Chapter 21: Q18DQ (page 967)
Describe the concept of management by exception and explain how standard costs help managers apply this concept to control costs.
The concept of management by exception explains the process of conveying the variances to the managers for their interventions to resolve them.
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Suncoast Company set the following standard costs for one unit of its product.
Direct materials (4 .5 lbs. @ \(6 per lb.) | \)27 |
Direct labor (1 .5 hrs. @ \(12 per hr.) | 18 |
Overhead (1 .5 hrs. @ \)16 per hr.) | 24 |
Total standard cost. | \(69 |
The predetermined overhead rate (\)16.00 per direct labor hour) is based on an expected volume of 75% of the factory’s capacity of 20,000 units per month. Following are the company’s budgeted overhead costs per month at the 75% capacity level.
| Overhead Budget (75% Capacity) | |
Variable overhead costs | |
Indirect materials \(22,500 | |
Indirect labor 90,000 | |
Power 22,500 | |
Repairs and maintenance 45,000 | |
Total variable overhead costs | \)180,000 |
Fixed overhead costs | |
Depreciation—Building 24,000 | |
Depreciation—Machinery 72,000 | |
Taxes and insurance 18,000 | |
Supervision 66,000 | |
Total fixed overhead costs. | 180,000 |
Total overhead costs | \(360,000 |
The company incurred the following actual costs when it operated at 75% of capacity in December.
Direct materials (69,000 lbs. @ \)6 .10 per lb.) | \( 420,900 |
Direct labor (22,800 hrs. @ \)12 .30 per hr.) | |
Overhead costs | |
Indirect materials \(21,600 | |
Indirect labor 82,260 | |
Power 23,100 | |
Repairs and maintenance 46,800 | |
Depreciation—Building 24,000 | |
Depreciation—Machinery 75,000 | |
Taxes and insurance 16,500 | |
Supervision 66,000 | 355,260 |
Total costs | \)1,056,600 |
Required
1. Examine the monthly overhead budget to
(a) determine the costs per unit for each variable overhead item and its total per unit costs and (b) identify the total fixed costs per month.
2. Prepare flexible overhead budgets (as in Exhibit 21.12) for December showing the amounts of each variable and fixed cost at the 65%, 75%, and 85% capacity levels.
3. Compute the direct materials cost variance, including its price and quantity variances.
4. Compute the direct labor cost variance, including its rate and efficiency variances.
5.Prepare a detailed overhead variance report (as in Exhibit 21.16) that shows the variances for individual items of overhead.
Refer to the information in Exercise 21-8 and compute the (1) direct labor rate and (2) direct labor efficiency variances. Indicate whether each variance is favorable or unfavorable.
Kenya Company’s standard cost accounting system recorded this information from its June operations.
Standard direct material cost | $130,000 |
Direct materials quantity variance (favorable) | 5,000 |
Direct materials price variance (favorable) | 1,500 |
Actual direct labor cost | 65,000 |
Direct labor efficiency variance (favorable) | 3,000 |
Direct labor rate variance (unfavorable) | 500 |
Actual overhead cost | 250,000 |
Volume variance (unfavorable) | 12,000 |
Controllable variance (unfavorable) | 8,000 |
Required
1. Prepare journal entries dated June 30 to record the company’s costs and variances for the month. (Do not prepare the journal entry to close the variances.)
Analysis Component
2. Identify the variances that would attract the attention of a manager who uses management by exception. Describe what action(s) the manager should consider.
Identify the main purpose of a flexible budget for managers.
What limits the usefulness to managers of fixed budget performance reports?
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