Nobles Finman6e SMQ CH23

Chapter 23
Flexible Budgets and Standard Cost Systems

Review Questions
1. What is a variance?
A variance is the difference between an actual amount and the budgeted amount.
2. Explain the difference between a favorable and an unfavorable variance.
A variance is favorable if it increases operating income. For example, if actual revenue is greater
than budgeted revenue or if actual expense is less than budgeted expense, then the variance is
favorable. If the variance decreases operating income, the variance is unfavorable. For example, if
actual revenue is less than budgeted revenue or if actual expense is greater than budgeted expense,
the variance is unfavorable.
3. What is a static budget performance report?
A static budget is a budget prepared for only one level of sales volume. A static budget performance
report compares actual results to the expected results in the static budget and reports the differences
(static budget variances).
4. How do flexible budgets differ from static budgets?
A flexible budget is a budget prepared for various levels of sales volume within a relevant range. A
static budget is prepared for only one level of sales volume—the expected number of units sold—
and it doesn’t change after it is developed.
5. How is a flexible budget used?
Because a flexible budget is prepared for various levels of sales volume within a relevant range, it
provides the basis for preparing the flexible budget performance report and understanding the two
components of the overall static budget variance (a static budget is prepared for only one level of
sales volume, and a static budget performance report shows only the overall static budget variance).
6. What are the two components of the static budget variance? How are they calculated?
The overall static budget variance is the difference between actual operating income, based on the
number of units actually sold, and the expected operating income in the static budget, based on the
number of units expected to be sold. The two components of the overall static budget variance are
the flexible budget variance and the sales volume variance.
The flexible budget variance is the difference between actual operating income for the number of
units actually sold and expected operating income in the flexible budget for the number of units
actually sold. The individual flexible budget variances arise when the actual sales price per unit,
variable cost per unit, and/or total fixed costs differ from those expected for the number of units
actually sold.
© 2018 Pearson Education, Inc. 23-1
The sales volume variance is the difference between expected operating income in the flexible
budget for the number of units actually sold and expected operating income in the static budget
based on the number of units expected to be sold. The sales volume variance and the individual
volume variances for sales revenue, variable costs, and contribution margin arise only when the
number of units actually sold differs from the number of units expected in the static budget.
7. What is a flexible budget performance report?
A flexible budget performance report compares actual results to the expected results in the flexible
budget for the number of units actually sold and compares the expected results in the flexible budget
for the number of units actually sold to the expected results in the static budget based on the number
of units expected to be sold. By so doing, a flexible budget performance report provides information
for managers to understand the underlying causes of variances: (1) flexible budget variances that
arise when the actual sales price per unit, variable cost per unit, and/or total fixed costs differ from
those expected for the number of units actually sold, and (2) sales volume variances that arise only
when the number of units actually sold differs from the number of units expected in the static
budget.
8. What is a standard cost system?
A standard cost system is an accounting system that uses standards for product costs—direct
materials, direct labor, and manufacturing overhead. (A standard is a price, cost, or quantity that is
expected under normal conditions.)
9. Explain the difference between a cost standard and an efficiency standard. Give an example of each.
Each input (direct materials, direct labor, and manufacturing overhead) that goes into making a
product has both a cost standard and an efficiency standard. A cost standard is the expected cost of
each input and an efficiency standard is the expected quantity of each input to be put into the
manufacturing process. For example, the cost standard for direct materials starts with the expected
base purchase cost of each unit of materials then factors in expected purchase discounts, freight-in,
and receiving costs. The efficiency standard for direct materials is the quantity of direct materials
that should be used in the manufacturing process if employees are working efficiently without
wasting materials.
10. Give the general formulas for determining cost and efficiency variances.
The cost variance is the difference in costs (actual cost per unit minus standard cost per unit) of an
input, multiplied by the actual quantity used of the input. The efficiency variance is the difference in
quantities (actual quantity of input used minus standard quantity of input allowed for the actual
number of units produced), multiplied by the standard cost per unit of the input.
11. How does the static budget affect cost and efficiency variances?
A static budget is a budget prepared for only one level of sales volume—the number of units
expected to be sold—and it doesn’t change after it is developed. The overall static budget variance
shown on a static budget performance report is the difference between actual operating income,
based on the number of units actually sold, and the expected operating income in the static budget,
based on the number of units expected to be sold. The report does not provide information about the
two components of the overall static budget variance—the flexible budget variance and the sales
volume variance. Cost and efficiency variances are components of flexible budget variances and are
based on differences between actual results for the number of units actually sold and expected results
for the number of units actually sold. Thus a static budget doesn’t provide the information required
to understand cost and efficiency variances.
12. List the direct materials variances, and briefly describe each.
The direct materials variances are the direct materials cost variance and the direct materials
efficiency variance.
The direct materials cost variance measures how well the company keeps the actual direct materials
cost per unit within standard. A direct materials cost variance is favorable (unfavorable) if the actual
direct materials cost per unit is less (greater) than the standard direct materials cost per unit.
The direct materials efficiency variance measures how well the company keeps the actual usage of
direct materials within standard. A direct materials efficiency variance is favorable (unfavorable) if
the total quantity of direct materials actually used is less (greater) than the total standard allowed to
manufacture the actual total quantity of units.
13. List the direct labor variances, and briefly describe each.
The direct labor variances are the direct labor cost variance and the direct labor efficiency variance.
The direct labor cost variance measures how well the company keeps direct labor cost per hour
within standard. A direct labor cost variance is favorable (unfavorable) if the actual direct labor cost
per hour is less (greater) than the standard direct labor cost per hour.
The direct labor efficiency variance measures how well the company keeps the actual usage of direct
labor hours within standard. A direct labor efficiency variance is favorable (unfavorable) if the total
number of direct labor hours actually used is less (greater) than the total standard allowed to
manufacture the actual total quantity of units.
14. List the variable overhead variances, and briefly describe each.
The variable overhead variances are the variable overhead cost variance and the variable overhead
efficiency variance.
The variable overhead cost variance measures how well the company keeps variable overhead cost
per unit within standard. A variable overhead cost variance is favorable (unfavorable) if the actual
variable cost per unit is less (greater) than the standard variable overhead cost per unit.
The variable overhead efficiency variance measures how well the company keeps actual usage of the
allocation base for variable overhead within standard. A variable overhead efficiency variance is
favorable (unfavorable) if the total quantity of the allocation base actually used is less (greater) than
the total standard allowed to manufacture the actual total quantity of units.

15. List the fixed overhead variances, and briefly describe each.
The fixed overhead variances are the fixed overhead cost variance and the fixed overhead volume
variance.
The fixed overhead cost variance measures how well the company keeps total fixed overhead cost
within standards. A fixed overhead cost variance is favorable (unfavorable) if the actual total fixed
overhead cost is less (greater) than the budgeted total fixed overhead cost.
The fixed overhead volume variance is not a cost variance. It is a volume variance and explains why
fixed overhead is overallocated or underallocated. A fixed overhead volume variance is favorable
(unfavorable) if the number of units actually manufactured is greater (less) than the number of units
budgeted. A favorable (unfavorable) fixed overhead volume variance indicates that total fixed
overhead cost allocated to units manufactured was greater (less) than the total budgeted fixed
overhead cost.
16. How is the fixed overhead volume variance different from the other variances?
The fixed overhead volume variance is not a flexible budget variance (whereas the fixed overhead
cost variance and the cost and efficiency variances for variable manufacturing inputs are). As a
volume variance, rather than a cost variance, the fixed overhead volume variance shows how
allocating fixed costs on a per unit basis causes a difference between budgeted total fixed overhead
and allocated total fixed overhead. The allocation results in the overallocation or underallocation of
fixed overhead when actual volume is not equal to budgeted volume. A favorable (unfavorable)
fixed overhead volume variance indicates that total fixed overhead cost was overallocated
(underallocated) to units manufactured; a favorable (unfavorable) fixed overhead volume variance
indicates that total fixed overhead cost allocated to units manufactured was greater (less) than the
total budgeted fixed overhead cost.
17. What is management by exception?
Management by exception is when managers concentrate on results that are outside the accepted
parameters, focusing on the exceptions and investigating variances they believe are significant.
18. List the eight product variances and the manager most likely responsible for each.
Variance Manager Responsible

Direct materials cost variance Purchasing
Direct materials efficiency variance Production
Direct labor cost variance Human Resources
Direct labor efficiency variance Production
Variable overhead cost variance Production
Variable overhead efficiency variance Production
Fixed overhead cost variance Production
Fixed overhead volume variance Production

19. Briefly describe how journal entries differ in a standard cost system.
Journal entries differ in a standard cost system in the following ways:
• Raw Materials Inventory: Actual quantity at standard cost.

