Mastery Problem: Evaluating Variances from Standard Costs

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Sole Purpose Shoe Company

Sole Purpose Shoe Company is owned and operated by Sarah Charles. The company manufactures casual shoes, with manufacturing facilities in your state. Sarah began the business this year, and while she has a great deal of experience in manufacturing popular and comfortable shoes, she needs some help in evaluating her results for the year, and asks for your help.

Starting Questions

Sarahs first questions for you have to do with the general ideas and terminology used to evaluate variances.

Provide answers to the following questions (1)-(3).

1. Why might Sarah want to use standard costs to compare with her actual costs?

a. Standard costs give management a cost structure for products that is applicable for the entire life of the business.

b. Standard costs allow management to motivate employees by comparing their performance to what it would be under perfect conditions.

c. Management can evaluate the differences between standard costs and actual costs to focus on correcting the cost variances.

abcc

2. What are some possible drawbacks to using standard costs that Sarah might consider?

a. Standards limit operating improvements because employees may be discouraged from improving beyond the standards.

b. Standards may become stale in a dynamic manufacturing environment.

c. Employees may focus only on efficiency improvement and their own operations rather than considering the larger objectives of the organization.

d. Since standards are impossible to attain, they are a distraction from the work at hand.

e. Since standards never change, they do not reflect reality.

a, b and cb, c and dc, d and ea, d and eb, d and ea, b and c

3. Sarah wants to be sure she understands the basic definitions involved:

Answer the following questions by selecting the correct words.

A favorable variance occurs when the actual cost (what the product does cost) is

greater thanless thanthe same asless than

the standard cost (what the product should cost). A favorable variance is represented by a

positivenegativenegative

number, indicating that costs are

higherlowerlower

than expected.

An unfavorable variance occurs when the actual cost (what the product does cost) is

greater thanless thanthe same asgreater than

the standard cost (what the product should cost). An unfavorable variance is represented by a

positivenegativepositive

number, indicating that costs are

higherlowerhigher

than expected.

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Feedback

1. Review the reasoning for using standard costs and comparing them with actual costs, and the advantages, the computation and analysis that cost variances can provide.

2. Review the criticisms of using standard costs and comparing them with actual costs, and the possible disadvantages inherent in the computation and analysis of cost variances.

3. Review the definitions of favorable and unfavorable variance.

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Direct Materials

Under normal conditions, Sarah spends $8.40 per unit of materials, and it will take 3.60 units of material per pair of shoes. During July, Sole Purpose Shoe Company incurred actual direct materials costs of $62,211 for 6,990 units of direct materials in the production of 2,150 pairs of shoes.

Complete the following table, showing the direct materials variance relationships for July for Sole Purpose Shoe Company. If required, round your answers to two decimal places. When entering variances, use a negative number for a favorable cost variance, and a positive number for an unfavorable cost variance.

Actual Cost						Standard Cost
Actual Quantity	X	Actual Price		Actual Quantity	X	Standard Price		Standard Quantity	X	Standard Price
fill in the blank dfb2f6f9903bfa9_1	X	$fill in the blank dfb2f6f9903bfa9_2		fill in the blank dfb2f6f9903bfa9_3	X	$fill in the blank dfb2f6f9903bfa9_4		fill in the blank dfb2f6f9903bfa9_5	X	$fill in the blank dfb2f6f9903bfa9_6
	= $fill in the blank dfb2f6f9903bfa9_7				= $fill in the blank dfb2f6f9903bfa9_8				= $fill in the blank dfb2f6f9903bfa9_9
			UnfavorableFavorableUnfavorable Direct Materials CostPriceQuantityRateTimeQuantity Variance:				UnfavorableFavorableFavorable Direct Materials CostPriceQuantityRateTimeQuantity Variance:
			$fill in the blank dfb2f6f9903bfa9_14				$fill in the blank dfb2f6f9903bfa9_15
					UnfavorableFavorableFavorable Total Direct Materials CostPriceQuantityRateTimeCost Variance:
					$fill in the blank dfb2f6f9903bfa9_18

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Direct Labor

Under normal conditions, Sarah pays her employees $8.50 per hour, and it will take 2.80 hours of labor per pair of shoes. During August, Sole Purpose Shoe Company incurred actual direct labor costs of $65,340 for 7,260 hours of direct labor in the production of 2,200 pairs of shoes.

