Chapter 6 Materials Fall 2023

Sales Volume (car washes) 8,800 Sales 132,000 $ Budgeted Variable Costs Cleaning supplies 19,800 Electricity 4,400 Labor 35,200 Budgeted Fixed Costs Manager's Salary 4,500 Depreciation (equip) 9,000 Rent (building) 12,000 Net Operating Income: 47,100 $ At the end of the month, the actual results were compared to December's budget. Actual Static Results Budget Difference Sales Volume (car washes) 9,100 8,800 300 Sales 136,500 $ 132,000 $ 4,500 Budgeted Variable Costs Cleaning supplies 18,200 19,800 (1,600) Electricity 4,641 4,400 241 Labor 35,945 35,200 745 Budgeted Fixed Costs Manager's Salary 4,500 4,500 ‐ Depreciation (equip) 9,200 9,000 200 Rent (building) 12,000 12,000 ‐ Net Operating Income: 52,014 $ 47,100 $ 4,914 $ Waco Car Wash (WCW) prepared the following budgeted Income Statement for the month of December. Calculate WCW's sales price and standard costs. 1 Chapter 6 Performance Evaluation - Variance Analysis Overall, How did you perform? What is a Static Budget? What is a flexible budget?

Flexible Sales Actual Budget Flexible Volume Static Results Variance Budget Variance Budget Sales Volume (car washes) 9,100 8,800 Sales 136,500 $ 132,000 $ Budgeted Variable Costs Cleaning supplies 18,200 19,800 Electricity 4,641 4,400 Labor 35,945 35,200 Budgeted Fixed Costs Manager's Salary 4,500 4,500 Depreciation (equip) 9,200 9,000 Rent (building) 12,000 12,000 Net Operating Income: 52,014 $ 47,100 $ Prepare a flexible budget for the month of December and a flexible budget performance report for Waco Car Wash. What might have caused the difference between the actual cost of the cleaning supplies and the amount that should have been incurred (the flexible budget amount) ? Unfavorable variances: Favorable variances: 2

Direct Materials Direct Labor AQ = AH = AP = AR = SQ = SH = SP = SR = 1. Waco Car Wash actually washed 9100 cars using 113,750 oz of soap at a cost of $.16 per oz to wash. Waco Car Wash’s standards for one car wash are 9oz of soap, at a cost of $.25 per oz. (1) (2) (3) (1) ‐ (2) (2) ‐ (3) Price Variance Quantity Variance 4

2. Harmon Household Products, Inc. manufactures a number of consumer items for general household use. One of these products, a chopping board, requires an expensive hardwood. At the beginning of the year, the company expected to produce 4,200 chopping boards in February. During February , the company actually manufactured 4,000 chopping boards using 11,000 board feet of hardwood. The hardwood cost the company $18,700. The company’s standards for one chopping board are 2.5 board feet of hardwood, at a cost of $1.80 per board foot. 1. What cost for wood should have been incurred to make 4,000 chopping blocks? How much greater or less is this than the cost that was incurred? 2. Break down the difference computed in (1) above into a materials price variance and a materials quantity variance. (1) (2) (3) (1) ‐ (2) (2) ‐ (3) Price Variance Quantity Variance 5

4. Hollowell Audio, Inc., manufactures military ‐ specification compact discs. The company uses standards to control its costs. The labor standards that have been set for one disc are as follows: Standard hours: 24 minutes Standard rate per hour: $6.00 Standard cost: $2.40 During July, 8,500 hours of direct labor time were recorded to make 20,000 discs. The direct labor cost totaled $49,300 for the month. 1. What direct labor cost should have been incurred to make the 20,000 discs? By how much does this differ from the cost that was incurred? 2. What are the labor rate and efficiency variances (include F or U)? 3. What is the overall variance (include F or U)? 4. How much more or less did we pay our laborers than expected? 5. Were our laborers more or less efficient than we anticipated? 6. How many more or fewer hours did it take our laborers to make 20,000 discs than we thought? 7. Give a plausible explanation for what may have caused the overall variance. (1) (2) (3) (1) ‐ (2) (2) ‐ (3) 7

