ACC2002 tutorial 6

TUTORIAL 6ACC2002

Done By: Liu Xiaoxuan U072692BTan Sze Huay Bestia U096840RHo Qi Lin U097079UOoi Yi Yee Clarissa A0071956W

Tutorial Group B17

Problem 10-39 (P.447) Part 1a

1. Components of Standard Costing System Direct Material Standards/Labor Rate Standards:o Material Price Standardso Material Quantity Standards

Direct Labor Standardso Labor Rate Standardso Labor Efficiency Standards


Material Price Standards/Labor Rates Standards

Accounting department, quality control department, production department

1A) Who should be involved in setting the standards?


• Material Quantity Standards/Labor Efficiency Standards:– Sales department, production department

Problem 10-39 (P.447) Part 1b

•Material Price Standards/Labor Rate Standards•Discounts, freight, quality, payroll taxes, fringe benefits,

qualifications.

1B) What factors should be considered in establishing the standards?

Problem 10-39 (P.447) Part 1b

•Material Quantity Standards/Labor Efficiency Standards:•Historical experience, engineering studies, input

from operating personnel.

Problem 10-39 (P.447) Part 2

•Materials Use VarianceResponsibility: Production ManagerReason: The manager can ensure that the standard is

met through methods such as minimizing scrap, wastes and rework.

2. Who will be assigned for each and for resulting variances?


•Materials Price VarianceResponsibility: Purchasing Supervisor

(under Production department)

Reason: Price of materials is largely beyond his/her control; however the price variance can be influenced by factors such as quality, quantity discounts, distance of the source from plants etc which are under control of the purchasing manager.


• Labor Use VarianceResponsibility: Production Manager

Reason: Methods to promote the efficiency of labors are under control of the production manager. Examples of such methods are: allocating employees based on their skills, increase quality of trainings, increase quality of production supervision and increase motivation level of employees.


• Labor Wages VarianceResponsibility: Production Manager

Reason: Production manager is able to ensure standards are met through mixing different skill levels employees to work tasks.

Problem 10-42 (P.447)


1. Computation of Material Price Variance


1. Computation of Material Quantity Variance


Recommend purchasing agent to continue buying this quality because total overall material variance is favorable.


2. Computation of Labour Rate Variance


New manufacturing process should be discontinued because overall total labor variance is unfavorable.


3. Computation of NEW Labor Rate Variance


3. Computation of NEW Labor Efficiency Variance


3. Computation of Annual Savings

• New process should be adopted because total projected annual savings is favorable.

Standard cost system would help Crunchy Chips

(i)To improve planning and control and,

(ii)To facilitate product costing

1. Discuss the benefits of a standard costing system for Crunchy Chips.

Question 6 Part 1

Question 3 : Problem 10-42

Standard quantity

Standard Price Standard Cost

Direct Material 25 quarts $4/quart $100 Direct Labor 0.768 hours $15/hour $11.52 Variable Overhead 0.768 hours $8/hour $6.14 Fixed Overhead 0.768 hours $12/hour $9.22 Total Standard Cost $126.88 Standard Cost = Standard Quantity * Standard Cost

Requirement 1

Question 3 : Problem 10-42

Actual Hour = 1.280hr * 320 units = 409.6hr

Standard Hour = 0.768hr * 320 units = 245.76hr

LEV= SR(AH - SH)= $15(409.6 – 245.76)= $ 2457.60

Since actual hour is more than standard hour, an unfavorable labor efficiency will be expected.

Requirement 2

Requirement 3

1st unit 320th unitTime taken is longer

Time taken is shorter

640th unitSame time taken for each unit here

Since cumulative average time per unit takes into account the

average time of previous serviced unit, cumulative average time

per unit at 640 will be shorter than the cumulative average time

per unit at 320.

Cumulative Average time per unit

=Total time Total units

Requirement 3 (con’t)

640 units * 1.024 hr – 320 units * 1.280 hr

320 units

= 0.768 hr per unit

0.768 hr per units is a good choice for per unit labor

standard as it is the average most efficient time per unit after

the learning effects are achieved.

Question 4: Problem 10-44

Standard quantity Standard PriceDirect Material: Liquids 1,050,000 ounces $0.25 per ounce Bottles 250,000 bottles $0.05 per bottleDirect Labor 50,000 DLH $12.50 per DLHVariable overhead 50,000 DLH $4.70 per DLHFixed overhead 50,000 DLH $1.00 per DLH

Actual quantity Actual PriceDirect Material: Liquids 1,150,000 ounces $0.27 per ounce

Bottles 250,000 bottles $0.048 per bottle

Direct Labor 48,250 DLH $12.90 per DLH

Requirement 1

Direct material standard cost= liquids standard cost + bottles standard cost= $275,000

Upper limit = $295,000

Lower limit = $275,000

Liquids standard cost= SP * SQ= $0.25 * 1,050,000 ounces= $262,500

Bottles standard cost= SP * SQ= $0.05 * 250,000 bottles= $12,500


Direct labor standard cost= SR * SH= $12.50 * 50,000 DLH= $625,000



Overhead standard cost= VOH + FOH= $0.94 * 250,000 + $0.20 * 250,000= $285,000



Requirement 2

Bottle price variance= AQ(AP – SP)= 250,000($0.048 - $0.05)= $500 F

Bottle usage variance= SP(AQ – SQ)= $0.05(250,000 – 250,000)= $0

Liquids price variance= AQ(AP – SP)= 1,150,000($0.27 - $0.25)= $23,000 U

Investigate!

