Chapter 10

BUS 227 Questions and Answers

1. Cloverleaf, Inc. produces glass shelves that are used in furniture. Each shelf requires 3.6 pounds of
raw material at a cost of $2 per pound. Unfortunately, given the nature of the manufacturing
process, one out of every five shelves is chipped, scratched, or broken at the beginning of production
and has to be scrapped.
On average, 20 good shelves are completed during each hour. Laborers who work on these units are
paid $15 per hour.
Required:
A. Distinguish between perfection standards and practical standards.
B. Who within an organization would be in the best position to assist in setting the:
1. direct-material price standard?
2. direct-material quantity standard?
3. direct-labor efficiency standard?
C. Calculate a practical direct-material and direct-labor standard for each good shelf produced.

A. Perfection standards, or those achieved under nearly perfect operating conditions, assume peak
efficiency at minimum cost. Employees are pushed to reach these ideal measures, often becoming
discouraged. Practical standards, on the other hand, are high but attainable, thus presenting a
realistic target for personnel. Such standards incorporate allowances for normal downtime and other
typical inefficiencies.
B. 1. The purchasing manager.
2. The production supervisor as well as production engineers.
3. The production supervisor as well as industrial engineers.

C.
2. Vanderhaus Corporation manufactures a variety of liquid lawn fertilizers, including a very popular
product called Lush 'N Green. Data about Lush 'N Green and Proctol, a major ingredient, follow.
Expected operations:
· Proctol is purchased in 55-gallon drums at a cost of $65 per drum. A 2% cash discount is offered by
Proctol's manufacturer for prompt payment of invoices, and Vanderhaus takes advantage of all
discounts offered.
· Vanderhaus normally purchases 200 drums of Proctol at a time, paying shipping fees of $2,660 per
shipment.
· Each gallon of Lush 'N Green requires three quarts of Proctol; however, because of evaporation and
spills, Vanderhaus loses 4% of all Proctol that enters production. (Recall that there are four quarts in
a gallon.)
Actual operations:
· For the period just ended, Vanderhaus purchased 1,500 drums of Proctol at a total cost of
$118,100, which reflects discounts and shipping. There was no beginning inventory, but an end-of-
period inventory revealed that 30 drums were still on hand.
· Manufacturing activity output totaled 104,000 gallons of Lush 'N Green.
Assume that the company computes variances at the earliest point in time.
Required:
A. Compute the standard purchase price for one gallon of Proctol.
B. Compute the standard quantity of Proctol to be used in producing one gallon of Lush 'N Green.
Express your answer in quarts.
C. Compute the direct-material price variance for Proctol.
D. How much Proctol was used in manufacturing activity and how much should have been used?
Express your answer in quarts.
 A.

B. Three quarts of Proctol are required for each gallon of Lush 'N Green; however, 4% of Proctol input
is lost through evaporation and spills. Thus, the standard input is 3.125 quarts (3 0.96).

C.

D. Actual usage: (1,500 - 30) = 1,470 drums; 1,470 drums  55 gallons  4 quarts = 323,400 quarts
Standard usage: 104,000 gallons  3.125 = 325,000 quarts

3. Quicksilver Company has set the following standards for one unit of product:
Direct material
Quantity: 6.2 pounds per unit
Price per pound: $11 per pound
Direct labor
Quantity: 6 hours per unit
Rate per hour: $23 per hour
Actual costs incurred in the production of 2,800 units were as follows:
Direct material: $194,350 ($11.50 per pound)
Direct labor: $393,750 ($22.50 per hour)
All materials purchased were consumed during the period.
Required:
Calculate the direct-material price and quantity variances, and the direct-labor rate and efficiency
variances. Indicate whether each variance is favorable or unfavorable.
4. Upstart, Inc. manufactures a product that has the following standard costs:

The following information pertains to July:

Direct material purchased: 42,500 yards at $2.78 per yard, or $118,150
Direct material used: 36,000 yards
Direct labor: 7,500 hours at $18.30 per hour, or $137,250
Actual completed production: 1,050 units
Assume that the company computes variances at the earliest point in time.
Required:
Calculate the direct-material price and quantity variances, and the direct-labor rate and efficiency
variances. Indicate whether each variance is favorable or unfavorable.
5. Chen Enterprises purchased 67,000 pounds (cost = $616,400) of direct material to be used in the
manufacture of the company's only product. According the production specifications, each
completed unit requires four pounds of direct material at a standard cost of $9 per pound. Direct
materials consumed by the end of the period totaled 65,500 pounds in the manufacture of 16,050
finished units.
An examination of Chen's payroll records revealed that the company worked 42,000 labor hours (cost
= $621,600) during the period, and specifications called for each completed unit requiring 2.6 hours
of labor at a standard cost of $15 per hour.
Assume that the company computes variances at the earliest point in time.
Required:
Calculate the direct-material price and quantity variances, and the direct-labor rate and efficiency
variances. Indicate whether each variance is favorable or unfavorable.
6. DiAngelo Products uses a standard costing system to assist in the evaluation of operations. The
company has had considerable employee difficulties in recent months, so much so that management
has hired a new production supervisor (Joe Simms). Simms has been on the job for six months and
has seemingly brought order to an otherwise chaotic situation.
The vice-president of manufacturing recently commented that "¼ Simms has really done the trick.
Joe's team-building/morale-boosting exercises have truly brought things under control." The vice-
president's comments were based on both a plant tour, where he observed a contented work force,
and review of a performance report that showed a total labor variance of $14,000F. This variance is
truly outstanding, given that it is less than 2% of the company's budgeted labor cost. Additional data
follow.
· Total completed production amounted to 20,000 units.
· A review of the firm's standard cost records found that each completed unit requires 2.75 hours of
labor at $14 per hour. DiAngelo's production actually required 42,000 labor hours at a total cost of
$756,000.
Required:
A. As judged by the information contained in the performance report, should the vice-president be
concerned about the company's labor variances? Why?
B. Calculate DiAngelo's direct-labor variances.
C. On the basis of your answers to requirement "B," should DiAngelo be concerned about its labor
situation? Why?
D. Briefly analyze and explain the direct-labor variances.
A. No. The variance is favorable and small, being less than 2% of the budgeted amount.
B.

C. Yes. Although the combined variance of $14,000F is small, a more detailed analysis reveals the
presence of sizable, offsetting variances. Both the rate variance and the efficiency variance are in
excess of 21% of budgeted amounts ($770,000). A variance investigation should be undertaken if
benefits of the investigation exceed the costs. Put simply, things are not going as smoothly as the
vice-president believes.
D. The favorable efficiency variance means that the company is producing units by consuming fewer
hours than expected. This may be the result of the team-building/morale-boosting exercises, as a
contented, well-trained work force tends to be efficient in nature. However, another totally plausible
explanation could be that DiAngelo is paying premium wages (as indicated by the unfavorable rate
variance) to hire laborers with above-average skill levels.
7. A manufacturing company is expected to complete a task in 45 minutes. During a recent accounting
period, 3,200 completed units were produced, resulting in the following labor variances:
Labor rate variance: $520 favorable
Labor efficiency variance: $2,800 unfavorable
The standard labor rate is $14 per hour.
Required:
Calculate (1) the standard hours allowed for the work performed, (2) the actual hours worked, and
(3) the actual wage rate.

1. Standard hours allowed: 2,400

2. Actual hours worked: 2,600
3. Actual wage rate: $13.80
8. Halo Enterprises recently experienced a fire, forcing the company to use incomplete information to
analyze operations. Consider the following data and assume that all materials purchased during the
period were used in production:
Direct materials:
Standard price per pound: $9
Actual price per pound: $8
Price variance: $20,000F
Total of direct-material variances: $2,000F
Direct labor:
Actual hours worked: 40,000
Actual rate per hour: $15
Efficiency variance: $28,000F
Total of direct-labor variances: $12,000U
Halo completed 12,000 units.
Required:
Determine the following: (1) actual materials used, (2) direct-material quantity variance, (3) direct-
labor rate variance, (4) standard labor rate per hour, and (5) standard labor time per finished unit.

1. Actual materials used: 20,000 pounds

2. Direct-material quantity variance: $18,000U
3. Direct-labor rate variance: $40,000U
4. Standard labor rate per hour: $14
5. Standard labor time per finished unit: 3.5 hours (42,000 hours  12,000 units)
9. Marcie Simone is the long-time catering director of Naples-on-the-Beach, a hotel noted throughout
the industry for quality, profitability, and cost control. The hotel recently catered a steak dinner for a
2,000-person convention. Strict standards were in place for the dinner: 0.75 pounds of beef per plate
at $9 per pound. A review of the accounting records shortly after the convention showed that 1,680
pounds of beef were purchased and consumed, costing the hotel $13,440.
Required:
A. Calculate the cost of beef budgeted for the dinner and the total beef variance (i.e., the difference
between budgeted and actual cost). Should this variance be of concern to the hotel? Why?
B. Assess the job that Simone did in "managing" the beef purchase by performing a variance analysis.
Comment on your findings.
C. Assume that the hotel received a number of complaints shortly after the dinner concluded. Explain
a possible reason behind the conventioneers' unhappiness.

