.

The term "management by exception" is best

defined as:
A. choosing exceptional managers.
B. controlling actions of subordinates
through acceptance of management
techniques.
C. investigating unfavorable variances.
D. devoting management time to
investigate significant variances.
E. controlling costs so that non-zero
variances are treated as "exceptional."

Answer: D LO: 1 Type: RC, N

 5. Which of the following are methods for
setting standards?
A. Analysis of historical data.
B. Task analysis.
C. Task analysis and the analysis of
historical data.
D. Matrix application forms.
E. Goal congruence.

Answer: C LO: 2 Type: RC

6. Which of the following individuals is least

likely to become involved in the

268
270
 9. Which of the following would be
considered if a company desires to
establish a series of practical
manufacturing standards?
A. The productivity loss associated with
a short-term worker slowdown.
B. Normal defect rates in an assembly
process.
C. Highly unusual spoilage rates with
direct materials.
D. Quantity discounts associated with
purchases of direct materials.
E. Both "B" and "D"

Answer: E LO: 2 Type: RC, N

10. Which of the following would not be

considered if a company desires to
establish a series of practical
manufacturing standards?
A. Production time lost during unusual
machinery breakdowns.
B. Normal worker fatigue.
C. Freight charges on incoming raw
materials.
D. Production time lost during setup
procedures for new manufacturing
runs.
E. The historical 2% defect rate
associated with raw material inputs.

Answer: A LO: 2 Type: RC, N

11. Which of the following choices correctly

notes a characteristic associated with
perfection standards and one associated
with practical standards?
Perfection Standards
 A. Attainable in an ideal environment

B. Result in many unfavorable variances

C. Tend to boost worker morale
D. Generally, are easily achieved by
workers
E. Generally preferred by behavioral scientists

Answer: B LO: 2 Type: RC, N

12. Consider the following statements:

I.The standard cost per unit of materials is

used to calculate a materials price
variance.
II.The standard cost per unit of materials is
used to calculate a materials
quantity variance.
III.The standard cost per unit of materials
cannot be determined until the end
of the period.

Which of the above statements is (are)

true?
A. I only.
B. II only.
C. III only.
D. I and II.
E. I, II, and III.

Answer: D LO: 3 Type: RC

272
13. Which of the following choices correctly
notes the use of the standard price per unit
of direct material when calculating the
materials price variance and the materials
quantity variance?
Price Quantity Variance
Variance
A. Used Always used
B. Used Occasionally used
C. Used Not used
D. Not used Always used
E. Not used Not used

A
274
 18. If a company has an unfavorable direct-
material quantity variance, then:
A. the direct-material price variance is
favorable.
B. the total direct-material variance is
unfavorable.
C. the total direct-material variance is
favorable.
D. the direct-labor efficiency variance is
unfavorable.
E. any of the above variances can occur.

Answer: E LO: 3 Type: N

19. A favorable labor efficiency variance is

created when:
A. actual labor hours worked exceed
standard hours allowed.
B. actual hours worked are less than the
standard hours allowed.
C. actual wages paid are less than
amounts that should have been paid.
D. actual units produced exceed
budgeted production levels.
E. actual units produced exceed standard
hours allowed.

Answer: B LO: 3 Type: N

21. Solo Corporation recently purchased

25,000 gallons of direct material at $5.60
per gallon. Usage by the end of the period
amounted to 23,000 gallons. If the
standard cost is $6.00 per gallon and the
company believes in computing variances
at the earliest point possible, the direct-
material price variance would be
calculated as:
A. $800F.
B. $9,200F.
C. $9,200U.
D. $10,000F.
E. $10,000U.

Answer: D LO: 3 Type: A

Use the following to answer questions 22-23:

276
The following data relate to product no. 89 of Des
Moines Corporation:

Direct material standard: 3 square feet at

$2.50 per square foot
Direct material purchases: 30,000 square
feet at $2.60 per square foot
Direct material consumed: 29,200 square
feet
Manufacturing activity, product no. 89:
9,600 units completed
 22. The direct-material quantity variance is:
A. $1,000F.
B. $1,000U.
C. $1,040F.
D. $1,040U.
E. $2,000F.

Answer: B LO: 3 Type: A

23. The direct-material price variance is:

A. $2,880U.
B. $2,920F.
C. $2,920U.
D. $3,000F.
E. $3,000U.

Answer: E LO: 3 Type: A

24. Consider the following information:

Direct material purchased and

used, 80,000 gallons
Standard quantity of direct
material allowed for May
production, 76,000 gallons
Actual cost of direct materials
purchased and used, $176,000
Unfavorable direct-material
quantity variance, $9,400

The direct-material price variance is:

A. $11,400F.
B. $11,400U.
C. $12,000F.

278
D. $12,000U.
E. none of the above.

Answer: C LO: 3 Type: A, N

25. Courtney purchased and consumed 50,000

gallons of direct material that was used in
the production of 11,000 finished units of
product. According to engineering
specifications, each finished unit had a
manufacturing standard of five gallons. If
a review of Courtney's accounting records
at the end of the period disclosed a
material price variance of $5,000U and a
material quantity variance of $3,000F,
determine the actual price paid for a gallon
of direct material.
A. $0.50.
B. $0.60.
C. $0.70.
D. An amount other than those shown
above.
E. Not enough information to judge.

