Chapter 10

Standard Costs and Overhead Analysis

Discussion Case (20 minutes)

While standard cost systems have many advantages, disadvantages can in-
clude the following:
 Disagreement between managers over whether the standard should
be set at expected, ideal, or current levels
 Difficulty when adjusting for seasonality of costs or for periods of in-
flation when using standard cost systems
 Timeliness of evaluation may suffer because management needs to
wait until the end of each accounting period to compare actual to
standard. By that point, problems may have gone unresolved for sev-
eral weeks
 Favorable variances may actually mean employees have not devoted
enough time to ensuring the quality of the product.
 Companies often fail to update standards on a timely basis which re-
duces the overall integrity of the standard costing system.

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Solutions Manual, Chapter 10 1
Solutions to Questions

10-1 A quantity standard indicates how much 10-9 Standard hours allowed refers to the
of an input should be used to make a unit of quantity of time that should have been taken to
output. A price standard indicates how much the complete the output produced in the period. It is
input should cost. calculated by multiplying the number of units
produced by the standard hours per unit.
10-2 Ideal standards assume perfection and
do not allow for any inefficiency. Thus, ideal 10-10 The two factors that can cause an over-
standards are rarely, if ever, attained. Practical head spending variance are: (a) the actual pur-
standards can be attained by employees working chase price of the variable overhead items dif-
at a reasonable, though efficient pace and allow fers from the standard or (b) the actual quantity
for normal breaks and work interruptions. of variable overhead items used differs from the
standard.
10-3 Chronic inability to meet a standard is
likely to be demoralizing and may result in de- 10-11 The denominator level of activity is the
creased productivity. denominator in the predetermined overhead
rate. It is based on managers’ estimate of the
10-4 A budget is usually expressed in terms total activity (e.g., labour hours, machine hours,
of total dollars, whereas a standard is expressed etc.) for the period the rate will be used.
on a per unit basis. A standard might be viewed
as the budgeted cost for one unit. 10-12 In Chapter 5 we were dealing with a
normal cost system, whereas in Chapter 10 we
10-5 The standard rate per hour for direct are dealing with a standard cost system.
labour would typically include the wages paid Standard costing ensures that each unit of
per hour plus employee benefits such as em- product bears the same amount of overhead
ployment insurance, extended medical insurance cost regardless of any variations in efficiency of
and other labour costs. the use of the application base.

10-6 Separating an overall variance into a 10-13 A budget variance and a volume vari-
price variance and a quantity variance provides ance are computed for fixed manufacturing
more information for decision-making purposes. overhead cost in a standard cost system.
Moreover, price and quantity variances are usu-
ally the responsibilities of different managers. 10-14 The fixed overhead budget variance
compares actual to budgeted costs for fixed
10-7 The materials price variance is usually overhead items. If actual costs exceed budgeted
the responsibility of the purchasing manager. costs, the variance is labelled unfavourable.
The materials quantity and labour efficiency var-
iances are usually the responsibility of produc- 10-15 The volume variance is favourable when
tion managers and supervisors. the activity for a period, at standard, is greater
than the denominator activity level. Conversely,
10-8 An unfavourable labour efficiency vari- if the activity level, at standard, is less than the
ance could be caused by poorly trained or un- denominator level of activity, the volume vari-
motivated employees, poor quality materials, ance is unfavourable. The variance does not
poor supervision, machine breakdowns or inac- measure deviations in spending. It measures
curate standards with respect to the quantity of deviations in actual activity from the denomina-
hours needed to produced a unit of good out- tor level of activity.
put.

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2 Managerial Accounting, 11th Canadian Edition
10-16 The volume variance can also be meas-
ured in physical units, such as direct labour
hours or machine hours.

10-17 The under- or overapplied overhead can

be factored into variable overhead spending and
efficiency variances and the fixed overhead
budget and volume variances.

10-18 Underapplied overhead means that ac-

tual overhead exceeded the amount applied to
products during the period. An unfavourable
overhead variance in total means that the actual
overhead costs exceeded the standard cost of
overhead allowed for the period. Since in a
standard costing system overhead applied is
equal to the standard amount of overhead al-
lowed, underapplied overhead is synonymous
with unfavourable overhead.

10-19 Managers can base variance investiga-

tion decision on: (a) the dollar amount of the
variance, (b) the size of the variance as a pro-
portion of the underlying cost or (c) a statistical
control chart whereby the size of the variance is
expressed in terms of a standard deviation. Only
variances in excess of a certain value of the
standard deviation (e.g., 1) are investigated.

10-20 If labour is a fixed cost and standards

are tight, then the only way to generate favour-
able labour efficiency variances is for every
workstation to produce at capacity. However, the
output of the entire system is limited by the ca-
pacity of the bottleneck. If workstations before
the bottleneck in the production process pro-
duce at capacity, the bottleneck will be unable to
process all of the work in process. In general, if
every workstation is attempting to produce at
capacity, then work in process inventory will
build up in front of the workstations with the
least capacity.

10-21 Theoretical capacity is the volume of

activity that would result from operations being
conducted 24 hours per day, 7 days per week
with no downtime. Practical capacity is based on
theoretical capacity less unavoidable downtime
for maintenance, machine setups, training, etc.

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Solutions Manual, Chapter 10 3
Foundational Exercises

1,2.

Standard Quantity Al-

Actual Quantity of Actual Quantity of In- lowed
Input, put, for Actual Output,
at Actual Price at Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)
160,000 kg × 160,000 kg × 150,000 kg* ×
$7.50 per kg $8.00 per kg $8.00 per kg
= $1,200,000 = $1,280,000 = $1,200,000
Materials price Materials quantity
variance = $80,000 F variance = $80,000 U

*30,000 units × 5 kg per unit = 150,000 kg

Alternatively, the variances can be computed using the formulas:

Materials price variance = AQ (AP – SP)

= 160,000 kg ($7.50 per kg – $8.00 per kg)
= $80,000 F
Materials quantity variance = SP (AQ – SQ)
= $8.00 per kg (160,000 kg – 150,000 kg)
= $80,000 U

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4 Managerial Accounting, 11th Canadian Edition
Foundational Exercises (continued)

3. and 4.

Standard Quantity Al-

Actual Quantity Actual Quantity lowed for Actual Out-
of Input, of Input, put,
at Actual Price at Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)
170,000 kg × 170,000 kg × 150,000 kg* ×
$7.50 per kg $8.00 per kg $8.00 per kg
= $1,275,000 = $1,360,000 = $1,200,000
Materials price variance
= $85,000 F
160,000 pounds ×
$8.00 per pound
= $1,280,000
Materials quantity vari-
ance = $80,000 U
*30,000 units × 5 kg per unit = 150,000 units

Alternatively, the variances can be computed using the formulas:

Materials price variance = AQ (AP – SP)

= 170,000 kg ($7.50 per kg – $8.00 per kg)
= $85,000 F
Materials quantity variance = SP (AQ – SQ)
= $8.00 per kg (160,000 kg – 150,000 kg)
= $80,000 U

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Solutions Manual, Chapter 10 5
Foundational Exercises (continued)

5 and 6.

Standard Hours Allowed

Actual Hours of Input, Actual Hours of Input, for Actual Output,
at Actual Rate at Standard Rate at Standard Rate
(AH × AR) (AH × SR) (SH × SR)
55,000 hours × 55,000 hours × 60,000 hours* ×
$15 per hour $14.00 per hour $14.00 per hour
= $825,000 = $770,000 = $840,000
Labor efficiency vari-
Labor rate variance ance
= $55,000 U = $70,000 F
Spending variance = $15,000 F
*30,000 units × 2.0 hours per unit = 60,000 hours

Alternatively, the variances can be computed using the formulas:

Labor rate variance = AH (AR – SR)

= 55,000 hours ($15.00 per hour – $14.00 per hour)
= $55,000 U
Labor efficiency variance = SR (AH – SH)
= $14.00 per hour (55,000 hours – 60,000 hours)
= $70,000 F

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6 Managerial Accounting, 11th Canadian Edition
Foundational Exercises (continued)

7 and 8.

Standard Hours Allowed

Actual Hours of Input, Actual Hours of Input, for Actual Output,
at Actual Rate at Standard Rate at Standard Rate
(AH × AR) (AH × SR) (SH × SR)
55,000 hours × 55,000 hours × 60,000 hours* ×
$5.10 per hour** $5.00 per hour $5.00 per hour
= $280,500 = $275,000 = $300,000
Variable overhead ef-
Variable overhead rate ficiency variance
variance = $5,500 U = $25,000 F
Spending variance = $19,500 F
*30,000 units × 2.0 hours per unit = 60,000 hours
** $280,500 ÷ 55,000 hours = $5.10 per hour

Alternatively, the variances can be computed using the formulas:

Variable overhead rate variance = AH (AR* – SR)

= 55,000 hours ($5.10 per hour – $5.00 per hour)
= $5,500 U

*$280,500 ÷ 55,000 hours = $5.10 per hour

Variable overhead efficiency variance = SR (AH – SH)

= $5.00 per hour (55,000 hours – 60,000 hours)
= $25,000 F

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Solutions Manual, Chapter 10 7
Exercise 10-1 (20 minutes)

1. Cost per 50 kilogram container ............................. $3,750.00

Less: 2% cash discount ....................................... 75.00
Net cost .............................................................. 3,675.00
Add freight cost per 50 kilogram container
($250 ÷ 10 containers) ..................................... 25.00
Total cost per 50 kilogram container ..................... $3,700.00
Standard cost per kilogram purchased .................. $74

2. X43 required per pouch as per bill of materials ............... 480 grams
Add allowance for material rejected as unsuitable
(480 grams ÷ 0.96 = 500 grams;
500 grams – 480 grams = 20 grams) ......................... 20 grams
Standard quantity of X43 per saleable pouch ................. 500 grams

