Chapter 23: Q8RQ (page 1305)
Question:What is a standard cost system?
Answer
A standard costing system is a tool for preparing various budgets and controlling costs.
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Office Plus sells its main product, ergonomic mouse pads, for \(13 each. Its variable cost is \)5.10 per pad. Fixed costs are \(205,000 per month for volumes up to 65,000 pads. Above 65,000 pads, monthly fixed costs are \)250,000. Prepare a monthly flexible budget for the product, showing sales revenue, variable costs, fixed costs, and operating income for volume levels of 45,000, 55,000, and 75,000 pads.
Question:Match the variance to the correct definition.
Variance Definition
2. Cost variance
3. Efficiency variance
4. Flexible budget variance
5. Sales volume variance
6. Static budget variance
a. The difference between the expected results in the flexible budget for the actual units sold and the static budget.
b. The difference between actual results and the expected results in the flexible budget for the actual units sold.
c. Measures how well the business keeps unit costs of material and labor inputs within standards.
d. The difference between actual results and the expected results in the static budget.
e. Measures how well the business uses its materials or human resources
Preparing a flexible budget and computing standard cost variances
McKnight Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system. McKnight allocates overhead based on yards of direct materials. The company’s performance report includes the following selected data:
Static Budget (1,025 recliners) | Actual Results (1,005 recliners) | ||
Sales | (1,025 recliners * \(500 each) | \)512,500 | |
(1,005 recliners * \(495 each) | \)497,475 | ||
Variable Manufacturing Costs: | |||
Direct Materials | (6,150 yds. @ \(8.50/yard) | 52,275 | |
(6,300 yds. @ \)8.30/yard) | 52,290 | ||
Direct Labor | (10,250 DLHr @ \(9.20/DLHr) | 94,300 | |
(9,850 DLHr @ \)9.40/DLHr) | 92,590 | ||
Variable Overhead | (6,150 yds. @ \(5.10/yard) | 31,365 | |
(6,300 yds. @ \)6.50/yard) | 40,950 | ||
Fixed Manufacturing Costs: | |||
Fixed Overhead | 62,730 | 64,730 | |
Total Cost of Goods Sold | 240,670 | 250,560 | |
Gross Profit | \(271,830 | \)246,915 |
Requirements
1. Prepare a flexible budget based on the actual number of recliners sold.
2. Compute the cost variance and the efficiency variance for direct materials and for direct labor. For manufacturing overhead, compute the variable overhead cost, variable overhead efficiency, fixed overhead cost, and fixed overhead volume variances. Round to the nearest dollar.
3. Have McKnight’s managers done a good job or a poor job controlling materials, labor, and overhead costs? Why?
4. Describe how McKnight’s managers can benefit from the standard cost system.
Kellogg Company manufacturers and markets ready-to-eat cereal and convenience foods including Raisin Bran, Pop Tarts, Rice Krispies Treats, and Pringles. In addition to the raw materials used when producing its products, Kellogg Company also has significant labor costs associated with the products. As of January 2, 2016, Kellogg Company had approximately 33,577 employees. A shortage in the labor pool, regulatory measures, and other pressures could increase the company’s labor cost, having a negative impact on the company’s operating income.
Requirements
1. Suppose Kellogg Company noticed an increase in its actual direct labor costs compared to the budgeted amount. How could Kellogg Company investigate this?
2. What is the direct labor cost variance and how would a company calculate this variance?
3. What is the direct labor efficiency variance and how would a company calculate this variance?
4. Suppose that Kellogg Company found an unfavorable total direct labor variance that was due completely to the direct labor cost variance. What measures could Kellogg Company take to control this variance?
5. Suppose that Kellogg Company found an unfavorable total direct labor variance that was due completely to the direct labor efficiency variance. What measures could Kellogg Company take to control this variance?
Headset manufactures headphone cases. During September 2018, the company produced 106,000 cases and recorded the following cost data:
Standard Cost Information
Quantity | Cost | |
Direct Materials | 2 parts | \( 0.16 per part |
Direct Labor | 0.02 hours | 8.00 per hour |
Variable Manufacturing Overhead | 0.02 hours | 11.00 per hour |
| Fixed Manufacturing Overhead (\)30,720 for static budget volume of 96,000 units and 1,920 hours, or \(16 per hour) | ||
Actual Information
Direct Materials (209,000 parts @ \)0.21 per part) \( 43,890 Direct Labor(1,620 hours @ \)8.10 per hour) 13,122 Variable Manufacturing Overhead 9,000 Fixed Manufacturing Overhead 30,000 |
Requirements
1. Compute the cost and efficiency variances for direct materials and direct labor.
2.For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances.
3. Headset’s management used betterquality materials during September. Discuss the tradeoff between the two direct material variances.
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