Answer: C LO: 3 Type: A, N

 26. Holland Enterprises recently used 20,000
labor hours to produce 8,300 completed
units. According to manufacturing
specifications, each unit is anticipated to
take 2.5 hours to complete. The
company's actual payroll cost amounted to
$370,000. If the standard labor cost per
hour is $18, Holland's labor rate variance
is:
A. $10,000F.
B. $10,000U.
C. $10,375F.
D. $10,375U.
E. none of the above.

Answer: B LO: 3 Type: A

27. Denver Enterprises recently used 14,000

labor hours to produce 7,500 completed
units. According to manufacturing
specifications, each unit is anticipated to
take two hours to complete. The
company's actual payroll cost amounted to
$158,200. If the standard labor cost per
hour is $11, Denver's labor efficiency
variance is:
A. $11,000U.
B. $11,000F.
C. $11,300U.
D. $11,300F.
E. none of the above.

Answer: B LO: 3 Type: A

28. Alex Company recently completed 10,600

units of its single product, consuming
32,000 labor hours that cost the firm
$480,000. According to manufacturing
specifications, each unit should have
required 3 hours of labor time at
$15.40 per hour. On the basis of
this information, determine Alex’s
labor rate variance and labor
efficiency variance.
Rate Efficiency
A. $12,720F $3,000F
B. $12,720F $3,000U

280
 C. $12,800F $3,080F
D. $12,800F $3,080U
E. $12,800U $3,080U

Answer: D LO: 3 Type: A

Use the following to answer questions 29-30:

The following data relate to product no. 33 of La

Quinta Corporation:

Direct labor standard: 5 hours at $14 per

hour
Direct labor used in production: 45,000
hours at a cost of $639,000
Manufacturing activity, product no. 33:
8,900 units completed
 29. The direct-labor rate variance is:
A. $8,900F.
B. $8,900U.
C. $9,000F.
D. $9,000U.
E. none of the above.

Answer: D LO: 3 Type: A

30. The direct-labor efficiency variance is:

A. $7,000F.
B. $7,000U.
C. $7,100F.
D. $7,100U.
E. none of the above.

Answer: B LO: 3 Type: A

Answer: B LO: 3 Type: A, N

32. Simms Corporation had a favorable direct-

labor efficiency variance of $6,000 for the
period just ended. The actual wage rate
was $0.50 more than the standard rate of
$12.00. If the company's standard hours
allowed for actual production totaled
9,500, how many hours did the firm
actually work?
A. 9,000.
B. 9,020.
C. 9,980.
D. 10,000.
E. None of the above.

Answer: A LO: 3 Type: A , N

282
Use the following to answer questions 33-37:

Cost standards for product no. C77:

Direct 3 pounds $ 7.50
material at $2.50
per pound
Direct labor 5 hours at 37.50
$7.50 per
hour

Actual results:
Units 7,800 units
produced
Direct 26,000 $
material pounds at 70,200
purchased $2.70
Direct 23,100 62,37
material used pounds at 0
$2.70
Direct labor 40,100 292,73
hours at 0
$7.30

33. The direct-material quantity variance is:

A. $750F.
B. $750U.
C. $6,500U.
D. $7,250U.
E. none of the above.

Answer: A LO: 3 Type: A

36. The direct-labor efficiency variance is:

A. $8,000F.
B. $8,000U.
C. $8,250F.
D. $8,250U.
E. none of the above.

Answer: D LO: 3 Type: A

 37. The standard hours allowed for the work
performed are:
A. 5.
B. 5.14.
C. 39,000.
D. 40,100.
E. none of the above.

Answer: C LO: 3 Type: A

38. When considering whether to investigate a

variance, managers should consider all of
the following except the variance's:
A. size.
B. pattern of recurrence.
C. trends over time.
D. nature, namely, whether it is
favorable or unfavorable.
E. controllability.

Answer: D LO: 4 Type: RC

284
39.Which of the following combinations of direct-
material variances might prompt
management to undertake a detailed
variance investigation?
A. Price, unfavorable; quantity,
unfavorable.
B. Price, unfavorable; quantity,
favorable.
C. Price, favorable; quantity,
unfavorable.
D. Price favorable; quantity, favorable.
E. All of the above.

Answer: E LO: 4 Type: N

40. Consider the following statements about

variance investigation:

I.Variance investigation involves a look at

only unfavorable variances.
II.Variance investigation is typically based
on a cost-benefit analysis.
III.Variance investigation is often
performed by establishing
guidelines similar to the following:
Investigate variances that are
greater than $X or greater than Y%
of standard cost.

