Managerial Accounting

Business

Quiz 10 :

Standard Costs and Variances

Quiz 10 :

Standard Costs and Variances

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What is meant by the term management by exception
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Under management by exception, managers focus their attention on results that deviate from expectations. It is assumed that results that meet expectations do not require investigation.

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Comprehensive Variance Analysis Portland Company's Ironton Plant produces precast ingots for industrial use. Carlos Santiago, who was recently appointed general manager of the Ironton Plant, has just been handed the plant's contribution format income statement for October. The statement is shown below: img *Contains direct materials, direct labor, and variable manufacturing overhead. Mr. Santiago was shocked to see the loss for the month, particularly because sales were exactly as budgeted. He stated, "1sure hope the plant has a standard cost system in operation. If it doesn't, I won't have the slightest idea of where to start looking for the problem." The plant does use a standard cost system, with the following standard variable cost per ingot: img *Based on machine-hours. During October the plant produced 5,000ingots and incurred the following costs: a.Purchased 25,000 pounds of materials at a cost of $2.95 per pound. There were no raw materials in inventory at the beginning of the month. bUsed 19,800 pounds of materials in production. (Finished goods and work in process, inventories are insignificant and can be ignored.)c.Worked 3,600 direct labor-hours at a cost of $8.70 per hour. d.Incurred a total variable manufacturing overhead cost of $4.320 for the month. A total of 1,800 machine-hours was recorded. It is the company's policy to close all variances to cost of goods sold on a monthly basis. Required: 1.Compute the following variances for October: a. Direct materials price and quantity variances. b. Direct labor rate and efficiency variances. c. Variable overhead rate and efficiency variances. 2.Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for October. What impact did this figure have on the company's income statement 3.Pick out the two most significant variances that you computed in (1) above. Explain to Mr. Santiago possible causes of these variances.
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1)a)Calculate materials quantity variance, which is the difference of standard price (SP) at the standard quantity (SQ) and the SP at the actual quantity of input (AQ).
img Calculate materials price variance, which is the difference between AQ and the actual price (AP) and the AQ at the SP.
img b)
Calculate labor efficiency variance as the difference of standard rate (SR) at the standard hour (SH) and the SR at the actual hours of input (AH).
img Calculate labor rate variance, which is the difference between actual hours (AH) at the actual rate (AR) and the actual hours at the standard rate.
img c)
Calculate variable overhead efficiency variance as follows:
img Calculate variable rate variance as follows:
img 2)
Summary of variances is as follows:
img The net unfavorable variance of $16,390 caused an increase of $16,390 in the variable cost of goods sold. It also accounts for the difference between the budgeted net operating income and the actual net loss for the month.
3)
The two largest variances are the material price variance and the labor efficiency variance.
Materials price variance: Several issues could've caused the materials price variance. These include outdated standards, uneconomical quantity purchased, higher quality materials, or a high-cost method of transport.
Labor efficiency variance: Several issues could've caused the labor efficiency variance. These include poorly trained workers, faulty equipment, work interruptions, inaccurate standards, insufficient demand or strikes.

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Direct Labor Variances AirMeals, Inc., prepares in-flight meals for a number of major airlines. One of the company's products is stuffed cannelloni with roasted pepper sauce, fresh baby corn, and spring salad. During the most recent week, the company prepared 6,000 of these meals using 1,150 direct labor-hours. The company paid these direct labor workers a total of $11,500 for this work, or $10 per hour. According to the standard cost card for this meal, it should require 0.20 direct labor-hours at a cost of $9.50 per hour. Required: 1.According to the standards, what direct labor cost should have been incurred to prepare 6,000 meals How much does this differ from the actual direct labor cost 2.Break down the difference computed in (1) above into a labor rate variance and a labor efficiency variance.
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1.
Calculate the direct labor cost that incurred to prepare 6,000 meals as follows:
• Calculate total direct labor hours allowed.
• Calculate direct labor cost using direct labor hours allowed.
Firstly, calculate total direct labor hours allowed. It is calculated by multiplying the number of meals prepared with standard direct labor hours per meal.
img Calculate total standard direct labor cost.
img Calculate the difference of standard direct labor cost and actual labor cost.
Deduct standard direct labor cost from actual labor cost incurred.
img 2.
Break down the above calculated difference amount into labor efficiency variance and labor efficiency variance.
Calculate labor efficiency variance by multiplying the difference of actual hours and standard hours with standard rate.
img Calculate labor rate variance by multiplying the difference of actual rate standard rate with actual hours.
img If both labor efficiency variance and labor rate variance are added, the result would be equal to the above calculated difference.

