

Hours)
= $8.25 × [(4,000 × .75 hr.) − 2,780 hrs.]
= $8.25 × 220 hrs.
= $1,815 Favorable

c. Yes, the strategy of using more highly paid workers was effective. The standard direct
labor cost of producing 4,000 vases is $24,750 (4,000 × .75 × $8.25). Actual direct labor
costs incurred in September amounted to $24,464, for a favorable total labor variance
of $286. This favorable total labor variance is consistent with the computations in part
b, which indicate that the $1,815 savings from increased efficiency exceeds by $286 the
additional costs incurred from paying the higher-than-standard wage rate.

Ex. 24–6 a. Marlo’s labor rate variance is computed as follows:

Labor Rate Variance = Actual Labor Hours × (Standard Rate − Actual Rate)
= 3,600 hrs. × ($16 − $18*)
= −$7,200 (or $7,200 Unfavorable)
*Actual Rate per Hour = $64,800 ÷ 3,600 hours = $18/hour

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 253
 b. Marlo’s labor efficiency variance is computed as follows:
Labor Efficiency Variance = Standard Rate × (Standard Hours − Actual Hours)
= $16 per hour × (4,500 hours* − 3,600 hours)
= $14,400 Favorable
*Standard Hours Allowed = 9,000 units × 0.5 hours/unit = 4,500 hours

c. Extended hours worked during the period may have resulted in an increased average
wage rate due to overtime wage premiums. This may explain Marlo’s unfavorable
labor rate variance. The standard time allowed to produce a single unit is 0.5 hours.
The average time it actually took to produce a single unit during the period was 0.4
hours (3,600 hours/9,000 units). Thus, although many employees worked extra hours
during the period, their time spent in production was efficiently used as evidenced by
Marlo’s favorable labor efficiency variance.

Ex. 24–7 a. Standard price, $8.75 per pound

The unfavorable materials price variance, $910, indicates actual costs were $0.25 per
pound above standard ($910 ÷ 3,640 lbs. = $0.25/lb.). Thus, as the actual cost was
$9.00/lb., the standard cost must have been $8.75/lb.
b. Standard price, $8.75 per pound
The materials quantity variance is found by multiplying the standard materials price
by the difference between the standard quantity of materials and the actual quantity
used. The standard price of materials, $8.75/lb., was determined in part a, above.
c. Actual quantity of materials used, 3,640 pounds
In computing the materials quantity variance, the actual quantity of materials used is
deducted from the standard quantity, and this difference is multiplied by the standard
price. Thus, (c) represents the actual quantity of materials used. This amount, 3,640
pounds, appeared in the partially complete formula for computing the materials price
variance.
d. Materials quantity variance, $1,400 favorable
Computation: $8.75 Standard Price × (3,800 Standard Pounds − 3,640 Actual Pounds)
= $1,400.

Ex. 24–8 a. A favorable direct materials price variance means that the purchase price of materials
was lower than budgeted. Reasons for favorable price variances could include better
negotiation on the part of purchasing agents, the purchase of lower quality materials
at a lower price, higher quantity discounts, inaccurate budgeted prices for materials,
or a lowering of the basic cost of materials due to external economic factors.

b. One explanation of the variances is that higher skilled workers were hired at wages
greater than the budgeted rate. The higher skilled workers may have been more efficient
at performing their tasks and at using materials, resulting in favorable labor efficiency
and materials quantity variances. The favorable materials price variance could be due to
any of the factors listed in part a (except the purchase of lower quality materials).

254 © The McGraw-Hill Companies, Inc., 2005

Ex. 24–9 Given that Ringo incurred actual overhead costs of $8,000, applied overhead costs of
$7,200, and reported a $1,500 unfavorable overhead spending variance for the period, we
know that its standard overhead allowed was $6,500 and that its overhead volume
variance was $700 favorable as shown below:

Actual Overhead Standard Overhead Overhead

Costs Incurred Costs Allowed Costs Applied
$8,000 ? $7,200

$1,500 Unfavorable ?
Spending Variance

From the above diagram, we see the standard overhead costs allowed must be $6,500
($8,000 less the $1,500 unfavorable spending variance). Since overhead costs applied
($7,200) exceeds the standard amount allowed ($6,500), actual output must have exceeded
normal output, making the $700 volume variance favorable.

Ex. 24–10 Overhead spending variance:

Overhead budgeted for actual production (18,000 units):
Fixed..................................................................................................... $300,000
Variable ($5 per unit × 18,000 units) ................................................ 90,000
Overhead per flexible budget ............................................................................ $ 390,000
Actual overhead ...................................................................................................... 383,800
Overhead spending variance—favorable ............................................................. $ 6,200

Volume variance:
Overhead applied to Work in Process Inventory at standard cost
(18,000 units × $20/unit)....................................................................................... $ 360,000
Less: Budgeted overhead for 18,000 unit production level................................. 390,000
Volume variance (unfavorable) ............................................................................. $ (30,000)

Ex. 24–11 a. Overhead Spending Variance = Standard Overhead Allowed at Actual Production
Level − Actual Overhead Costs
Standard overhead allowed at the actual production of 4,500 units:
Fixed overhead allowed ................................................................................... $40,000
Variable overhead allowed
($60,000/10,000 hrs. × 2 hours per unit × 4,500 units) ................................ 54,000
Total overhead allowed................................................................................ $94,000
Spending Variance = $94,000 − $93,000 = $1,000 Favorable

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 255
 b. Overhead Volume Variance = Overhead Applied − Overhead Allowed at Actual
Production Level
Budgeted Overhead
Overhead Rate per Direct Labor Hour = Budgeted Labor Hours

