Mastery Problem: Evaluating Variances from Standard Costs 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 Sarah's 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. 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. 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 An unfavorable variance occurs when the actual cost (what the product does cost) is the standard cost (what the product should cost). A favorable variance is represented by a number, indicating that costs are than expected. the standard cost (what the product should cost). An unfavorable variance is represented by a number, indicating that costs are than expected. 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 $61,321 for 6,890 units of direct materials in the production of 2,175 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 Actual Quantity Actual x Price x Direct Labor Direct Materials Variance: Actual Quantity Total Direct Materials Variance: Standard Price Direct Materials Variance: Standard Cost Standard Quantity x Standard Price 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 Actual x Hours Actual Rate Direct Labor Variance: Actual Hours x Total Direct Labor Variance: Standard Rate Direct Labor Variance: Standard Cost Standard Hours x Standard Rate 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 2,500 pairs of shoes that required 8,750 units of material purchased at $8.20 per unit and 6,750 hours of labor at an hourly rate of $8.90 per hour during the month. Actual factory overhead during September was $20,250. 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 Direct labor $8.40 per unit $8.50 per hour Factory overhead $2.70 per hour 3.60 units per pair 2.80 hours per pair 2.80 hours per pair $30.24 23.80 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 Direct materials Direct labor Factory overhead Total manufacturing costs Cost Variance - (Favorable) Unfavorable 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. 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.