• Work-in-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold: Standard
quantity of inputs allowed for actual outputs, at standard cost of inputs.
• Favorable variances are credited because they increase operating income.
• Unfavorable variances are debited because they decrease operating income.
• The manufacturing overhead variances will account for the difference between the actual costs
debited to Manufacturing Overhead and the standard cost allocated by a credit to Manufacturing
Overhead.
• A standard cost income statement highlights the variances for management.
20. What is a standard cost income statement?
A standard cost income statement highlights the manufacturing variances for management. It doesn’t
alter actual operating income, it simply emphasizes the variances from standard. The statement starts
with sales revenue at standard then the favorable (unfavorable) sales revenue variance is added
(subtracted) to arrive at sales revenue at actual. Next, cost of goods sold at standard is reported and
the eight unfavorable (favorable) manufacturing variances are added (subtracted) to arrive at cost of
goods sold at actual. The difference between sales revenue at actual and cost of goods sold at actual
is gross profit at actual, from which selling and administrative expenses at actual are subtracted to
arrive at operating income at actual.

Short Exercises
S23-1 Matching terms
Learning Objective 1
Match each term to the correct definition.

Terms Definitions
a. Flexible budget 1. A summarized budget for several levels of
b. Flexible budget volume that separates variable costs from fixed
variance costs.
c. Sales volume 2. A budget prepared for only one level of sales.

variance 3. The difference between an actual amount and the
d. Static budget budgeted amount.
e. Variance 4. The difference arising because the company

actually earned more or less revenue, or incurred
more or less cost, than expected for the actual
level of output.
5. The difference arising only because the number of
units actually sold differs from the static budget
units.
SOLUTION
1. a.
2. d.
3. e.
4. b.
5. c.
S23-2 Preparing flexible budgets

Moje, Inc. manufactures travel locks. The budgeted selling price is $19 per lock, the variable cost is $9
per lock, and budgeted fixed costs are $13,000 per month. Prepare a flexible budget for output levels of
4,000 locks and 11,000 locks for the month ended April 30, 2018.

S23-2, cont.
SOLUTION
MOJE, INC.
Flexible Budget
For the Month Ended April 30, 2018
Budget
Amounts
per Unit
Units 4,000 11,000
Sales Revenue $ 19 $ 76,000 $ 209,000
Variable Costs 9 36,000 99,000
Contribution Margin 40,000 110,000
Fixed Costs 13,000 13,000
Operating Income $ 27,000 $ 97,000
S23-3 Calculating flexible budget variances

Complete the flexible budget variance analysis by filling in the blanks in the partial flexible budget
performance report for 9,000 travel locks for Grant, Inc.

S23-3, cont.
SOLUTION
GRANT, INC.
Flexible Budget Performance Report (partial)
For the Month Ended April 30, 2018
Actual Flexible Budget Flexible

Results Variance Budget
Units 9,000 0 9,000
Sales Revenue $ 126,000 $ 18,000 F $ 108,000
Variable Costs 52,300 2,000 U 50,300
Contribution Margin 73,700 16,000 F 57,700
Fixed Costs 16,100 1,200 U 14,900
Operating Income $ 57,600 $ 14,800 F $ 42,800
S23-4 Matching terms

Match each term to the correct definition.

Terms Definitions
a. Benchmarking 1. Measures whether the quantity of materials or
b. Efficiency labor used to make the actual number of outputs
variance is within the standard allowed for the number of
outputs.
c. Cost variance
2. Uses standards based on best practice.
d. Standard
3. Measures how well the business keeps unit costs
of materials and labor inputs within standards.
4. A price, cost, or quantity that is expected under
normal conditions.
SOLUTION
1. b.
2. a.
3. c.
4. d.

S23-5 Identifying the benefits of standard costs
Setting standards for a product may involve many employees of the company. Identify some of the
employees who may be involved in setting the standard costs, and describe what their role might be in
setting those standards.
SOLUTION
The purchasing manager provides information about purchase costs, discounts, delivery requirements,
and credit policies (for direct materials cost standards).
The human resources manager provides information about wage rates based on experience requirements,
payroll taxes, and fringe benefits (for direct labor cost standards).
The production manager and engineers provide information about (1) product specifications, spoilage,
and production scheduling (for direct materials efficiency standards) and (2) time requirements for
production levels and employee experience needed (for direct labor efficiency standards).
The production manager provides information about the nature and amount of resources needed to
support activities, such as moving materials, maintaining equipment, and product inspection (for
manufacturing overhead standards).

S23-6 Calculating materials variances
Martin, Inc. is a manufacturer of lead crystal glasses. The standard direct materials quantity is 1.0 pound
per glass at a cost of $0.50 per pound. The actual result for one month’s production of 6,500 glasses was
1.2 pounds per glass, at a cost of $0.30 per pound. Calculate the direct materials cost variance and the
direct materials efficiency variance.
SOLUTION
Direct Materials Cost Variance = (AC ̶ SC) × AQ

= ($0.30 per pound – $0.50 per pound) × 7,800 pounds(a)
= $1,560 F
Direct Materials Efficiency Variance = (AQ ̶ SQ) × SC

= (7,800 pounds(a) – 6,500 pounds(b)) × $0.50 per pound
= $650U
(a)
1.2 pounds per glass × 6,500 glasses = 7,800 actual pounds
(b)
1.0 pound per glass × 6,500 glasses = 6,500 standard pounds
S23-7 Calculating labor variances

Martin, Inc. manufactures lead crystal glasses. The standard direct labor time is 0.5 hours per glass, at a
cost of $18 per hour. The actual results for one month’s production of 6,500 glasses were 0.2 hours per
glass, at a cost of $11 per hour. Calculate the direct labor cost variance and the direct labor efficiency
variance.
Note: Short Exercises S23-6 and S23-7 must be completed before attempting Short Exercise S23-8.

S23-7, cont.
SOLUTION
Direct Labor Cost Variance = (AC ̶ SC) × AQ

= ($11 per DLHr – $18 per DLHr) × 1,300 DLHr(a)
= $9,100 F
Direct Labor Efficiency Variance = (AQ ̶ SQ) × SC

= (1,300 DLHr(a) – 3,250 DLHr(b)) × $18 per DLHr
= $35,100 F
(a)
0.2 DLHr per glass × 6,500 glasses = 1,300 actual DLHr
(b)
0.5 DLHr per glass × 6,500 glasses = 3,250 standard DLHr
S23-8 Interpreting material and labor variances

Refer to your results from Short Exercises S23-6 and S23-7.