Which of the above statements is (are)

true?
A. I only.
B. II only.
C. III only.
D. II and III.
E. I, II, and III.

Answer: D LO: 4 Type: RC

 41. A statistical control chart is best used for Answer: C LO: 5 Type: N
determining:
A. direct-material price variances.
B. direct-labor variances.
C. whether a variance is favorable or
unfavorable.
D. who should be held accountable for
specific variances.
E. whether a particular variance should
be investigated.

Answer: E LO: 4 Type: RC

42. The individual generally responsible for

the direct-material price variance is the:
A. sales manager.
B. production supervisor.
C. purchasing manager.
D. finance manager.
E. head of the human resources
department.

Answer: C LO: 5 Type: RC

43. A production supervisor generally has

little influence over the:
A. direct-material quantity variance.
B. direct-labor rate variance.
C. direct-labor efficiency variance.
D. direct-material price variance.
E. number of units produced.

Answer: D LO: 5 Type: N

44. In which department would an

investigation normally begin regarding an
unfavorable materials quantity variance?
A. Quality control.
B. Purchasing.
C. Engineering.
D. Production.
E. Receiving.

Answer: D LO: 5 Type: RC

45. Cohen Corporation has a favorable

materials quantity variance. Which
department would likely be asked to
explain the cause of this variance?
A. Engineering.
B. Purchasing.
C. Production.
D. Marketing.
E. None, because the variance is
favorable.

286
 D. Labor efficiency variance,
46. Rogers, Inc., had an unfavorable labor unfavorable.
efficiency variance and an unfavorable E. All of the above.
materials quantity variance. Which
department might be held accountable for Answer: E LO: 5 Type: N
these variances?
A. Purchasing, because bad materials
can harm labor efficiency.
B. Production, because inefficient
workers may use more materials than
allowed.
C. Purchasing and/or production.
D. Marketing.
E. Shipping.

Answer: C LO: 5 Type: N

47. A direct-material quantity variance can be

caused by all of the following except:
A. improper employee training.
B. changes in sales volume.
C. acquisition of materials at a very
attractive price.
D. adjustment problems with machines.
E. disgruntled workers.

Answer: B LO: 5 Type: N

48. A direct-labor efficiency variance cannot

be caused by:
A. inexperienced employees.
B. poor quality raw materials.
C. employee inefficiency.
D. an out-of-date labor time standard.
E. producing fewer finished units than
originally planned.

Answer: E LO: 5 Type: N

49. Justin Company recently purchased

materials from a new supplier at a very
attractive price. The materials were found
to be of poor quality, and the company's
laborers struggled significantly as they
shaped the materials into finished product.
In a desperation move to make up for
some of the time lost, the manufacturing
supervisor brought in more-senior
employees from another part of the plant.
Which of the following variances would
have a high probability of arising from this
situation?
A. Material price variance, favorable.
B. Material quantity variance,
unfavorable.
C. Labor rate variance, unfavorable.
 C. provide management with a basis for
50. Listed below are five variances (and performance evaluations.
possible causes) that are under review by D. if set correctly, can provide a
management of Knox Company. Which motivational tool for employees.
of the following is least likely to cause the E. will provide all of the above benefits
variance indicated? for a company.
A. The need to ship goods acquired from
a distant supplier via FedEx rather Answer: E LO: 7 Type: RC, N
than via truck; material price variance.
B. The need to complete goods on a
timely basis during a period of high
absenteeism; labor rate variance.
C. A work-team that is very unhappy
with its supervisor; labor efficiency
variance.
D. The need to close a plant for two days
because of blizzard conditions;
material quantity variance, part no.
542.
E. A malfunctioning piece of
manufacturing equipment; labor
efficiency variance.

Answer: D LO: 5 Type: N

51. Lucky Corporation's purchasing manager

obtained a special price on an aluminum
alloy from a new supplier, resulting in a
direct-material price variance of $9,500F.
The alloy produced more waste than
normal, as evidenced by a direct-material
quantity variance of $2,000U, and was
also difficult to use. This slowed worker
efficiency, generating a $2,500U labor
efficiency variance. To help remedy the
situation, the production manager used
senior line employees, which gave rise to a
$900U labor rate variance. If overall
product quality did not suffer, what
variance amount is best used in judging
the appropriateness of the purchasing
manager's decision to acquire substandard
material?
A. $4,100F.
B. $5,000F.
C. $7,000F.
D. $7,500F.
E. $9,500F.

Answer: A LO: 5 Type: A, N

52. Standard costs:

A. allow a manager to assess the
efficiency of operations.
B. allow a company to practice
management by exception.

288
 Answer: E LO: 9 Type: RC
53. Which of the following is a criticism of
standard costing, as applied to today's 56. To improve its manufacturing efficiency,
manufacturing environment? companies should strive toward increasing
A. Automated manufacturing processes __________ time as a percentage of
are very consistent in meeting processing time + inspection time +
production specifications, making waiting time + move time. The blank is:
variances very small and relatively A. processing time.
unimportant. B. lead time.
B. Variance information is usually C. waiting time.
aggregated (i.e., combined) rather D. move time.
than associated with a particular batch E. inspection time.
of goods or a specific product line.
C. Traditional standard costing fails to Answer: A LO: 9 Type: RC
focus on key business issues such as
customer service and bringing
products to market faster than the
competition.
D. Standard costing pays considerable
attention to labor cost and labor
efficiency, which are becoming a
relatively unimportant factor of
production.
E. All of the above are valid criticisms.