3. Standard Standard Standard

Quantity per Price per Cost per
Item pouch Kilogram pouch
X43 500 grams $74 $37

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8 Managerial Accounting, 11th Canadian Edition
Exercise 10-2 (20 minutes)

1. Number of CertiPro II boards ............................... 1,200

Number of board metres per cutting board ........... × 0.4
Standard board metres allowed ............................ 480
Standard cost per metre ...................................... × $5.00
Total standard cost .............................................. $2,400
Actual cost incurred ............................................. $2,970
Standard cost above ............................................ 2,400
Total variance—unfavourable ............................... $ 570

2. Actual Quantity of Actual Quantity of Standard Quantity

Inputs, at Inputs, at Allowed for Output,
Actual Price Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)
$2,970 540 board metres × 480 board metres ×
$5 per metre $5 per metre
= $2,700 = $2,400

  
Price Variance, Quantity Variance,
$270 U $300 U

Total Variance, $570 U

Alternatively:
Materials Price Variance = AQ (AP – SP)
540 board metres ($5.50 per metre* – $5.00 per metre) = $270 U
*$2,970 ÷ 540 board metres = $5.50 per metre.
Materials Quantity Variance = SP (AQ – SQ)
$5 per metre (540 board metres – 480 board metres) =
$300 U

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Solutions Manual, Chapter 10 9
Exercise 10-3 (20 minutes)

1. Number of meals prepared ..................... 6,000

Standard direct labour-hours per meal..... × 0.20
Total direct labour-hours allowed ............ 1,200
Standard direct labour cost per hour ....... × $9.50
Total standard direct labour cost ............. $11,400
Actual cost incurred ................................ $11,500
Total standard direct labour cost
(above) ............................................... 11,400
Total direct labour variance .................... $ 100 Unfavourable

2. Actual Hours of Standard Hours

Input, at the Actual Actual Hours of Input, Allowed for Output, at
Rate at the Standard Rate the Standard Rate
(AH×AR) (AH×SR) (SH×SR)
1,150 hours × 1,150 hours × 1,200 hours ×
$10.00 per hour $9.50 per hour $9.50 per hour
= $11,500 = $10,925 = $11,400
  
Rate Variance, Efficiency Variance,
$575 U -$475 F

Total Variance, $100 U

Alternatively, the variances can be computed using the formulas:

Labour rate variance = AH (AR – SR)
= 1,150 hours ($10.00 per hour – $9.50 per hour)
= $575 U
Labour efficiency variance = SR (AH – SH)
= $9.50 per hour (1,150 hours – 1,200 hours)
= -$475 F

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10 Managerial Accounting, 11th Canadian Edition
Exercise 10-4 (20 minutes)

1. Number of claims processed ............................ 15,000

Standard direct labour-hours per request ......... × 0.25
Total direct labour-hours allowed ..................... 3,750
Standard variable overhead cost per hour......... × $1.20
Total standard variable overhead cost .............. $4,500
Actual variable overhead cost incurred ............. $4,950
Total standard variable overhead cost (above) .. 4,500
Total variable overhead variance ...................... $ 450 Unfavourable

2. Actual Hours of Standard Hours

Input, at the Actual Actual Hours of Input, Allowed for Output, at
Rate at the Standard Rate the Standard Rate
(AH×AR) (AH×SR) (SH×SR)
4,500 hours × 4,500 hours × 3,750 hours ×
$1.10 per hour* $1.20 per hour $1.20 per hour
= $4,950 = $5,400 = $4,500
  
Variable overhead Variable overhead
spending variance, efficiency variance,
-$450 F $900 U

Total variance, $450 U

*$4,950 ÷ 4,500 hours =$1.10 per hour

Alternatively, the variances can be computed using the formulas:

Variable overhead spending variance:
AH (AR – SR) = 4,500 hours ($1.10 per hour – $1.20 per hour)
= -$450 F
Variable overhead efficiency variance:
SR (AH – SH) = $1.20 per hour (4,500 hours – 3,750 hours)
= $900 U

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Solutions Manual, Chapter 10 11
Exercise 10-5 (45 minutes)

1. Fixed portion of the predetermined overhead rate:

Fixed overhead  Denominator level of activity

$40,000/10,000 DLHS = $4.00 per DLH

2. Budget variance = Actual fixed overhead cost – Flexible budget fixed

overhead cost

= $38,000 - $40,000 = -$2,000 F

Volume variance = Fixed portion of × (denominator hours – standard

predetermined rate hours)

= $4.00 per DLH (10,000 DLHs – 9,000 DLHs)

= $4,000 U

Note to instructors: students may benefit from the following reconciliation

of underapplied fixed overhead to the budget and volume variances.

Actual fixed overhead $ 38,000

Applied fixed overhead 36,000 (9,000 hours × $4 per hour)

Underapplied overhead $ 2,000

Budget variance $ 2,000 F

Volume variance 4,000 U

Net $ 2,000 U

Recall from the chapter that underapplied overhead relates to unfavourable

variances.

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12 Managerial Accounting, 11th Canadian Edition
Exercise 10-6 (20 minutes)

Hastings Corporation
Variable Overhead Performance Report
For the Year Ended December 31
Budgeted direct labour-hours ........................ 42,000
Actual direct labour-hours ............................. 44,000
Standard direct labour-hours allowed ............. 45,000
(1) (2) (3)
Actual Flexible Flexible
Costs In- Budget Budget
curred Based on Based on (4)
Cost 44,000 44,000 45,000 Total Spending Efficiency
Formula DLHs DLHs DLHs Variance Variance Variance
Overhead Costs (per DLH) (AH × AR) (AH × SR) (SH × SR) (1)-(3) (1)-(2) (2)-(3)
Indirect labour ........... $0.90 $42,000 $39,600 $40,500 $1,500 U $2,400 U $ 900 F
Supplies ..................... 0.15 6,900 6,600 6,750 150 U 300 U 150 F
Electricity ................... 0.05 1,800 2,200 2,250 450 F 400 F 50 F
Total variable over-
head cost ................ $1.10 $50,700 $48,400 $49,500 $1,200 U $2,300 U $1,100 F

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Solutions Manual, Chapter 10 13
Exercise 10-7 (20 minutes)
1. The standard price of a kilogram of white chocolate is determined as fol-
lows:
Purchase price, finest grade white chocolate ........................ £9.00
Less purchase discount, 5% of the purchase price of £9.00 .. (0.45)
Shipping cost from the supplier in Belgium........................... 0.20
Receiving and handling cost ................................................ 0.05
Standard price per kilogram of white chocolate .................... £8.80

2. The standard quantity, in kilograms, of white chocolate in a dozen truf-

fles is computed as follows:
Material requirements ............................. 0.80
Allowance for waste ............................... 0.02
Allowance for rejects .............................. 0.03
Standard quantity of white chocolate ....... 0.85

3. The standard cost of the white chocolate in a dozen truffles is deter-

mined as follows:
Standard quantity of white chocolate (a) ..... 0.85 kilogram
Standard price of white chocolate (b) .......... £8.80 per kilogram
Standard cost of white chocolate (a) × (b) .. £7.48

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14 Managerial Accounting, 11 th Canadian Edition
Exercise 10-8 (30 minutes)
1. a. Notice in the solution below that the materials price variance is com-
puted on the entire amount of materials purchased, whereas the ma-
terials quantity variance is computed only on the amount of materials
used in production.
Actual Quantity of Actual Quantity of Standard Quantity
Inputs, at Inputs, at Allowed for Output, at
Actual Price Standard Price Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)
20,000 cells × $0.65 20,000 cell × $0.60 12,000 cell* × $0.60
per cell per cell per cell
= $13,000 = $12,000 = $7,200

  
Price Variance,
$1,000 U
14,000 cells × $0.60 per cell
= $8,400

Quantity Variance,
$1,200 U
*4,000 lamps × 3 cells per lamp = 12,000 solar cells

Alternative Solution:
Materials Price Variance = AQ (AP – SP)
20,000 diodes ($0.65 per cell – $0.60 per cell) = -$1,000 U
Materials Quantity Variance = SP (AQ – SQ)
$0.60 per diode (14,000 cells – 12,000 cells) = $1,200 U

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Solutions Manual, Chapter 10
Exercise 10-8 (continued)
b. Direct labour variances:
Actual Hours of Actual Hours of Standard Hours
Input, at the Actual Input, at the Allowed for Output,
Rate Standard Rate at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
$35,000 3,100 hours × 3,000 hours* ×
$12 per hour $12 per hour
= $37,200 = $36,000

  
Rate Variance, Efficiency Variance,
$2,200 F $1,200 U

Total Variance, $1,000 F

*4,000 lamps × 0.75 hours per lamp = 3,000 hours

Alternative Solution:
Labour Rate Variance = AH (AR – SR)
3,100 hours ($11.29* per hour – $12.00 per hour) = $2,201 F (dif
ference due to rounding)
*$35,000 ÷ 3,100 hours = $11.29 per hour
Labour Efficiency Variance = SR (AH – SH)
$12 per hour (3,100 hours – 3,000 hours) = $1,200 U

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16 Managerial Accounting, 11 th Canadian Edition
Exercise 10-8 (continued)
2. A variance usually has many possible explanations. In particular, we
should always keep in mind that the standards themselves may be in-
correct. Some of the other possible explanations for the variances ob-
served appear below:
Materials Price Variance Since this variance is unfavourable, the actual
price paid per unit for the material was more than the standard price. This
could occur for a variety of reasons including an unanticipated change in
the market price of the material, loss of bargaining power with a major
supplier, or purchases in smaller quantities than usual causing the supplier
to raise the per unit price.
Materials Quantity Variance Since this variance is unfavourable, more
materials were used to produce the actual output than were called for by
the standard. This could also occur for a variety of reasons. Some of the
possibilities include poorly trained or supervised workers, improperly ad-
justed machines, and defective materials.
Labour Rate Variance Since this variance is favourable, the actual aver-
age wage rate was lower than the standard wage rate. Some of the pos-
sible explanations include hiring more than the usual number of new em-
ployees at wages less than the standard wage rate bringing down the av-
erage wage rate and less than the expected amount of overtime.
Labour Efficiency Variance Since this variance is unfavourable, the actual
number of labour hours was greater than the standard labour hours al-
lowed for the actual output. As with the other variances, this variance
could have been caused by any of a number of factors. Some of the pos-
sible explanations include poor supervision, poorly trained workers, low-
quality materials requiring more labour time to process, and machine
breakdowns. In addition, if the direct labour force is essentially fixed, an
unfavourable labour efficiency variance could be caused by a reduction in
output due to decreased demand for the company’s products.