Complete the following table, showing the direct labor variance relationships for August for Sole Purpose Shoe Company. If required, round your answers to two decimal places. When entering variances, use a negative number for a favorable variance, and a positive number for an unfavorable variance.

Actual Cost						Standard Cost
Actual Hours	X	Actual Rate		Actual Hours	X	Standard Rate		Standard Hours	X	Standard Rate
fill in the blank b3aca5069f8301d_1	X	$fill in the blank b3aca5069f8301d_2		fill in the blank b3aca5069f8301d_3	X	$fill in the blank b3aca5069f8301d_4		fill in the blank b3aca5069f8301d_5	X	$fill in the blank b3aca5069f8301d_6
	= $fill in the blank b3aca5069f8301d_7				= $fill in the blank b3aca5069f8301d_8				= $fill in the blank b3aca5069f8301d_9
			UnfavorableFavorableUnfavorable Direct Labor CostPriceQuantityRateTimeCost Variance:				UnfavorableFavorableUnfavorable Direct Labor CostPriceQuantityRateTimeQuantity Variance:
			$fill in the blank b3aca5069f8301d_14				$fill in the blank b3aca5069f8301d_15
					UnfavorableFavorableUnfavorable Total Direct Labor CostPriceQuantityRateTimeCost Variance:
					$fill in the blank b3aca5069f8301d_18

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Budget Performance Report

Sarah has learned a lot from you over the past two months, and has compiled the following data for Sole Purpose Shoe Company for September using the techniques you taught her. She would like your help in preparing a Budget Performance Report for September. The company produced 3,500 pairs of shoes that required 12,250 units of material purchased at $8.20 per unit and 9,450 hours of labor at an hourly rate of $8.90 per hour during the month. Actual factory overhead during September was $28,350. When entering variances, use a negative number for a favorable cost variance, and a positive number for an unfavorable cost variance.

Use the data in the following table to prepare the Budget Performance Report for Sole Purpose Shoe Company for September.

Manufacturing Costs	Standard Price	Standard Quantity	Standard Cost Per Unit
Direct materials	$8.40 per unit	3.60 units per pair	$30.24
Direct labor	$8.50 per hour	2.80 hours per pair	23.80
Factory overhead	$2.70 per hour	2.80 hours per pair	7.56
Total standard cost per pair			$61.60

Sole Purpose Shoe Company Budget Performance Report For the Month Ended September 30
Manufacturing Costs	Actual Costs	Standard Cost at Actual Volume	Cost Variance - (Favorable) Unfavorable
Direct materials	$fill in the blank fbdc17fc3fcb045_1	$fill in the blank fbdc17fc3fcb045_2	$fill in the blank fbdc17fc3fcb045_3
Direct labor	fill in the blank fbdc17fc3fcb045_4	fill in the blank fbdc17fc3fcb045_5	fill in the blank fbdc17fc3fcb045_6
Factory overhead	fill in the blank fbdc17fc3fcb045_7	fill in the blank fbdc17fc3fcb045_8	fill in the blank fbdc17fc3fcb045_9
Total manufacturing costs	$fill in the blank fbdc17fc3fcb045_10	$fill in the blank fbdc17fc3fcb045_11	$fill in the blank fbdc17fc3fcb045_12

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Final Questions

Before Sarah makes any changes based on the Budget Performance Report for September, she wants to be sure she understands the results, and has the following questions for you.

Answer the following questions (1) and (2). All questions pertain to the September data.

1. What caused the total cost variance for direct materials?

a. The actual quantity of direct materials per unit was less than the standard quantity.

b. The actual price for direct materials per unit was less than the standard price.

c. The favorable price variance dominated the unfavorable quantity variance, causing the total cost variance for direct materials to be favorable.

d. The unfavorable quantity variance dominated the favorable price variance, causing the total cost variance for direct materials to be unfavorable.

e. A factor other than those listed caused the total cost variance for direct materials.

a and bb and cc and dd and ea and ea and b

2. What caused the total cost variance for direct labor?

a. The actual number of labor hours per unit was less than the standard number.

b. The unfavorable rate variance was larger than the favorable time variance, causing the total cost variance for direct labor to be unfavorable.

c. The favorable time variance was larger than the unfavorable rate variance, causing the total cost variance for direct labor to be favorable.

d. The actual rate for labor hours per unit was less than the standard rate.

e. A factor other than those listed caused the total cost variance for direct labor.

a and bb and cc and dd and ea and ea and b