Answer: E LO: 8 Type: RC

54. Which of the following is not a valid way

to adapt standard cost systems to today's
manufacturing environment?
A. Emphasize material and overhead
costs.
B. Use more non-traditional cost drivers
such as number of setups or number
of engineering change orders.
C. Update standards more frequently to
adjust for the elimination of non-
value-added costs.
D. Use additional nonfinancial measures
for performance evaluation and
control.
E. Devote more resources to the tracking
of direct labor cost.

Answer: E LO: 8 Type: RC

55. To assess how customers perceive a

company's products, management may
study:
A. the number of customer complaints.
B. the number of warranty claims.
C. the number of products returned.
D. the cost of repairing returned
products.
E. all of the above measures.
 measures.
57. In the calculation of manufacturing cycle D. internal-operations performance
efficiency, which of the following measures.
activities results in value-added time? E. interdisciplinary performance
A. Moving. measures.
B. Processing.
C. Inspection. Answer: B LO: 10 Type: RC
D. Waiting.
E. All of the above. 65. When using a balanced scorecard, which
of the following is typically classified as
Answer: B LO: 9 Type: RC an internal-operations performance
measure?
58. The manufacturing cycle efficiency for A. Cash flow.
PQR Company when the processing time B. Number of customer complaints.
is six hours and inspection, waiting, and C. Employee training hours.
move time are one hour each is: D. Number of employee suggestions.
A. 0.67. E. Number of suppliers used.
B. 0.75.
C. 0.78. Answer: E LO: 10 Type: RC
D. 0.88.
E. an amount other than those shown
above.

Answer: A LO: 9 Type: A

59. Which of the following would not be a

concern of a company that desires to
compete in a global manufacturing arena?
A. Number of new products introduced.
B. Manufacturing cycle efficiency.
C. Number of customer complaints.
D. Number of on-time deliveries.
E. All of the above would be concerns.

Answer: E LO: 9 Type: RC

60. An increasingly popular approach that

integrates financial and customer
performance measures with measures in
the areas of internal operations and
learning and growth is known as:
A. the integrated performance
measurement tool (IPMT).
B. the balanced scorecard.
C. gain sharing.
D. cycle efficiency.
E. overall quality assessment (OQA).

Answer: B LO: 10 Type: RC

64. When using a balanced scorecard, a

company's market share is typically
classified as an element of the firm's:
A. financial performance measures.
B. customer performance measures.
C. learning and growth performance

290
66. Which of the following perspectives is
influenced by a company's vision and
strategy?
A. Financial.
B. Customer.
C. Internal operations.
D. Learning and growth.
E. All of the above.

Answer: E LO: 10 Type: RC

67. Which of the following journal entries

definitely contains an error?
A. Raw-Material Inventory
Direct-Material Price Variance
Accounts Payable
B. Raw-Material Inventory
Direct-Material Price Variance
Accounts Payable
C. Raw-Material Inventory
Direct-Material Price Variance
Work-in-Process Inventory
D. Work-in-Process Inventory
Direct-Material Quantity Variance
Raw-Material Inventory
E. Work-in-Process Inventory
Direct-Material Quantity Variance
Raw-Material Inventory

Answer: C LO: 11 Type: N

68. At the end of the accounting period, most

companies close variance accounts to:
A. Raw-Material Inventory.
B. Work-in-Process Inventory.
C. Finished-Goods Inventory.
D. Cost of Goods Sold.
E. Income Summary.

Answer: D LO: 11 Type: RC

EXERCISES

Setting a Standard

69. Cloverleaf, Inc., produces glass shelves

that are used in furniture. Each shelf
requires 3.6 pounds of raw material at a
cost of $2 per pound. Unfortunately,
given the nature of the manufacturing
process, one out of every five shelves is
chipped, scratched, or broken at the
beginning of production and has to be
scrapped.

On average, 20 good shelves are

completed during each hour. Laborers
who work on these units are paid $15 per
hour.

Required:
A. Distinguish between perfection
standards and practical standards.
B. Who within an organization would be
in the best position to assist in setting:
1. the direct-material price
standard?
2. the direct-material quantity
standard?
3. the direct-labor efficiency
standard?
C. Calculate a practical direct-material
and direct-labor standard for each
good shelf produced.

LO: 2, 3, 5 Type: A, N

Answer:
A. Perfection standards, or those achieved under nearly perfect operating conditions, assume peak
efficiency at minimum cost. Employees are pushed to reach these ideal measures, often
becoming discouraged. Practical standards, on the other hand, are high but attainable, thus
presenting a realistic target for personnel. Such standards incorporate allowances for normal
downtime and other typical inefficiencies.