Requirements
1. For each variance, who in Martin’s organization is most likely responsible?
2. Interpret the direct materials and direct labor variances for Martin’s management.
SOLUTION
Requirement 1
Variance Manager Responsible

Direct materials cost variance Purchasing
Direct materials efficiency variance Production
Direct labor cost variance Human Resources
Direct labor efficiency variance Production
Requirement 2
The $1,560 favorable direct materials cost variance calculated in S23-6 indicates that the actual direct
materials cost per pound was kept within standard. The $0.30 actual cost per pound was less than the
$0.50 standard cost per pound.
The $650 unfavorable direct materials efficiency variance calculated in S23-6 indicates that actual usage
of direct materials was not kept within standard. The 7,800 total pounds actually used was greater than
the 6,500 total pounds allowed to manufacture 6,500 glasses.
S23-8, cont.
Requirement 2, cont.
The $9,100 favorable direct labor cost variance calculated in S23-7 indicates that the actual direct labor
cost per hour was kept within standard. The $11.00 actual cost per direct labor hour was less than the
$18.00 standard cost per direct labor hour.
The $35,100 favorable direct labor efficiency variance calculated in S23-7 indicates that actual usage of
direct labor hours was kept within standard. The 1,300 total direct labor hours actually used were less
than the 3,250 total direct labor hours allowed to manufacture 6,500 glasses.
S23-9 Computing standard overhead allocation rates

The following information relates to Morgan, Inc.’s overhead costs for the month:
Static budget variable overhead $7,800
Static budget fixed overhead $3,900
Static budget direct labor hours 1,300 hours
Static budget number of units 5,200 units
Morgan allocates manufacturing overhead to production based on standard direct labor hours. Compute
the standard variable overhead allocation rate and the standard fixed overhead allocation rate.
Note: Short Exercise S23-9 must be completed before attempting Short Exercise S23-10.
SOLUTION
Standard VOH Budgeted VOH

=
allocation rate Budgeted allocation base
$7,800
=
1,300 DLHr
= $6.00 per DLHr
Standard FOH Budgeted FOH

=
$3,900
=
1,300 DLHr
= $3.00 per DLHr

S23-10 Computing overhead variances
Refer to the Morgan, Inc. data in Short Exercise S23-9. Last month, Morgan reported the following
actual results: actual variable overhead, $10,800; actual fixed overhead, $2,770; actual production of
7,000 units at 0.20 direct labor hours per unit. The standard direct labor time is 0.25 direct labor hours
per unit (1,300 static direct labor hours / 5,200 static units).
Requirements
1. Compute the overhead variances for the month: variable overhead cost variance, variable overhead
efficiency variance, fixed overhead cost variance, and fixed overhead volume variance.
2. Explain why the variances are favorable or unfavorable.
SOLUTION
Requirement 1
VOH Cost Variance = Actual VOH − (SC × AQ)

= $10,800 − ($6.00 per DLHr(a) × 1,400 DLHr(b))
= $2,400 U
VOH Efficiency Variance = (AQ ̶ SQ) × SC

= (1,400 DLHr(b) – 1,750 DLHr(c)) × $6.00 per DLHr(a)
= $2,100 F
FOH Cost Variance = Actual FOH ̶ Budgeted FOH

= $2,770 ̶ $3,900
= $1,130 F
FOH Volume Variance = Budgeted FOH ̶ Allocated FOH

= $3,900 ̶ $5,250(d)
= $1,350 F
(a)
Calculated in S23-9
(b)
7,000 units produced × 0.2 direct labor hours per unit = 1,400 DLHr
(c)
7,000 units produced × 0.25 direct labor hours per unit = 1,750 DLHr
(d)
$3.00 per DLHr × 1,750 DLHr (c) = $5,250

S23-10 (continued)
Requirement 2
The $2,400 unfavorable variable overhead cost variance indicates that actual variable overhead cost per
direct labor hour was not kept within standard. The $7.71(a) actual cost per direct labor hour was more
than the $7.00 standard cost per direct labor hour (the standard variable overhead allocation rate per
direct labor hour).
The $2,100 favorable variable overhead efficiency variance indicates that actual usage of direct labor
hours was kept within standard. The 1,400 total direct labor hours actually used was less than the 1,750
total direct labor hours allowed to manufacture 7,000 units.
The $1,130 favorable fixed overhead cost variance indicates that actual total fixed cost was kept within
budget. The $2,770 actual total fixed overhead cost was less than the $3,900 budgeted total fixed
overhead cost.
The $1,350 favorable fixed overhead volume variance is not a cost variance; it is a volume variance and
explains why fixed overhead was overallocated. The variance is favorable because the company
manufactured more units (7,000) than budgeted (5,200). Therefore, total fixed overhead cost allocated to
glasses was $1,350 more than the total budgeted fixed overhead cost ($5,250 total fixed overhead cost
was allocated compared with the $3,900 total budgeted fixed overhead cost).
(a)
$10,800 / 1,400 DLHr = $7.71 rounded
S23-11 Understanding variance relationships

Complete the table below for the missing variances.

Total Flexible Budget Product Cost Variance
(a)
Total Direct Materials Variance Total Direct Labor Variance Total Manufacturing Overhead Variance
(b) (c) (d)
Direct Direct
Materials Materials Direct Direct Labor Total Fixed
Cost Efficiency Labor Cost Efficiency Total Variable Overhead Overhead
Variance Variance Variance Variance Variance Variance
$310 F $165 U $160 U $415 F (e) (f)
Variable Variable Fixed
Overhead Overhead Overhead
Cost Efficiency Cost
Variance Variance Variance
$525 U $575 F $50 F

S23-11, cont.
SOLUTION
Total Flexible Budget Product Cost Variance

$500 F (a)
Total Direct Total Direct Total Manufacturing
Materials Variance Labor Variance Overhead Variance
$145 F (b) $255 F (c) $100 F (d)
Direct Direct Direct Direct
Total Fixed
Materials Materials Labor Labor Total Variable
Overhead
Cost Efficiency Cost Efficiency Overhead Variance
Variance
Variance Variance Variance Variance
$310 F $165 U $160 U $415 F $50 F (e) $50 F (f)
Variable Variable Fixed
Overhead Overhead Overhead
Cost Efficiency Cost
Variance Variance Variance
$525 U $575 F $50 F
Calculations (in the order worked):

(b)
$310 F − $165 U = $145 F
(c)
$160 U − $415 F = $255 F
(e)
$525 U − $575 F = $50 F
(f)
$50 F: equal to the fixed overhead cost variance
(d)
$50 F + $50 F = $100 F
(a)
$145 F + $255 F + $100 F = $500 F

S23-12 Journalizing materials entries
The following direct materials variance analysis was performed for Moore.
Requirements
1. Record Moore’s direct materials journal entries. Assume purchases were made on account.
2. Explain what management will do with this variance information.
SOLUTION
Requirement 1
Date Accounts and Explanation Debit Credit

Raw Materials Inventory 3,160
Direct Materials Cost Variance 2,370
Accounts Payable 5,530
Purchased direct materials.
Work-in-Process Inventory 2,880

Direct Materials Efficiency Variance 280
Raw Materials Inventory 3,160
Used direct materials.
Requirement 2
It is not enough for Moore’s management to know that a variance occurred. They must know why it
occurred. Each of the direct materials variances will be investigated and information will be obtained
from the managers responsible for each. (The purchasing manager is responsible for the direct materials
cost variance, and the production manager is responsible for the direct materials efficiency variance).
The $2,370 unfavorable direct materials cost variance indicates that the actual direct materials cost per
pound was not kept within standard. The $0.70 actual cost per pound was greater than the $0.40 standard
cost per pound.
S23-12, cont.
The $280 unfavorable direct materials efficiency variance indicates that the actual usage of direct
materials was not kept within standard. The 7,900 total pounds actually used was greater than the 7,200
total pounds allowed to manufacture the actual quantity of units.
It should also be noted that there may be trade-offs between the direct materials cost variance and the
direct materials efficiency variance. Decisions made by the purchasing manager may affect the direct
materials efficiency variance for the production manager. Moore’s purchasing manager may have
purchased better quality (higher cost) direct materials, leading to the $2,370 unfavorable direct materials
cost variance. Purchasing better quality direct materials could be expected to lead to a favorable direct
materials efficiency variance, but this didn’t occur. Instead, the direct materials efficiency variance was
unfavorable.
Cautionary remarks: Variances raise questions that can help pinpoint issues. Variances should be used to
investigate and make changes, not punish employees. Good managers use variances as a guide for
investigation, rather than merely to assign blame, and investigate favorable as well as unfavorable
variances.
S23-13 Journalizing labor entries

The following direct labor variance analysis was performed for Morris.
Requirements
1. Record Morris’s direct labor journal entry (use Wages Payable).
2. Explain what management will do with this variance information.