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Solutions Manual, Chapter 10
Exercise 10-9 (20 minutes)
1. Actual Quantity of Actual Quantity of Standard Quantity
Inputs, at Inputs, at Allowed for Output,
Actual Price Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)
20,000 ml × $0.20 20,000 ml × $0.25 18,000 ml* × $0.25
per ml per ml per ml
= $4,000 = $5,000 = $4,500

  
Price Variance, Quantity Variance,
$1,000 F $500 U

Total Variance, $500 F

*3,000 units × 6 ml per unit = 18,000 ml

Alternatively:
Materials Price Variance = AQ (AP – SP)
20,000 ml ($0.20 per ml – $0.25 per ml) =$1,000 F
Materials Quantity Variance = SP (AQ – SQ)
$0.25 per ml (20,000 ml – 18,000 ml) = $500 U

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18 Managerial Accounting, 11 th Canadian Edition
Exercise 10-9 (continued)
2. Actual Hours of Actual Hours of Standard Hours
Input, at the Input, at the Allowed for Output,
Actual Rate Standard Rate at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
$7,500 625 hours × 600 hours* ×
$12 per hour $12 per hour
= $7,500 = $7,200

  
Rate Variance, Efficiency Variance,
$0 $300 U

Total Variance, $300 U

*3,000 units × 0.2 hours per unit = 600 hours

Alternatively:
Labour Rate Variance = AH (AR – SR)
625 hours ($12 per hour* – $12 per hour) = $0
*7,500 ÷ 625 hours = $12 per hour
Labour Efficiency Variance = SR (AH – SH)
$12 per hour (625 hours – 600 hours) = -$300 U

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Solutions Manual, Chapter 10
Exercise 10-10 (15 minutes)
Notice in the solution below that the materials price variance is computed
on the entire amount of materials purchased, whereas the materials quan-
tity variance is computed only on the amount of materials used in produc-
tion.
Actual Quantity of Actual Quantity of Standard Quantity
Inputs, at Inputs, at Allowed for Output,
Actual Price Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)
20,000 ml × $0.20 20,000 ml × $0.25 12,000 ml* × $0.25
per ml per ml per ml
= $4,000 = $5,000 = $3,000

  
Price Variance,
-$1,000 F
16,000 ml × $0.25 per gram
= $4,000

Quantity Variance,
$1,000 U
*2,000 bottles × 6 ml per bottle = 12,000 ml

Alternatively:
Materials Price Variance = AQ (AP – SP)
20,000 grams ($0.20 per ml – $0.25 per ml) = -$1,000 F
Materials Quantity Variance = SP (AQ – SQ)
$0.25 per ml (16,000 ml – 12,000 ml) = $1,000 U

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20 Managerial Accounting, 11 th Canadian Edition
Exercise 10-11 (30 minutes)

1. Number of units manufactured ............................. 16,000

Standard labour time per unit (12 minutes ÷ 60
minutes per hour) ............................................. × 0.2
Total standard hours of labour time allowed .......... 3,200
Standard direct labour rate per hour ..................... × $15
Total standard direct labour cost .......................... $48,000
Actual direct labour cost ...................................... $49,300
Standard direct labour cost .................................. 48,000
Total variance—unfavourable ............................... $ 1,300

2. Actual Hours of Actual Hours of Standard Hours

Input, at the Input, at the Allowed for Output,
Actual Rate Standard Rate at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
$49,300 3,400 hours × 3,200 hours* ×
$15 per hour $15 per hour
= $51,000 = $48,000

  
Rate Variance, Efficiency Variance,
-$1,700 F $3,000 U

Total Variance, $1,300 U

*16,000 units × 0.2 hour per unit = 3,200 hours

Alternative Solution:
Labour Rate Variance = AH (AR – SR)
3,400 hours ($14.50 per hour* – $15.00 per hour) = -$1,700 F
*$49,300 ÷ 3,400 hours = $14.50 per hour
Labour Efficiency Variance = SR (AH – SH)
$15 per hour (3,400 hours – 3,200 hours) = $3,000 U

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Solutions Manual, Chapter 10
Exercise 10-11 (continued)
3. Actual Hours of Actual Hours of Standard Hours
Input, at the Input, at the Allowed for Output,
Actual Rate Standard Rate at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
$15,640 3,400 hours × 3,200 hours ×
$4 per hour $4 per hour
= $13,600 = $12,800

  
Spending Variance, Efficiency Variance,
$2,040 U $800 U

Total Variance, $2,840 U

Alternative Solution:
Variable Overhead Spending Variance = AH (AR – SR)
3,400 hours ($4.60 per hour* – $4.00 per hour) = $2,040 U
*$15,640 ÷ 3,400 hours = $4.60 per hour
Variable Overhead Efficiency Variance = SR (AH – SH)
$4 per hour (3,400 hours – 3,200 hours) = $800 U

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22 Managerial Accounting, 11 th Canadian Edition
Exercise 10-12 (20 minutes)
1. If the total variance is $660 unfavourable, and if the rate variance is
$300 favourable, then the efficiency variance must be $960 unfavoura-
ble, since the rate and efficiency variances taken together always equal
the total variance.
Knowing that the efficiency variance is $960 unfavourable, one approach
to the solution would be:
Efficiency Variance = SR (AH – SH)
$12 per hour (AH – 420 hours*) = $960 U
$12 per hour × AH – $5,040 = $960**
$12 per hour × AH = $6,000
AH = 500 hours
* 168 batches × 2.5 hours per batch = 420 hours
** When used with the formula, unfavourable variances are positive
and favourable variances are negative.

2. Knowing that 500 hours of labour time were used during the week, the
actual rate of pay per hour can be computed as follows:
Rate Variance = AH (AR – SR)
500 hours (AR – $12 per hour) = $300 F
500 hours × AR – $6,000 = –$300*
500 hours × AR = $5,700
AR = $11.40 per hour
* When used with the formula, unfavourable variances are positive
and favourable variances are negative.

Alternatively, knowing that there is a $300 F variance given 500 actual

hours translates into $0.60 per hour. Since the standard rate is $12 per
hour, the actual rate must be $11.40 per hour ($12 – $0.60).

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Solutions Manual, Chapter 10
Exercise 10-12 (continued)
An alternative approach to each solution would be to work from known
to unknown data in the columnar model for variance analysis:
Actual Hours of Actual Hours of Standard Hours
Input, at the Input, at the Allowed for Output,
Actual Rate Standard Rate at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
500 hours × 500 hours × 420 hours§ ×
$11.40 per hour $12 per hour* $12 per hour*
= $5,700 = $6,000 = $5,040

  
Rate Variance, Efficiency Variance,
$300 F* $960 U

Total Variance, $660 U*

§
168 batches × 2.5 hours per batch = 420 hours
*Given

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24 Managerial Accounting, 11 th Canadian Edition
Exercise 10-13 (20 minutes)
1. Overall rate = $33,200  8,000 MHs = $4.15 per MH
Variable rate = $8,400  8,000 MHs = $1.05 per MH
Fixed rate = $24,800  8,000 MHs = $3.10 per MH

2. The standard hours per unit of product are:

8,000 MHs ÷ 3,200 units = 2.5 MHs per unit
The standard hours allowed for the actual production would be:
3,500 units × 2.5 MHs per unit = 8,750 MHs

3. Variable overhead
spending variance = (AH × AR) – (AH × SR)
= ($9,860) – (8,500 MHs x $1.05 per MH)
= ($9,860) – ($8,925)
= $935 U
Variable overhead ef-
ficiency variance = SR (AH – SH)
= $1.05 per MH (8,500 MHs – 8,750 MHs)
= $262.50 F

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Solutions Manual, Chapter 10
Exercise 10-13 (continued)
Fixed overhead budget and volume variances:
Fixed Overhead Cost
Actual Fixed Budgeted Fixed Applied to
Overhead Cost Overhead Cost Work in Process
$25,100 $24,800* 8,750 standard MHs
× $3.10 per MH
= $27,125
  
Budget Variance, Volume Variance,
$300 U -$2,325 F

Total Variance, $2,025 F

*8,000 denominator MHs × $3.10 per MH = $24,800.

Alternative approach to the budget variance:

Budget variance = Actual fixed overhead cost – budgeted fixed over-
head cost
= $25,100 – $24,800 = $300 U
Alternative approach to the volume variance:
Volume variance = Fixed portion
of the predetermined × (Denominator hours -
rate standard hours allowed)

= $3.10 per MH (8,000 MHs – 8,750 MHs) = -$2,325 F

Reconciliation of overhead variances to overapplied overhead:

Variable OH spending variance $935.00 U
Variable OH efficiency variance 262.50 F
Fixed OH budget variance 300.00 U
Fixed OH volume variance 2,325.00 F
Total $1,352.50 F

Actual OH (variable + fixed) $34,960.00 ($9,860 + $25,100)

Applied OH (variable + fixed) 36,312.50 ($9,187.50 + $27,125)
Overapplied OH $ 1,352.50

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26 Managerial Accounting, 11 th Canadian Edition
Exercise 10-14 (15 minutes)

1. 6,800 units × 0.5 DLH per unit = 3,400 DLHs.