Liquids usage variance= SP(AQ – SQ)= $0.25(1,150,000 – 1,050,000)= $25,000 U

MPV = Liquids price variance + bottle price variance = $23,000 U + $500 F = $22,500 U

MUV = Bottle usage variance + Liquids usage variance = $0 +$25,000 U = $25,000 U

Total direct material variance = MPV + MUV= $22,500 U + $ 25,000 U= $47,500 U


Requirement 3

LRV = AH(AR – SR) = 48,250($12.90 - $12.50) = $19,300 U

LEV = SR(AH – SH) = $12.50(48,250 – 50,000) = $21,875 F

Total labor variance = LRV + LEV= $19,300 U + $21,875 F= $2,575 F

Investigate!

Qn 5. Problem 10-48 (p.453)Req 1:

AP = $4.70/lbsAQpurchased = 260,000 lbs

AQused = 260,000 + 60,000 = 320,000 lbs

SP = $5.00/lbsSQ = 6.0 x 50,000 = 300,000 lbs

MQV = SP (AQused - SQ) = $5.00 (320,000 – 300,000) = $100,000 U

MPV = AQpurchased (AP – SP) = 260,000 ($4.70 - $5.00) = $78,000 F

Materials usage variance is more controllable.

Production manager is generally responsible for materials

usage variance

o Minimize scrap, waste and rework to ensure that

standards are met

Materials price variance:

o Price of materials determined by market forces, thus

beyond control

o BUT price variance can be influenced by factors such as

quality, quantity discounts, distance of the source from

the plant etc., which are under the control of the

purchasing agent.

o But generally less controllable

Req 2AR = $1,066,000 / 82,000 hrs = $13/hrAH = 82,000 hrsSR = $12/hrSH = 1.6 hrs/unit x 50,000 units = 80,000 hrs

• LRV = AH (AR – SR)= 82,000 ($13 - $12)= $82,000 U

• LEV = SR (AH – SH)= $12 (82,000 – 80,000) = $24,000 U

Production manager usually responsible for the labor efficiency variance

Possible causes:oMismatch of skill level to tasksoLack of motivationoPoor quality of production

supervisiono Inadequate training provided to

employees

Req 3

MPV = $78,000 FMQV = $100,000 ULRV = $82,000 ULEV = $24,000 U

Net savings/loss = $78,000 - $100,000 - $72,000 - $24,000 = $128,000 U

• Net loss of $128,000 due to total material variances & total labor

variances.

• Should discontinue usage of cheaper raw material.

• Material price & Labor rate less controllable, since they are usually

determined by external market forces.

oMaterial price (AP – SP = $0.30)

oLabor rate (AR – SR = $1)

• Need to revise standards for:

oMaterial standard quantity (AQused – SQ = 20,000 lbs)

oLabor standard hours (AH – SH = 2,000 hrs)

More significant differences

• Material quantity & Labor hour standards may have been set too

high, resulting in large variances.

Req 4

Dr Raw Materials $1,300,000*

Cr MPV (F) $78,000

Cr Accounts Payable $1,222,000**

Calculations:

*AQpurchased x SP

= 260,000 lbs x $5.00/lbs

= $1,300,000

**AQpurchased x AP

= 260,000 lbs x $4.70/lbs

= $1,222,000

Dr Work-in-process $1,500,000*

Dr MQV (U) $100,000

Cr Raw Materials $1,600,000**

Calculations:

*SQ x SP

= 300,000 lbs x $5.00/lbs

= $1,500,000

** AQused x SP

= 320,000 lbs x $5.00/lbs

= $1,600,000

Dr Work-in-process $960,000*

Dr LRV (U) $82,000

Dr LEV (U) $24,000

Cr Wages payable $1,066,000**

Calculations:

*SR x SH = $12/hr x 80,000hrs = $960,000

**AR x AH = $13/hr x 82,000hrs = $1,066,000

Dr Work-in-process $600,000

Cr Manufacturing Overhead $600,000*

Calculations:

Standard overhead rates = $12 / 1.6hrs = $7.50/hr

* Manufacturing overhead cost = $7.50/hr x 1.6 hrs x 50,000 units = $600,000

i. By developing unit price and quantity standards, an overall variance can be decomposed into price variance and a usage or efficiency variance.

This allows Edward Golding to know if the variance is favourable or unfavourable.

By the standard cost system, Edward will know whether the variance is attributed to discrepancies between planned usage and actual usage or both. Hence, it provides specific signals regarding the need for corrective action and where the action should be focused. As a result, it improves the operational control of Crunchy Chips.