S23-13, cont.
SOLUTION
Requirement 1

Direct Labor Efficiency Variance 6,300
Direct Labor Cost Variance 5,400
Wages Payable 19,800
Direct labor costs incurred.
Requirement 2
It is not enough for Morris’s management to know that a variance occurred. They must know why it
occurred. Each of the direct labor variances will be investigated and information will be obtained from
the managers responsible for each (the human resources manager is responsible for the direct labor cost
variance and the production manager is responsible for the direct labor efficiency variance).
The $5,400 favorable direct labor cost variance indicates that the actual direct labor cost per hour was
kept within standard. The $11.00 actual cost per direct labor hour was less than the $14.00 standard cost
per direct labor hour.
The $6,300 unfavorable direct labor efficiency variance indicates that the actual usage of direct labor
hours was not kept within standard. The 1,800 total direct labor hours actually used was greater than the
1,350 total direct labor hours allowed to manufacture the actual quantity of units.
Additionally, there may be trade-offs between the direct labor cost variance and the direct labor
efficiency variance. Decisions made by the human resources manager may affect the direct labor
efficiency variance for the production manager. Morris’s human resources manager may have hired less
skilled (lower paid) direct labor workers, leading to the $5,400 favorable direct labor cost variance.
Hiring less skilled direct labor workers would likely have contributed to the $6,300 unfavorable direct
labor efficiency variance.
It should be noted that the total direct labor variance was $900 unfavorable (the $5,400 favorable direct
labor cost variance minus the $6,300 unfavorable direct labor efficiency variance), indicating that the
savings from hiring less skilled direct labor workers did not outweigh the less efficient use of direct
labor in production.
variances.

S23-14 Preparing a standard cost income statement
Use the following information to prepare a standard cost income statement for Mitchell Company for
2018.
Cost of Goods Sold (at standard) $ 366,000 Direct Labor Efficiency Variance $ 19,500 F
Sales Revenue (at standard) 570,000 Variable Overhead Efficiency Variance 3,300 U
Direct Materials Cost Variance 7,200 U Fixed Overhead Volume Variance 12,500 F
Direct Materials Efficiency 2,700 U Selling and Administrative Expenses 71,000
Variance
Direct Labor Cost Variance 42,000 U Variable Overhead Cost Variance 1,700 F
Fixed Overhead Cost Variance 2,100 F
SOLUTION
MITCHELL COMPANY
Standard Cost Income Statement
For the Year Ended December 31, 2018
Sales Revenue at standard $ 570,000

Cost of Goods Sold at standard cost $ 366,000
Manufacturing Cost Variances:
Direct Materials Cost Variance $ 7,200
Direct Materials Efficiency Variance 2,700
Direct Labor Efficiency Variance (19,500)
Variable Overhead Cost Variance (1,700)
Variable Overhead Efficiency Variance 3,300
Fixed Overhead Cost Variance (2,100)
Fixed Overhead Volume Variance (12,500)
Total Manufacturing Cost Variances 19,400
Cost of Goods Sold at actual cost 385,400
Gross Profit 184,600
Selling and Administrative Expenses 71,000
Operating Income $ 113,600

Exercises
E23-15 Preparing a flexible budget
$229,500 Op. Inc. for 55,000 units
Office Plus sells its main product, ergonomic mouse pads, for $13 each. Its variable cost is $5.10 per
pad. Fixed costs are $205,000 per month for volumes up to 65,000 pads. Above 65,000 pads, monthly
fixed costs are $250,000. Prepare a monthly flexible budget for the product, showing sales revenue,
variable costs, fixed costs, and operating income for volume levels of 45,000, 55,000, and 75,000 pads.
SOLUTION
OFFICE PLUS
Monthly Flexible Budget
Budget
Amounts
per Unit
Units 45,000 55,000 75,000
Sales Revenue $ 13.00 $ 585,000 $ 715,000 $ 975,000
Variable Costs 5.10 229,500 280,500 382,500
Contribution Margin 355,500 434,500 592,500
Fixed Costs 205,000 205,000 250,000
Operating Income $ 150,500 $ 229,500 $ 342,500

E23-16 Preparing a flexible budget performance report
Murphy Company managers received the following incomplete performance report:
Complete the performance report. Identify the employee group that may deserve praise and the group
that may be subject to criticism. Give your reasoning.
SOLUTION
MURPHY COMPANY
Flexible Budget Performance Report
For the Year Ended July 31, 2018
Flexible Sales
Actual Budget Flexible Volume Static
Results Variance Budget Variance Budget
Units 35,000 0 35,000 5,000 F 30,000
Sales Revenue $ 219,000 $ 0 $ 219,000 $ 27,000 F $ 192,000
Variable Expenses 85,000 1,000 U 84,000 13,000 U 71,000
Contribution Margin 134,000 1,000 U 135,000 14,000 F 121,000
Fixed Expenses 105,000 5,000 U 100,000 0F 100,000
Operating Income $ 29,000 $ 6,000 U $ 35,000 $ 14,000 F $ 21,000

E23-16, cont.
Based on the overall favorable sales volume variance, marketing and sales personnel deserve praise. The
number of units actually sold was greater than the number of units expected to be sold. The overall
$14,000 favorable sales volume variance is the difference between expected operating income ($35,000)
in the flexible budget for the 35,000 units actually sold and expected operating income ($21,000) in the
static budget based on 30,000 units expected to be sold. The overall favorable sales volume variance and
the individual volume variances for sales revenue ($27,000 favorable), variable expenses ($13,000
unfavorable), and contribution margin ($14,000 favorable) arise only because the company sold 35,000
units rather than the 30,000 units expected in the static budget.
The employee groups that deserve praise or may be subject to criticism for the total variable expenses
flexible budget variance and the total fixed expenses flexible budget variance depends on the
composition of each these overall variances—production variances versus selling and administrative
variances, as well as the individual variances contributing to each of these.
Although the overall variable expenses flexible budget variance is $1,000 unfavorable, this is the net
result of variable production flexible budget variances and variable selling and administrative flexible
budget variances. Further, a variable production flexible budget variance is the net result of the total
direct materials variance, total direct labor variance, and total variable manufacturing overhead variance.
Digging even deeper:
• The total direct material variance is the net result of the direct materials cost variance
(purchasing manager) and direct materials efficiency variance (production manager).
• The total direct labor variance is the net result of the direct labor cost variance (human resources
manager) and direct labor efficiency variance (production manager).
• The total variable manufacturing overhead variance (production manager) is the net result of the
variable overhead cost variance and variable overhead efficiency variance.
Similarly, although the overall fixed expenses flexible budget variance is $5,000 unfavorable, this is the
net result of the fixed overhead cost variance (production manager) and fixed selling and administrative
flexible budget variances (marketing/sales manager and others).
Identification of the magnitude and direction (favorable versus unfavorable) of each of the individual
production and selling and administrative variances (both variable and fixed) is prerequisite to
determining employees that deserve praise or may be subject to criticism.
variances.

E23-17 Preparing a flexible budget performance report
Flex. Bud. Var. for Op. Inc. $31,040 F
Top managers of Marshall Industries predicted 2018 sales of 14,800 units of its product at a unit price of
$9.50. Actual sales for the year were 14,600 units at $12.00 each. Variable costs were budgeted at $2.00
per unit, and actual variable costs were $2.10 per unit. Actual fixed costs of $48,000 exceeded budgeted
fixed costs by $4,000.
Prepare Marshall’s flexible budget performance report. What variance contributed most to the year’s
favorable results? What caused this variance?
SOLUTION
MARSHALL INDUSTRIES
1 2 3 4 5
(1) – (3) (3) – (5)
Budget Flexible Sales
Amounts Actual Budget Flexible Volume Static
per Unit Results Variance Budget Variance Budget
Units 14,600 0 14,600 200 U 14,800
Sales Revenue $ 9.50 $ 175,200(a) $ 36,500 F $ 138,700(c) $ 1,900 U $ 140,600(f)
Variable Costs 2.00 30,660(b) 1,460 U 29,200(d) 400 F 29,600(g)
Contribution 144,540 35,040 F 109,500 1,500 U
Margin 111,000
Fixed Costs 48,000 4,000 U 44,000(e) 0 44,000
Operating Income $ 96,540 $ 31,040 F $ 65,500 $ 1,500 U $ 67,000
Flexible Budget Variance Sales Volume Variance

$ 31,040 F $ 1,500 U
Static Budget Variance

$ 29,540 F
(a)
$12.00 per unit × 14,600 units
(b)
$ 2.10 per unit × 14,600 units
(c)
(d)
(e)
$48,000 − $4,000
(f)
(g)