= $100,000
10,000 hours = $10 per direct labor hour

Overhead rate per unit = $10 per labor hour × 2 labor hours per unit = $20 per unit
Overhead applied = 4,500 actual production units × $20 per unit = $90,000
Volume variance = $90,000 − $94,000 (from part a) = $4,000 Unfavorable

c. Although the overall overhead variance is unfavorable, it is mostly due to an unfavor-

able volume variance, reflecting that actual production was less than budgeted pro-
duction. The overhead spending variance was favorable, due to fixed costs that were
$2,000 lower than expected ($40,000 − $38,000) and variable costs that were $1,000
higher than allowed at the actual production level ($54,000 − $55,000). Zeta’s manager
may want to investigate why the variable overhead costs per unit were higher than
expected and determine if it is linked to the lower fixed costs. As long as Zeta is
meeting its sales demand, the unfavorable volume variance may not require any
corrective action.

Ex. 24–12 The entry to close McGill’s unfavorable overhead spending variance required that the
variance account be credited for $600. Given that the Cost of Goods Sold account was also
credited for $4,200 to close both the spending and the volume variance, its volume
variance must have been favorable by $4,800 as shown in the following journal entry:
Overhead Volume Variance................................................................... 4,800*
Overhead Spending Variance........................................................................ 600
Cost of Goods Sold.......................................................................................... 4,200
*The entry required to close McGill’s favorable volume variance of $4,800.

Ex. 24–13 a. Materials Price Variance = Actual Quantity × (Standard Price − Actual Price)
= 27,000 yds. × ($3.10/yd. − $3.05/yd.)
= $1,350 Favorable

Materials Quantity Variance = Standard Price × (Standard Quantity − Actual Quantity)

= $3.10/yd. × (26,250 yds.* − 27,000 yds.)
= −$2,325 (or $2,325 Unfavorable)
*15,000 pillowcases × 1.75 yds./pillowcase = 26,250 yds.

256 © The McGraw-Hill Companies, Inc., 2005

 b. Labor Rate Variance = Actual Hours × (Standard Hourly Rate − Actual Hourly Rate)
= 3,300 hrs. × ($5.95/hr − $5.80/hr.*)
= $495 Favorable
*$19,140 ÷ 3,300 hrs. = $5.80/hr.

Labor Efficiency Variance = Standard Hourly Rate × (Standard Hours − Actual Hours)
= $5.95/hr. × (3,000 hrs.** − 3,300 hrs.)
= −$1,785 (or $1,785 Unfavorable)
**Standard Quantity = 15,000 pillowcases × .2 hr./pillowcase = 3,000 hrs.

Ex. 24–14 a. A favorable materials price variance results from the purchasing department being able
to acquire direct materials at a price below standard cost. This may result from
finding a lower price supplier or from obtaining discounts for quantity purchases. The
manager of the purchasing department (purchasing agent) is responsible for this
variance.

b. An unfavorable labor rate variance may result from incurring unexpected overtime
costs or from using higher payscale workers than are called for in the cost standards to
perform specific manufacturing activities. The production manager is responsible for
the scheduling of direct workers and for the labor rate variance.

c. A favorable volume variance results from producing more units during the period than
the average level of production assumed in determining the standard cost. Volume
variances result merely from the mechanics of using a standard unit cost to apply fixed
overhead to production. Therefore, volume variances do not necessarily indicate
efficiency or inefficiency, and no manager is held “responsible” for these variances.

d. An unfavorable materials quantity variance means that more than the standard
quantity of materials was used in the manufacture of the units produced. Causes
include employee carelessness or inexperience, production machinery that is out of
adjustment, or, perhaps, the purchase of a lower-grade material by the purchasing
department. In most cases, the production manager is responsible for the efficient use
of materials and is responsible for the materials quantity variance. If, however, the un-
favorable variance stems from the purchase of low-grade materials, responsibility rests
with the manager deciding to purchase this type of material (production manager or
purchasing agent).

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 257
 SOLUTIONS TO PROBLEMS
15 Minutes, Medium PROBLEM 24–1
BROWN PHARMACEUTICALS

a. MPV = Actual Quantity × (Standard Price − Actual Price)

= 100,000 grams × ($50/g − $50/g*)
= $0
*Actual Price = $5,000,000 ÷ 100,000 grams = $50 per gram

b. Given that Brown’s materials price variance equals its materials quantity variance, both variances
must equal zero. Thus, the standard quantity of material allowed per batch of Zantig must equal
the 2,500 grams actually used, as shown below:
Total grams used.......................................................................................... 100,000
Number of batches....................................................................................... 40
Grams per batch .......................................................................................... 2,500 grams (or 2.5 kg)

c. Materials usage in the pharmaceutical industry must be extremely accurate and precise. Thus, one
would not expect to see a significant materials quantity variance.

258 © The McGraw-Hill Companies, Inc., 2005

25 Minutes, Strong PROBLEM 24–2
WILSON’S

a. MPV = Actual Quantity × (Standard Price − Actual Price)

= 600 pounds × ($15/lb − $16/lb)
= −$600 (or $600 Unfavorable)

b. The materials quantity variance (MQV) is used to find the standard quantity of material allowed
for producing 550 units:
MQV = Standard Price × (Standard Quantity − Actual Quantity)
−$300 = $15/lb × (Standard Quantity − 600 pounds)

Thus we may solve for the Standard Quantity as follows:

−300 = 15 (Standard Quantity) − 9,000
8,700 = 15 (Standard Quantity)
8,700 ÷ 15 = (Standard Quantity) = 580 pounds

c. Work in Process Inventory (580 pounds × $15 per pound) ............................. 8,700
Materials Quantity Variance (unfavorable)...................................................... 300
Materials Price Variance (unfavorable) ............................................................ 600
Direct Materials Inventory (600 pounds × $16 per pound)...................................... 9,600
To record direct materials applied to production.

d. Wilson’s overhead volume variance is unfavorable by $600, given that it is twice the unfavorable
materials quantity variance of $300. The volume variance is unfavorable because actual output of
500 units was less than normal output of 550 units.

