Question

Mastery Problem: Evaluating Variances from Standard Costs

Sole Purpose Shoe Company

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 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 cost variances.

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.

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   the standard cost (what the product should cost). A favorable variance is represented by a   number, indicating that costs are   than expected.

An unfavorable variance occurs when the actual cost (what the product does cost) is   the standard cost (what the product should cost). An unfavorable variance is represented by a   number, indicating that costs are   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 favorable cost variance, and a positive number for an 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	$
	= $				= $				= $
			Direct Materials   Variance:				Direct Materials   Variance:
			$				$
					Total Direct Materials   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 2,200 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	$
	= $				= $				= $
			Direct Labor   Variance:				Direct Labor   Variance:
			$				$
					Total Direct Labor   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 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.

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.

Answer 1

Q.no-1.a) Standard costs give management a cost structure for products that is applicable for the entire life of the business.

Reason-The remaining options b and c talk about what might happen after choosing standard costing and the question is regarding why might she choose standard costing

Q.no-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. (If not revised from time to time)

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

All of the three options above are possible drawbacks of standard costing , standards are possible to attain and also they might change with change in the business environment.

Q.no-3.A favorable variance occurs when the actual cost is lower than the standard cost. A favorable variance is represented by a positive number, indicating that costs are lesser than expected.

An unfavorable variance occurs when the actual cost is more than the standard cost An unfavorable variance is represented by a  negative number, indicating that costs are more than expected.

Q.no-4.

Actual quantity x Actual price (1)	Actual quantity x Standard price (2)	Standard quantity x Standard price (3)
63,101	59,556	66,528
(7,090 x 8.9)	(7,090 x 8.4)	(7,920 x 8.4)

Direct material variance (1-2) = $3,545 Unfavorable

Direct material variance (2-3) = $6,972 Favorable

Total Direct material variance = $3,427 Favorable

Notes-

Actual quantity = 7,090 units (Given); Actual price = $8.9 per unit (63,101 / 7,090); Standard price = $8.4 per unit (Given)

Standard quantity = 3.6 units of input for one unit of output for 2,200 units of output input = 7,920 (2,020 x 3.6)

Q.no-5.

Actual hours x Actual rate (1)	Actual hours x Standard rate (2)	Standard hours x Standard rate (3)
65,340	61,710	52,360
(7,260 x 9)	(7,090 x 8.5)	(7,920 x 8.5)

Direct labor variance (1-2) = $3,630 Favorable

Direct material variance (2-3) = $9,350 Favorable

Total Direct material variance = $12,980 Favorable

Notes-

Actual hours = 7,260 Hours (Given); Actual rate = $9 per hour (65,340 / 7,260); Standard rate = $8.5 per hour (Given)

Standard hours= 2.8 hours for one unit of output for 2,200 units of output input = 6,160 (2,200 x 2.8)

Q.no-6.

Manufacturing cost	Actual cost	Standard cost	Cost variance
Direct material	86,100	90,720	(4,620)
	(10,500 units x $8.2 per unit)	(3000 pairs x 3.6 units per pair x 8.4 per unit)
Direct labor	72,090	71,400	690
	(8,100 hours x $8.9 per hour)	(3000 pairs x 2.8 hours per pair x 8.5 per hour)
Factory overhead	24,300	22,680	1,620
	Given	(3000 pairs x 2.8 hours per pair x 2.7 per hour)
Total	182,490	184,800	(2,310)

Variance in brackets indicate Favorable variance

Q.no-7.Why material variances

a. The actual quantity of direct materials per unit was less than the standard quantity. (less by 300 units than standard)

b. The actual price for direct materials per unit was less than the standard price.(less by 0.2 per unit than standard)

Q.no-8.Why labor variances

b. The unfavorable rate variance was larger than the favorable time variance, causing the total cost variance for direct labor to be unfavorable (Rate variance = $3,240 Unfavorable, Time variance = $2,550 Favorable)