Exercise 10-1 (20 minutes)

1. Number of helmets ........................................... 35,000

Standard kilograms of plastic per helmet ............ 0.6
Total standard kilograms allowed ....................... 21,000
Standard cost per kilogram ................................ $8
Total standard cost ........................................... $168,000
Actual cost incurred (given) ............................... $171,000
Total standard cost (above) ............................... 168,000
Total material varianceunfavorable ................. $ 3,000

2. Actual Quantity Standard Quantity

of Input, at Actual Quantity of Input, Allowed for Output, at
Actual Price at Standard Price Standard Price
(AQ AP) (AQ SP) (SQ SP)
22,500 kilograms 21,000 kilograms*
$8 per kilogram $8 per kilogram
$171,000 = $180,000 = $168,000

Price Variance, Quantity Variance,
$9,000 F $12,000 U
Spending Variance,
$3,000 U
*35,000 helmets 0.6 kilograms per helmet = 21,000 kilograms

Alternatively, the variances can be computed using the formulas:

Materials price variance = AQ (AP SP)
22,500 kilograms ($7.60 per kilogram* $8.00 per kilogram)
= $9,000 F
* $171,000 22,500 kilograms = $7.60 per kilogram
Materials quantity variance = SP (AQ SQ)
$8 per kilogram (22,500 kilograms 21,000 kilograms)
= $12,000 U
Exercise 10-2 (20 minutes)

1. Number of meals prepared ................... 4,000

Standard direct labor-hours per meal .... 0.25
Total direct labor-hours allowed ............ 1,000
Standard direct labor cost per hour ....... $9.75
Total standard direct labor cost............. $9,750
Actual cost incurred ............................. $9,600
Total standard direct labor cost (above) 9,750
Total direct labor variance .................... $ 150 Favorable

2. Actual Hours of Standard Hours

Input, at the Actual Hours of Input, Allowed for Output, at
Actual Rate at the Standard Rate the Standard Rate
(AHAR) (AHSR) (SHSR)
960 hours 960 hours 1,000 hours
$10.00 per hour $9.75 per hour $9.75 per hour
= $9,600 = $9,360 = $9,750

Rate Variance, Efficiency Variance,
$240 U $390 F
Spending Variance,
$150 F

Alternatively, the variances can be computed using the formulas:

Labor rate variance = AH(AR SR)
= 960 hours ($10.00 per hour $9.75 per hour)
= $240 U
Labor efficiency variance = SR(AH SH)
= $9.75 per hour (960 hours 1,000 hours)
= $390 F
Exercise 10-3 (20 minutes)

1. Number of items shipped................................. 120,000

Standard direct labor-hours per item ................ 0.02
Total direct labor-hours allowed ....................... 2,400
Standard variable overhead cost per hour......... $3.25
Total standard variable overhead cost .............. $ 7,800
Actual variable overhead cost incurred ............. $7,360
Total standard variable overhead cost (above) .. 7,800
Total variable overhead variance ...................... $ 440 Favorable

2. Actual Hours of Standard Hours

Input, at the Actual Hours of Input, Allowed for Output, at
Actual Rate at the Standard Rate the Standard Rate
(AHAR) (AHSR) (SHSR)
2,300 hours 2,300 hours 2,400 hours
$3.20 per hour* $3.25 per hour $3.25 per hour
= $7,360 = $7,475 = $7,800

Variable Overhead
Variable Overhead Rate Efficiency Variance,
Variance, $115 F $325 F
Spending Variance,
$440 F
*$7,360 2,300 hours = $3.20 per hour

Alternatively, the variances can be computed using the formulas:

Variable overhead rate variance:
AH(AR SR) = 2,300 hours ($3.20 per hour $3.25 per hour)
= $115 F
Variable overhead efficiency variance:
SR(AH SH) = $3.25 per hour (2,300 hours 2,400 hours)
= $325 F
Exercise 10-6 (20 minutes)
1. Actual Quantity Actual Quantity Standard Quantity
of Input, at of Input, at Allowed for Output,
Actual Price Standard Price at Standard Price
(AQ AP) (AQ SP) (SQ SP)
20,000 pounds 20,000 pounds 18,400 pounds*
$2.35 per pound $2.50 per pound $2.50 per pound
= $47,000 = $50,000 = $46,000