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30 Minutes, Medium PROBLEM 24–3
AGRICHEM INDUSTRIES

a. Computation of materials price variance (MPV):

MPV = Actual Quantity Used × (Standard Price − Actual Price)
= 102,500 lbs. × ($0.60/lb − $0.57/lb.)
= 102,500 lbs. × $0.03/lb.
= $3,075 Favorable

Computation of materials quantity variance (MQV):

MQV = Standard Price × (Standard Quantity − Actual Quantity)
= $0.60 × [(500 lbs. × 200 batches) − 102,500 lbs.]
= $0.60 × −2,500 lbs.
= −$1,500 (or $1,500 Unfavorable)

Computation of labor rate variance (LRV):

LRV = Actual Hours × (Standard Hourly Rate − Actual Hourly Rate)
= 4,750 × ($7.00/hr. − $6.80/hr.)
= 4,750 × $0.20/hr.
= $950 Favorable

Computation of labor efficiency variance (LEV):

LEV = Standard Hourly Rate × (Standard Hours − Actual Hours)
= $7.00/hr. × [(25 hrs. × 200 batches) − 4,750 hrs.]
= $7.00/hr. × 250 hrs.
= $1,750 Favorable

Overhead variances are computed on the following page.

260 © The McGraw-Hill Companies, Inc., 2005

 PROBLEM 24–3
AGRICHEM INDUSTRIES (concluded)

Computation of overhead spending variance:

Overhead budgeted for 200 batches:
Fixed $ 5 0 0 0 0
Variable (200 batches × $25 per batch) 5 0 0 0
Total budgeted overhead $ 5 5 0 0 0
Less: Actual overhead for the month 5 4 5 2 5
Overhead spending variance (favorable) $ 4 7 5

Computation of volume variance:

Overhead applied at standard cost ($225 × 200 batches) $ 4 5 0 0 0
Budgeted overhead (above) 5 5 0 0 0
Volume variance (unfavorable) $ ( 1 0 0 0 0)

b.
General Journal

Jan. 31 Work in Process Inventory (at standard) 6 0 0 0 0

Materials Quantity Variance 1 5 0 0
Materials Price Variance 3 0 7 5
Materials Inventory (actual) 5 8 4 2 5
To record direct materials used in January.
Standard cost (200 batches × $300) $60,000
Actual cost $58,425

31 Work in Process Inventory (at standard) 3 5 0 0 0

Labor Rate Variance 9 5 0
Labor Efficiency Variance 1 7 5 0
Direct Labor (actual) 3 2 3 0 0
To record direct labor cost applicable to January
production:
Standard cost (200 batches × $175) $35,000
Actual cost $32,300

31 Work in Process Inventory (at standard) 4 5 0 0 0

Volume Variance 1 0 0 0 0
Overhead Spending Variance 4 7 5
Manufacturing Overhead (actual) 5 4 5 2 5
To apply overhead to work in process, using standard
unit cost:
Standard cost (200 batches × $225) $45,000
Actual cost $54,525

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25 Minutes, Medium PROBLEM 24–4
AMERICAN HARDWOOD PRODUCTS
a.
General Journal

(1) Work in Process (standard cost) 9 0 0 0 0

Materials Quantity Variance 8 4 0 0
Materials Price Variance 2 4 0 0
Direct Materials Inventory (actual cost) 9 6 0 0 0
To record materials used.

(2) Work in Process (standard cost) 8 4 0 0 0

Labor Efficiency Variance 1 5 0 0
Labor Rate Variance 3 0 0 0
Direct Labor (actual cost) 8 2 5 0 0
To record direct labor cost.

(3) Work in Process (standard cost) 1 1 5 5 0 0

Overhead Spending Variance 3 2 4 0
Overhead Volume Variance 4 5 0 0
Manufacturing Overhead (actual cost) 1 2 3 2 4 0
To record manufacturing overhead assigned to
production, and to record overhead variances.

b. (1) Finished Goods Inventory (at standard cost) 2 7 0 0 0 0

Work in Process (at standard cost) 2 7 0 0 0 0
To transfer cost of units completed to finished goods
inventory, 9,000 units at $30 per unit.

(2) Cost of Goods Sold (at standard cost) 2 6 4 0 0 0

Finished Goods Inventory (at standard cost) 2 6 4 0 0 0
To record cost of units sold, 8,800 units at $30 per unit.

c. Fixed overhead per month = $4,500 (unfavorable

volume variance) ÷ .10 (idle capacity percentage) $ 4 5 0 0 0

262 © The McGraw-Hill Companies, Inc., 2005

45 Minutes, Strong PROBLEM 24–5
SVEN ENTERPRISES

a. Materials Price Variance = Actual Quantity Used × (Standard Price − Actual Price)
= 148,450 pounds × ($4.20 − $4.00*)
= $29,690 Favorable
*Actual Price per Pound = $593,800/148,450 pounds = 4.00/pound

Materials Quantity Variance = Standard Price × (Standard Quantity − Actual Quantity)