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What is a quantity standard What is a price standard
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Material and labor Variances Sonne Company produces a perfume called Whim. The direct materials and direct labor standards for one bottle of Whim are given below: img During the most recent month, the following activity was recorded: a.Twenty thousand ounces of material were purchased at a cost of $2.40 per ounce. b. All of the material was used to produce 2,500 bottles of Whim. c.Nine hundred hours of direct labor time were recorded at a total labor cost of $10,800. Required: 1.Compute the direct materials price and quantity variances for the month. 2.Compute the direct labor rate and efficiency variances for the month.
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"Our workers are all under labor contracts; therefore, our labor rate variance is bound to be zero." Discuss.
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Distinguish between ideal and practical standards.
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Material Variances Harmon Household Products, Inc., manufactures a number of consumer items for general household use. One of these products, a chopping board, requires an expensive hardwood. During a recent month, the company manufactured 4,000 chopping boards using 11,000 board feet of hardwood. The hardwood cost the company $18,700. The company's standards for one chopping hoard are 2.5 board feet of hardwood. at a cost of $1.80 per board foot. Required: 1.According to the standards, what cost for wood should have been incurred to make 4,000 chopping blocks How much greater or less is this than the cost that was incurred 2.Break down the difference computed in (1) above into a materials price variance and a materials quantity variance.
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If the materials price variance is favorable but the materials quantity variance is unfavorable, what might this indicate
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What effect, if any, would you expect poor-quality materials to have on direct labor variances
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Should standards be used to identify who to blame for problems
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Who is generally responsible for the materials price variance The materials quantity variance The labor efficiency variance
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Labor and Variable Manufacturing Overhead Variances Hollowell Audio, Inc. manufactures military-specification compact discs. The company uses standards to control its costs. The labor standards that have been set for one disc are as follows: img During July, 2,125 hours of direct labor time were required to make 20,000 discs. The direct labor cost totaled $49,300 for the month. Required: 1.According to the standards, what direct labor cost should have been incurred to make the 20,000 discs By how much does this differ from the cost that was incurred 2.Break down the difference in cost from (1) above into a labor rate variance and a labor efficiency variance. 3.The budgeted variable manufacturing overhead rate is $16.00 per direct labor-hour, During July, the company incurred $39,100 in variable manufacturing overhead cost. Compute the variable overhead rate and efficiency variances for the month.
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Material Variances Refer to the data in Exercise 10-6. Assume that instead of producing 2,500 bottles of Whim during the month, the company produced only 2,000 bottles using 16,000 ounces of material. (The rest of the material purchased remained in raw materials inventory.)Required: Compute the direct materials price and quantity variances for the month.
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Variable Overhead Variances Order Up, Inc., provides order fulfillment services for dot.com merchants. The company maintains warehouses that stock items carried by its dot.com clients. When a client receives an order from a customer, the order is forwarded to Order Up, which pulls the item from storage, packs it, and ships it to the customer. The company uses a predetermined variable overhead rate based on direct labor-hours. In the most recent month, 140,000 items were shipped to customers using 5,800 direct labor hours. The company incurred a total of $15.950 in variable overhead costs. According to the company's standards, 0.04 direct labor-hours are required to fulfill an order for one item and the variable overhead rate is $2.80 per direct labor-hour. Required: 1.According to the standards, what variable overhead cost should have been incurred to fill the orders for the 140,000 items How much does this differ from the actual variable overhead cost 2.Break down the difference computed in (1) above into a variable overhead rate variance and a variable overhead efficiency variance.