B. 1. The purchasing manager.

2. The production supervisor as well as production engineers.
3. The production supervisor as well as industrial engineers.

C. Direct materials: 4.5 pounds* x $2 per pound

Direct labor: 0.05 hours* x $15
Total

*Direct materials: (3.6 x 5) ÷ 4 = 4.5; direct labor: 1 ÷ 20 = 0.05

292
Required:
A. Compute
the standard purchase price for one
gallon of Proctol.
B. Compute
the standard quantity of Proctol to be
used in producing one gallon of Lush
'N Green. Express your answer in
quarts.
C. Compute
the direct-material price variance for
Proctol.
D. How much
Proctol was used in manufacturing
activity and how much should have
been used? Express your answer in
quarts.

LO: 2, 3 Type: A, N
 Answer:
A. Purchase price per drum
Less: 2% discount

Shipping fee per drum ($420 ÷ 200 drums)

Total

Total purchase price ($46.20) ÷ 55 gallons = $0.84 per gallon

B. Three quarts of Proctol are required for each gallon of Lush 'N Green; however, 4% of
Proctol input is lost through evaporation and spills. Thus, the standard input is 3.125 quarts
(3 ÷ 0.96).

C. Standard cost of purchases (1,200 drums x $46.20)

Actual cost of purchases
Direct-material price variance

D. Actual usage: (1,200 - 15) = 1,185 drums; 1,185 drums x 55 gallons x 4 quarts = 260,700
quarts
Standard usage: 82,000 gallons x 3.125 = 256,250 quarts

Straightforward Calculation of Variances

71. Quicksand Company has set the following

standards for one unit of product:

Direct material
Quantity: 6.2 pounds per unit
Price per pound: $11 per
pound
Direct labor
Quantity: 6 hours per unit
Rate per hour: $23 per hour

Actual costs incurred in the production of

2,800 units were as follows:

Direct material: $194,350 ($11.50

per pound)
Direct labor: $393,750 ($22.50 per
hour)

All materials purchased were consumed

during the period.

Required:
Calculate the direct-material price and
quantity variances and the direct-labor rate
and efficiency variances. Indicate whether
each variance is favorable or unfavorable.

LO: 3 Type: A

294
 Answer:

Actual Material Cost

Actual Actual Actual
x
Quantity Price Quantity
16,900 x $11.50 16,900
$194,350 $185,900
$8,450U
Direct-material
price variance
*2,800 units x 6.2 pounds

Actual Labor Cost

Actual Actual Actual
x
Hours Rate Hours
17,500 x $22.50 17,500
$393,750 $402,500
$8,750F
Direct-labor
rate variance
#2,800 units x 6 hours

Straightforward Calculation of Variances

72. Upstate manufactures a product that has

the following standard costs:

Direct materials: 40 $108

yards at $2.70 per yard
Direct labor: 8 hours at 144
$18.00 per hour
Total $252

The following information pertains to

July:

Direct material purchased: 42,500

yards at $2.78 per yard, or
$118,150
Direct material used: 36,000
yards
Direct labor: 7,500 hours at
$18.30 per hour, or $137,250
Actual completed production:
1,050 units

Required:
Calculate the direct-material price and
quantity variances and the direct-labor rate
and efficiency variances. Indicate whether
each variance is favorable or unfavorable.

LO: 3 Type: A
 Answer:

Actual Material Cost

Actual Actual Actual
x
Quantity Price Quantity
42,500 x $2.78 42,500
$118,150 $114,750
$3,400U
Direct-material
price variance

Standard Material Cost

Actual Standard Standard
x
Quantity Price Quantity
36,000 x $2.70 42,000*
$97,200 $113,400
$16,200F
Direct-material
quantity variance
*1,050 units x 40 yards

Actual Labor Cost

Actual Actual Actual
x
Hours Rate Hours
7,500 x $18.30 7,500
$137,250 $135,000
$2,250U
Direct-labor
rate variance
#1,050 units x 8 hours

296
Variance Calculation and Interpretation

73. Richie Ventura operates a commercial

painting business in Sacramento, which
has a very tight labor market. Much of his
work focuses on newly constructed
apartments and townhouses.

The following data relate to crew no. 5 for

a recently concluded period when 85
apartment units were painted:
 Three new employees were
assigned to crew no. 5. Wages
averaged $18.80 per hour for each
employee; the crew took 2,550 hours
to complete the work.
 Based on his knowledge of
the operation, articles in trade
journals, and conversations with other
painters, Ventura established the
following standards:
 small, being less than 2% of the
Variance Computation, Analysis of Performance budgeted amount.