E23-17, cont.
The $36,500 favorable flexible budget variance for sales revenue contributed the most to the year’s
favorable results. The $12.00 actual unit selling price was $2.50 higher than the $9.50 expected unit
selling price for the 14,600 units actually sold. This favorable per unit difference was sufficient to more
than offset the unfavorable difference in sales volume (the 14,600 units actually sold was 200 less than
the 14,800 units expected to be sold, resulting in a $1,900 unfavorable sales volume variance for sales
revenue).
E23-18 Defining the benefits of setting cost standards and calculating materials and labor
variances
Learning Objectives 2, 3
2. DM Eff. Var. $675 F
Murry, Inc. produced 1,000 units of the company’s product in 2018. The standard quantity of direct
materials was three yards of cloth per unit at a standard cost of $1.35 per yard. The accounting records
showed that 2,500 yards of cloth were used and the company paid $1.40 per yard. Standard time was
two direct labor hours per unit at a standard rate of $10.00 per direct labor hour. Employees worked
1,700 hours and were paid $9.50 per hour.
Requirements
1. What are the benefits of setting cost standards?
2. Calculate the direct materials cost variance and the direct materials efficiency variance as well as the
direct labor cost and efficiency variances.
SOLUTION
Requirement 1
Benefits of setting cost standards (using a standard costing system) include the following:
• Preparing the master budget.
• Setting target levels of performance for flexible budgets.
• Identifying performance standards.
• Setting sales price of products.
• Decreasing accounting costs.
Requirement 2

= ($1.40 per yard – $1.35 per yard) × 2,500 yards
= $125 U

E23-18, cont.
Requirement 2

= (2,500 yards – 3,000 yards(a)) × $1.35 per yard
= $675 F

= ($9.50 per DLHr – $10.00 per DLHr) × 1,700 DLHr
= $850 F

(b)
= (1,700 DLHr – 2,000 DLHr ) × $10.00 per DLHr
= $3,000 F
(a)
3 yards per unit × 1,000 units = 3,000 standard yards
(b)
2 DLHr per unit × 1,000 units = 2,000 standard DLHr
E23-19 Calculating materials and labor variances
DL Eff. Var. $2,400 F
Matthews Fender, which uses a standard cost system, manufactured 20,000 boat fenders during 2018,
using 143,000 square feet of extruded vinyl purchased at $1.30 per square foot. Production required 400
direct labor hours that cost $16.00 per hour. The direct materials standard was seven square feet of vinyl
per fender, at a standard cost of $1.35 per square foot. The labor standard was 0.028 direct labor hour
per fender, at a standard cost of $15.00 per hour.
Compute the cost and efficiency variances for direct materials and direct labor. Does the pattern of
variances suggest Matthews Fender’s managers have been making trade-offs? Explain.

E23-19, cont.
SOLUTION

= ($1.30 per sq. foot – $1.35 per sq. foot) × 143,000 sq. feet
= $7,150 F

= (143,000 sq. feet – 140,000 sq. feet(a)) × $1.35/sq. foot
= $4,050 U

= ($16 per DLHr – $15 per DLHr) × 400 DLHr
= $400 U

= (400 DLHr – 560 DLHr(b)) × $15 per DLHr
= $2,400 F
(a)
7 sq. feet per fender × 20,000 fenders = 140,000 standard sq. feet
(b)
0.028 DLHr per fender × 20,000 fenders = 560 standard DLHr
There may be trade-offs between the direct materials cost variance and the direct materials efficiency
variance. Decisions made by the purchasing manager may affect the direct materials efficiency variance
for the production manager. Matthews Fender’s purchasing manager may have purchased lower quality
(less expensive) direct materials, leading to the $7,150 favorable direct materials cost variance (the
$1.30 actual direct materials cost per square foot was less than the $1.35 direct materials standard cost
per square foot for the 143,000 square feet actually purchased). Lower quality direct materials would
likely have contributed to the $4,050 unfavorable direct materials efficiency variance (the 143,000
square feet actually used was greater than the 140,000 square feet allowed for actual production of
20,000 fenders at the $1.35 direct materials standard cost per square foot). However, the total direct
materials variance was $3,100 favorable (the $7,150 favorable direct materials cost variance minus the
$4,050 unfavorable direct materials efficiency variance), indicating that the savings from lower quality
(less expensive) direct materials outweighed the less efficient usage of direct materials in production.

E23-19, cont.
There may be trade-offs between the direct labor cost variance and the direct labor efficiency variance.
Decisions made by the human resources manager may affect the direct labor efficiency variance for the
production manager. Matthews Fender’s human resources managers may have hired more skilled
(higher paid) direct labor workers, leading to the $400 unfavorable direct labor cost variance (the $16
actual direct labor cost per direct labor hour was greater than the $15 direct labor standard cost per direct
labor hour). Hiring more skilled direct labor workers would likely have contributed to the $2,400
favorable direct labor efficiency variance (400 direct labor hours actually used was less than the 560
direct labor hours allowed for actual production of 20,000 fenders). However, the total direct labor
variance was $2,000 favorable (the $2,400 favorable direct labor efficiency variance minus the $400
unfavorable direct labor cost variance), indicating that the more efficient use of direct labor in
production outweighed the higher cost of hiring more skilled direct labor workers.
E23-20 Computing overhead variances
1. FOH Vol. Var. $3,000 U
Mason Fender is a competitor of Matthews Fender from Exercise E23-19. Mason Fender also uses a
standard cost system and provides the following information:
Static budget variable overhead $ 2,300
Static budget fixed overhead $ 23,000
Static budget direct labor hours 575 hours
Static budget number of units 23,000 units
Standard direct labor hours 0.025 hours per fender
Mason Fender allocates manufacturing overhead to production based on standard direct labor hours.
Mason Fender reported the following actual results for 2018: actual number of fenders produced,
20,000; actual variable overhead, $5,350; actual fixed overhead, $26,000; actual direct labor hours, 460.
Requirements
1. Compute the overhead variances for the year: variable overhead cost variance, variable overhead
efficiency variance, fixed overhead cost variance, and fixed overhead volume variance.

E23-20, cont.
SOLUTION
Requirement 1

=
$2,300
=
575 DLHr
= $4 per DLHr

=
$23,000
=
575 DLHr
= $40 per DLHr

= $5,350 − ($4 per DLHr × 460 DLHr)
= $3,510 U

= (460 DLHr – 500 DLHr(a)) × $4 per DLHr
= $160 F

= $26,000 ̶ $23,000
= $3,000 U

E23-20, cont.
Requuirement 1, cont.
= $23,000 ̶ $20,000(b)
= $3,000 U
(a)
20,000 fenders × 0.025 DLHr per fender = 500 DLHr
(b)
$40 per DLHr × 500 DLHr = $20,000
Requirement 2
direct labor hour was not kept within standard. The $11.63(c) actual cost per direct labor hour was greater
direct labor hour).
The $160 favorable variable overhead efficiency variance indicates that actual usage of direct labor
hours was kept within standard. The 460 total direct labor hours actually used was less than the 500 total
direct labor hours allowed to manufacture 20,000 fenders.
The $3,000 unfavorable fixed overhead cost variance indicates that actual total fixed cost was not kept
within budget. The $26,000 actual total fixed overhead cost was greater than the $23,000 budgeted total
fixed overhead cost.
The $3,000 unfavorable fixed overhead volume variance is not a cost variance. It is a volume variance
and explains why fixed overhead was underallocated. The variance is unfavorable because the company
manufactured fewer fenders (20,000) than budgeted (23,000). Therefore, total fixed overhead cost
allocated to production was $3,000 less than the total budgeted fixed overhead cost ($20,000 total fixed
overhead cost was allocated compared with the $23,000 total budgeted fixed overhead cost).
(c)
$5,350 / 460 DLHr = $11.63 rounded

E23-21 Calculating overhead variances
1. VOH Cost Var. $1,600 U
Mills, Inc. is a competitor of Murry, Inc. from Exercise E23-18. Mills also uses a standard cost system
and provides the following information:
Static budget variable overhead $ 1,200
Static budget fixed overhead $ 1,600
Static budget direct labor hours 800 hours
Static budget number of units 400 units
Standard direct labor hours 2 hours per unit
Mills allocates manufacturing overhead to production based on standard direct labor hours. Mills
reported the following actual results for 2018: actual number of units produced, 1,000; actual variable
overhead, $4,000; actual fixed overhead, $3,100; actual direct labor hours, 1,600.
Requirements
1. Compute the variable overhead cost and efficiency variances and fixed overhead cost and volume
variances.
SOLUTION
Requirement 1

=
$1,200
=
800 DLHr
= $1.50 per DLHr

=
$1,600
=
800 DLHr
= $2.00 per DLHr

E23-21, cont.