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The materials price variance can be computed at what two different points in time Which point is better Why
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Material and Labor Variances Topper Toys has developed a new toy called the Brainbuster. The company has a standard cost system to help control costs and has established the following standards for the Brainbuster toy: Direct materials: 8 diodes per toy at $0.30 per diode Direct labor: 0.6 hours per toy at $14.00 per hour During August, the company produced 5,000 Brainbuster toys. Production data on the toy for August follow: Direct materials: 70,000 diodes were purchased at a cost of $0.28 per diode. 20,000 of these diodes were still in inventory at the end of the month. Direct labor: 3,200 direct labor-hours were worked at a cost of $48,000. Required: 1.Compute the following variances for August: a. Direct materials price and quantity variances. b. Direct labor rate and efficiency variances. 2.Prepare a brief explanation of the possible causes of each variance.
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Working Backwards from Labor Variances The Worldwide Credit Card, Inc., uses standards to control the labor time involved in opening mail from card holders and recording the enclosed remittances. Incoming mail is gathered into batches, and a standard time is set for opening and recording each batch. The labor standards relating to one batch are as follows: img The record showing the time spent last week in opening batches of mail has been misplaced. However, the batch supervisor recalls that 168 batches were received and opened during the week, and the controller recalls the following variance data relating to these batches: img Required: 1.Determine the number of actual labor-hours spent opening batches during the week. 2.Determine the actual hourly rate paid to employees for opening batches last week. (Hint: A useful way to proceed would be to work from known to unknown data either by using the variance formulas or by using the columnar format shown in Exhibit 10-6.)
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Why are separate price and quantity variances computed
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Variance Analysis in a Hospital "What's going on in that lab" asked Derek Warren, chief administrator for Cottonwood Hospital, as he studied the prior month's reports. "Every month the lab teeters between a profit and a loss. Are we going to have to increase our lab fees again" "We can't," replied Lois Ankers, the controller. "We're getting lots of complaints about the last increase, particularly from the insurance companies and governmental health units. They're now paying only about 80%of what we bill. I'm beginning to think the problem is on the cost side." To determine if lab costs are in line with other hospitals, Mr. Warren has asked you to evaluate the costs for the past month. Ms. Ankers has provided you with the following information: a.Two basic types of tests are performed in the lab-smears and blood tests. During the past month, 2,700 smears and 900 blood tests were performed in the lab. b.Small glass plates are used in both types of tests. During the past month, the hospital purchased 16,000 plates at a cost of $38,400. This cost is net of a 4% purchase discount. A total of 2,000 of these plates were unused at the end of the month; no plates were on hand at the beginning of the month. c.During the past month, 1,800 hours of labor time were used in performing smears and blood tests. The cost of this labor time was $18,450. d.The lab's variable overhead cost last month totaled $11,700. Cottonwood Hospital has never used standard costs. By searching industry literature, however, you have determined the following nationwide averages for hospital labs: Plates: Three plates are required per lab test. These plates cost $2.50 each and are disposed of after the test is completed. Labor: Each smear should require 0.3 hours to complete, and each blood test should require 0.6 hours to complete. The average cost of this lab time is $12 per hour. Overhead: Overhead cost is based on direct labor-hours. The average rate of variable overhead is $6 per hour. Required: 1.Compute the materials price variance for the plates purchased last month. and compute a materials quantity variance for the plates used last month. 2.For labor cost in the lab: a. Compute a labor rate variance and a labor efficiency variance. b. In most hospitals. three-fourths of the workers in the lab are certified technicians and one-fourth are assistants. In an effort to reduce costs. Cottonwood Hospital employs only one-half certified technicians and one-half assistants. Would you recommend that this policy be continued Explain. 3.Compute the variable overhead rate and efficiency variances. Is there any relation between the variable overhead efficiency variance and the labor efficiency variance Explain.
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