= $4.20 per pound × (149,940 pounds* − 148,450 pounds)
= $6,258 Favorable
*Standard Quantity Allowed = 147 batches × 1,020 pounds/batch = 149,940 pounds

b. Labor Rate Variance = Actual Labor Hours × (Standard Rate − Actual Rate)
= 2,200 hours × ($8.50 − $8.00*)
= $1,100 Favorable
*Actual Rate per Hour = $17,600/2,200 hours = $8.00/hour

Labor Efficiency Variance = Standard Hourly Rate × (Standard Hours − Actual Hours)
= $8.50 per hour × (2,058 hours* − 2,200 hours)
= −$1,207 (or $1,207 Unfavorable)
*Standard Hours Allowed = 147 batches × 14 hours/batch = 2,058 hours

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 263
 PROBLEM 24–5
SVEN ENTERPRISES (continued)

c. Overhead variances:

Actual Overhead Standard Overhead Overhead

Costs Incurred Costs Allowed Costs Applied
Fixed $2,450 Fixed $ 2,800 $29/batch × 147 batches = $4,263
Variable 1,175 Variable 1,323*
$3,625 $ 4,123

$498 Favorable $140 Favorable

Spending Variance Volume Variance
*Standard Variable Overhead Allowed = $9.00/batch × 147 batches = $1,323

d. Entry to charge materials to production:

Work in Process Inventory (at standard cost) .................................................. 629,748*
Materials Quantity Variance (favorable) .................................................................. 6,258
Materials Price Variance (favorable)......................................................................... 29,690
Direct Materials Inventory (at actual cost) ............................................................... 593,800
To record the cost of direct materials charged to production.
*147 actual batches × 1,020 pounds allowed per batch × $4.20 per pound = $629,748

e. Entry to charge direct labor to production:

Work in Process Inventory (at standard cost) .................................................. 17,493*
Labor Efficiency Variance (unfavorable).......................................................... 1,207
Labor Rate Variance (favorable) ............................................................................... 1,100
Direct Labor (at actual cost) ....................................................................................... 17,600
To record the cost of direct labor charged to production.
*147 actual batches × 14 hours allowed per batch × $8.50 per hour = $17,493

264 © The McGraw-Hill Companies, Inc., 2005

 PROBLEM 24–5
SVEN ENTERPRISES (concluded)

f. Entry to charge overhead to production:

Work in Process Inventory (at standard cost) .................................................. 4,263
Overhead Spending Variance (favorable) ................................................................. 498
Overhead Volume Variance (favorable).................................................................... 140
Manufacturing Overhead (at actual cost) ................................................................. 3,625
To apply overhead to production.

g. Entry to transfer the 147 batches of puppy meal produced in April to finished goods:
Finished Goods Inventory (at standard cost) .................................................... 651,504
Work in Process Inventory (at standard cost) .......................................................... 651,504*
To transfer 147 batches of puppy meal to finished goods in April.
*The $651,504 figure equals the total direct materials, direct labor, and manufacturing overhead
charged to production at standard cost during April ($629,748 + $17,493 + $4,263).

h. Entry to close overapplied overhead to cost of goods sold:

Overhead Spending Variance (favorable) ......................................................... 498
Overhead Volume Variance (favorable)............................................................ 140
Cost of Goods Sold....................................................................................................... 638
To close overhead variances to Cost of Goods Sold.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 265
45 Minutes, Strong PROBLEM 24–6
SLICK CORPORATION

a. Materials Price Variance = Actual Quantity Used × (Standard Price − Actual Price)
= 16,500 gallons × ($1.30 − $1.25*)
= $825 Favorable
*Actual Price per Pound = $20,625 ÷ 16,500 gallons = $1.25/gallon

Materials Quantity Variance = Standard Price × (Standard Quantity − Actual Quantity)

= $1.30 per gallon × (16,250 gallons* − 16,500 gallons)
= −$325 (or $325 Unfavorable)
*Standard Quantity Allowed = 5,000 cases × 3.25 gallons/case = 16,250 gallons

b. Labor Rate Variance = Actual Labor Hours × (Standard Rate − Actual Rate)
= 4,200 hours × ($16 − $15)
= $4,200 Favorable

Labor Efficiency Variance = Standard Hourly Rate × (Standard Hours − Actual Hours)
= $16 per hour × (3,750 hours* − 4,200 hours)
= −$7,200 (or $7,200 Unfavorable)
*Standard Hours Allowed = 5,000 cases × 0.75 hours/case = 3,750 hours

266 © The McGraw-Hill Companies, Inc., 2005

 PROBLEM 24–6
SLICK CORPORATION (concluded)

c. Overhead variances:

Actual Overhead Standard Overhead Overhead

Costs Incurred Costs Allowed Costs Applied
Fixed $2,200 Fixed $ 2,600 $2/case × 5,000 cases = $10,000
Variable 7,750 Variable 7,500*
$9,950 $ 10,100

$150 Favorable $100 Unfavorable

Spending Variance Volume Variance
*Standard Variable Overhead Allowed = $1.50/case × 5,000 cases = $7,500

d. (1) Work in Process Inventory (at standard cost)............................................ 21,125*

Materials Quantity Variance (unfavorable) ............................................... 325
Materials Price Variance (favorable) .................................................................. 825
Direct Materials Inventory (at actual cost)......................................................... 20,625
To record the cost of direct materials charged to production.
*5,000 actual cases × 3.25 gallons allowed per case × $1.30 per gallon = $21,125

(2) Work in Process Inventory (at standard cost)............................................ 60,000*

Labor Efficiency Variance (unfavorable) ................................................... 7,200
Labor Rate Variance (favorable)......................................................................... 4,200
Direct Labor (at actual cost) ................................................................................ 63,000
To record the cost of direct labor charged to production.
*5,000 actual cases × 0.75 hours allowed per case × $16 per hour = $60,000

(3) Work in Process Inventory (at standard cost)............................................ 10,000

Overhead Volume Variance (unfavorable)................................................. 100
Overhead Spending Variance (favorable)........................................................... 150
Manufacturing Overhead (at actual cost) ........................................................... 9,950
To apply overhead to production.