74. Diablo Products uses a standard costing B.

system to assist in the evaluation of Actual Labor Cost
operations. The company has had Actual Actual Actual Standard
x x
considerable employee difficulties in Hours Rate Hours Rate
recent months, so much so that 42,00
management has hired a new production 42,000 x $18.00* x $14.00
0
supervisor (Joe Simms). Simms has been $756,000 $588,000
on the job for six months and has $168,000U $182,0
seemingly brought order to an otherwise Direct-labor Direct-l
chaotic situation. rate variance efficiency
*$756,000  42,000 hours
The vice-president of manufacturing #20,000 units x 2.75 hours
recently commented that "… Simms has
really done the trick. Joe's team- C. Yes. Although the combined variance
building/morale-boosting exercises have of $14,000F is small, a more detailed
truly brought things under control." The analysis reveals the presence of
vice-president's comments were based on sizable, offsetting variances. Both the
both a plant tour, where he observed a rate variance and the efficiency
contented work force, and review of a variance are in excess of 21% of
performance report that showed a total budgeted amounts ($770,000). A
labor variance of $14,000F. This variance variance investigation should be
is truly outstanding, given that it is less undertaken if benefits of the
than 2% of the company's budgeted labor investigation exceed the costs. Put
cost. Additional data follow. simply, things are not going as
 Total completed production smoothly as the vice-president
amounted to 20,000 units. believes.
 A review of the firm's
standard cost records found that each
completed unit requires 2.75 hours of
labor at $14 per hour. Diablo's
production actually required 42,000
labor hours at a total cost of $756,000.

Required:
A. As judged by
the information contained in the
performance report, should the vice-
president be concerned about the
company's labor variances? Why?
B. Calculate
Diablo's direct-labor variances.
C. On the basis of
your answers to requirement "B,"
should Diablo be concerned about its
labor situation? Why?
D. Briefly analyze
and explain the direct-labor variances.

LO: 3, 4, 5 Type: A, N

Answer:
A. No. The variance is favorable and

298
 D. The favorable efficiency variance
means that the company is producing
units by consuming fewer hours than
expected. This may be the result of
the team-building/morale-boosting
exercises, as a contented, well-trained
work force tends to be efficient in
nature. However, another totally
plausible explanation could be that
Diablo is paying premium wages (as
indicated by the unfavorable rate
variance) to hire laborers with above-
average skill levels.

Variance Analysis: Working Backward

75. A manufacturing company is expected to

complete a task in 45 minutes. During a
recent accounting period, 3,200 completed
units were produced, resulting in the
following labor variances:

Labor rate variance: $520

favorable
Labor efficiency variance: $2,800
unfavorable

The standard labor rate is $14 per hour.

Required:
Calculate (1) the standard hours allowed
for the work performed, (2) the actual
hours worked, and (3) the actual wage
rate.

LO: 3 Type: A

Answer:

Actual Labor Cost

Actua Actua
Actual Standard
l x l x
Rate Rate
Hours Hours
2,600 x $13.80 2,600 x $14.00
$35,850 $36,400
$520F
Direct-labor
rate variance efficiency variance
*3,200 units x 0.75 hours

1. Standard hours allowed: 2,400

2. Actual hours worked: 2,600
3. Actual wage rate: $13.80
Variance Analysis: Working Backward

76. Hermosa Enterprises recently experienced

a fire, forcing the company to use
incomplete information to analyze
operations. Consider the following data
and assume that all materials purchased
during the period were used in production:

Direct materials:
Standard price per pound: $9
Actual price per pound: $8
Price variance: $20,000F
Total of direct-material
variances: $2,000F

Direct labor:
Actual hours worked: 40,000
Actual rate per hour: $15
Efficiency variance: $28,000F
Total of direct-labor
variances: $12,000U

Hermosa completed 12,000 units.

Required:
Determine the following: (1) actual
materials used, (2) materials quantity
variance, (3) labor rate variance, (4)
standard labor rate per hour, and (5)
standard labor time per finished unit.

LO: 3 Type: A

300
 C. Assume that the
Answer: hotel received a number of complaints
shortly after the dinner concluded.
Actual Material Cost Explain a possible reason behind the
Actual Actual Actual conventioneers' unhappiness.
x
Quantity Price Quantity
20,000 x $8.00 20,000 LO: 3, 4, 5 Type: A, N
$160,000 $180,000
$20,000F
Direct-material
price variance

Actual Labor Cost

Actual Actual Actual
x
Hours Rate Hours
40,000 x $15.00 40,000
$600,000 $560,000
$40,000U
Direct-labor
rate variance

1. Actual materials used: 20,000 pounds

2. Materials quantity variance: $18,000U
3. Labor rate variance: $40,000U
4. Standard labor rate per hour: $14
5. Standard labor time per finished unit:
3.5 hours (42,000 hours ÷ 12,000
units)

Variance Interpretation: Restaurant

77. Nancy Simon is the long-time catering

director of Naples-on-the-Beach, a hotel
noted throughout the industry for quality,
profitability, and cost control. The hotel
recently catered a steak dinner for a 2,000-
person convention. Strict standards were
in place for the dinner: 0.75 pounds of
beef per plate at $9 per pound. A review
of the accounting records shortly after the
convention showed that 1,680 pounds of
beef were purchased and consumed,
costing the hotel $13,440.

