Inputs $(1)$

Standard Quantity or Hours $(2)$

Standard Price

or Rate

Standard Cost

$(1)\backslash$times $(2)$

Direct materials $...............3\mathrm{.}0$ pounds $$4\mathrm{.}00$ per pound $$12\mathrm{.}00$

Direct labor................... $0\mathrm{.}50$ hours $$22\mathrm{.}00$ per hour $11\mathrm{.}00$

Variable manufacturing $........$

overhead $..................0\mathrm{.}50$ hours $$6\mathrm{.}00$ per hour $3\mathrm{.}00$

Total standard cost per unit $.....$ $$26\mathrm{.}00$

Standard Costs and Variances $453$

Using Standards in Flexible Budgets

Once Terry Sherman created the standard cost card shown in Exhibit $101,$ he was ready to use this information to calculate direct materials, direct labor, and variable manufactur$-$ ing overhead variances. Therefore, he gathered the following data for the month of June:

Using the above data and the standard cost data from Exhibit $101,$ Terry com$-$ puted the spending and activity variances shown in Exhibit $102.$ Notice that the actual results and flexible budget columns are each based on the actual output of $2,000$ stat$-$ ues. The planning budget column is based on the planned output of $2,100$ statues. The standard costs of $$12\mathrm{.}00$ per unit for materials, $$11\mathrm{.}00$ per unit for direct labor, and

$$3\mathrm{.}00$ per unit for variable manufacturing overhead are each multiplied by the actual output of $2,000$ statues to compute the amounts in the flexible budget column. For example, the standard direct labor cost per unit of $$11\mathrm{.}00$ multiplied by $2,000$ statues equals the direct labor flexible budget of $$22,000.$ Similarly, the three standard variable cost figures are multiplied by $2,100$ statues to compute the amounts in the planning budget column. For example, the direct labor cost for the planning budget is $$23,100(=$ $$11\mathrm{.}00$ per unit $\backslash$times $2,100$ units$).$

The spending variances shown in Exhibit $102$ are computed by taking the amounts in the actual results column and subtracting the amounts in the flexible budget column. For all three variable manufacturing costs, this computation results in a positive num$-$ ber because the actual amount of the cost incurred to produce $2,000$ statues exceeds the standard cost allowed for $2,000$ statues. Because, in all three instances, the actual cost incurred exceeds the standard cost allowed for the actual level of output, the variance is labeled unfavorable $($U$).$ Had any of the actual costs incurred been less than the standard cost allowed for the actual level of output, the corresponding variances would have been labeled favorable $($F$).$

The activity variances shown in the exhibit are computed by taking the amounts in the flexible budget column and subtracting the amounts in the planning budget column. For all three variable manufacturing costs, these computations result in negative num$-$ bers and what are labeled as favorable $($F$)$ variances. The label favorable is used in these instances because the standard cost allowed for the actual output is less than the standard

EXHIBIT $102$

Flexible Budget Performance Report for Variable Manufacturing Costs

Colonial Pewter

Flexible Budget Performance Report$$Variable Manufacturing Costs For the Month Ended June $30$

Actual Results Spending Variances Flexible Budget Activity Variances Planning Budget

Statues produced $($q$).............................2,0002,0002,100$

Direct materials $($$$12\mathrm{.}00$q$)........................$ $$24,700$ $$700$ U $$24,000$ $$1,200$ F $$25,200$

Direct labor $($$$11\mathrm{.}00$q$)...........................$ $$22,680$ $$680$ U $$22,000$ $$1,100$ F $$23,100$

Variable manufacturing overhead $($$$3\mathrm{.}00$q$).........$ $$7,140$ $$1,140$ U $$6,000$ $$300$ F $$6,300$

$454$ Chapter $10$

cost allowed for the planned output. Had the actual level of activity been greater than the planned level of activity, all of the computations would have resulted in positive numbers and unfavorable $($U$)$ activity variances.

While the performance report in Exhibit $102$ is useful, it would be even more useful if the spending variances could be broken down into their price$-$related and quantity$-$ related components. For example, the direct materials spending variance in the report is

$$700$ unfavorable. This means that, given the actual level of production for the period, direct materials costs were too high by $$700$at least according to the standard costs. Was this due to higher than expected prices for materials? Or was it due to too much material being used? The standard cost variances we will be discussing in the rest of the chapter are designed to answer these questions.

Required:

$1.$ Traditional Income Statement

$2.$ Result from variance computation