(4) Finished Goods Inventory (at standard cost) ............................................. 91,125

Work in Process Inventory (at standard cost).................................................... 91,125*
To transfer 5,000 cases to finished goods in May.
*The $91,125 figure equals the total direct materials, direct labor, and manufacturing over-
head charged to production at standard cost during May ($21,125 + $60,000 + $10,000).

(5) Overhead Spending Variance (favorable)................................................... 150

Overhead Volume Variance (unfavorable)......................................................... 100
Cost of Goods Sold ................................................................................................ 50
To close overhead variances to Cost of Goods Sold.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 267
40 Minutes, Strong PROBLEM 24–7
POLYGLAZE, INC.

a. Materials price variance:

Actual Quantity × (Standard Price − Actual Price)
(8,000 units × 11 ounces) × ($0.15/oz. − $0.16/oz.) $ (8 8 0 ) Unfavorable

Materials quantity variance:

Standard Price × (Standard Quantity − Actual Quantity)
$0.15/oz. × (80,000 ounces − 88,000 ounces) $ (1 2 0 0 ) Unfavorable

Journal entry to record direct materials used in June:

Work in Process Inventory (8,000 units × 10 oz. × $0.15/oz.) 1 2 0 0 0

Materials Price Variance 8 8 0
Materials Quantity Variance 1 2 0 0
Materials Inventory (8,000 units × 11 oz. × $0.16/oz.) 1 4 0 8 0
To record cost of direct materials used in June.

b. Labor rate variance:

Actual Hours × (Standard Hourly Rate − Actual Hourly Rate)
(8,000 units × .45 hr.) × ($10.00/hr. − $10.40/hr.) $ (1 4 4 0 ) Unfavorable

Labor efficiency variance:

Standard Hourly Rate × (Standard Hours − Actual Hours)
$10.00/hr. × [(8,000 units × .5 hr.) − (8,000 units × .45 hr.)]
$10.00/hr. × 400 hrs. $ 4 0 0 0 Favorable

Journal entry to record direct labor cost for June:

Work in Process Inventory (8,000 units × .5 hr. × $10/hr.) 4 0 0 0 0

Labor Rate Variance 1 4 4 0
Labor Efficiency Variance 4 0 0 0
Direct Labor (8,000 units × .45 hr. × $10.40/hr.) 3 7 4 4 0
To record direct labor costs applicable to production during June.

268 © The McGraw-Hill Companies, Inc., 2005

 PROBLEM 24–7
POLYGLAZE, INC. (concluded)

c. Overhead spending variance:

Overhead per flexible budget—8,000 units:
Fixed $ 5 0 0 0
Variable (8,000 units × $0.50 per unit) 4 0 0 0
Total overhead per flexible budget $ 9 0 0 0
Less: Actual overhead in June ($5,000 + $4,600) 9 6 0 0
Overhead spending variance $ ( 6 0 0 ) Unfavorable

Overhead volume variance:

Overhead applied at standard cost (8,000 units × $1) $ 8 0 0 0
Less: Overhead per flexible budget (above) 9 0 0 0
Overhead volume variance $ (1 0 0 0 ) Unfavorable

Journal entry to record overhead applied to work in process:

Work in Process Inventory (8,000 units × $1 per unit) 8 0 0 0

Overhead Spending Variance 6 0 0
Overhead Volume Variance 1 0 0 0
Manufacturing Overhead (Actual cost, $5,000 + $4,600) 9 6 0 0
To apply overhead cost to 8,000 units produced at the standard
rate of $1 per unit.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 269
40 Minutes, Strong PROBLEM 24–8
HERITAGE FURNITURE CO.

a. (1) Computation of materials price variance (MPV):

MPV = Actual Quantity Used × (Standard Price − Actual Price)
= (800 units × 110 ft.) × ($1.30/ft. − $1.20/ft.)
= 88,000 ft. × $0.10
= $8,800 Favorable

(2) Computation of materials quantity variance (MQV):

MQV = Standard Price × (Standard Quantity − Actual Quantity)
= $1.30/ft. × [(800 units × 100 ft.) − (88,000 ft.)]
= $1.30/ft. × −8,000 ft.
= −$10,400 (or $10,400 Unfavorable)

(3) Computation of labor rate variance (LRV)

LRV = Actual Hours × (Standard Hourly Rate − Actual Hourly Rate)
= (800 units × 5.5 hrs.) × ($8.00/hr. − $7.80/hr.)
= 4,400 hrs. × $0.20
= $880 Favorable

(4) Computation of labor efficiency variance (LEV):

LEV = Standard Hourly Rate × (Standard Hours − Actual Hours)
= $8.00/hr. × [(800 units × 5 hrs.) − (800 units × 5.5 hrs.)]
= $8.00/hr. × −400 hours
= −$3,200 (or $3,200 Unfavorable)

Overhead variances are computed on the following page.