= $4,000 − ($1.50 per DLHr × 1,600 DLHr)
= $1,600 U

= (1,600 DLHr – 2,000 DLHr(a)) × $1.50 per DLHr
= $600 F

= $3,100 ̶ $1,600
= $1,500 U

= $1,600 ̶ $4,000(b)
= $2,400 F
(a)
1,000 units × 2 DLHr per unit = 2,000 DLHr
(b)
$2 per DLHr × 2,000 DLHr = $4,000
Requirement 2
direct labor hour was not kept within standard. The $2.50(a) actual cost per direct labor hour was greater
direct labor hour).
The $600 favorable variable overhead efficiency variance indicates that actual usage of direct labor
hours was kept within standard. The 1,600 total direct labor hours actually used was less than the 2,000
total direct labor hours allowed to manufacture 1,000 units.
The $1,500 unfavorable fixed overhead cost variance indicates that actual total fixed cost was not kept
within budget. The $3,100 actual total fixed overhead cost was greater than the $1,600 budgeted total
fixed overhead cost.
The $2,400 favorable fixed overhead volume variance is not a cost variance. It is a volume variance and
manufactured more units (1,000) than budgeted (400). Therefore, total fixed overhead cost allocated to
units was $2,400 more than the total budgeted fixed overhead cost ($4,000 total fixed overhead cost was
allocated compared with the $1,600 total budgeted fixed overhead cost).
(a)
$4,000 / 1,600 DLHr = $2.50
E23-22 Preparing a standard cost income statement
GP $270,700
The May 2018 revenue and cost information for McDonald Outfitters, Inc. follows:
Sales Revenue (at standard) $ 610,000
Cost of Goods Sold (at standard) 348,000
Direct Materials Cost Variance 1,500 F
Direct Materials Efficiency Variance 6,600 F
Direct Labor Cost Variance 4,200 U
Direct Labor Efficiency Variance 2,700 F
Variable Overhead Cost Variance 2,800 U
Variable Overhead Efficiency Variance 1,100 U
Fixed Overhead Cost Variance 2,300 U
Fixed Overhead Volume Variance 8,300 F
Prepare a standard cost income statement for management through gross profit. Report all standard cost
variances for management’s use. Has management done a good or poor job of controlling costs?
Explain.
SOLUTION
MCDONALD OUTFITTERS, INC.

For the Month Ended May 31, 2018
Sales Revenue at standard $ 610,000

Direct Materials Cost Variance $ (1,500)
Direct Materials Efficiency Variance (6,600)
Direct Labor Efficiency Variance (2,700)
Variable Overhead Cost Variance 2,800
Fixed Overhead Cost Variance 2,300
Total Manufacturing Cost Variances (8,700)
Gross Profit $ 270,700
The $1,500 favorable direct materials cost variance indicates that management did a good job keeping
actual direct materials cost per unit within standard. The actual cost per unit was less than the standard
cost per unit.
E23-22, cont.
The $6,600 favorable direct materials efficiency variance indicates that management did a good job
keeping actual usage of direct materials within standard. The total quantity of direct materials actually
used was less than the total allowed to manufacture the actual total number of units.
The $4,200 unfavorable direct labor cost variance indicates that management did not do a good job
keeping actual direct labor cost per hour within standard. The actual cost per direct labor hour was
greater than the standard cost per direct labor hour.
The $2,700 favorable direct labor efficiency variance indicates that management did a good job keeping
actual usage of direct labor hours within standard. The total number of direct labor hours actually used
was less than the total allowed to manufacture the actual total number of units.
The $2,800 unfavorable variable overhead cost variance indicates that management did not do a good
job keeping actual variable overhead cost per unit within standard. The actual cost per unit was greater
than the standard cost per unit (the standard variable overhead allocation rate per unit).
The $1,100 unfavorable variable overhead efficiency variance indicates that management did not do a
good job keeping actual usage of the allocation base for variable overhead within standard. The total
quantity of the allocation base actually used was greater than the total allowed to manufacture the actual
total number of units.
The $2,300 unfavorable fixed overhead cost variance indicates that management did not do a good job
keeping actual total fixed overhead cost within budget. The actual total fixed overhead cost was greater
than the budgeted total fixed overhead cost.
The $8,300 favorable fixed overhead volume variance is not a cost variance. It is a volume variance and
manufactured more units than budgeted. Therefore, total fixed overhead cost allocated to units was
$8,300 more than the total budgeted fixed overhead cost.
variances.

E23-23 Preparing journal entries
MOH Adj. $1,000 DR
Marsh Company uses a standard cost system and reports the following information for 2018:
Standards:
3 yards of cloth per unit at $1.05 per yard
2 direct labor hours per unit at $10.50 per hour
Overhead allocated at $5.00 per direct labor hour
Actual:
2,600 yards of cloth were purchased at $1.10 per yard
Employees worked 1,800 hours and were paid $10.00 per hour
Actual variable overhead was $1,700
Actual fixed overhead was $7,300
Marsh Company reported the following variances:

Direct materials cost variance $ 130 U
Direct materials efficiency variance 420 F
Direct labor cost variance 900 F
Direct labor efficiency variance 2,100 F
Variable overhead cost variance 1,500 U
Variable overhead efficiency variance 1,500 F
Fixed overhead cost variance 600 U
Fixed overhead volume variance 1,600 F
Marsh produced 1,000 units of finished product in 2018. Record the journal entries to record direct
materials, direct labor, variable overhead, and fixed overhead, assuming all expenditures were on
account and there were no beginning or ending balances in the inventory accounts (all materials
purchased were used in production, and all goods produced were sold). Record the journal entries to
record the transfer to Finished Goods Inventory and Cost of Goods Sold (omit the journal entry for Sales
Revenue). Adjust the Manufacturing Overhead account.

E23-23, cont.
SOLUTION

Raw Materials Inventory ($1.05/yard × 2,600 yards) 2,730
Direct Materials Cost Variance 130
Accounts Payable ($1.10/yard × 2,600 yards) 2,860
Work-in-Process Inventory ($1.05/yard × 3,000 yards) 3,150

Direct Materials Efficiency Variance 420
Raw Materials Inventory ($1.05/yard × 2,600 yards) 2,730
Work-in-Process Inventory ($10.50/DLHr × 2,000 DLHr) 21,000

Direct Labor Cost Variance 900
Wages Payable ($10.00/DLHr × 1,800 DLHr) 18,000
Manufacturing Overhead ($1,700 VOH + $7,300 FOH) 9,000

Various Accounts 9,000
Manufacturing overhead costs incurred.
Work-in-Process Inventory ($5/DLHr × 2,000 DLHr) 10,000

Manufacturing Overhead 10,000
Manufacturing overhead costs allocated.
Finished Goods Inventory ($3,150 + $21,000 + $10,000) 34,150

Completed goods transferred.
Cost of Goods Sold 34,150

Finished Goods Inventory 34,150
Cost of sales at standard cost.

Variable Overhead Cost Variance 1,500
Fixed Overhead Cost Variance 600
Fixed Overhead Volume Variance 1,600
To adjust Manufacturing Overhead.