2. and 3.
Fixed Overhead Cost
Actual Fixed Budgeted Fixed Applied to
Overhead Cost Overhead Cost Work in Process
$27,310* $26,800** 3,400 standard DLHs
× $8 per DLH*
= $27,200
  
Budget Variance, Volume Variance,
$510 U -$400 F*
*Given.
**$27,200 – 400

4. Fixed cost element of the = Budgeted fixed overhead cost

predetermined overhead rate Denominator activity
= $26,800 = $8 per DLH
Denominator activity

Denominator Activity= $26,800/$8 = direct labour hours

Therefore, the denominator activity was 3,350 direct labour hours.

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Solutions Manual, Chapter 10
Exercise 10-15 (10 minutes)
Company X: This company has an unfavourable volume variance since
the standard direct labour-hours allowed for the actual
output are less than the denominator activity.
Company Y: This company has an unfavourable volume variance since
the standard direct labour-hours allowed for the actual
output are less than the denominator activity.
Company Z: This company has a favourable volume variance since the
standard direct labour-hours allowed for the actual output
are greater than the denominator activity.

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28 Managerial Accounting, 11th Canadian Edition
 Exercise 10-16 (20 minutes)

Pay Loans Company

Overhead Performance Report
For the Month Ended October 31
Budgeted labour-hours ................................................................................ 1,300
Actual labour-hours ..................................................................................... 1,290
Standard labour-hours allowed for the actual number of checks processed ..... 1,320

(1) (2) (3)

Actual Flexible Flexible Breakdown of the
Cost Costs In- Budget Budget Total Variance
Formula curred for Based on Based on Spending
(per 1,290 La- 1,290 La- 1,320 La- Total Vari- (Budget) Efficiency
labour- bour-Hours bour-Hours bour-Hours ance Variance Variance
Overhead costs hour) (AH × AR) (AH × SR) (SH × SR) (1) – (3) (1) – (2) (2) – (3)
Variable overhead costs:
Office supplies ............ $0.30 $ 219 $ 387 $ 396 $177 F $168 F $ 9F
Staff coffee lounge...... 0.10 186 129 132 54 U 57 U 3F
Indirect labour ............ 3.90 3,348 5,031 5,148 1,800 F 1,683 F 117 F
Total variable over-
head cost................. $4.30 3,753 5,547 5,676 1,923 F 1,794 F 129 F
Fixed overhead costs:
Supervisory salaries.. 6,300 6,000 6,000 300 U 300 U
Total overhead cost $10,053 $11,547 $11,676 $1,623 F $1,494 F $129 F

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Solutions Manual, Chapter 10
NOTE: In the solution above students may get confused with the fact that
the fixed overhead flexible budget amount is $6,000 for both columns (2)
and (3). An explanation can be found on page 430 and in exhibit 10-13.
This fixed amount is not the same thing as fixed overhead applied at
standard as you would compute in your variance analysis. The volume var-
iance is not part of the measurement of performance.

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30 Managerial Accounting, 11 th Canadian Edition
Exercise 10-17 (30 minutes)

1. Theoretical capacity = 30,000  .75 = 40,000 hours

Practical capacity = 30,000  .80 = 37,500 hours
Denominator = 30,000 hours
Actual = 24,000 hours
(12,000 units × 2* hours per unit)
*for purposes of capacity analysis, standard hours are used.

Total overhead cost at each level of capacity utilization:

Theoretical: (40,000 × $4) + $240,000*=$400,000
Practical: (37,500 × $4) + $240,000 = $390,000
Denominator: (30,000 × $4) + $240,000 = $360,000
Actual: (24,000 × $4) + $240,000 = $336,000

*Fixed overhead rate = Total estimated fixed overhead

Denominator activity

$8 = Total estimated fixed overhead

30,000 hours
Fixed overhead is therefore $240,000

2. Operating income at each level of activity is as follows:

Theoretical: 20,000 units × ($100 - $50) - $400,000 = $600,000
Practical: 18,750 units × ($100 - $50) - $390,000 = $547,500
Denominator: 15,000 units × ($100 - $50) - $360,000 = $390,000
Actual: 12,000 units × ($100 - $50) - $336,000 = $264,000

The opportunity loss of producing 12,000 units instead of one of the

other capacity utilization alternatives is calculated as follows:

Theoretical: $600,000 - $264,000 = $336,000

Practical: $547,500 - $264,000 = $283,500
Denominator: $390,000 - $264,000 = $126,000

For example, the company incurs an opportunity loss of $126,000 by

producing 12,000 units instead of the denominator level of 15,000
units.

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Solutions Manual, Chapter 10
Exercise 10-18 (15 minutes)

1. Total overhead at the

Predetermined = denominator activity
overhead rate Denominator activity

$1.90 per DLH × 30,000 per DLH + $168,000

=
30,000 DLHs
$225,000
=
30,000 DLHs
= $7.50 per DLH

Variable element: ($1.90 per DLH × 30,000 DLHs) ÷ 30,000 DLHs =

$57,000 ÷ 30,000 DLHs = $1.90 per DLH

Fixed element: $168,000 ÷ 30,000 DLHs = $5.60 per DLH

2. Direct materials, 2.5 yards × $8.60 per yard ...................... $21.50

Direct labor, 3 DLHs* × $12.00 per DLH ............................ 36.00
Variable manufacturing overhead, 3 DLHs × $1.90 per DLH 5.70
Fixed manufacturing overhead, 3 DLHs × $5.60 per DLH .... 16.80
Total standard cost per unit .............................................. $80.00
*30,000 DLHs ÷ 10,000 units = 3 DLHs per unit.

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32 Managerial Accounting, 11 th Canadian Edition
 Problem 10-19 (45 minutes)
1. a.
Actual Quantity of Actual Quantity of Standard Quantity
Inputs, at Inputs, at Allowed for Output,
Actual Price Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)
6,300 kgs. × 6,300 kgs. × 5,000 kgs.* ×
$1.50 per kg. $1.25 per kg. $1.25 per kg.
= $9,450 = $7,875 = $6,250

  
Price Variance,
$1,575 U
4,900 kgs. × $1.25 per kg.
= $6,125

Quantity Variance,
-$125 F
*2,500 units × 2.0 kgs. per unit = 5,000 kgs.

Alternatively:
Materials Price Variance = AQ (AP – SP)
6,300 kgs. ($1.50 per kg. – $1.25 per kg.) = $1,575 U
Materials Quantity Variance = SP (AQ – SQ)
$1.25 per kg. (4,900 kgs. – 5,000 kgs.) = -$125 F

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Solutions Manual, Chapter 10
Problem 10-19 (continued)
b.
Actual Hours of Actual Hours of Standard Hours
Input, at the Input, at the Allowed for Output,
Actual Rate Standard Rate at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
1,800 hours × 1,800 hours × 1,350 hours* ×
$9.50 per hour $10.00 per hour $10.00 per hour
= $17,100 = $18,000 = $13,500

  
Rate Variance, Efficiency Variance,
-$900 F $4,500 U

Total Variance, $3,600 U

*2,500 units × 0.54 hour per unit = 1,350 hours

Alternatively:
Labour Rate Variance = AH (AR – SR)
1,800 hours ($9.50 per hour – $10.00 per hour) = -$900 F
Labour Efficiency Variance = SR (AH – SH)
$10.00 per hour (1,800 hours – 1,350 hours) = $4,500 U

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34 Managerial Accounting, 11 th Canadian Edition
Problem 10-19 (continued)
c.
Actual Hours of Actual Hours of Standard Hours
Input, at the Input, at the Allowed for Output,
Actual Rate Standard Rate at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
$1,080 900 hours × 675 hours* ×
$1.00 per hour $1.00 per hour
= $900 = $675

  
Spending Variance, Efficiency Variance,
$180 U $225 U

Total Variance, $405 U

*2,500 units × 0.27 hours per unit = 675 hours

Alternatively:
Variable Overhead Spending Variance = AH (AR – SR)
900 hours ($1.20 per hour* – $1.00 per hour) = $180 U
*$1,080 ÷ 900 hours = $1.20 per hour
Variable Overhead Efficiency Variance = SR (AH – SH)
$1.00 per hour (900 hours – 675 hours) = $225 U

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Solutions Manual, Chapter 10
Problem 10-19 (continued)
2. Summary of variances:
Material price variance .......................... $1,575 U
Material quantity variance ...................... 125 F
Labour rate variance ............................. 900 F
Labour efficiency variance ..................... 4,500 U
Variable overhead spending variance ...... 180 U
Variable overhead efficiency variance ..... 225 U
Net variance ......................................... $5,455 U
The net unfavourable variance of $5,455 for the month caused the
plant’s variable cost of goods sold to increase from the budgeted level of
$40,000 to $45,455:
Budgeted cost of goods sold at $16 per unit ........ $40,000
Add the net unfavourable variance (as above) ..... 5,455
Actual cost of goods sold .................................... $45,455
This $5,455 net unfavourable variance also accounts for the difference
between the budgeted net operating income and the actual net loss for
the month.
Budgeted net operating income .......................... $7,500
Deduct the net unfavourable variance added to
cost of goods sold for the month (5,455)
Add favourable variance on fixed overhead ......... 500
Actual operating income (loss)............................ $ 2,545

3. The two most significant variances are the materials price variance and
the labour efficiency variance. Possible causes of the variances include:
Materials Price Variance: Outdated standards, uneconomical quanti-
ty purchased, higher quality materials,
high-cost method of transport.
Labour Efficiency Vari- Poorly trained workers, faulty equipment,
ance: work interruptions, inaccurate standards,
and insufficient demand.

