Module 11. Standard Costs and Variances - The Basics

Kretsmart Company is worried about the cost of its direct materials and has asked you to study its materials price variance. Kretsmart is concerned that the purchasing manager may not be buying from the lowest-priced vendor. Here are data for Kretsmart Company:

Actual Results

Total cost of purchasing material: $58,000

Number of material pounds used in production: 5,850 pounds

Number of units produced: 300 units

Number of material pounds purchased: 6,250 pounds

Kretsmart has established the following standards:

Price per pound of materials: $10.00 per pound

Number of pounds of material to produce one unit: 20 pounds

What is Kretsmart Company's computed materials price variance?

$4,500 F

Correct!

The materials price variance is based on the quantity of materials purchased, with the actual price paid compared to the price that should have been paid according to the standard. The amount is computed using the standard price.

Total cost of purchasing the 6,250 pounds of material = $58,000

AQ × SP = 6,250 pounds × $10.00 = $62,500

$62,500 - $58,000 = $4,500 F

The variance is favorable because the company paid less than the standard.

The plant supervisor for Orange Zest Company is concerned about the quality of her plant workers. During her casual observations of the workers' habits, she observes that the workers do a lot of talking and watching but not much working. Her production manager assures her that the workers are getting their work done in an efficient manner. The plant supervisor asks to see the labor efficiency variance calculations.

These cost data are for Orange Zest Company:

Actual Results

Number of labor hours worked: 1,000 hours

Total labor cost: $48,000

Number of units produced: 300 units

Orange Zest has established the following standards:

Standard labor rate: $50 per hour

Number of labor hours to produce one unit: 3 hours

What is Orange Zest Company's computed labor efficiency variance?

$5,000 U

Correct!

The labor efficiency variance is based on the quantity of labor hours used compared to the quantity that should have been used according to the standard. The amount is computed using the standard rate.

Hours that should have been used:

900 hours = 300 units produced × 3 standard hours per unit

AH × SR = 1,000 hours × $50 = $50,000

SH × SR = 900 hours × $50 = $45,000

$50,000 - $45,000 = $5,000 U

The variance is unfavorable because more hours were used than the standard.

Management at Paradigm Toys is worried that its labor costs are too high. Paradigm Toys has asked you to study its direct labor cost to see if the labor rate it is paying is above what it believes it should be paying based on standard labor rates:

Here are data for Paradigm Toys:

Actual Results

Number of labor hours worked: 2,000 hours

Total labor cost: $48,000

Number of units produced: 300 units

Paradigm Toys has established the following standards:

Standard labor rate: $30 per hour

Number of labor hours to produce one unit: 7 hours

What is Paradigm Toys's computed labor rate variance?

$12,000 F

Correct!

The labor rate variance is based on the quantity of labor hours paid for, with the actual wage rate paid compared to the rate that should have been paid according to the standard. The amount is computed using the actual labor hours.

Actual labor cost for the 2,000 hours worked = $48,000

SR = 2,000 hours × $30 = $60,000

$60,000 - $48,000 = $12,000 F

The variance is favorable because they paid less than the standard.

uality Apple Farms is surprised that its manufacturing costs are lower than expected. Management has already studied direct materials and direct labor costs and found them to be normal. Now management has asked you to study the manufacturing overhead costs to see if they are surprisingly low and why. The following are data for Quality Apple Farms.

Here are estimated data as of the beginning of Year 1:

Estimated total manufacturing overhead: $100,000

Estimated direct labor hours: 40,000 hours

Here are actual data for Year 1:

Actual total manufacturing overhead: $90,000

Actual direct labor hours: 45,000 hours

The number of units produced during Year 1 was 1,000. The standard number of direct labor hours to be worked to produce each unit is 50.

What is Quality Apple Farms' computed variable manufacturing overhead efficiency variance?

$12,500 F

Correct!

Predetermined overhead rate: $100,000/40,000 hours = $2.50 per hour

The variable overhead efficiency variance is based on the quantity of labor hours used compared to the quantity that should have been used according to the standard. The amount is computed using the standard predetermined overhead rate. This overhead efficiency variance reflects the difference in variable overhead cost caused by working a different number of labor hours (the overhead cost driver) from the standard.

Hours that should have been used:

50,000 hours = 1,000 units produced × 50 standard hours per unit

AH × SR = 45,000 hours × $2.50 = $112,500

SH × SR = 50,000 hours × $2.50 = $125,000

$125,000 - $112,500 = $12,500 F

The variance is favorable because they used fewer hours than the standard.

Bicknello Noodle is experiencing much higher production costs than normal that are far above its standard. After investigating various possible causes, they have found that the main reason for high production costs is that the company is hiring many temporary employees, each of whom costs the company much more per hour than a normal full-time employee.

Which variance should highlight this problem?

Labor rate variance

Correct!

The labor rate variance is calculated as the difference between the actual labor rate and the standard labor rate times the number of standard hours worked. When expensive temporary hires are working, the actual rate being paid those temporary workers would be higher than expected and should be highlighted by the labor rate variance.