Question

1. Sole Purpose Shoe Company is owned and operated by Sarah Charles. The company manufactures casual shoes, with manufacturing facilities in your state. Sarah began the business this year, and while she has a great deal of experience in manufacturing popular and comfortable shoes, she needs some help in evaluating her results for the year, and asks for your help.

   Starting Questions

   Sarah’s first questions for you have to do with the general ideas and terminology used to evaluate variances.

   Provide answers to the following questions (1)-(3).

   1. Why might Sarah want to use A detailed estimate of what a product should cost.standard costs to compare with her actual costs?

   a. Standard costs give management a cost structure for products that is applicable for the entire life of the business.

   b. Standard costs allow management to motivate employees by comparing their performance to what it would be under perfect conditions.

   c. Management can evaluate the differences between standard costs and actual costs to focus on correcting the The differences between actual and standard costs.cost variances.

   • a
   • b
   • c

   2. What are some possible drawbacks to using standard costs that Sarah might consider?

   a. Standards limit operating improvements because employees may be discouraged from improving beyond the standards.

   b. Standards may become “stale” in a dynamic manufacturing environment.

   c. Employees may focus only on efficiency improvement and their own operations rather than considering the larger objectives of the organization.

   d. Since standards are impossible to attain, they are a distraction from the work at hand.

   e. Since standards never change, they do not reflect reality.

   • a, b and c
   • b, c and d
   • c, d and e
   • a, d and e
   • b, d and e

   3. Sarah wants to be sure she understands the basic definitions involved:

   Answer the following questions by selecting the correct words.

   A favorable variance occurs when the actual cost (what the product does cost) is

   • greater than
   • less than
   • the same as
   the standard cost (what the product should cost). A favorable variance is represented by a
   • positive
   • negative
   number, indicating that costs are
   • higher
   • lower
   than expected.

   An unfavorable variance occurs when the actual cost (what the product does cost) is

   • greater than
   • less than
   • the same as
   the standard cost (what the product should cost). An unfavorable variance is represented by a
   • positive
   • negative
   number, indicating that costs are
   • higher
   • lower
   than expected.

   Direct Materials

   Under normal conditions, Sarah spends $8.40 per unit of materials, and it will take 3.60 units of material per pair of shoes. During July, Sole Purpose Shoe Company incurred actual direct materials costs of $63,101 for 7,090 units of direct materials in the production of 2,200 pairs of shoes.

   Complete the following table, showing the direct materials variance relationships for July for Sole Purpose Shoe Company. If required, round your answers to two decimal places. When entering variances, use a negative number for a A variance that occurs when the actual cost is less than standard cost.favorable cost variance, and a positive number for an A variance that occurs when the actual cost exceeds the standard cost.unfavorable cost variance.

   Actual Cost								Standard Cost
   Actual Quantity	X	Actual Price		Actual Quantity	X	Standard Price		Standard Quantity	X	Standard Price
   	X	$			X	$			X	$
   	= $				= $				= $
   			Unfavorable Favorable Direct Materials Cost Price Quantity Rate Time Variance:				Unfavorable Favorable Direct Materials Cost Price Quantity Rate Time Variance:
   			$				$
   					Unfavorable Favorable Total Direct Materials Cost Price Quantity Rate Time Variance:
   					$

   Direct Labor

   Under normal conditions, Sarah pays her employees $8.50 per hour, and it will take 2.80 hours of labor per pair of shoes. During August, Sole Purpose Shoe Company incurred actual direct labor costs of $65,340 for 7,260 hours of direct labor in the production of 2,100 pairs of shoes.

   Complete the following table, showing the direct labor variance relationships for August for Sole Purpose Shoe Company. If required, round your answers to two decimal places. When entering variances, use a negative number for a favorable variance, and a positive number for an unfavorable variance.

   Actual Cost								Standard Cost
   Actual Hours	X	Actual Rate		Actual Hours	X	Standard Rate		Standard Hours	X	Standard Rate
   	X	$			X	$			X	$
   	= $				= $				= $
   			Unfavorable Favorable Direct Labor Cost Price Quantity Rate Time Variance:				Unfavorable Favorable Direct Labor Cost Price Quantity Rate Time Variance:
   			$				$
   					Unfavorable Favorable Total Direct Labor Cost Price Quantity Rate Time Variance:
   					$

   Budget Performance Report

   Sarah has learned a lot from you over the past two months, and has compiled the following data for Sole Purpose Shoe Company for September using the techniques you taught her. She would like your help in preparing a A report that summarizes actual costs, standard costs, and the differences for the units produced.Budget Performance Report for September. The company produced 3,000 pairs of shoes that required 10,500 units of material purchased at $8.20 per unit and 8,100 hours of labor at an hourly rate of $8.90 per hour during the month. Actual factory overhead during September was $24,300. When entering variances, use a negative number for a favorable cost variance, and a positive number for an unfavorable cost variance.