E23-24 Preparing a standard cost income statement
GP $1,097,480
McCarthy Fender, which uses a standard cost system, manufactured 20,000 boat fenders during 2018.
The 2018 revenue and cost information for McCarthy follows:
Sales Revenue $ 1,300,000
Cost of Goods Sold (at standard) 196,800
Direct materials cost variance 7,150 F
Direct materials efficiency variance 5,950 U
Direct labor cost variance 400 U
Direct labor efficiency variance 530 F
Variable overhead cost variance 650 U
Variable overhead efficiency variance 360 F
Fixed overhead cost variance 2,350 U
Fixed overhead volume variance 4,410 U
Assume each fender produced was sold for the standard price of $65, and total selling and administrative
costs were $250,000. Prepare a standard cost income statement for 2018 for McCarthy Fender.
SOLUTION
MCCARTHY FENDER
Sales Revenue at standard ($65/fender × 20,000 fenders) $ 1,300,000

Direct Materials Cost Variance $ (7,150)
Direct Materials Efficiency Variance 5,950
Direct Labor Cost Variance 400
Direct Labor Efficiency Variance (530)
Variable Overhead Cost Variance 650
Variable Overhead Efficiency Variance (360)
Fixed Overhead Volume Variance 4,410
Gross Profit 1,097,480

Problems (Group A)
P23-25A Preparing a flexible budget performance report
3. Static Bud. Var. for Op. Inc. $22,900 F
Cell One Technologies manufactures capacitors for cellular base stations and other communications
applications. The company’s July 2018 flexible budget shows output levels of 6,000, 7,500, and 9,500
units. The static budget was based on expected sales of 7,500 units.
The company sold 9,500 units during July, and its actual operating income was as follows:
Requirements
1. Prepare a flexible budget performance report for July.
2. What was the effect on Cell One’s operating income of selling 2,000 units more than the static
budget level of sales?
3. What is Cell One’s static budget variance for operating income?
4. Explain why the flexible budget performance report provides more useful information to Cell
One’s managers than the simple static budget variance. What insights can Cell One’s managers
draw from this performance report?

P23-25A, cont.
SOLUTION
Requirement 1
CELL ONE TECHNOLOGIES

For the Month Ended July 31, 2018
1 2 3 4 5
(1) – (3) (3) – (5)
Units 9,500 9,500 7,500
Sales Revenue $ 21 $206,500 $ 7,000 F $ 199,500 $ 42,000 F $ 157,500(a)
Variable Expenses 10 100,100 5,100 U 95,000 20,000 U 75,000(b)
Contribution Margin 106,400 1,900 F 104,500 22,000 F 82,500
Fixed Expenses 56,000 1,000 U 55,000 0 55,000
Operating Income $ 50,400 $ 900 F $ 49,500 $ 22,000 F $ 27,500

$ 900 F $ 22,000 F

$ 22,900 F
(a)
$21 per unit × 7,500 units = $157,500
(b)
$10 per unit × 7,500 units = $75,000
Requirement 2
Selling 2,000 units more than the static budget level of sales increased Cell One’s operating income by
$22,000 (which is the $22,000 favorable sales volume variance calculated in Requirement 1).
Requirement 3
Cell One’s static budget variance for operating income is $22,900 favorable (calculated in Requirement
1).

P23-25A, cont.
Requirement 4
The static budget is prepared for only one level of sales volume—the 7,500 units expected to be sold—
and it doesn’t change after it is developed. The $22,900 favorable static budget variance is the difference
between actual operating income ($50,400), based on 9,500 units actually sold, and the expected
operating income ($27,500) in the static budget, based on 7,500 units expected to be sold. The flexible
budget performance report (Requirement 1) provides more useful information than the simple static
budget variance because it separates the $22,900 favorable static budget variance into its components:
the $900 favorable flexible budget variance and the $22,000 favorable sales volume variance.
The primary reason for the favorable operating income results is that the 9,500 units actually sold was
more than the 7,500 units expected to be sold in the static budget. The overall $22,000 favorable sales
volume variance is the difference between the expected operating income ($49,500) in the flexible
budget for the 9,500 units actually sold and expected operating income ($27,500) in the static budget
based on 7,500 units expected to be sold. The overall favorable sales volume variance and the individual
volume variances for sales revenue ($42,000 favorable), variable expenses ($20,000 unfavorable), and
contribution margin ($22,000 favorable) arise only because the company sold 9,500 units rather than the
7,500 units expected in the static budget.
The overall $900 favorable flexible budget variance is the difference between actual operating income
($50,400) for the 9,500 units actually sold and expected operating income ($49,500) in the flexible
budget for the 9,500 units actually sold. Because the $7,000 favorable flexible budget variance for sales
revenue was $900 greater than the sum of the unfavorable flexible budget variances for variable
expenses ($5,100) and fixed expenses ($1,000), the overall flexible budget variance (for operating
income) was $900 favorable. The individual flexible budget variances arise because actual sales price
per unit, variable expense per unit, and fixed expenses were different from those expected for the 9,500
units actually sold.
• The $7,000 favorable flexible budget variance for sales revenue was favorable because the
$21.74 ($206,500 / 9,500 units, rounded) actual sales price per unit was higher than the $21 per
unit budgeted.
• The $5,100 unfavorable flexible budget variance for variable expenses was unfavorable because
the $10.54 ($100,100 / 9,500 units, rounded) actual variable expense per unit was higher than the
$10 per unit budgeted.
• The $1,900 favorable flexible budget variance for contribution margin was favorable because the
$11.20 ($106,400 / 9,500, rounded) actual contribution margin per unit was higher than the $11
($21 – $10) per unit budgeted.
• The $1,000 unfavorable flexible budget variance for fixed expenses was unfavorable because the
$56,000 actual fixed expenses were higher than the $55,000 budgeted.

P23-26A Preparing a flexible budget computing standard cost variances
Learning Objectives 1, 2, 3, 4
2. VOH Eff. Var. $1,368 U
Morton Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system.
Morton allocates overhead based on yards of direct materials. The company’s performance report
includes the following selected data:
Static Budget Actual
(1,000 Results (980
recliners) recliners)
Sales (1, 000 recliners ´ $505 each) $ 505,000
(980 recliners ´ $480 each) $ 470,400
Variable Manufacturing Costs:

Direct Materials (6,000 yds. @ $8.60/yd.) 51,600
(6,143 yds. @ $8.40/yd.) 51,601
Direct Labor (10,000 DLHr @ 92,000
$9.20/DLHr)
(9,600 DLHr @ 89,280
$9.30/DLHr)
Variable (6,000 yds. @ $5.20/yd.) 31,200
Overhead
(6,143 yds. @ $6.60/yd.) 40,544
Fixed Manufacturing Costs:
Fixed Overhead 60,600 62,600
Total Cost of Goods Sold 235,400 244,025
Gross Profit $ 269,600 $ 226,375
Requirements
1. Prepare a flexible budget based on the actual number of recliners sold.
2. Compute the cost variance and the efficiency variance for direct materials and for direct labor. For
manufacturing overhead, compute the variable overhead cost, variable overhead efficiency, fixed
overhead cost, and fixed overhead volume variances. Round to the nearest dollar.
3. Have Morton’s managers done a good job or a poor job controlling materials, labor, and overhead
costs? Why?
4. Describe how Morton’s managers can benefit from the standard cost system.