A.

The variance should not be a concern to the hotel because it is both favorable and less than 1% of
the budget.
B. Simone did a marginal job in managing the purchase. Although the total variance is only $60F, it is
composed of two sizable, offsetting amounts. She saved the hotel a considerable amount of money
in the acquisition but much of the savings were consumed in excess usage.

C. It is possible that Simone bought a marginal product. The price variance and quantity variance may
indicate that she purchased cheap beef, which turned out to be of poor quality, resulting in greater
waste (trimming) than normal by the kitchen staff. The beef's overall quality (perhaps, toughness)
may be the underlying reason behind the conventioneers' complaints.
10. Bob's Burgers and Such, a national fast-food chain, has experienced a number of problems in the past
few years, and management is considering the adoption of a balanced scorecard as part of a
turnaround effort.
Required:
A. Briefly explain the concept of a balanced scorecard. What general factors are included in a typical
balanced scorecard?
B. Independent of your answer in requirement "A," assume that Bob's is very concerned about
customer satisfaction. List four different (and specific) customer-satisfaction measures that may be
appropriate for the firm (and for other fast-food providers).
C. Independent of requirement "A," assume that Bob's wants to return to former levels of
profitability. List several financial measures that would allow management to assess success or failure
with respect to the following goals: (1) pay creditors on a timely basis, (2) keep shareholders happy,
and (3) improve profitability over time at stores that have been open at least one year.

A. A balanced scorecard is a tool that incorporates a variety of different measures, both financial and
non-financial, in the performance-evaluation process. The measures are critical to a firm's success
and are tied to organizational strategy. The goal of a balanced scorecard is to allow improvement in a
number of broad-reaching areas rather than permit a manager to improve only a small facet of the
business at the expense of others. Typical factors are often divided into four categories: financial,
customer, learning and growth, and internal operations.
B. Answers will vary but often include market share, queue time, results of a customer quality survey,
number of customer complaints, number of order errors, and number of repeat customers.
C. Pay creditors on a timely basis: stipulated end-of-period cash balance and current ratio
Shareholder satisfaction: growth in earnings per share, increases in per-share market price of Bob's
stock, price-earnings ratio
Profitability improvement: gross margin growth rates, earnings growth rates

11. Howard Company has established the following standards:

Direct materials: 2.0 pounds at $4.10
Direct labor: 1.5 hours at $7 per hour
Additional information was extracted from the accounting records:
Actual production: 32,000 completed units
Direct materials purchased: 70,000 pounds at $3.82, or $267,400
Direct materials consumed: 65,000 pounds
Actual labor incurred: 51,000 hours at $6.30, or $321,300
Direct-labor rate variance: $35,700 favorable
Direct-labor efficiency variance: $21,000 unfavorable
Assume that the company computes variances at the earliest point in time.
Required:
Prepare journal entries to record the:
A. Purchase of direct materials.
B. Usage of direct materials.
C. Incurrence of direct labor costs.
 In "C" the Direct-Labor Efficiency Variance should be 21,000 and the Direct-Labor Rate Variance
should be 35,700.

12. Standard costs are said to be useful in performance evaluation. Assume that the standard direct
materials cost per unit of finished product is $6 (three pounds at $2 per pound).
Required:
A. Explain how such a standard can be used to evaluate performance.
B. Why is the degree of controllability important when utilizing standard costs to evaluate
performance?

A. The standard provides a measure of how much material should be used for a unit of product and
how much each pound of raw material should cost. This standard serves as a basis for evaluating
performance by allowing a comparison to be made of standard cost/usage against actual cost/usage.
B. The degree of controllability is important because not all factors are subject to the same amount
of control. For example, the market for the raw material may be a seller's market in which case
management would have very little control over the material price variance. On the other hand,
management generally has more control over the usage of materials because of the ability to
influence the amount of scrap and rejected units produced. In short, a manager should be held
accountable only for those items under his/her control.