Required:
A. Calculate the cost
of beef budgeted for the dinner and
the total beef variance (i.e., the
difference between budgeted and
actual cost). Should this variance be
of concern to the hotel? Why?
B. Assess the job
that Simon did in "managing" the beef
purchase by performing a variance
analysis. Comment on your findings.
 Answer:
A. Budget: 2,000 plates x 0.75 x $9
Actual
Total variance, unfavorable

The variance should not be a concern to the hotel because it is less than 1% of the budget.

B. Simon did a marginal job in managing the purchase. Although the total variance is only $60U, it is
composed of two sizable, offsetting amounts. She saved the hotel a considerable amount of money in the
acquisition but the savings were more than consumed in excess usage.

Actual Material Cost

Actual Actual Actual
x
Quantity Price Quantity
1,680 x $8.00 1,680
$13,440 $15,120
$1,680F
Direct-material
price variance
*2,000 plates x 0.75 pounds

C. It is possible that Simon bought a marginal product. The price variance and quantity variance may
indicate that she purchased cheap beef, which turned out to be of poor quality, resulting in greater waste
(trimming) than normal by the kitchen staff. The beef's overall quality (perhaps, toughness) may be the
underlying reason behind the conventioneers' complaints.

302
Required:
Create a table with the following headings:
materials price variance, materials quantity
variance, labor rate variance, and labor
efficiency variance. Determine which of
these variances would be affected by the
individual events and whether the variance
would be favorable or unfavorable.

LO: 5 Type: N

Answer:

Materials Materials Labor Labor

Price Quantity Rate Efficienc
y
Variance Variance Varianc Variance
e
1. U F
2.
3. U F
4. U
5. F F
 Determine the proper classification
Efficiency Measures (financial, customer, learning and growth,
or internal operations) for each of the
79. The following information for a recent twelve factors listed.
project was taken from the records of
Argon Company: LO: 10 Type: RC, N

Processing time 15.0 Answer:

days 1. Customer 7. Customer
Inspection time 0.5 2. Financial 8. Internal operat
days 3. Internal operations 9. Internal operat
Waiting time: 4. Internal operations 10. Financial
From order receipt 6.0 5. Learning and growth 11. Learning and g
until start of production days 6. Learning and growth 12. Financial
From start of 3.0
production through days
project completion
Move time 1.5
days

Required:
A. How long did it take to complete the
project once production commenced?
B. Compute the manufacturing cycle
efficiency.
C. As judged by the cycle efficiency,
what percentage of the overall
production time was spent on (1)
value-adding activities and (2) non-
value adding activities?
D. Compute the company's delivery
cycle time.

LO: 9 Type: A, N

Answer:
A. Processing time
Inspection time
Waiting time in production
Move time
Total

B. Processing time (15.0) ÷ [Processing time (15.0) + inspection time (0.5) + waiting time in
production (3.0) + move time (1.5)] = 0.75

C. 1. 75% (cycle efficiency)

2. 25% (100% - 75%)

D. Waiting time until start of project

Manufacturing cycle time
9. Number of vendors used
10. Cash flow from operations
11. Employee training hours
12. Gross margin

Required:

304
 B. Answers will vary but often include
Balanced Scorecard market share, queue time, results of a
customer quality survey, number of
80. Bob's Burgers and Such, a national fast- customer complaints, number of order
food chain, has experienced a number of errors, and number of repeat
problems in the past few years, and customers.
management is considering the adoption of
a balanced scorecard as part of a C. Pay creditors on a timely basis:
turnaround effort. stipulated end-of-period cash balance
and current ratio
Required: Shareholder satisfaction: growth in
A. Briefly explain the concept of a earnings per share, increases in
balanced scorecard. What general per-share market price of Bob's
factors are included in a typical stock, price-earnings ratio
balanced scorecard? Profitability improvement: gross
B. Independent of your answer in margin growth rates, earnings growth
requirement "A," assume that Bob's is rates
very concerned about customer
satisfaction. List four different (and
specific) customer-satisfaction
measures that may be appropriate for
the firm (and for other fast-food
providers).
C. Independent of requirement "A,"
assume that Bob's wants to return to
former levels of profitability. List
several financial measures that would
allow management to assess success
or failure with respect to the following
goals: (1) pay creditors on a timely
basis, (2) keep shareholders happy,
and (3) improve profitability over
time at stores that have been open at
least one year.