270 © The McGraw-Hill Companies, Inc., 2005

 PROBLEM 24–8
HERITAGE FURNITURE CO. (continued)

(5) Computation of overhead spending variance:

Overhead per flexible budget for 800 units:
Fixed $ 1 5 0 0 0
Variable (800 units × $7.00 per unit) 5 6 0 0 $ 2 0 6 0 0
Less: Actual overhead for the month 1 8 4 8 0
Overhead spending variance (favorable) $ 2 1 2 0

(6) Computation of volume variance:

Overhead applied using standard cost ($800 units × $22
per unit) $ 1 7 6 0 0
Overhead per flexible budget for 800 units
(computed above) 2 0 6 0 0
Volume variance (unfavorable) $ ( 3 0 0 0)

b.
General Journal

July 30 Work in Process Inventory (at standard) 1 0 4 0 0 0

Materials Quantity Variance 1 0 4 0 0
Materials Price Variance 8 8 0 0
Materials Inventory (at actual) 1 0 5 6 0 0
To record direct materials used during July.
Standard cost = 800 units @ $130 = $104,000
Actual cost = 800 units @ $132 = $105,600

30 Work in Process Inventory (at standard) 3 2 0 0 0

Labor Efficiency Variance 3 2 0 0
Labor Rate Variance 8 8 0
Direct Labor (actual cost) 3 4 3 2 0
To charge July production with direct labor cost.
Standard cost = 800 units @ $40.00 = $32,000
Actual cost = 800 units @ $42.90 = $34,320

30 Work in Process Inventory (at standard) 1 7 6 0 0

Volume Variance 3 0 0 0
Overhead Spending Variance 2 1 2 0
Manufacturing Overhead (actual cost) 1 8 4 8 0
To charge overhead to production at standard cost.
Standard cost = 800 units @ $22.00 = $17,600
Actual cost = $18,480

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 271
 PROBLEM 24–8
HERITAGE FURNITURE CO. (concluded)

c. Comments on cost variances:

The company appears to be having significant problems in two areas. First, the large unfavorable
materials quantity variance ($10,400) indicates that far more material is being used in the pro-
duction process than is provided for in the cost standards. Assuming that the cost standards are
reasonable, the quantity of materials being used is excessive. Second, the unfavorable labor effi-
ciency variance indicates that more labor hours are being used than indicated by the standards.
This indicates low productivity by direct workers. (The unfavorable volume variance results only
from scheduled production being less than “normal” production and is not a cause for concern.)
The company shows two significant favorable variances: the materials price variance and the
overhead spending variance. The favorable materials price variance ($8,800) may indicate that the
purchasing department is doing an excellent job of securing materials at advantageous prices. The
overhead spending variance may indicate that the production manager is doing very well at
controlling spending on overhead. However, these favorable variances may be closely linked to the
company’s problems in the areas of materials usage and labor efficiency.
The favorable materials price variance may mean that the purchasing department is purchasing
lower-grade materials than normal and perhaps contributing to the large unfavorable materials
quantity variance because some of these materials prove to be unusable. The favorable overhead
spending variance may result from unfilled supervisory positions, which may be contributing to
the inefficient use of materials and the low productivity of direct workers. Thus, management
should thoroughly investigate the causes of these cost variances.

272 © The McGraw-Hill Companies, Inc., 2005

60 Minutes, Strong PROBLEM 24–9
PUZZCO CORPORATION

a. Given that PuzzCo’s output for the period was at its “normal” level of 22,000 units, the company’s
overhead volume variance was zero. Since PuzzCo’s materials price variance was equal to its
volume variance for the period, it too, was zero. Thus, the $6,000 favorable materials variance
must apply entirely to the quantity variance.

b. Standard quantity of materials allowed:

Materials Quantity Variance = Standard Price × (Standard Quantity − Actual Quantity)
$6,000 = $2.00/pound × (Standard Quantity − 90% Standard Quantity)
$6,000 = $2.00 × Standard Quantity − $1.80 × Standard Quantity
$6,000 = $0.20/pound (Standard Quantity)
Thus, the standard quantity allowed = 6,000 ÷ $0.20 = 30,000 pounds.

c. Actual quantity of materials used:

90% × 30,000 pounds = 27,000 pounds

d. Actual direct labor hours:

Actual Time per Unit = 0.85 hours × 22,000 units = 18,700 hours
Given actual direct labor costs of $280,500, the actual direct labor rate was $15 per hour ($280,500
÷ 18,700 hours).

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 273
 PROBLEM 24–9
PUZZCO CORPORATION (concluded)

e. PuzzCo’s favorable labor variance of $1,100 equals the sum of its labor rate variance and labor
efficiency variances. Each of these variances is presented below:
Actual labor cost .................................................................................................................... $ 280,500
Add: Favorable labor variance............................................................................................. 1,100
Standard labor cost ............................................................................................................... $ 281,600
Standard labor hours allowed .............................................................................................. 17,600*
Standard labor rate ($281,600 ÷ 17,600 hours)................................................................... $ 16
*Standard hours = (.85 hours − .05 hours) × 22,000 units

f. Labor Rate Variance = Actual Labor Hours × (Standard Rate − Actual Rate)
= 18,700 hours × ($16 − $15)
= 18,700 hours Favorable

g. Labor Efficiency Variance = Standard Rate × (Standard Hours − Actual Hours)

= $16 × (17,600 − 18,700)
= −$17,600 (or $17,600 Unfavorable)

h. Given that PuzzCo’s overhead volume variance was zero (see part a above), its $3,000 unfavorable
overhead variance must apply entirely to the company’s spending variance.

