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Chapter 23: Q10RQ (page 1305)

Question:Give the general formulas for determining cost and efficiency variances.

Short Answer

Expert verified

Answer

The general formulae for cost variance are given by theproduct of actual quantity and the difference between actual cost and standard cost. The general formulae for efficiency variance are given by the product of standard quantity and the variation among actual quantity and standard quantity.

Step by step solution

01

General formula for determining cost variances

The cost variances are computed by using the following formulae

CostVariance=ActualCost×ActualQuantity-StandardCost×ActualQuantity=Actualcost-Standardcost×ActualQuantity=AC-SC×AQ

02

General formula for determining efficiency variances

The efficiency variances are computed by using the following formulae

CostVariance=StandardCost×ActualQuantity-StandardCost×StandardQuantity=Actualcost-Standardcost×StandardCost=AQ-SQ×SC

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Most popular questions from this chapter

Computing standard cost variances and reporting to management

Hear Smart manufactures headphone cases. During September 2018, the company produced and sold 105,000 cases and recorded the following cost data:

Standard Cost Information

Quantity

Cost

Direct Materials

2 parts

\( 0.15 per part

Direct Labor

0.02 hours

8.00 per hour

Variable Manufacturing Overhead

0.02 hours

10.00 per hour

Fixed Manufacturing Overhead (\)28,500 for static budget volume of

95,000 units and 1,900 hours, or \(15 per hour)

Actual Cost Information

Direct Materials (209,000 parts @ \)0.20 per part) \( 41,800

Direct Labor (1,600 hours @ \)8.15 per hour) 13,040

Variable Manufacturing Overhead 9,000

Fixed Manufacturing Overhead 26,000

Requirements

1. Compute the cost and efficiency variances for direct materials and labor.

2. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances.

3. Hear Smart’s management used better quality materials during September. Discuss the tradeoff between the two direct material variances.

Drew Castello, general manager of Sunflower Manufacturing, was frustrated. He wanted the budgeted results, and his staff was not getting them to him fast enough. Drew decided to pay a visit to the accounting office, where Jeff Hollingsworth was supposed to be working on the reports. Jeff had recently been hired to update the accounting system and speed up the reporting process.

“What’s taking so long?” Drew asked. “When am I going to get the variance reports?” Jeff sighed and attempted to explain the problem. “Some of the variances appear to be way off. We either have a serious problem in production, or there is an error in the spreadsheet. I want to recheck the spreadsheet before I distribute the report.” Drew pulled up a chair, and the two men went through the spreadsheet together. The formulas in the spreadsheet were correct and showed a large unfavorable direct labor efficiency variance. It was time for Drew and Jeff to do some investigating.

After looking at the time records, Jeff pointed out that it was unusual that every employee in the production area recorded exactly eight hours each day in direct labor. Did they not take breaks? Was no one ever five minutes late getting back from lunch? What about clean­up time between jobs or at the end of the day?

Drew began to observe the production laborers and noticed several disturbing items. One employee was routinely late for work, but his time card always showed him clocked in on time. Another employee took 10­ to 15­minute breaks every hour, averaging about 1 hours each day, but still reported eight hours of direct labor each day. Yet another employee often took an extra 30 minutes for lunch, but his time card showed him clocked in on time. No one in the production area ever reported any “down time” when they were not working on a specific job, even though they all took breaks and completed other tasks such as doing clean­up and attending department meetings.

Requirements

1. How might the observed behaviors cause an unfavorable direct labor efficiency variance?

2. How might an employee’s time card show the employee on the job and working when the team member was not present?

3. Why would the employees’ activities be considered fraudulent?

Identifying the benefits of standard costs

Setting standards for a product may involve many employees of the company. Identify some of the employees who may be involved in setting the standard costs, and describe what their role might be in setting those standards.

Question:What is management by exception?

The following direct labor variance analysis was performed for Morris.

AC × AQ \(19,800 SC × SQ \)14.00 per DLHr × 1,350 DLHr \(18,900 SC × AQ \)14.00 per DLHr × 1,800 DLHr \(11.00 per DLHr × 1,800 DLHr \)25,200 Efficiency Variance Cost Variance \(5,400 F \)6,300 U

Requirements

1. Record Morris’s direct labor journal entry (use Wages Payable).

2. Explain what management will do with this variance information.
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