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36 Managerial Accounting, 11 th Canadian Edition
Problem 10-20 (45 minutes)
1. The standard quantity of plates allowed for tests performed during the
month would be:
Smears ................................. 2,700
Blood tests ............................ 900
Total ..................................... 3,600
Plates per test ....................... × 3
Standard quantity allowed ...... 10,800
The variance analysis for plates would be:
Actual Quantity of Actual Quantity of Standard Quantity
Inputs, at Inputs, at Allowed for Output,
Actual Price Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)
$38,400 16,000 plates × 10,800 plates ×
$2.50 per plate $2.50 per plate
= $40,000 = $27,000

  
Price Variance,
-$1,600 F
14,000 plates × $2.50 per plate
= $35,000

Quantity Variance,
$8,000 U

Alternative Solution:
Materials Price Variance = AQ (AP – SP)
16,000 plates ($2.40 per plate* – $2.50 per plate) = -$1,600 F
*$38,400 ÷ 16,000 plates = $2.40 per plate.
Materials Quantity Variance = SP (AQ – SQ)
$2.50 per plate (14,000 plates – 10,800 plates) = $8,000 U

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Solutions Manual, Chapter 10
Problem 10-20 (continued)
Note that all of the price variance is due to the hospital’s 4% quantity
discount. Also note that the $8,000 quantity variance for the month is
equal to nearly 30% of the standard cost allowed for plates. This vari-
ance may be the result of using too many assistants in the lab.

2. a. The standard hours allowed for tests performed during the month
would be:
Smears: 0.3 hour per test × 2,700 tests ..... 810
Blood tests: 0.6 hour per test × 900 tests ... 540
Total standard hours allowed ...................... 1,350
The variance analysis of labour would be:
Actual Hours of Actual Hours of Standard Hours
Input, at the Input, at the Allowed for Output,
Actual Rate Standard Rate at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
$18,450 1,800 hours × 1,350 hours ×
$12 per hour $12 per hour
= $21,600 = $16,200

  
Rate Variance, Efficiency Variance,
-$3,150 F $5,400 U

Total Variance, $2,250 U

Alternative Solution:
Labour Rate Variance = AH (AR – SR)
1,800 hours ($10.25 per hour* – $12.00 per hour) = -$3,150 F
*$18,450 ÷ 1,800 hours = $10.25 per hour
Labour Efficiency Variance = SR (AH – SH)
$12 per hour (1,800 hours – 1,350 hours) = $5,400 U

© McGraw-Hill Education Ltd., 2018. All rights reserved.

38 Managerial Accounting, 11 th Canadian Edition
Problem 10-20 (continued)
b. The policy probably should not be continued. Although the hospital is
saving $1.75 per hour by employing more assistants relative to the
number of senior technicians than other hospitals, this savings is
more than offset by other factors. Too much time is being taken in
performing lab tests, as indicated by the large unfavourable labour ef-
ficiency variance. And, it may be that much of the hospital’s unfa-
vourable quantity variance for plates is traceable to inadequate su-
pervision of assistants in the lab.

3. The variable overhead variances follow:

Actual Hours of Actual Hours of Standard Hours
Input, at the Input, at the Allowed for Output,
Actual Rate Standard Rate at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
$11,700 1,800 hours × 1,350 hours ×
$6 per hour $6 per hour
= $10,800 = $8,100

  
Spending Variance, Efficiency Variance,
$900 U $2,700 U

Total Variance, $3,600 U

Alternative Solution:
Variable Overhead Spending Variance = AH (AR – SR)
1,800 hours ($6.50 per hour* – $6.00 per hour) = $900 U
*$11,700 ÷ 1,800 hours = $6.50 per hour
Variable Overhead Efficiency Variance = SR (AH – SH)
$6 per hour (1,800 hours – 1,350 hours) = $2,700 U

Yes, the two efficiency variances are related. Both are computed by
comparing actual labour time to the standard hours allowed for the out-
put of the period. Thus, if there is an unfavourable labour efficiency var-
iance, there will also be an unfavourable variable overhead efficiency
variance.

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Solutions Manual, Chapter 10
Problem 10-20 (continued)
4. Fixed overhead budget and volume variances:
Fixed Overhead Cost
Actual Fixed Budgeted Fixed Applied to
Overhead Cost Overhead Cost Work in Process
$10,400 $10,000* 1,350 standard
hours
× $8.00 per hour
= $10,800
  
Budget Variance, Volume Variance,
$400 U -$800 F

Total Variance, $400 F

*1,250 denominator hours × $8.00 per hour = $10,000.

Alternative approach to the budget variance:

Budget variance = Actual fixed overhead – Flexible budget fixed over-
head

$10,400 - $10,000 = $400 U

Alternative approach to the volume variance:

Volume variance = Fixed Overhead Rate (Denominator hours – standard

hours allowed)

$8(1,250 – 1,350) = -$800 F

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40 Managerial Accounting, 11 th Canadian Edition
Problem 10-21 (45 minutes)
1. Direct materials price and quantity variances:
Direct Materials Price Variance = AQ (AP – SP)
78,000 metres ($3.75 per metre – $3.50 per metre) = $19,500 U
Direct Materials Quantity Variance = SP (AQ – SQ)
$3.50 per metre (78,000 metres – 80,000 metres*) = -$7,000 F
*20,000 units × 4 metres per unit = 80,000 metres

2. Direct labour rate and efficiency variances:

Direct Labour Rate Variance = AH (AR – SR)
32,500 DLHs ($11.80 per DLH – $12.00 per DLH) = -$6,500 F
Direct Labour Efficiency Variance = SR (AH – SH)
$12.00 per DLH (32,500 DLHs – 30,000 DLHs*) = $30,000 U
*20,000 units × 1.5 DLHs per unit = 30,000 DLHs

3. a. Variable manufacturing overhead spending and efficiency variances:

Actual Hours of Actual Hours of Standard Hours
Input, at the Input, at the Allowed for Output,
Actual Rate Standard Rate at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
$68,250 32,500 DLHs × 30,000 DLHs ×
$2 per DLH $2 per DLH
= $65,000 = $60,000
  
Spending Variance, Efficiency Variance,
$3,250 U $5,000 U

Alternative solution:
Variable Overhead Spending Variance = (AH × AR) – (AH × SR)
($68,250) – (32,500 DLHs × $2.00 per DLH) = $3,250 U
Variable Overhead Efficiency Variance = SR (AH – SH)
$2.00 per DLH (32,500 DLHs – 30,000 DLHs) = $5,000 U

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Solutions Manual, Chapter 10
Problem 10-21 (continued)
b. Fixed overhead budget and volume variances:
Fixed Overhead Cost
Actual Fixed Budgeted Fixed Applied to
Overhead Cost Overhead Cost Work in Process
$148,000 $150,000 30,000 DLHs ×
$6 per DLH
= $180,000
  
Budget Variance, Volume Variance,
-$2,000 F -$30,000 F

Alternative approach to the budget variance:

Budget variance = Actual fixed overhead – Flexible budget fixed over-
head
$148,000 – $150,000 = -$2,000 F

Alternative approach to the volume variance:

Volume variance = Fixed Overhead Rate (Denominator hours – standard

hours allowed)
$6.00 per DLH (25,000 DLHs – 30,000 DLHs) = -$30,000 F

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42 Managerial Accounting, 11 th Canadian Edition
Problem 10-21 (continued)
4. The total of the variances would be:
Direct materials variances:
Price variance ............................................... $19,500 U
Quantity variance .......................................... 7,000 F
Direct labour variances:
Rate variance................................................ 6,500 F
Efficiency variance ........................................ 30,000 U
Variable manufacturing overhead variances:
Spending variance......................................... 3,250 U
Efficiency variance ........................................ 5,000 U
Fixed manufacturing overhead variances:
Budget variance ............................................ 2,000 F
Volume variance ........................................... 30,000 F
Total of variance .............................................. $12,250 U
Notice that the total of the variances agrees with the $12,250 unfavour-
able variance mentioned by the vice president.
It appears that not everyone should be given a bonus for good cost con-
trol. The materials price variance and the labour efficiency variance are
7.1% and 8.3%, respectively, of the standard cost allowed and thus
would warrant investigation. In addition, the variable overhead spending
variance is 5.0% of the standard cost allowed.
The reason the company’s large unfavourable variances (for materials
price and labour efficiency) do not show up more clearly is that they are
offset for the most part by the company’s favourable volume variance
for the year. This favourable volume variance is the result of the compa-
ny operating at an activity level that is well above the denominator ac-
tivity level used to set predetermined overhead rates. (The company
operated at an activity level of 30,000 standard DLHs; the denominator
activity level set at the beginning of the year was 25,000 DLHs.) As a re-
sult of the large favourable volume variance, the unfavourable price and
efficiency variances have been concealed in a small “net” figure. Finally,
the large favourable volume variance may have been achieved by build-
ing up inventories.