274 © The McGraw-Hill Companies, Inc., 2005

60 Minutes, Strong PROBLEM 24–10
RIPLEY CORPORATION

a. Based on the journal entry to charge direct materials costs to work in process, the actual quantity
of material purchased and used during June is determined as follows:
Materials Price Variance = Actual Quantity Used × (Standard Price − Actual Price)
$8,200 = Actual Quantity Used × ($6 − $5)
Thus, the actual quantity of material used during June was 8,200 pounds.

b. Based on the journal entry to charge direct material costs to work in process, the standard quan-
tity of material allowed for the actual level of output achieved in June is determined as follows:
Materials Quantity Variance = Standard Price × (Standard Quantity − Actual Quantity)
−$1,200 = $6 per pound × (Standard Quantity − 8,200 pounds*)
−$1,200 = $6 (Standard Quantity) − $49,200
$48,000 = $6 (Standard Quantity)
Thus, the standard quantity allowed = $48,000 ÷ $6 per pound = 8,000 pounds.
*The 8,200 pounds figure was calculated in part a above.

c. Based on the journal entry to charge direct labor costs to work in process, the average per hour
labor cost incurred in June is determined as follows:
Labor Rate Variance = Actual Labor Hours × (Standard Rate − Actual Rate)
−$950 = 9,500 hours × ($9 − Actual Rate)
−$950 = $85,500 − 9,500 (Actual Rate)
−$86,450 = −9,500 (Actual Rate)
Thus, the actual hourly rate incurred = −$86,450 ÷ −9,500 hours = $9.10 per hour.

d. Based on the journal entry to charge direct labor costs to work in process, the standard direct
labor hours allowed during June is determined as follows:
Labor Efficiency Variance = Standard Hourly Rate × (Standard Hours − Actual Hours)
−$4,500 = $9 per hour × (Standard Hours − 9,500 hours)
−$4,500 = $9 (Standard Hours) − $85,500
$81,000 = $9 (Standard Hours)
Thus, the standard hours allowed = $81,000 ÷ $9 per hour = 9,000 hours.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 275
 PROBLEM 24–10
RIPLEY CORPORATION (concluded)

e. Based on the journal entry to charge overhead costs to work in process, the following relationships
exist:

Actual Overhead Standard Overhead Overhead

Costs Incurred Costs Allowed Costs Applied
$22,000 ? $25,000

$2,000 Unfavorable $5,000 Favorable

Spending Variance Volume Variance

Thus standard overhead costs allowed for in June of $20,000 can be computed as follows:
$22,000 − $2,000 = $20,000, or $25,000 − $5,000 = $20,000.

f. Finished Goods Inventory (at standard cost) .................................................... 154,000

Work in Process Inventory (at standard cost) .......................................................... 154,000*
To transfer cost of completed units to finished goods.
*The $154,000 figure equals the total direct materials, direct labor, and manufacturing overhead
charged to production at standard cost during June ($48,000 + $81,000 + $25,000).

g. Overhead Volume Variance (favorable)............................................................ 5,000

Materials Price Variance (favorable)................................................................. 8,200
Materials Quantity Variance (unfavorable)........................................... 1,200
Direct Labor Rate Variance (unfavorable) ............................................ 950
Direct Labor Efficiency Variance (unfavorable) ................................... 4,500
Overhead Spending Variance (unfavorable).......................................... 2,000
Cost of Goods Sold.................................................................................... 4,550
To close the cost variance accounts.

h. Given that Ripley’s overhead volume variance was favorable, its actual production during June
must have exceeded “normal” output.

276 © The McGraw-Hill Companies, Inc., 2005

45 Minutes, Medium PROBLEM 24–11
THE ANTON COMPANY

a. Since the direct materials quantity variance is $0, the actual quantity of materials used per stand
must equal the budgeted quantity per stand. Thus the total quantity purchased and used is:
220 stands × 3 square feet per stand = 660 square feet.

Materials Price Variance = Actual Quantity Used × (Standard Price − Actual Price)
−$33 (Unfavorable) = 660 sq. ft. × ($.25 − actual price)/sq. ft.
−$33
= $.25 − actual price
660

−$.05 = $.25 − actual price

Actual Price = $ .30 per square foot

b. Labor Efficiency Variance = Standard Hourly Rate × (Standard Hours − Actual Hours)
−$550 (Unfavorable) = $10 × (.5 hours per unit − actual hours per unit) × 220 units
−$550
$2,200 = .5 hours per unit − actual hours per unit
−.25 = .5 hours per unit − actual hours per unit
Actual Hours Per Unit = .75 hours per unit

c. Labor Rate Variance = Actual Labor Hours × (Standard Rate − Actual Rate)
$231 (Favorable) = .75 hours per unit × 220 units × ($10 per hour − actual rate)
$231 = 165 hours × ($10 per hour − actual rate)
$231
165 = $10 − actual rate
$1.40 = $10 − actual rate
Actual Rate Per Hour = $8.60 per hour

d. Overhead Spending Variance = Standard Overhead Allowed at Actual Production Level

− Actual Overhead Costs
−$210 (Unfavorable) = $1,040* − actual overhead costs
Actual Overhead Costs = $1,250

*Standard overhead allowed at the actual production of 220 units:

Fixed overhead allowed ($3 × 200 units)........................................................................... $ 600
Variable overhead allowed ($2 × 220 units) ..................................................................... 440
Total overhead allowed .................................................................................................. $1,040

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 277
 SOLUTIONS TO CASES
25 Minutes, Strong CASE 24–1
IT’S NOT MY FAULT

a. The basic problem is that the production manager is being unfairly charged with cost overruns
that should be assigned to the sales department. If we assume that filling the large “rush” order is
appropriate, the production manager apparently has no choice but to incur labor costs at over-
time rates. Under these circumstances, the production manager should not be held responsible for
exceeding a budget that does not include overtime labor costs.
Also, the performance reports of the sales department overstate that department’s contribution to
the profitability of the business. The gross profit credit to the sales department is based upon
standard costs. This practice overstates the actual gross profit earned on “rush” orders, because it
ignores any overtime costs incurred in filling these orders.

b. The production manager should not be penalized by the extra direct labor costs incurred when the
production department is asked to produce beyond normal capacity. The extra costs relating to
overtime should be considered a “normal” cost of the “rush” order and, therefore, should be
included in the cost of goods sold charged against the sales department. This may be accomplished
by charging any unfavorable labor rate variances resulting from overtime on rush orders against
the sales department, instead of the production department. This will cause the sales department
to consider the possible overtime costs in deciding whether or not to accept rush orders.

