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.

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.

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.

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.

QUESTION 1

1. The law of diminishing marginal productivity pertains to_____:

   	a.	the short run.
   	b.	the long run.
   	c.	both the short run and the long run.
   	d.	the short run for small firms, and the long run for large firms.

1 points   

QUESTION 2

1. Assume that you own a sole proprietorship. Your first year earnings were $75,000, and your explicit costs were $55,000.  If you could have worked at another establishment and earned $25,000, which of the following is true?

   	a.	Your firm earned an economic profit of $20,000.
   	b.	Your firm's total implicit costs were $80,000.
   	c.	Your firm sustained an economic loss of $5,000.
   	d.	Your firm's total costs are $100,000.

1 points   

QUESTION 3

1. Which of the following is true regarding accounting profit?

   	a.	It is typically smaller than economic profit.
   	b.	It includes all explicit and implicit cost of production.
   	c.	It includes depreciation.
   	d.	All of the above.

1 points   

QUESTION 4

1. Marginal cost is understood as the change in__________ when producing one more unit of output. In the short run, marginal cost can also be determined by the change in__________ when producing one more unit of output.

   	a.	variable cost; fixed cost
   	b.	total cost; fixed cost
   	c.	fixed cost; variable cost
   	d.	total cost; variable cost

1 points   

QUESTION 5

1. Which of the following are characteristics of a perfectly competitive market?

   	a.	Firms are price takers.
   	b.	Firms produce identical or nearly identical products.
   	c.	Firms can enter the market without any restrictions.
   	d.	All of the above.

1 points   

QUESTION 6

1. An organization with 50 employees will add 10 employees next month. This is_____:

   	a.	a long run decision.
   	b.	a long run and a short run decision.
   	c.	a short run decision.
   	d.	none of the above.

1 points   

QUESTION 7

1. Fixed inputs are_____:

   	a.	those inputs to production that have a fixed price.
   	b.	those inputs to production that result in a fixed variable product.
   	c.	those inputs to production that cannot be varied in the short run.
   	d.	those inputs to production that have a fixed market.

1 points   

QUESTION 8

1. When deciding whether to continue operations or shutdown, a perfectly competitive firm should_____:

   	a.	continue operations if the price of the firm's product falls below the minimum average variable cost.
   	b.	shut down if the price of the firm's product falls below the minimum average variable cost.
   	c.	continue operations if the marginal cost of a new invention for the firm surpasses average variable cost.
   	d.	shut down if it can cover all of its costs, but only at a diminishing marginal rate.

1 points   

QUESTION 9

1. If the total output rises while the cost per unit fails, a firm is understood to be enjoying_____:

   	a.	increased profits.
   	b.	economies of scale.
   	c.	maximum efficiency.
   	d.	all of the above.

1 points   

QUESTION 10

1. Firms that compete in perfectly competitive markets must decide_____:

   	a.	the quantity to produce.
   	b.	the price to charge.
   	c.	the price to charge and the quantity to produce.
   	d.	none of the above.

the following cost-of-quality data were collected at the installment loan department of the Kenney Bank. Classify these data into the appropriate cost-of-quality categories.

1.

Run credit checks:$2,036.03

2.Review documents:$3,290.66

3.Make document corrections; gather additional information:$1,696.47

4.Prepare tickler file; review and follow up on titles, insurance, second meetings:$105.22

5.Review all output:$2,914.92

6.Correct rejects and incorrect output:$433.63

7.Reconcile incomplete collateral report:$78.89

8.Handle dealer problem calls; address associate problems; research and communicate information:$2,290.55

9.Compensate for system downtime: $557.17

10.Conduct training:$1,168.91

Loan Payment

1.Receive, inspect, and process payments:$797.14

2.Respond to inquiries when no coupon is presented with payments:$859.31

Loan Payoff

1.Receive, inspect, and process payoff and release documents:$205.36

2.Research payoff problems:$15.12

Calculate the amount and the percent of the total. Round your answers for dollar values to the nearest cent. Round your answers for percentage values to two decimal places.

Total Appraisal costs. $.   Percent of Total %

Total External failure costs. $.   Percent of Total %

Total Internal failure costs$ Percent of Total%

Total Prevention costs. $. Percent of Total%

MATLAB CODE

Let’s say you need to write a small script that takes in the total amount of money entered, and a cost, and returns the correct change in quarters/dimes/nickels/pennies.