LO: 10 Type: RC, N

Answer:
A. A balanced scorecard is a tool that
incorporates a variety of different
measures, both financial and non-
financial, in the performance-
evaluation process. The measures are
critical to a firm's success and are tied
to organizational strategy. The goal
of a balanced scorecard is to allow
improvement in a number of broad-
reaching areas rather than permit a
manager to improve only a small facet
of the business at the expense of
others. Typical factors are often
divided into four categories: financial,
customer, learning and growth, and
internal operations.
Standard Costs and Journal Entries

82. Howell Company has established the

following standards:

Direct materials: 2.0 pounds at

$4.10
Direct labor: 1.5 hours at $7 per
hour

Additional information was extracted from

the accounting records:

Actual production: 32,000

completed units
Direct materials purchased: 70,000
pounds at $3.82, or $267,400
Direct materials consumed: 65,000
pounds
Actual labor incurred: 51,000
hours at $6.30, or $321,300
Direct-labor rate variance: $37,200
favorable
Direct-labor efficiency variance:
$22,500 unfavorable

Required:
Prepare journal entries to record the:
A. Purchase of direct materials.
B. Usage of direct materials.
C. Incurrence of direct labor costs.

LO: 11 Type: A

Answer:
A. Raw-Material Inventory (70,000 x $4.10)
Direct-Material Price Variance (70,000 x $0.28)
Accounts Payable (70,000 x $3.82)

B. Work-in-Process Inventory (32,000 x 2 x $4.10)

Direct-Material Quantity Variance (1,000 x $4.10)
Raw-Material Inventory (65,000 x $4.10)

C. Work-in-Process Inventory (32,000 x 1.5 x $7.00)

Direct-Labor Efficiency Variance
Wages Payable (51,000 x $6.30)
Direct-Labor Rate Variance

306
DISCUSSION QUESTIONS The sum of the favorable variances
exceeded the unfavorable materials price
Usefulness of Standard Costs in Performance variance by a considerable amount. The
Evaluations quality of the output from the department
was the same as usual. BoSan operates
83. Standard costs are said to be useful in very close to a JIT system for materials
performance evaluation. Assume that the purchases, with virtually all material
standard direct materials cost per unit of acquired during the quarter being used in
finished product is $6 (three pounds at $2 manufacturing activities.
per pound).
Required:
Required: Is there any connection among these
A. Explain how such a standard can be variances? If so, explain.
used to evaluate performance.
B. Why is the degree of controllability LO: 3, 5 Type: N
important when utilizing standard
costs to evaluate performance?

LO: 1, 5 Type: RC

Answer:
A. The standard provides a measure of
how much material should be used for
a unit of product and how much each
pound of raw material should cost.
This standard serves as a basis for
evaluating performance by allowing a
comparison to be made of standard
cost/usage against actual cost/usage.

B. The degree of controllability is

important because not all factors are
subject to the same amount of control.
For example, the market for the raw
material may be a seller's market in
which case management would have
very little control over the material
price variance. On the other hand,
management generally has more
control over the usage of materials
because of the ability to influence the
amount of scrap and rejected units
produced.

Interaction of Material and Labor Variances

84. For the quarter just ended, BoSan, Inc.,

reported the following variances in one of
its manufacturing departments:

Material price variance, U

Material quantity variance, F
Labor efficiency variance, F
Labor rate variance, negligible
Machine hours efficiency, F
 Answer:
Answer: A. An unfavorable price variance reduces
While a connection between these any net favorable variance that may
variances cannot be guaranteed, the have arisen during the year. A
following scenario is plausible. Better- sufficient number of such events
than-standard quality materials were could cause the net materials price
purchased, leading to an unfavorable variance to be unfavorable and would
materials price variance. When these eliminate the bonus to the materials
materials were used during the period (JIT purchasing manager.
basis for raw materials purchases),
favorable efficiency variances arose B. The use of the variance in this way
because the material was easier for labor would lead to an undesirable
and machines to process. behavioral outcome. The materials
purchasing manager is a gatekeeper;
Motivational Effects of Standard Cost Systems that is, this manager observes the
purchasing opportunities available and
85. Standard cost systems can have determines whether or not the firm
motivational effects; some are desirable, will follow them. In this case, the
some are not. Consider the following manager would be unlikely to pursue
situation: the grade 4A material because of the
negative effect on the bonus
The materials purchasing manager is paid calculation. As a result, the overall
a salary plus a bonus based on the net possibility of offsetting higher
favorable materials price variance. purchase costs with savings in yield
Generally, this bonus amounts to 30 - 40% and productivity would not
of the manager's total compensation. Due materialize.
to the bankruptcy of a company in a
related field, there is an opportunity to buy
a key raw material. The standards for this
material call for grade 2A, usually
purchased for $56 per ton. Because of the
bankruptcy, the company can obtain a
higher grade, 4A, for $62 per ton. While
the quality of the final product will be the
same regardless of the grade of material
used, there will be substantial savings in
material yield and labor productivity if 4A
is used. These savings are expected to be
two to three times the additional cost of $6
per ton.

Required:
A. How would an unfavorable price
variance on a particular purchase
affect the overall price variance for
the year?
B. Would the use of the materials price
variance as a basis for the manager's
bonus lead to a desirable or
undesirable behavioral outcome?
Explain, being sure to note whether
the manager would likely pursue
acquisition of the grade 4A material.

LO: 5 Type: N

308