278 © The McGraw-Hill Companies, Inc., 2005

50 Minutes, Strong CASE 24–2
ARMSTRONG CHEMICAL

a. The president is not correct in arguing that the standard costs for Tough-Coat should not be
revised for purposes of valuing the inventory at the end of the year. The standards set for material
X-1 and direct labor for future periods, however, depend on anticipated prices and operating
conditions. But the issue in this problem is not future standards; the issue is to revise past standard
costs that have proved to be unrealistic, both for the evaluation of operating efficiency and for
inventory valuation purposes.
There is no merit to the president’s position that, because the cost of material X-1 “shows signs of
going up,” the standard cost of $1.00 per ounce should not be changed. The fact is that material X-
1 actually costs only $0.70 per ounce. If the ending inventory is priced on the basis of the $1.00
standard cost for material X-1, the inventory would be overstated because it would include a
fictitious cost element. A fundamental accounting principle is that inventories should be valued at
actual cost.
Since the wage rate increased by 10% early in the year, the standard unit cost for direct labor for
Tough-Coat should be increased from $0.80 to $0.88. The fact that the productivity of workers did
not increase is an important point, but it is not a relevant argument against the revision of the
standard cost for direct labor.

b. Revised
Standard Cost
per Unit
Material X-1 ($840,000 ÷ 1,200,000 ounces purchased) .............................................. $0.70
Material X-2 (No change required)............................................................................... 0.50
Direct labor ($0.80 × 110%).......................................................................................... 0.88
Factory overhead (No change required)....................................................................... 1.40
Total revised cost per unit.......................................................................................... $3.48

Revised schedule of inventory at the end of the year:

Materials:
Material X-1, 200,000 ounces @ $0.70 .............................................. $140,000
Material X-2, 100,000 pounds @ $0.50 ............................................. 50,000 $190,000
Finished goods:
Tough-Coat, 100,000 units at revised standard cost of $3.48 per unit................... 348,000
Total inventory at Dec. 31 .............................................................................................. $538,000

c. As the schedule above indicates, the ending inventory would be reduced from $560,000 to
$538,000, a reduction of $22,000. This reduction in the valuation of ending inventory would have
the effect of reducing operating income by 44% (from $50,000 to $28,000). On this point the
president is correct, but the use of an unacceptable accounting procedure cannot be defended on
grounds that the use of sound accounting “would reduce operating income.”

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 279
 CASE 24–2
ARMSTRONG CHEMICAL (concluded)

d. (1) Materials price variance (MPV) for X-1:

MPV = Actual Quantity Used × (Standard Price − Actual Price)
= 1,000,000* ounces × ($1.00/oz. − $0.70/oz.)
= $300,000 Favorable

Materials quantity variance (MQV) for X-1:

MQV = Standard Price × (Standard Quantity − Actual Quantity)
= $1.00/ounce × (1,000,000 ounces − 1,000,000* ounces)
= $0
*$1,200,000 oz. purchased − 200,000 oz. in ending inventory

(2) Materials price variance (MPV) for X-2:

MPV = Actual Quantity Used × (Standard Price − Actual Price)
= 1,050,000** pounds × ($0.50/lb. − $0.50/lb.)
= $0

Materials quantity variance (MQV) for X-2:

MQV = Standard Price × (Standard Quantity − Actual Quantity)
= $0.50 × (1,000,000 lbs. − 1,050,000** lbs.)
= −$25,000 (or $25,000 Unfavorable)
**1,150,000 oz. purchased − 100,000 oz. in ending inventory

(3) Total Labor Variance = Standard Labor Cost − Actual Labor Cost
= (1,000,000 units × $0.80) − $880,000
= −$80,000 (or $80,000 Unfavorable)

(4) Total Overhead Variance = Overhead Applied − Actual Overhead

= (1,000,000 units × $1.40) − $1,400,000
= $0

280 © The McGraw-Hill Companies, Inc., 2005

15 Minutes, Easy CASE 24–3
BUSINESS WEEK ASSIGNMENT:
U.S. NAVY’S M1 TANKS

When adding technology upgrades rather than creating a brand new product, it is difficult to
understand the production process. For example, will existing tanks be brought to a facility where the
technology is added? Will existing tanks need to have the technology added wherever they happen to
be? Will new tanks being created have the technology added as they are being created or after as a
sort of add on? The impact on standard costs when processes are impacted by add-ons from
technology upgrades primarily occurs with standard labor costs.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 281
 SOLUTION TO INTERNET ASSIGNMENT
30 Minutes, Medium INTERNET 24–1
DELTA AND CONTINENTAL AIRLINES

a. The spending variance will equal the difference between the price obtained and the budgeted
$1,000 fare per ticket.

b. The reasonableness of the standard will be affected by current airline pricing policies and how far
in advance reservations are made. Fares are often lower the earlier reservations are made and can
be substantially more expensive if they are made near the date of departure.

282 © The McGraw-Hill Companies, Inc., 2005