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Solutions Manual, Chapter 10
Problem 10-22 (45 minutes)

1. Total rate: (£31,500 + £72,000)/18,000 MHs = £5.75 per MH

Variable rate: £31,500/18,000 MHs = £1.75 per MH

Fixed rate: £72,000/18,000 MHs = £4.00 per MH

2. 16,000 standard MHs × £5.75 per MH = £92,000

3. Variable manufacturing overhead variances:

Actual Hours of Actual Hours of Standard Hours
Input, at the Input, at the Allowed for Output,
Actual Rate Standard Rate at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
£26,500 15,000 MHs × 16,000 MHs ×
£1.75 per MH £1.75 per MH
= £26,250 = £28,000
  
Spending Variance, Efficiency Variance,
£250 U -£1,750 F

Alternative solution:
Variable Overhead Spending Variance = (AH × AR) – (AH × SR)
(£26,500) – (15,000 MHs × £1.75 per MH) = £250 U
Variable Overhead Efficiency Variance = SR (AH – SH)
£1.75 per MH (15,000 MHs – 16,000 MHs) = -£1,750 F

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44 Managerial Accounting, 11 th Canadian Edition
Problem 10-22 (continued)
Fixed overhead variances:
Fixed Overhead Cost
Actual Fixed Budgeted Fixed Applied to
Overhead Cost Overhead Cost Work in Process
£70,000 £72,000 16,000 MHs ×
£4 per MH
= £64,000
  
Budget Variance, Volume Variance,
-£2,000 F £8,000 U

Alternative approach to the budget variance:

Budget variance = Actual fixed overhead – Flexible budget fixed over-
head
£70,000 – £72,000 = -£2,000 F

Alternative approach to the volume variance:

Volume variance = Fixed Overhead Rate (Denominator hours – standard
hours allowed)
£4 per MH (18,000 MHs – 16,000 MHs) = £8,000 U

Verification of variances:
Variable overhead spending variance................ £ 250 U
Variable overhead efficiency variance ............... 1,750 F
Fixed overhead budget variance....................... 2,000 F
Fixed overhead volume variance ...................... 8,000 U
Underapplied overhead ................................... £4,500

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Solutions Manual, Chapter 10
Problem 10-22 (continued)
4. Variable overhead
Spending variance: This variance includes both price and quantity ele-
ments. The overhead spending variance reflects differences between ac-
tual and standard prices for variable overhead items. It also reflects dif-
ferences between the amounts of variable overhead inputs that were ac-
tually used and the amounts that should have been used for the actual
output of the period. Since the variable overhead spending variance is
unfavourable, either too much was paid for variable overhead items or
too many of them were used.
Efficiency variance: The term “variable overhead efficiency variance” is a
misnomer, since the variance does not measure efficiency in the use of
overhead items. It measures the indirect effect on variable overhead of
the efficiency or inefficiency with which the activity base is utilized. In
this company, machine-hours is the activity base. If variable overhead is
really proportional to machine-hours, then more effective use of ma-
chine-hours has the indirect effect of reducing variable overhead. Since
1,000 fewer machine-hours were required than indicated by the stand-
ards, the indirect effect was presumably to reduce variable overhead
spending by about £1,750 (£1.75 per machine-hour × 1,000 machine-
hours).

Fixed overhead
Budget variance: This variance is simply the difference between the
budgeted fixed cost and the actual fixed cost. In this case, the variance
is favourable, which indicates that actual fixed costs were lower than an-
ticipated in the budget.
Volume variance: This variance occurs as a result of actual activity being
different from the denominator activity that was used in the predeter-
mined overhead rate. In this case, the variance is unfavourable, so ac-
tual activity was less than the denominator activity. It is difficult to place
much of a meaningful economic interpretation on this variance. It tends
to be large, so it often swamps the other, more meaningful variances if
they are simply netted against each other.

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46 Managerial Accounting, 11 th Canadian Edition
Problem 10-23 (45 minutes)
1. a. In the solution below, the materials price variance is computed on the
entire amount of materials purchased, whereas the materials quantity
variance is computed only on the amount of materials used in pro-
duction:
Actual Quantity of Actual Quantity of Standard Quantity
Inputs, at Inputs, at Allowed for Output,
Actual Price Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)
$19,800 1,800 kgs. × 1,400 kgs.* ×
$12.00 per kg. $12.00 per kg.
= $21,600 = $16,800

  
Price Variance,
-$1,800 F
1,500 kgs. × $12.00 per kg.
= $18,000

Quantity Variance,
$1,200U
*4,000 pkgs × 350 grams per pkg = 1,400 kgs.
Alternatively:
Materials Price Variance = AQ (AP – SP)
1,800 kgs. ($11.00 per kg.* – $12.00 per kg.) = -$1,800 F
*$19,800 ÷ 1,800 kgs. = $11.00 per kg.
Materials Quantity Variance = SP (AQ – SQ)
$12.00 per kg. (1,500 kgs. – 1,400 kgs.) = $1,200U

b. No, the contract should probably not be signed. Although the new
supplier is offering the material at only $11.00 per kg., it does not
seem to hold up well in production as shown by the large materials
quantity variance. Moreover, the company still has 300 kgs. of unused
material in the warehouse; if these materials do as poorly in produc-
tion as the 1,500 kgs. already used, the total quantity variance on the
1,800 kgs. of materials purchased will be large.

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Solutions Manual, Chapter 10
Problem 10-23 (continued)
2. a.
Actual Hours of Actual Hours of Standard Hours
Input, at the Input, at the Allowed for Output,
Actual Rate Standard Rate at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
925 hours* × $14.00 925 hours × $13.00 1,000 hours** ×
per hour per hour $13.00 per hour
= $12,950 = $12,025 = $13,000

  
Rate Variance, Efficiency Variance,
$925 U -$975 F

Total Variance, -$50 F

* 5 workers × 185 hours per worker = 925 hours

** 4,000 units × 0.25 hours per pkg = 1,000 hours

Alternatively:
Labour Rate Variance = AH (AR – SR)
1,200 hours ($14.00 per hour – $13.00 per hour) = $925 U
Labour Efficiency Variance = SR (AH – SH)
$13.00 per hour (925 hours – 1,000 hours) = -$975 F

b. Yes, the new labour mix should probably be continued. Although it

increases the average hourly labour cost from $13.00 to $14.00,
thereby causing a $925 unfavourable labour rate variance, this is
more than offset by greater efficiency of labour time. Notice that the
labour efficiency variance is $50 favourable. Thus, the new labour mix
reduces overall labour costs.

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48 Managerial Accounting, 11 th Canadian Edition
Problem 10-23 (continued)
3. Actual Hours of Actual Hours of Standard Hours
Input, at the Input, at the Allowed for Output,
Actual Rate Standard Rate at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
$1,850 925 hours × 1,000 hours ×
$1.60 per hour $1.60 per hour
= $1,480 = $1,600

  
Spending Variance, Efficiency Variance,
$370 U -$120 F

Total Variance, $250 U

Alternatively:
Variable Overhead Spending Variance = AH (AR – SR)
925 hours ($ 2.00 per hour* – $1.60 per hour) = $370 U
*$1,850 ÷ 925 hours = $2.00 per hour
Variable Overhead Efficiency Variance = SR (AH – SH)
$1.60 per hour (925 hours – 1,000 hours) = -$120 F

Both the labour efficiency variance and the variable overhead efficiency
variance are computed by comparing actual labour-hours to standard
labour-hours. Thus, if the labour efficiency variance is favourable, then
the variable overhead efficiency variance will be favourable as well.

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Solutions Manual, Chapter 10
Problem 10-24 (45 minutes)
The cost formulas for each overhead item with a variable cost component
can be developed from the data in the problem using the simple high-low
method. The calculations are as follows*:
Utilities: ($49,000 - $41,000)/(50,000 – 40,000) = $0.80 per hour
Fixed: $49,000 – (50,000 × $0.80) = $9,000

Supplies: ($5,000 - $4,000)/(50,000 – 40,000) = $0.10 per hour

Fixed: $5,000 – (50,000 × $0.10) = $0

Indirect labour: ($10,000 - $8,000)/(50,000 – 40,000) = $0.20 per hour

Fixed: $10,000 – (50,000 × $0.20) = $0

Maintenance: ($41,000 - $37,000)/(50,000 – 40,000) = $0.40 per hour

Fixed: $41,000 – (50,000 × $0.40) = $21,000

Supervision: All fixed at $10,000 since the cost does not vary with
the percentage of capacity used.

*Fixed costs could also have been calculated using the low-point
(40,000 machine hours) in each case.
2. The cost formula for all overhead costs would be: Y = $40,000 + $1.50x
Where x = machine hours.

Overhead Item Variable Component Fixed Component

Utilities $0.80 $9,000

Supplies 0.10 0

Indirect labour 0.20 0

Maintenance 0.40 21,000

Supervision 0 10,000

Totals $1.50 $40,000

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50 Managerial Accounting, 11 th Canadian Edition
Problem 10-24 (continued)

3. Asper Company
Performance Report
For the Month of May
Budgeted machine-hours ............. 40,000
Standard machine-hours allowed .. 41,000
Actual machine-hours .................. 43,000 *
Cost Flexible
Formula Actual Cost Budget Spending
Overhead Costs per MH 43,000 MH 43,000 MH Variance
Variable overhead costs:
Utilities.................... $0.80 $ 33,540 ** $ 34,400 $ 860 F
Supplies .................. 0.10 6,450 4,300 2,150 U
Indirect labour ......... 0.20 9,890 8,600 1,290 U
Maintenance ............ 0.40 14,190 ** 17,200 3,010 F
Total variable overhead
cost ........................ $1.50 64,070 64,500 430 F
Fixed overhead costs:
Utilities.................... 9,000 9,000 0
Maintenance ............ 21,000 21,000 0
Supervision ............. 10,000 10,000 0
Total fixed overhead
cost ........................ 40,000 40,000 0
Total overhead cost .... $104,070 $104,500 $ 430 F
* 86% of 50,000 MHs = 43,000 MHs
** $42,540 – $9,000 fixed = $33,540
$35,190 – $21,000 fixed = $14,190

4. Assuming that variable overhead should be proportional to actual

machine-hours, the unfavourable spending variance could be the result
either of price increases or of waste. Unlike the price variance for mate-
rials and the rate variance for labour, the spending variance for variable
overhead measures both price and waste elements. This is why the var-
iance is called a “spending” variance.