Question 6 Part 1

ii. Standard cost system helps to have greater capacity for control of product costing. It provides readily available unit cost information that can be used for pricing decisions at any time throughout the period because actual costs (direct or indirect) do not need to be known.

Question 6 Part 1

The engineering study may reveal the ideal standards (peak/maximum output) which can only be achieved if everything operates perfectly. Hence, the President should set currently attainable standards which can only be achieved under efficient operating conditions.

This implies that the standards should be set at hours that are 10% higher than the ideal standards revealed by the engineering study.

Question 6 Part 2

2. Discuss the President’s concern about using the result of the engineering study to set the labour

standards. What standards would you recommend?

Manufacturing Processes

Original Standard Hours

New Standard Hours*

Raw Potato Inspection 3200 3520

Finished Chip Inspections

12000 13200

Frying Monitor 6300 6930

Boxing 16600 18260

Machine Operators 6300 6930

*New Standard Hours = Original Standard Hours X (100 + 10)%

Question 6 Part 3

3. Develop a standard cost sheet for Crunchy Chips’ plain potato chips

Direct MaterialsDirectMaterials

Cost / $ Amount Used Per Bag of Chips

Cost Used Per Bag of Chips/ $

Potatoes 0.245 / pound (4 X 4.25 X 0.0625) = 1.0625 pound

(0.245 X 1.0625) = 0.260

Cooking Oil 0.04 / ounce 3.3 ounce (0.04 X 3.3) = 0.132

Bags 0.11 / bag 1 bag 0.11

Boxes 0.52 / box 1/15 box (0.52 X 1/150) = 0.0347

Total Cost Per Bag

0.537*

* Do not forget about the potato pieces that are sold to the animal feed producers

Direct MaterialsAmount of Potatoes used to produce one bag of chips

= 4.25 X 4

= 17 ounce

Amount of Potatoes used in one bag of chips = 16.3 ounce

Hence, rejected amount of potatoes per bag of chips

= 17 -16.3

= 0.7 ounce

Cash received for selling off rejected amount of potatoes per bag

= 0.7 X 0.0625 X $0.16

= $0.007

Direct MaterialsDirectMaterials

Cost / $ Amount Used Per Bag of Chips

Cost Used Per Bag of Chips/ $

Potatoes 0.245 / pound

(4 X 4.25 X 0.0625) = 1.0625 pound

(0.245 X 1.0625) = 0.260

Cooking Oil 0.04 / ounce 3.3 ounce (0.04 X 3.3) = 0.132

Bags 0.11 / bag 1 bag 0.11

Boxes 0.52 / box 1/15 box (0.52 X 1/150) = 0.0347

Rejected amount of Potato Pieces

0.16 / pound

(0.0625 X 0.7 ) = 0.04375

0.007

Total Cost Per Bag

0.530

-=

Direct Labour

Direct Labour Hours Needed Cost per hour / $

Cost / $

Raw Potato Inspection

3520 15.20 53,504

Finished Chip Inspection

13200 10.30 135,960

Frying Monitor 6930 14.00 97,020

Boxing 18260 11.00 200,860

Machine Operators 6930 13.00 90,090

Total Cost 577,434

Direct Labour Cost per bag of chips = $577,434 / (8.8 X 106)= $0.0656

OVERHEADVariable Overhead

= (116/100) X $577,434

= $669,823.44

Fixed Overhead = $1,135,216

Total Overhead Cost = Variable OH + Fixed OH

= $669,823.44 + $1,135,216

= $1,805,039.44

Overhead Cost per bag of chips

= $1,805,039.44 / (8.8 X 106)

= $0.205

Standard Unit CostDM per bag = $0.530

DL per bag = $0.0656

Overhead per bag = $0.205

Standard Unit Cost

= DM + DL + OH

= $0.530 + $0.0656 + $0.205

= $0.80

Standard Quantity (SP)

= 8.8 X 106 X 17 X 0.0625

= 9.35 X 106 pounds

Material Usage Variance (MUV) = (AP – SQ)SP

= (9.5 X 106 – 9.35 X 106) (0.245)

= (150000)(0.245)

= $36750 U

4. Suppose that the level of production was 8.8 million bags of potato chips for the year as planned. If 9.5 million pounds of potatoes were used, compute the material usage variance

for potatoes

Qn 7. Supplement QuestionReq 1

• “Rigged” standard costs by setting standards too low, so as to produce favorable variances

oOverstate favorable variances

oUnderstate COGS

oOverstate net operating income

Req 2

• Should not be permitted to continue this practice

• Violates ethical standards of competence, integrity & credibility.

oFinancial reporting regulations forbid carrying variances forward from one year to the next

oWill falsely inflate profits of company. Lack of accountability towards investors

Req 3

• Standards rigged by Preston Lansing, Vice President of Home

Security Division.

• Gary Farber, assistant controller, said that Lansing’s practice

was common knowledge

• President of Merced Home Products aware and claims that the

board of directors was aware too.

Report to the board of directors in case the president was

lying.

Initiate a confidential discussion with an IMA Ethics Counselor

or other impartial advisor to obtain a better understanding of

possible courses of actions

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ACC2002 tutorial 6