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 tacilities in your state. Sarah began the business this year, and while she has a oreat deal of experience in manufacturino popilar and comfortable shoes, she needs some help in evaluating her results for the year, and asks for your help. Starting Questions Sarah's first quentions for you have to do with the general ideas and terminologr used to evaluate varlances. Provide answers to the following guestions (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 tise entire lifo of the business. b. Standard costs allow management to motivate employees by compating their perfomance to what it would be under perfect conditiong, c. Management can evaluate the differences between standard costs and actual costs to foous on correcting the cout vailiaices. 2. What are some possible drawbacks to using standard costs that Garat mioht consider? a. Standards limit operating improvements because-emplovees may be difcouraged from jnproving bevond the standards. b. Standards may become "stale" in a dvramic manafacturing emirocinent: b. Standards may become " btale" in a dymamic mansfacturing environment. c. Employees may focus only on efficiency improvement and their own operations rather thain considering the larger objectives of the organization. d. Since standards are impoesible 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 the standard cost what the product should cost). A favorable variance is represented by a number indicating that costs are than expected. An unfavorable variance occurs when the actual cost (what the product does cost) is the standard cost (what the product should cost). An unfivorable variance is represented by a number, indicating that costs are Direct Materials Under nommal conditions, Sarah spends $8.40 per unit of materiaisiand it will take 3,60 units of material per pair of shoes, Dunine July, Sole Purpose Shoe Company incurred actual direct materials costs of $62,211,f026,990 units of direct materials in the production of 2,175 pairs of shoed Complete the following tabie, showing the direct materiak variance relationshigs for July for Sole Purpose Shoe Company. if requited: round your. Direct Labor Under normal coniditions, Sarah pays her employees $8.50 per hour, and it wilt take 2.80 hours of labor per pair of shoes. During August, Sole. Purpose Shoe Company incurred actual direct labor costs of $65,880 for 7,320 hours of direct labor in the production of 2,300 pairs of shoes. Complete the following table, showing the direct labor variance relationships for August for Sole Purpose 5 hoe Company. If reguired. round vour answers to two decimal places. When entering variances, use a negative namber for a favorable variance, and a positive number foe an unfavorable yariance. hours of labor per pali of shoes. During August, Sole Purpose or in the production of 2.300 pairs of shoes. or Sole purpose 5 hoe Company, If required, round your vorable variance. and a positive number for an unfavorable. Budget Performance Report Sarah has learned a lot from you over the past two monthe, and has compied tha foliowing data for Sole Purpose Shoe Company for September using the techniques you taught her. She would like your help in preporing a Budoet funformance Report for September. The company produced 2.500 salis of shoes that required 8,750 units of materiat purchased at $8,20 per unit and 6,750 hours of labor at an hourfy fate of 98,90 ger hour during the misth. Actual factory overhead during September was $20,250. When entering variances, ust a nepattve number for a favorable cose variance. and a positive number for an unfavorable:cost variance. Use the data in the following table to prepare the Budjet Peformance Report for Sole Purpose Shoe company for Sestambur. ng data for Sole Purpose Shoe Company for September using ce:Report for 5 eptember. The company produced 2,500 poins of of labor at an hourly rate of $8.90 per hour during the month. negative number for a favorable cost variance, and a positive tpose Shoe company for September. \begin{tabular}{lccc} & & & \multicolumn{1}{c}{ Standard } \\ & Standard & Standard & \multicolumn{1}{c}{ Cost } \\ Manufacturing Costs & Price & Quantity & Per Unit \\ \hline 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 \\ & & & \end{tabular} Sole Purpose Shoe Company Budget Performance Report For the Month Ended September 30 Before Sarah makes any changes based on the Budget Performance Report for Septernber, 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 Septernber 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 vardance, 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 material5: 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 uniavorable. c. The favorable time variance was larger than the unfavorable rate variance, causing the total cost varfance for direct labor to be favorable. 4. The actual rate for labor hours per unit-was fess than the standard rate. e. A factor other than those listed caused the total cost variance for direct labor