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Solutions Manual, Chapter 10
 Problem 10-25 (45 minutes)
1. Total rate: $90,000/15,000 DLHs = $6.00 per DLH

Variable rate: $15,000/15,000 DLHs = $1.00 per DLH

Fixed rate: $75,000/15,000 DLHs = $5.00 per DLH

2. a. 11,000 units × 1.5 DLHs per unit = 16,500 standard DLHs.

b. Manufacturing Overhead
Applied costs (16,500
Actual costs 92,250 standard DLHs × $6
per DLH) 99,000
Overapplied overhead 6,750

3. Variable overhead variances:

Actual Hours of Actual Hours of Standard Hours
Input, at the Input, at the Allowed for Output,
Actual Rate Standard Rate at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
$15,750 17,500 DLHs × 16,500 DLHs ×
$1 per DLH $1 per DLH
= $17,500 = $16,500
  
Spending Variance, Efficiency Variance,
-$1,750 F $1,000 U

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52 Managerial Accounting, 11 th Canadian Edition
Problem 10-25 (continued)
Alternative solution:
Variable Overhead Spending Variance = (AH × AR) – (AH × SR)
($15,750) – (17,500 DLHs × $1 per DLH) = -$1,750 F
Variable Overhead Efficiency Variance = SR (AH – SH)
$1 per DLH (17,500 DLHs – 16,500 DLHs) = $1,000 U

Fixed overhead variances:

Fixed Overhead Cost
Actual Fixed Budgeted Fixed Applied to
Overhead Cost Overhead Cost Work in Process
$76,500 $75,000 16,500 DLHs ×
$5 per DLH
= $82,500
  
Budget Variance, Volume Variance,
$1,500 U -$7,500 F

Alternative approach to the volume variance:

Volume variance = Fixed Overhead Rate (Denominator hours –
standard hours allowed)
$5 per DLH (15,000 DLHs – 16,500 DLHs) = -$7,500 F

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Solutions Manual, Chapter 10
Problem 10-25 (continued)

Summary of variances:
Variable overhead spending variance.................. $ 1,750 F
Variable overhead efficiency variance ................. 1,000 U
Fixed overhead budget variance......................... 1,500 U
Fixed overhead volume variance ........................ 7,500 F
Overapplied overhead—see part 2...................... $ 6,750

4. Only the volume variance would have changed. It would have been un-
favourable, since the standard DLHs allowed for the year’s production
(16,500 DLHs) would have been less than the denominator DLHs
(18,000 DLHs).

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54 Managerial Accounting, 11 th Canadian Edition
Problem 10-26 (30 minutes)

1. The Groschi Company

Overhead Performance Report—Machining Department
For the Month of March
Budgeted machine-hours ..... 20,000
Actual machine-hours .......... 18,000
Flexible
Cost Actual Budget
Formula 18,000 18,000 Spending
Overhead Costs per MH MHs MHs Variance
Variable:
Utilities.................. $0.70 $ 12,000 $ 12,600 $ 600 F
Lubricants ............. 1.00 16,500 * 18,000 1,500 F
Machine setup ....... 0.20 4,800 3,600 1,200 U
Indirect labour ....... 0.60 12,500 10,800 1,700 U
Total variable cost .... $2.50 45,800 45,000 800 U
Fixed:
Lubricants ............. 8,000 8,000 0
Indirect labour ....... 120,000 120,000 0
Depreciation .......... 32,000 32,000 0
Total fixed cost......... 160,000 160,000 0
Total overhead cost .. $205,800 $205,000 $ 800 U
* $24,500 total lubricants – $8,000 fixed lubricants = $16,500
variable lubricants. The variable element of other costs is
computed in the same way.

2. In order to compute an overhead efficiency variance, it would be neces-

sary to know the standard hours allowed for the 9,000 units produced
during March in the Machining Department.

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Solutions Manual, Chapter 10
Problem 10-27 (30 minutes)
1. The company is using a static budget approach, and is comparing budg-
eted performance at one level of activity to actual performance at a
lower level of activity. This mismatching of activity levels causes the var-
iances to be favourable. The report in this format is not useful for meas-
uring either operating efficiency or cost control. All it tells Mr. Lockhart is
that the budgeted activity level of 17,500 machine-hours was not
achieved. It does not tell whether the actual output of the period was
produced efficiently, nor does it tell whether overhead spending has
been controlled during the month.

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56 Managerial Accounting, 11 th Canadian Edition
Problem 10-27 (continued)

2. Kal-Tubing Company
Performance Report—Machining Department
Budgeted machine-hours ................... 26,250 Standard machine-hours allowed………15,750*
Actual machine-hours ........................ 22,500
(2) (3)
Flexible Flexible
Budget Budget
Cost (1) Based on Based on
Formula Actual Actual Standard Total Spending Efficiency
(per Costs 22,500 15,750 Variance Variance Variance
Overhead Costs MH) Incurred MHs MHs (1) – (3) (1) – (2) (2) – (3)
Variable costs:
Indirect labour ....... $ 2.40 $ 59,100 $ 54,000 $ 37,800 $ 21,300 U $5,100 U $16,200 U
Utilities.................. 6.80 152,400 153,000 107,100 45,300 U 600 F 45,900 U
Supplies ................ 1.60 37,800 36,000 25,200 12,600 U 1,800 U 10,800 U
Maintenance .......... 3.20 74,700 72,000 50,400 24,300 U 2,700 U 21,600 U
Total variable cost .... $14.00 324,000 315,000 220,500 103,500 U $9,000 U $94,500 U
Fixed costs:
Maintenance .......... 117,000 117,000 117,000 0
Supervision ........... 247,500 247,500 247,500 0
Depreciation .......... 180,000 180,000 180,000 0
Total fixed cost......... 544,500 544,500 544,500 0
Total overhead cost .. $868,500 $859,500 $765,000 $103,500 U
*5,250 units × 3 MHs per unit = 15,750 MHs allowed.

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Solutions Manual, Chapter 10
Problem 10-28 (45 minutes)
1. and 2. Per Direct Labour-Hour
Variable Fixed Total
Denominator of 40,000 DLHs:
$100,000 ÷ 40,000 DLHs ................. $2.50 $ 2.50
$320,000 ÷ 40,000 DLHs ................. $8.00 8.00
Total predetermined rate .................... $10.50

Denominator of 50,000 DLHs:

$125,000 ÷ 50,000 DLHs ................. $2.50 $ 2.50
$320,000 ÷ 50,000 DLHs ................. $6.40 6.40
Total predetermined rate .................... $ 8.90

3. Denominator Activity: Denominator Activity:

40,000 DLHs 50,000 DLHs
Direct materials, 3 metres
@ $5.00 per yard .......... $15.00 Same .............................. $15.00
Direct labour, 2.5 DLHs @
$20.00 per DLH ............ 50.00 Same .............................. 50.00
Variable overhead, 2.5
DLHs @ $2.50 per DLH . 6.25 Same .............................. 6.25
Fixed overhead, 2.5 DLHs Fixed overhead, 2.5 DLHs
@ $8.00 per DLH .......... 20.00 @ $6.40 per DLH........... 16.00
Total standard cost per Total standard cost per
unit .............................. $91.25 unit .............................. $87.25

4. a. 18,500 units × 2.5 DLHs per unit = 46,250 standard DLHs

b. Manufacturing Overhead
Actual costs 446,500 Applied costs (46,250
standard DLHs × $10.50
per DLH) 485,625
Overapplied overhead 39,125

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58 Managerial Accounting, 11 th Canadian Edition
Problem 10-28 (continued)
c. Variable Overhead Spending Variance = (AH × AR) – (AH × SR)
($124,800) – (48,000 DLHs × $2.50 per DLH) = $4,800 U
Variable Overhead Efficiency Variance = SR (AH – SH)
$2.50 per DLH (48,000 DLHs – 46,250 DLHs) = $4,375 U

Fixed overhead variances:

Fixed Overhead Cost
Actual Fixed Budgeted Fixed Applied to
Overhead Cost Overhead Cost Work in Process
$321,700 $320,000* 46,250 standard
DLHs × $8.00 per
DLH
= $370,000
  
Budget Variance, Volume Variance,
$1,700 U -$50,000 F
*40,000 denominator DLHs × $8 per DLH = $320,000.

Alternative approach to the budget and volume variances:

Budget Variance:
Budget variance = Actual fixed overhead – Flexible budget fixed
overhead
$321,700 – $320,000 = $1,700 U

Volume Variance:
Fixed Overhead Rate (Denominator hours – standard hours allowed)
$8.00 per DLH (40,000 DLHs – 46,250 DLHs) = -$50,000 F

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Solutions Manual, Chapter 10
Problem 10-28 (continued)

Summary of variances:
Variable overhead spending ....... $ 4,800 U
Variable overhead efficiency ...... 4,375 U
Fixed overhead budget .............. 1,700 U
Fixed overhead volume ............. 50,000 F
Overapplied overhead ............... $39,125

5. The major disadvantage of using normal activity as the denominator in

the predetermined rate is the large volume variance that ordinarily re-
sults. This occurs because the denominator activity used to compute the
predetermined overhead rate is different from the activity level that is
anticipated for the period. In the case at hand, the company has used
the normal activity of 40,000 direct labour-hours to compute the prede-
termined overhead rate, whereas activity for the period was expected to
be 50,000 DLHs. This has resulted in a huge favourable volume variance
that may be difficult for management to interpret. In addition, the large
favourable volume variance in this case has masked the fact that the
company did not achieve the budgeted level of activity for the period.
The company had planned to work 50,000 DLHs, but managed to work
only 46,250 DLHs (at standard). This unfavourable result is concealed
due to using a denominator figure that is out of step with current
activity.
On the other hand, by using normal activity as the denominator unit
costs are stable from year to year. Thus, management’s decisions are
not clouded by unit costs that jump up and down as the activity level
rises and falls.