Chapter 6 Extra In ‐ Class Problems 1. Frazier Industries manufactures sporting equipment and one of its products, a football helmet, requires a special plastic. Frazier anticipated making 38,000 helmets in the second quarter. During the quarter ending on June 30, the company actually manufactured 35,000 helmets, using 22,500 kilograms of plastic. The plastic cost the company $171,000. According to the standard cost card, each helmet should require 0.6 kilograms of plastic at a cost of $8.00 per kilogram. a. What cost for plastic should have been incurred to make the helmets produced ? b. What is the materials price variance (include F or U)? c. What is the materials quantity variance (include F or U)? d. What is the overall variance? e. How much more expensive or cheaper was the material than expected (per kilogram)? f. How much more or less material did Frazier use than anticipated? g. Give a plausible explanation for what may have happened for the overall variance. 2. Skychefs, Inc. prepares in ‐ flight meals for a number of major airlines. One of the company’s products is a grilled salmon in dill sauce with baby new potatoes and spring vegetables. During the most recent week, the company prepared 4,000 of these meals using 960 direct ‐ labor hours. The company paid these direct labor workers a total of $9,600 for this work, or $10.00 per hour. According to the standard cost card for this meal, it should require 0.25 direct labor ‐ hours at a cost of $9.75 per hour. a. What direct labor cost should have been incurred to prepare 4,000 meals? How much does this differ from the actual direct labor cost? b. What are the labor rate and efficiency variance s (include F or U)? c. Give a plausible explanation for what may have happened for the overall variance. d. How much more or less did we pay our laborers than expected? e. Were our laborers more or less efficient than we anticipated? f. How many more or fewer hours did it take them to make 4,000 meals than we thought? 8

Ch. 6 S tandard Costing Practice Quiz 1. Standards that represent levels of operations that can be attained with reasonable efforts are called: A. currently attainable standards B. ideal standards D. practical standards C. theoretical standards E. none of the above 2. If the actual quantity of direct materials used in producing a commodity differs from the standard quantity, the variance is termed: A. rate variance B. controllable variance D. quantity variance C. price variance E. purchasing variance 3. If the wage rate paid per hour differs from the standard wage rate per hour for direct labor, the variance is termed: A. volume variance B. variable variance D. quantity variance C. rate variance E. controllable variance 4. It is best to recognize the price variance for direct materials when: A. the materials are placed into production. B. goods are completed and transferred to finished goods. C. the materials are purchased. D. none of these. 5. The labor rate variance is determined by multiplying the difference between the actual labor rate and the standard labor rate by: A. the standard hours allowed. B. the actual hours worked. C. the budgeted hours allowed. D. none of these. 6. If inferior-grade materials are purchased, the result may be: A. an unfavorable materials price variance. B. a favorable materials price variance. C. an unfavorable labor efficiency variance. D. a favorable labor efficiency variance. E. responses B. and C. are both correct. F. responses A. and D. are both correct. 7. The "price" variance for variable overhead is called a: A. rate variance C. budget variance. B. spending variance. D. none of these. 8. During June, Bradley Company produced 4,000 units of product. The standard cost card indicates the following for labor costs (per unit): 3.5 hours @ $6 = $21. During the month, the company worked 15,000 hours. The standard hours allowed for the month were: A. 14,000 hours C. 24,000 hours B. 15,000 hours D. none of these. 10

Use the following information for the next two questions. The following data relate to direct labor costs for the current period in which 3,000 units were produced and sold: Standard costs 2 hours per unit at $12.00 per hour Actual costs 7,500 hours at $11.60 9. What is the direct labor efficiency variance? A. $2,400 favorable C. $15,000 unfavorable B. $3,000 favorable D. $18,000 unfavorable 10. What is the direct labor rate variance? A. $2,400 favorable B. $3,000 favorable D. $17,500 unfavorable C. $15,000 unfavorable E. $18,000 unfavorable Use the following information for the next six questions. The standard costs and actual costs for direct materials, direct labor, and factory overhead for the manufacture of 2,500 units of product are as follows: Standard Costs Actual Costs Direct materials 1 kilogram per unit @ $8 per kilogram 2,800 kilograms @ $8.75 Direct labor 3 hours per unit @ $12 per hour 7,400 hours @ $11.40 Variable MOH 3 DL hours per unit @ $2 per hour $18,000 Fixed MOH 3 DL hours per unit @ $.80 per hour $8,000 11. The amount of the direct materials quantity variance is: A. $2,400 favorable B. $2,400 unfavorable D. $2,625 unfavorable C. $2,625 favorable E. $4,500 unfavorable 12. The amount of the direct materials price variance is: A. $1,875 favorable B. $1,875 unfavorable D. $2,100 favorable C. $1,950 unfavorable E. $2,100 unfavorable 13. The amount of the direct labor rate variance is: A. $4,440 favorable B. $4,440 unfavorable D. $4,500 unfavorable C. $4,500 favorable E. $5,640 unfavorable 14. The amount of the direct labor efficiency variance is: A. $1,140 favorable B. $1,140 unfavorable D. $1,200 unfavorable C. $1,200 favorable E. $5,640 unfavorable 11