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Chapter 23: Q8RQ (page 1305)
Question:What is a standard cost system?
Answer
A standard costing system is a tool for preparing various budgets and controlling costs.
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Download an Excel template for this problem online in MyAccountingLab or at http://www.pearsonhighered.com/Horngren. Pilchuck Company manufactures tote bags and has provided the following information for September 2018:
Units | Actual Results | Static Budget |
Static Budget | 11,000 | 12,000 |
Sales Revenue | \(368,000 | \)384,000 |
Variable Costs | 183,000 | 198,000 |
Contribution Margin | 185,000 | 186,000 |
Fixed Costs | 76,000 | 77,184 |
Operating Income | \(109,000 | \)108,816 |
In 75 words or fewer, explain what a cost variance is and describe its potential causes.
Cell One Technologies manufactures capacitors for cellular base stations and other communications applications. The company’s July 2018 flexible budget shows output levels of 6,000, 7,500, and 9,500 units. The static budget was based on expected sales of 7,500 units.
CELL ONE TECHNOLOGIES Flexible Budget For the Month Ended July 31, 2018 |
Budget Amount per Unit |
Units 6,000 7,500 9,500 |
Sales Revenue \(21 \)126,000 \(157,500 \)199,500 |
Variable Expenses 10 60,000 75,000 95,000 |
Contribution Margin 66,000 82,500 104,500 |
Fixed Expenses 55,000 55,000 55,000 |
Operating Income \(11,000 \)27,500 \(49,500 |
The company sold 9,500 units during July, and its actual operating income was as follows:
CELL ONE TECHNOLOGIES Income Statement For the Month Ended July 31, 2018 |
Sales Revenue \)206,500 |
Variable Expenses 100,100 |
Variable Expenses 106,400 |
Fixed Expenses 56,000 |
Operating Income $504,00 |
Requirements
1. Prepare a flexible budget performance report for July.
2. What was the effect on Cell One’s operating income of selling 2,000 units more than the static budget level of sales?
3. What is Cell One’s static budget variance for operating income?
4. Explain why the flexible budget performance report provides more useful information to Cell One’s managers than the simple static budget variance. What insights can Cell One’s managers draw from this performance report?
Martin, Inc. is a manufacturer of lead crystal glasses. The standard direct materialsquantity is 1.0 pound per glass at a cost of \(0.50 per pound. The actual result for onemonth’s production of 6,500 glasses was 1.2 pounds per glass, at a cost of \)0.30 perpound. Calculate the direct materials cost variance and the direct materials efficiencyvariance.
Preparing a flexible budget and performance report
This continues the Piedmont Computer Company situation from Chapter 22. Assume Piedmont Computer Company has created a standard cost card for the PCC model tablet computer, with overhead allocated based on direct labor hours:
Direct materials | \( 300 per tablet |
Direct labor | 3 hours per tablet at \)26 per hour |
Variable overhead | 3 hours per tablet at \(5 per hour |
Fixed overhead | \)54,000 per month |
During the month of September, Piedmont Computer Company incurred the following costs while manufacturing 1,100 PCC model tablets:
Direct material | \(341,000 |
Direct labor | 88,000 |
Variable overhead | 17,600 |
Fixed overhead | 56,320 |
Requirements
1. Prepare a flexible budget for September for 900, 1,000, and 1,100 PCC model tablets. The tablet has a standard sales price of \)675. List variable costs separately.
2. Using 1,000 PCC model tablets for the static budget, prepare a flexible budget performance report for September. Total sales revenue for the month was $767,800. The company sold 1,100 tablets.
3. What insights can the management of Piedmont Computer Company draw from the performance report?
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