ACT2121

Review Session 7 Answers

Problem 9-23

1. The cost control report compares the planning budget, which was
prepared for 35,000 machine-hours, to actual results for 38,000
machine-hours. This is like comparing apples to oranges. Costs that are
variable or mixed should be higher when the activity level is 38,000
rather than 35,000 machine-hours. Direct comparisons of budgeted to
actual costs are valid only if the costs are fixed. The cost control report
prepared by the company should not be used to evaluate how well costs
were controlled.

2. A report that would be helpful in assessing how well costs were

controlled appears below:
Freemont Corporation—Machining Department
Flexible Budget Performance Report
For the Month Ended June 30

Actual Spending Flexible Activity Planning

Results Variances Budget Variances Budget
Machine-hours (q) 38,000 38,000 35,000

Direct labor wages* ($2.30q) $ 86,100 $ 1,300 F $ 87,400 $6,900 U $ 80,500

Supplies* ($0.60q) 23,100 300 U 22,800 1,800 U 21,000
Maintenance** ($92,000 + $1.20q) 137,300 300 F 137,600 3,600 U 134,000
Utilities** ($11,700 + $0.10q) 15,700 200 U 15,500 300 U 15,200
Supervision ($38,000) 38,000 0 38,000 0 38,000

Depreciation ($80,000) 80,000 0 80,000 0 80,000

Total $380,200 $ 1,100 F $381,300 $12,600 U $368,700

* The variable cost per machine-hour is obtained by dividing the total variable cost from the
planning budget by 35,000 machine-hours.
** The variable cost per machine-hour is obtained by subtrac?ng the fixed cost (given) from the
planning budget and then dividing the result by 35,000 machine-hours.

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 Note that in this new report the overall spending variance is favorable—indica?ng that costs
were most likely under control.

PROBLEM 10–12

1. The standard quantity of plates allowed for tests performed during the
month would be:
Blood tests ..................................................... 1,800
Smears ........................................................... 2,400
Total ............................................................... 4,200
Plates per test ................................................ ×2
Standard quan?ty allowed............................. 8,400

The variance analysis for plates would be:

Actual Quantity of Actual Quantity of Standard Quantity

Input, at Actual Input, at Standard Allowed for Output,
Price Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)
12,000 plates 8,400 plates ×$5.00
×$5.00 per plate per plate
$56,400 = $60,000 = $42,000
­ ­ ­
Materials price
variance,
$3,600 F
10,500* plates ×
$5.00 per plate =
$52,500
­
Materials quantity
Variance,
$10,500 U
* 12,000 purchased – 1,500 unused = 10,500 used

Alterna?vely, the variances can be computed using the formulas:

Materials price variance = AQ (AP – SP)
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 12,000 plates ($4.70 per plate* – $5.00 per plate) = $3,600 F
*$56,400 ÷ 12,000 plates = $4.70 per plate.
Materials quan?ty variance = SP (AQ – SQ)
$5.00 per plate (10,500 plates – 8,400 plates) = $10,500 U

2.

a. The standard hours allowed for tests performed during the month
would be:
Blood tests: 0.3 hour per test × 1,800 tests ................................... 540 hours
Smears: 0.15 hour per test × 2,400 tests ....................................... 360 hours
Total standard hours allowed......................................................... 900 hours

The variance analysis would be:

Actual Hours of Standard Hours
Input, at the Actual Actual Hours of Input, Allowed for Output,
Rate at the Standard Rate at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
1,150 hours ×$20.00 900 hours ×$20.00
per hour per hour
$21,850 = $23,000 = $18,000
­ ­ ­
Labor rate variance, Labor efficiency
$1,150 F variance, $5,000 U
Spending variance, $3,850 U

Alterna?vely, the variances can be computed using the formulas:

Labor rate variance = AH (AR – SR)
1,150 hours ($19.00 per hour* – $20.00 per hour) = $1,150 F
*$21,850 ÷ 1,150 hours = $19.00 per hour
Labor efficiency variance = SR (AH – SH)
$20.00 per hour (1,150 hours – 900 hours) = $5,000 U

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 b. The policy probably should not be continued. Although the hospital is
saving $1 per hour by employing more assistants than senior
technicians, this savings is more than offset by other factors. Too
much time is being taken in performing lab tests, as indicated by the
large unfavorable labor efficiency variance. And, it seems likely that
most (or all) of the hospital’s unfavorable quantity variance for plates
is traceable to inadequate supervision of assistants in the lab.

