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 $61,321 for 6,890 units of direct materials in the production of 2,150 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 $65,880 for 7,320 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	$
	= $				= $				= $
			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

ans 1

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

The variances acan be calculated by comparing the actual cost with standard cost

ans 2

Option a,b and c are possible drawbacks of using standard costing

ans 3

Actual cost is less than standard cost

Negative number

cost are less than expected

unfavorable

Actual cost is more than standard cost

positive number

cost are more than expected

Column1	Column2	Column3	Column4	Column5	Column6	Column7	Column8	Column9	Column10	Column11
ans 4 Material
AQ	*	AP		AQ	*	SP		SQ	*	SP
6890		8.9		6890		8.4		7740		8.4
	61321				57876				65016
Direct Material Price variance			3445	U	Direct Material Quantity variance	-7140	F
		Total direct material variance (7140-3445)		-3695	F
SQ=2150*3.6	7740
Labor
AH	*	AR		AH	*	SR		SH	*	SR
7320		9		7320		8.5		5880		8.5
	65880				62220				49980
Direct labor rate variance			3660	U	Direct Labor efficiency variance	12240	F
		Total direct labor variance			15900	F

SH=2100*2.8	5880
Sole Purpose Shoe Company
Budget Performance Report
For the Month Ended September 30
Manufacturing Costs			Cost Variance -
		Standard Cost at	(Favorable)
	Actual Costs	Actual Volume	Unfavorable
Direct materials	86100	90720	-4620	F
	(10500*8.2)	(3000*8.4*3.6)
Direct labor	72090	71400	690	U
	(8100*8.9)	(3000*8.5*2.8)
Factory overhead	24300	22680	1620	U
		(3000*2.7*2.8)
Total manufacturing costs	182490	184800	-2310	F
ans
Material
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.
ans 2
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.
As standard hours allowed were =3000*2.8= 8400 which was more than AH resultimg an favorable time variane
If any doubt please comment