Price Variance, Quantity Variance,
$3,000 F $4,000 U
Spending Variance,
$1,000 U
*4,000 units 4.6 pounds per unit = 18,400 pounds

Alternatively, the variances can be computed using the formulas:

Materials price variance = AQ (AP SP)
20,000 pounds ($2.35 per pound $2.50 per pound) = $3,000 F
Materials quantity variance = SP (AQ SQ)
$2.50 per pound (20,000 pounds 18,400 pounds) = $4,000 U
Exercise 10-6 (continued)
2. Actual Hours of Standard Hours
Input, at the Actual Hours of Input, Allowed for Output, at
Actual Rate at the Standard Rate the Standard Rate
(AH AR) (AH SR) (SH SR)
750 hours 800 hours*
$12.00 per hour $12.00 per hour
$10,425 = $9,000 = $9,600

Rate Variance, Efficiency Variance,
$1,425 U $600 F
Spending Variance,
$825 U
*4,000 units 0.2 hours per unit = 800 hours

Alternatively, the variances can be computed using the formulas:

Labor rate variance = AH (AR SR)
750 hours ($13.90 per hour* $12.00 per hour) = $1,425 U
*10,425 750 hours = $13.90 per hour
Labor efficiency variance = SR (AH SH)
$12.00 per hour (750 hours 800 hours) = $600 F
Exercise 10-8 (30 minutes)
1. a. Notice in the solution below that 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 production.
Actual Quantity Standard Quantity
of Input, at Actual Quantity of Allowed for Output, at
Actual Price Input, at Standard Price Standard Price
(AQ AP) (AQ SP) (SQ SP)
25,000 microns 25,000 microns 18,000 microns*
$0.48 per micron $0.50 per micron $0.50 per micron
= $12,000 = $12,500 = $9,000

Price Variance,
$500 F
20,000 microns $0.50 per micron
= $10,000

Quantity Variance,
$1,000 U
*3,000 toys 6 microns per toy = 18,000 microns

Alternatively, the variances can be computed using the formulas:

Materials price variance = AQ (AP SP)
25,000 microns ($0.48 per micron $0.50 per micron) = $500 F
Materials quantity variance = SP (AQ SQ)
$0.50 per micron (20,000 microns 18,000 microns) = $1,000 U
Exercise 10-8 (continued)
b. Direct labor variances:
Actual Hours of Standard Hours Allowed
Input, at the Actual Hours of Input, for Output, at the
Actual Rate at the Standard Rate Standard Rate
(AH AR) (AH SR) (SH SR)
4,000 hours 3,900 hours*
$8.00 per hour $8.00 per hour
$36,000 = $32,000 = $31,200

Rate Variance, Efficiency Variance,
$4,000 U $800 U
Spending Variance,
$4,800 U
*3,000 toys 1.3 hours per toy = 3,900 hours

Alternatively, the variances can be computed using the formulas:

Labor rate variance = AH (AR SR)
4,000 hours ($9.00 per hour* $8.00 per hour) = $4,000 U
*$36,000 4,000 hours = $9.00 per hour
Labor efficiency variance = SR (AH SH)
$8.00 per hour (4,000 hours 3,900 hours) = $800 U
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
incorrect. Some of the other possible explanations for the variances
observed at Dawson Toys appear below:
Materials Price Variance Since this variance is favorable, the actual price
paid per unit for the material was less than the standard price. This could
occur for a variety of reasons including the purchase of a lower grade
material at a discount, buying in an unusually large quantity to take
advantage of quantity discounts, a change in the market price of the
material, or particularly sharp bargaining by the purchasing department.
Materials Quantity Variance Since this variance is unfavorable, 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
adjusted machines, and defective materials.
Labor Rate Variance Since this variance is unfavorable, the actual
average wage rate was higher than the standard wage rate. Some of the
possible explanations include an increase in wages that has not been
reflected in the standards, unanticipated overtime, and a shift toward
more highly paid workers.
Labor Efficiency Variance Since this variance is unfavorable, the actual
number of labor hours was greater than the standard labor hours allowed
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 possible
explanations include poor supervision, poorly trained workers, low-quality
materials requiring more labor time to process, and machine breakdowns.
In addition, if the direct labor force is essentially fixed, an unfavorable
labor efficiency variance could be caused by a reduction in output due to
decreased demand for the companys products.
It is worth noting that all of these variances could have been caused by
the purchase of low quality materials at a cut-rate price.
Problem 10-14 (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
production:
Actual Quantity of Actual Quantity Standard Quantity
Input, at of Input, at Allowed for Output, at
Actual Price Standard Price Standard Price
(AQ AP) (AQ SP) (SQ SP)
12,000 ounces 9,375 ounces*
$20.00 per ounce $20.00 per ounce
$225,000 = $240,000 = $187,500

Price Variance,
$15,000 F
9,500 ounces $20.00 per ounce
= $190,000

Quantity Variance,
$2,500 U
*3,750 units 2.5 ounces per unit = 9,375 ounces

Alternatively, the variances can be computed using the formulas:

Materials price variance = AQ (AP SP)
12,000 ounces ($18.75 per ounce* $20.00 per ounce) = $15,000 F
*$225,000 12,000 ounces = $18.75 per ounce
Materials quantity variance = SP (AQ SQ)
$20.00 per ounce (9,500 ounces 9,375 ounces) = $2,500 U

b. Yes, the contract probably should be signed. The new price of $18.75
per ounce is substantially lower than the old price of $20.00 per
ounce, resulting in a favorable price variance of $15,000 for the
month. Moreover, the material from the new supplier appears to
cause little or no problem in production as shown by the small
materials quantity variance for the month.
Problem 10-14 (continued)
2. a.
Actual Hours of Actual Hours of Standard Hours
Input, at the Input, at the Allowed for Output, at
Actual Rate Standard Rate the Standard Rate
(AH AR) (AH SR) (SH SR)
5,600 hours* 5,600 hours 5,250 hours**
$12.00 per hour $12.50 per hour $12.50 per hour
= $67,200 = $70,000 = $65,625

Rate Variance, Efficiency Variance,
$2,800 F $4,375 U
Spending Variance,
$1,575 U
* 35 technicians 160 hours per technician = 5,600 hours
** 3,750 units 1.4 hours per technician = 5,250 hrs

Alternatively, the variances can be computed using the formulas:

Labor rate variance = AH (AR SR)
5,600 hours ($12.00 per hour $12.50 per hour) = $2,800 F
Labor efficiency variance = SR (AH SH)
$12.50 per hour (5,600 hours 5,250 hours) = $4,375 U

b. No, the new labor mix probably should not be continued. Although it
decreases the average hourly labor cost from $12.50 to $12.00,
thereby causing a $2,800 favorable labor rate variance, this savings is
more than offset by a large unfavorable labor efficiency variance for
the month. Thus, the new labor mix increases overall labor costs.
Problem 10-14 (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)
5,600 hours* 5,250 hours**
$3.50 per hour $3.50 per hour
$18,200 = $19,600 = $18,375

Rate Variance, Efficiency Variance,
$1,400 F $1,225 U
Spending Variance,
$175 F
* Based on direct labor hours:
35 technicians 160 hours per technician = 5,600 hours
** 3,750 units 1.4 hours per unit = 5,250 hours

Alternatively, the variances can be computed using the formulas:

Variable overhead rate variance = AH (AR SR)
5,600 hours ($3.25 per hour* $3.50 per hour) = $1,400 F
*$18,200 5,600 hours = $3.25 per hour
Variable overhead efficiency variance = SR (AH SH)
$3.50 per hour (5,600 hours 5,250 hours) = $1,225 U

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