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60 Managerial Accounting, 11 th Canadian Edition
Problem 10-29 (45 minutes)
1. Each kilogram of fresh mushrooms yields 150 grams of dried mush-
rooms suitable for packing:
One kilogram of fresh mushrooms .................. 1,000 grams
Less: unacceptable mushrooms (1/4 of total) .. 250
Acceptable mushrooms .................................. 750
Less 80% shrinkage during drying .................. 600
Acceptable dried mushrooms.......................... 150 grams
Since 1,000 grams of fresh mushrooms yield 150 grams of dried mush-
rooms, 100 grams (or, 0.1 kilogram) of fresh mushrooms should yield
the 15 grams of acceptable dried mushrooms that are packed in each
jar.
The direct labour standards are determined as follows:
Sorting and Inspecting
Direct labour time per kilogram of fresh
mushrooms ........................................... 15 minutes
Grams of dried mushrooms per kilogram
of fresh mushrooms ............................... ÷ 150 grams
Direct labour time per gram of dried
mushrooms ........................................... 0.10 minute per gram
Grams of dried mushrooms per jar ............ × 15 grams
Direct labour time per jar .......................... 1.5 minutes

Drying
Direct labour time per kilogram of ac-
ceptable sorted fresh mushrooms ........... 10 minutes
Grams of dried mushrooms per kilogram
of acceptable sorted fresh mushrooms .... ÷ 150 grams
Direct labour time per gram of dried
mushrooms ........................................... 0.07 minute per gram*
Grams of dried mushrooms per jar ............ × 15 grams
Direct labour time per jar .......................... 1.05 minute
*Rounded

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Solutions Manual, Chapter 10
Problem 10-29 (continued)
Standard cost per jar of dried chanterelle mushrooms:
Direct material:
Fresh mushrooms
(0.1 kilogram per jar × €60.00 per kilogram) ......... €6.00
Jars, lids, and labels (€10.00 ÷ 100 jars).................. 0.10 €6.10
Direct labour:
Sorting and inspecting
(1.5 minutes per jar × €0.20 per minute*) ............ 0.30
Drying (1.05 minute per jar × €0.20 per minute*) .... 0.21
Packing
(0.10 minute per jar** × €0.20 per minute*) ........ 0.02 0.53
Standard cost per jar ................................................. €6.63
*€12.00 per hour is €0.20 per minute.
**10 minutes per 100 jars is 0.10 minute per jar.

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62 Managerial Accounting, 11 th Canadian Edition
Problem 10-29 (continued)
2. a. Ordinarily, the purchasing manager has more influence over the pric-
es of purchased materials than anyone else in the organization.
Therefore, the purchasing manager is usually held responsible for
material price variances.

b. The production manager is usually held responsible for materials

quantity variances. However, this situation is a bit unusual. The quan-
tity variance will be heavily influenced by the quality of the mush-
rooms acquired from gatherers by the purchasing manager. If the
mushrooms have an unusually large proportion of unacceptable
mushrooms, the quantity variance will be unfavourable. The produc-
tion process itself is likely to have less effect on the amount of wast-
age and spoilage. On the other hand, if the production manager is
not held responsible for the quantity variance, the production workers
may not take sufficient care in their handling of the mushrooms. A
partial solution to this problem would be to make the sorting and in-
spection process part of the purchasing manager’s responsibility. The
purchasing manager would then be held responsible for any wastage
in excess of the 100 grams expected for each 300 grams of accepta-
ble fresh mushrooms. The production manager would be held re-
sponsible for any wastage after that point. This is only a partial solu-
tion, however, because the purchasing manager may pass on at least
300 grams of every 400 grams of fresh mushrooms, whether they are
acceptable or not.

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Solutions Manual, Chapter 10
Problem 10-30 (45 minutes)
1. a. Materials Price Variance = AQ (AP – SP)
3,000 kgs. ($2.75 per kg.* – SP) = -$750 F**
$8,250 – 3,000 kgs. × SP = -$750***
3,000 kgs. × SP = $9,000
SP = $3 per kg.
*$8,250 ÷ 3,000 kgs. = $2.75 per kg.
**$600 U + ? = -$150 F; $600 U + -$750 F = -$150 F.
***When used with the formula, unfavourable variances are
positive and favourable variances are negative.

b. Materials Quantity Variance = SP (AQ – SQ)

$3 per kg. (3,000 kgs. – SQ) = $600 U
$9,000 – $3 per kg. × SQ = $600*
$3 per kg. × SQ = $8,400
SQ = 2,800 kgs.
*When used with the formula, unfavourable variances are
positive and favourable variances are negative.

Alternative approach to parts (a) and (b):

Actual Quantity of Actual Quantity of Standard Quantity
Inputs, at Inputs, at Allowed for Output,
Actual Price Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)
$8,250* 3,000 kgs.* × 2,800 kgs. ×
$3 per kg. $3 per kg.
= $9,000 = $8,400

  
Price Variance, Quantity Variance,
-$750 F $600 U*

Total Variance, -$150 F*

*Given.

c. 2,800 kgs. ÷ 700 units = 4 kgs. per unit.

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64 Managerial Accounting, 11 th Canadian Edition
Problem 10-30 (continued)
2. a. Labour Efficiency Variance = SR (AH – SH)
$10 per hour (AH – 875 hours*) = -$2,250 F
$10 per hour × AH – $8,750 = –$2,250**
$10 per hour × AH = $6,500
AH = 650 hours
*700 units × 1.25 hours per unit = 875 hours
**When used with the formula, unfavourable variances are positive
and favourable variances are negative.

b. Labour Rate Variance = AH (AR – SR)

650 hours ($10.50 per hour* – $10.00 per hour) = $325 U

Alternative approach to parts (a) and (b):

Actual Hours of Actual Hours of Standard Hours
Input, at the Input, at the Allowed for Output,
Actual Rate Standard Rate at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
650 hours × 650 hours × 875 hours*** ×
$10.50 per hour* $10.00 per hour** $10.00 per hour**
= $6,825* = $6,500 = $8,750

  
Rate Variance, Efficiency Variance,
$325 U -$2,250 F*

Total Variance, $1,925 F

* $6,825 total labour cost ÷ 650 hours = $10.50 per hour

** Given
*** 700 units × 1.25 hours per unit = 875 hours

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Solutions Manual, Chapter 10
 Problem 10-31 (45 minutes)
This is a very difficult problem that is harder than it looks. Be sure your
students have been thoroughly “checked out” in the variance formulas be-
fore assigning it.

1. Actual Quantity of Actual Quantity of Standard Quantity

Inputs, at Inputs, at Allowed for Output,
Actual Price Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)
$36,000 6,000 metres × 5,600 metres** ×
$6.50 per metre* $6.50 per metre*
= $39,000 = $36,400

  
Price Variance, Quantity Variance,
-$3,000 F $2,600 U

Total Variance, $400 F

*$18.20 ÷ 2.8 metres = $6.50 per metre.

**2,000 units × 2.8 metres per unit = 5,600 metres

Alternative Solution:
Materials Price Variance = AQ (AP – SP)
6,000 metres ($6.00 per metre* – $6.50 per metre) = -$3,000 F
*$36,000 ÷ 6,000 metres = $6.00 per metre
Materials Quantity Variance = SP (AQ – SQ)
$6.50 per metre (6,000 metres – 5,600 metres) = $2,600 U

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66 Managerial Accounting, 11 th Canadian Edition
Problem 10-31 (continued)
2. Many students will miss parts 2 and 3 because they will try to use prod-
uct costs as if they were hourly costs. Pay particular attention to the
computation of the standard direct labour time per unit and the stand-
ard direct labour rate per hour.
Actual Hours of Actual Hours of Standard Hours
Input, at the Input, at the Allowed for Output,
Actual Rate Standard Rate at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
$7,600 760 hours × 800 hours** ×
$9 per hour* $9 per hour*
= $6,840 = $7,200

  
Rate Variance, Efficiency Variance,
$760 U -$360 F

Total Variance, $400 U

* 780 standard hours ÷ 1,950 robes = 0.4 standard hour per robe.
$3.60 standard cost per robe ÷ 0.4 standard hours = $9 standard
rate per hour. Or alternatively $7,020÷780 hours = $9/hr.
** 2,000 robes × 0.4 standard hour per robe = 800 standard hours.

Alternative Solution:
Labour Rate Variance = AH (AR – SR)
760 hours ($10 per hour* – $9 per hour) = $760 U
*$7,600 ÷ 760 hours = $10 per hour
Labour Efficiency Variance = SR (AH – SH)
$9 per hour (760 hours – 800 hours) = -$360 F

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Solutions Manual, Chapter 10
Problem 10-31 (continued)
3. Actual Hours of In- Actual Hours of Standard Hours
put, at the Input, at the Allowed for Output,
Actual Rate Standard Rate at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
$3,800 760 hours × 800 hours ×
$3 per hour* $3 per hour*
= $2,280 = $2,400

  
Spending Variance, Efficiency Variance,
$1,520 U -$120 F

Total Variance, $1,400 U

*$1.20 standard cost per robe ÷ 0.4 standard hours = $3 standard

rate per hour.

Alternative Solution:
Variable Overhead Spending Variance = AH (AR – SR)
760 hours ($5 per hour* – $3 per hour) = $1,520 U
*$3,800 ÷ 760 hours = $5 per hour
Variable Overhead Efficiency Variance = SR (AH – SH)
$3 per hour (760 hours – 800 hours) = -$120 F

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68 Managerial Accounting, 11 th Canadian Edition