   Use the data in the following table to prepare the Budget Performance Report for Sole Purpose Shoe Company for September.

   Manufacturing Costs	Standard Price	Standard Quantity	Standard Cost Per Unit
   Direct materials	$8.40 per unit	3.60 units per pair	$30.24
   Direct labor	$8.50 per hour	2.80 hours per pair	23.80
   Factory overhead	$2.70 per hour	2.80 hours per pair	7.56
   Total standard cost per pair			$61.60

   Sole Purpose Shoe Company Budget Performance Report For the Month Ended September 30
   Manufacturing Costs	Actual Costs	Standard Cost at Actual Volume	Cost Variance - (Favorable) Unfavorable
   Direct materials	$	$	$
   Direct labor
   Factory overhead
   Total manufacturing costs	$	$	$

   Final Questions

   Before Sarah makes any changes based on the Budget Performance Report for September, she wants to be sure she understands the results, and has the following questions for you.

   Answer the following questions (1) and (2). All questions pertain to the September data.

   1. What caused the total cost variance for direct materials?

   a. The actual quantity of direct materials per unit was less than the standard quantity.

   b. The actual price for direct materials per unit was less than the standard price.

   c. The favorable price variance dominated the unfavorable quantity variance, causing the total cost variance for direct materials to be favorable.

   d. The unfavorable quantity variance dominated the favorable price variance, causing the total cost variance for direct materials to be unfavorable.

   e. A factor other than those listed caused the total cost variance for direct materials.

   • a and b
   • b and c
   • c and d
   • d and e
   • a and e

   2. What caused the total cost variance for direct labor?

   a. The actual number of labor hours per unit was less than the standard number.

   b. The unfavorable rate variance was larger than the favorable time variance, causing the total cost variance for direct labor to be unfavorable.

   c. The favorable time variance was larger than the unfavorable rate variance, causing the total cost variance for direct labor to be favorable.

   d. The actual rate for labor hours per unit was less than the standard rate.

   e. A factor other than those listed caused the total cost variance for direct labor.

   • a and b
   • b and c
   • c and d
   • d and e
   • a and e

Answer 1

1
c.	Management can evaluate the differences between standard costs and actual costs to focus on correcting the
	differences between actual and standard costs.cost variances.
2
a.	Standards limit operating improvements because employees may be discouraged from improving beyond the standards
b.	Standards may become “stale” in a dynamic manufacturing environment
c.	Employees may focus only on efficiency improvement and their own operations rather than considering the larger objectives of the organization
3	A favorable variance occurs when the actual cost (what the product does cost) is less than
	the standard cost (what the product should cost). A favorable variance is represented by a positive number, indicating that costs are
	lower than expected
	An unfavorable variance occurs when the actual cost (what the product does cost) is greater than
	the standard cost (what the product should cost). An unfavorable variance is represented by a negative number, indicating that costs are
	higher than expected.

Direct materials:
Actual cost								Standard cost
Actual quantity	x	Actual price			Actual quantity	x	Standard price			Standard quantity	x	Standard price
7090		8.9			7090		8.4			7920		8.4
		(63101/7090)								(2200*3.60)
	63101					59556					66528
			Unfavorable direct materials price variance				Favorable direct materials quantity variance
			-3545					6972
			(59556-63101)					(66528-59556)
					Favorable total direct materials cost variance
					3427
					(-3545+6972)
Direct labor:
Actual cost								Standard cost
Actual hours	x	Actual rate			Actual hours	x	Standard rate			Standard hours	x	Standard rate
7260		9			7260		8.5			5880		8.5
		(65340/7260)								(2100*2.80)
	65340					61710					49980
			Unfavorable direct labor rate variance				Unfavorable direct labor time variance
			-3630					-11730
			(61710-65340)					(49980-61710)
					Favorable total direct labor cost variance
					-15360
					(-3630+-11730)