3. The variable overhead variances follow:

Standard Hours
Actual Hours of Allowed for Output,
Input, at the Actual Actual Hours of Input, at the Standard
Rate at the Standard Rate Rate
(AH × AR) (AH × SR) (SH × SR)
1,150 hours ×$6.00 900 hours ×$6.00
per hour per hour
$7,820 = $6,900 = $5,400
­ ­ ­
Variable overhead
Variable overhead rate efficiency variance,
variance, $920 U $1,500 U
Spending variance, $2,420 U

Alterna?vely, the variances can be computed using the formulas:

Variable overhead rate variance = AH (AR – SR)
1,150 hours ($6.80 per hour* – $6.00 per hour) = $920 U
*$7,820 ÷ 1,150 hours = $6.80 per hour
Variable overhead efficiency variance = SR (AH – SH)
$6.00 per hour (1,150 hours – 900 hours) = $1,500 U
Yes, the two variances are closely related. Both are computed by comparing actual labor
?me to the standard hours allowed for the output of the period. Thus, if the labor
efficiency variance is favorable (or unfavorable), then the variable overhead efficiency
variance will also be favorable (or unfavorable).

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PROBLEM 10–15

1.

a.
Actual Quantity of Actual Quantity of Standard Quantity
Input, at Actual Input, at Standard Allowed for Output,
Price Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)
60,000 pounds 60,000 pounds 45,000 pounds*
×$4.95 per pound ×$5.00 per pound ×$5.00 per pound
= $297,000 = $300,000 = $225,000
­ ­ ­
Materials price
variance,$3,000 F
49,200 pounds × $5.00 per pound = $246,000
­
Materials quantity
variance,$21,000 U
*15,000 pools × 3.0 pounds per pool = 45,000 pounds

Alterna?vely, the variances can be computed using the formulas:

Materials price variance = AQ (AP – SP)

60,000 pounds ($4.95 per pound – $5.00 per pound) = $3,000 F
Materials quan?ty variance = SP (AQ – SQ)
$5.00 per pound (49,200 pounds – 45,000 pounds) = $21,000 U

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b.
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)
11,800 hours 11,800 hours 12,000 hours*
×$17.00 per hour ×$16.00 per hour ×$16.00 per hour
= $200,600 = $188,800 = $192,000
­ ­ ­
Labor rate variance, Labor efficiency
$11,800 U variance, $3,200 F
Spending variance, $8,600 U
*15,000 pools × 0.8 hours per pool = 12,000 hours

Alterna?vely, the variances can be computed using the formulas:

Labor rate variance = AH (AR – SR)
11,800 hours ($17.00 per hour – $16.00 per hour) = $11,800 U
Labor efficiency variance = SR (AH – SH)
$16.00 per hour (11,800 hours – 12,000 hours) = $3,200 F

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c.
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)
5,900 hours 6,000 hours* ×$3.00
×$3.00 per hour per hour
$18,290 = $17,700 = $18,000
­ ­ ­
Variable overhead rate Variable overhead
variance, $590 U efficiency variance,
$300 F
Spending variance, $290 U
*15,000 pools × 0.4 hours per pool = 6,000 hours
Alterna?vely, the variances can be computed using the formulas:
Variable overhead rate variance = AH (AR – SR)
5,900 hours ($3.10 per hour* – $3.00 per hour) = $590 U
*$18,290 ÷ 5,900 hours = $3.10 per hour

Variable overhead efficiency variance = SR (AH – SH)

$3.00 per hour (5,900 hours – 6,000 hours) = $300 F

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2. Summary of variances:
Material price variance .............................................. $ 3,000 F
Material quan?ty variance ........................................ 21,000 U
Labor rate variance .................................................... 11,800 U
Labor efficiency variance ........................................... 3,200 F
Variable overhead rate variance ................................ 590 U
Variable overhead efficiency variance ....................... 300 F
Net variance............................................................... $26,890 U
The net unfavorable variance of $26,890 for the month caused the plant’s variable cost of
goods sold to increase from the budgeted level of $435,000 to $461,890:

Budgeted cost of goods sold at $29 per pool ................................ $435,000

Add the net unfavorable variance, as above ................................. 26,890
Actual cost of goods sold ............................................................... $461,890
This $26,890 net unfavorable variance also accounts for the difference between the
budgeted net opera?ng income and the actual net opera?ng income for the month.

Budgeted net opera?ng income .................................................... $ 6,000

Deduct the net unfavorable variance added to cost of goods sold
for the month ............................................................................. 26,890
Net opera?ng loss .......................................................................... $(20,890)

3. The two most significant variances are the materials quantity variance
and the labor rate variance. Possible causes of the variances include:
Materials quan?ty variance: Outdated standards, unskilled workers, poorly
adjusted machines, carelessness, poorly trained
workers, inferior quality materials.
Labor rate variance: Outdated standards, change in pay scale,
over?me pay.

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EXERCISE 10A–5

1. 9,500 units × 4 hours per unit = 38,000 hours.

2. and 3.
Actual Fixed Budgeted Fixed Fixed Overhead Applied to
Overhead Overhead Work in Process
$198,700* $200,000 38,000 hours × $5 per hour*
= $190,000
­ ­ ­
Budget variance, Volume variance,
$1,300 F $10,000 U*
*Given

4.

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Therefore, the denominator ac?vity is: $200,000 ÷ $5 per hour = 40,000 hours.