• Initialize counter variables for quarters, dimes, nickels and pennies to 0. Counter variables are used to keep track of how many of each coin are to be returned.
• Calculate the amount of change to be given using the ‘total’ and ‘cost’ variables.
• While there is still change to be given, find the largest coin that can be returned, increment the coin’s counter, and subtract the coin value from the amount of change to be given.
• Display the total change, as well as how many of each coin are being returned.

PREVIOUS CODE FOR THIS

function value = get_coin_value(coin)

%Set value to be the correct number based on coin.

%For example, if coin == 'q', value = 25

if coin == 'q'

value = 25;

elseif coin == 'd'

value = 10;

elseif coin == 'n'

value = 5;

elseif coin == 'p'

value = 1;

else

value = 0;

end

function total = insert_coins

%your code here

total = 0;

%Loop to keep asking user for coin till total is less than 115 cents

while(total<115)

coin = input('Enter q for quarter, d for dime, n for nickel,p for penny:','s');

total = total + get_coin_value(coin);

end

disp("Your NAU power juice has been dispensed")

end

Question 2 Variance analysis for Divine Denim

Helen has been using a standard cost system developed by Good Numbers and calculates the standard cost of a completed pair of RTW jeans as $72.00, as follows:

The fixed overhead rate is based on an estimated 600 units per month. Direct labour is nearly a fixed cost in this business. Selling and administrative costs are $4500 per month plus $2 per pair of jeans sold. The following information is for production during April:

Divine Denim’s policy is to record materials price variances at the time materials are purchased. Use a spreadsheet to perform calculations.

Required:

As an accountant working for Good Numbers use a spreadsheet to:

1. prepare a flexible cost budget for the month of April.
2. calculate all common direct cost variances.
3. calculate all common factory overhead variances.
4. calculate a total variance for the selling and administrative costs.
5. prepare a production cost variance report for April.
6. prepare a report that sums all the variances necessary to prepare the reconciling journal entry at the end of the period. Explain how you would close the total variance; that is, identify the account or accounts that would be affected, and whether expenses in the accounts will be increased or decreased to adjust the records for the total variance.
7. use information in the April production cost variance report (part v. above) to identify and describe questions Helen, the owner of Devine Denim, might have about April’s production costs.

Allocating Joint Costs Using the Weighted Average Method

Orchard Fresh, Inc., purchases apples from local orchards and sorts them into four categories. Grade A are large blemish-free apples that can be sold to gourmet fruit sellers. Grade B apples are smaller and may be slightly out of proportion. These are packed in boxes and sold to grocery stores. Apples for slices are even smaller than Grade B apples and have blemishes. Apples for applesauce are of lower grade than apples for slices, yet still suitable for canning.

Information on a recent purchase of 20,000 pounds of apples is as follows: Assume that Orchard Fresh, Inc., uses the weighted average method of joint cost allocation and has assigned the following weights to the four grades of apples:

Total joint cost is $19,000.

Required:

1. Allocate the joint cost to the four grades of apples using the weighted average method. Round your allocation percentages to four decimal places and round the allocated costs to the nearest dollar.

(Note: The joint cost allocation does not equal $19,000 due to rounding.)

2. What if the factory found that Grade A apples were being valued less by customers and decided to decrease the weight factor for Grade A apples to 3.0? How would that affect the allocation of cost to Grade A apples? How would it affect the allocation of cost to the remaining grades? Round your allocation percentages to four decimal places and round the allocated costs to the nearest dollar.

(Note: The joint cost allocation does not equal $19,000 due to rounding.)

Absorption and Variable Costing Income Statements

During the first month of operations ended July 31, YoSan Inc. manufactured 9,200 flat panel televisions, of which 8,600 were sold. Operating data for the month are summarized as follows:

Required:

1. Prepare an income statement based on the absorption costing concept.

Feedback

1. Sales - (cost of goods manufactured - ending inventory*) = Gross profit; gross profit - selling and administrative expenses = income from operations
*(Manufactured Units - Sold units) x (total manufacturing costs/manufactured units)

Learning Objective 1 and Learning Objective 2.

2. Prepare an income statement based on the variable costing concept.

The following information is available for Shanika Company for 20Y6:

Required:

1. Prepare the 20Y6 statement of cost of goods manufactured.