P23-26A, cont.
SOLUTION
Requirement 1
MORTON RECLINERS
Flexible Budget
Budget
Amounts
per Unit
Actual Units (Recliners) 980
Sales $ 505.00 $ 494,900(d)
Direct Materials 51.60(a) 50,568(e)
Direct Labor 92.00(b) 90,160(f)
Variable Overhead 31.20(c) 30,576(g)
Fixed Overhead 60,600
Total Cost of Goods Sold 231,904
(a)
$ 51,600 / 1,000 recliners = $51.60 per recliner
(b)
$ 92,000 / 1,000 recliners = $ 92.00 per recliner
(c)
$ 31,200 / 1,000 recliners = $ 31.20 per recliner
(d)
$505.00 per recliner × 980 recliners = $ 494,900
(e)
$ 51.60 per recliner × 980 recliners = 50,568
(f)
(g)
Requirement 2

= $1,229 F

= $2,262 U

= $960 U

P23-26A, cont.
Requirement 2, cont

= (9,600 DLHr – 9,800 DLHr(b)) × $9.20 per DLHr
= $1,840 F
VOH Cost Variance = (AC ̶ SC) × AQ

= $8,600 U

= $1,368 U

= $62,600 ̶ $60,600
= $2,000 U

= $60,600 ̶ $59,388(c)
= $1,212 U
(a)
6,000 yards / 1,000 recliners = 6 yards per recliner
Thus:
6 yards per recliner × 980 recliners = 5,880 yards
(b)
10,000 DLHr / 1,000 recliners = 10 DLHr per recliner
Thus:
10 DLHr per recliner × 980 recliners = 9,800 DLHr
(c)
$60,600 / 6,000 yards = $10.10 per yard
Thus:
$10.10 per yard × 5,880 yards = $59,388

P23-26A, cont.
Requirement 3
The $1,229 favorable direct materials cost variance indicates that Morton’s managers did a good job
keeping actual direct materials cost per yard within standard. The $8.40 actual cost per yard was less
than the $8.60 standard cost per yard.
The $2,262 unfavorable direct materials efficiency variance and $1,368 unfavorable variable overhead
efficiency variance indicate that Morton’s managers did not do a good job keeping actual usage of direct
materials within standard. The 6,143 total yards actually used was greater than the 5,880 total yards
allowed to manufacture 980 recliners.
The $960 unfavorable direct labor cost variance indicates that Morton’s managers did not do a good job
keeping actual direct labor cost per hour within standard. The $9.30 actual cost per direct labor hour was
greater than the $9.20 standard cost per direct labor hour.
The $1,840 favorable direct labor efficiency variance indicates that Morton’s managers did a good job
keeping actual usage of direct labor hours within standard. The 9,600 total direct labor hours actually
used was less than the 9,800 total direct labor hours allowed to manufacture 980 recliners.
The $8,600 unfavorable variable overhead cost variance indicates that Morton’s managers did not do a
good job keeping actual variable overhead cost per yard within standard. The $6.60 actual cost per yard
was greater than the $5.20 standard cost per yard (the standard variable overhead allocation rate per
yard).
The $2,000 unfavorable fixed overhead cost variance indicates that Morton’s managers did not do a
good job keeping actual total fixed cost within budget. The $62,600 actual total fixed overhead cost was
greater than the $60,600 budgeted total fixed overhead cost.
manufactured fewer recliners (980) than budgeted (1,000). Therefore, total fixed overhead cost allocated
to recliners was $1,212 less than the total budgeted fixed overhead cost ($59,388 total fixed overhead
cost was allocated compared with the $60,600 total budgeted fixed overhead cost).
variances.

P23-26A, cont.
Requirement 4
Morton’s managers can benefit from the standard costing system in the following ways:
P23-27A Computing standard cost variances and reporting to management
Learning Objectives 3, 4, 5

2.
Hear Smart manufactures headphone cases. During September 2018, the company produced and sold
105,000 cases and recorded the following cost data:
Standard Cost Information
Quantity Cost
Direct Materials 2 parts $ 0.15 per part
Direct Labor 0.02 hours 8.00 per hour
Variable Manufacturing Overhead 0.02 hours 10.00 per hour
Fixed Manufacturing Overhead ($28,500 for static budget volume of
95,000 units and 1,900 hours, or $15 per hour)
Actual Cost Information

Direct Materials (209,000 parts @ $0.20 per part) $ 41,800
Direct Labor (1,600 hours @ $8.15 per hour) 13,040
Variable Manufacturing Overhead 9,000
Fixed Manufacturing Overhead 26,000
Requirements
1. Compute the cost and efficiency variances for direct materials and direct labor.
2. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the
fixed overhead cost and volume variances.
3. Hear Smart’s management used better quality materials during September. Discuss the trade-off
between the two direct material variances.

P23-27A, cont.
SOLUTION
Requirement 1

= ($0.20 per part – $0.15 per part) × 209,000 parts
= $10,450 U

= (209,000 parts – 210,000 parts(a)) × $0.15 per part
= $150 F

= $240 U

(b)
= (1,600 DLHr – 2,100 DLHr ) × $8.00 per DLHr
= $4,000 F
(a)
2 parts per case × 105,000 cases = 210,000 parts
(b)
0.02 DLHr per case × 105,000 cases = 2,100 DLHr

P23-27A, cont.
Requirement 2

= $9,000 − ($10 per DLHr × 1,600 DLHr)
= $7,000 F

(a)
= (1,600 DLHr – 2,100 DLHr ) × $10 per DLHr
= $5,000 F

= $26,000 ̶ $28,500
= $2,500 F

= $28,500 ̶ $31,500(b)
= $3,000 F
(a)
Calculated in Requirement 1
(b)
$15 per DLHr × 2,100 DLHr = $31,500
Requirement 3
for the production manager. Perhaps Hear Smart used better quality direct materials, indicated by the
fact that the $0.20 actual direct materials cost per part was greater than the $0.15 direct materials
standard cost per part. Therefore, the direct materials cost variance was $10,450 unfavorable for the
209,000 parts actually purchased. If so, then the better quality direct materials likely contributed to the
$150 favorable direct materials efficiency variance (209,000 parts actually used was less than the
210,000 parts allowed for actual production of 105,000 cases). However, the total direct materials
variance was $10,300 unfavorable (the $10,450 unfavorable direct materials cost variance minus the
$150 favorable direct materials efficiency variance), indicating that the more efficient usage of direct
materials did not outweigh the higher cost of the direct materials purchased. However, the higher quality
components may result in higher quality and durable final products which may lead to fewer returns and
warranty claims due to product failures and higher customer satisfaction.

P23-28A Computing and journalizing standard cost variances
3. VOH Cost Var. $985 F
Moss manufactures coffee mugs that it sells to other companies for customizing with their own logos.
Moss prepares flexible budgets and uses a standard cost system to control manufacturing costs. The
standard unit cost of a coffee mug is based on static budget volume of 59,800 coffee mugs per month:
Direct Materials (0.2 lbs. @ $0.25 per lb.) $ 0.05
Direct Labor (3 minutes @ $0.11 per minute) 0.33
Manufacturing Overhead:
Variable (3 minutes @ $0.06 per minute) $ 0.18
Fixed (3 minutes @ $0.13 per minute) 0.39 0.57
Total Cost per Coffee Mug $ 0.95
Actual cost and production information for July 2018 follows:

a. There were no beginning or ending inventory balances. All expenditures were on account.
b. Actual production and sales were 62,500 coffee mugs.
c. Actual direct materials usage was 11,000 lbs. at an actual cost of $0.17 per lb.
d. Actual direct labor usage was 197,000 minutes at a total cost of $25,610.
e.. Actual overhead cost was $10,835 variable and $29,765 fixed.
f. Selling and administrative costs were $95,000.
Requirements
2. Journalize the purchase and usage of direct materials and the assignment of direct labor, including
the related variances.
4. Journalize the actual manufacturing overhead and the allocated manufacturing overhead. Journalize
the movement of all production costs from Work-in-Process Inventory. Journalize the adjusting of
the Manufacturing Overhead account.
5. Moss intentionally hired more highly skilled workers during July. How did this decision affect the
cost variances? Overall, was the decision wise?

P23-28A, cont.
SOLUTION
Requirement 1

= ($0.17 per lb. – $0.25 per lb.) × 11,000 lbs.
= $880 F

= (11,000 lbs. – 12,500 lbs.(a)) × $0.25 per lb.
= $375 F

(b)
= ($0.13 per min. – $0.11 per min.) × 197,000 min.
= $3,940 U

= (197,000 min. – 187,500 min.(c)) × $0.11 per min.
= $1,045 U
(a)
0.2 lbs. per mug × 62,500 mugs = 12,500 lbs.
(b)
$25,610 total cost / 197,000 minutes = $0.13 cost per minute
(c)
3 minutes per mug × 62,500 mugs = 187,500 minutes
Requirement 2

Raw Materials Inventory ($0.25/lb. × 11,000 lbs.) 2,750
Direct Materials Cost Variance (from Req. 1) 880
Accounts Payable ($0.17/lb. × 11,000 lbs.) 1,870
Work-in-Process Inventory ($0.25/lb. × 12,500 lbs.) 3,125

Direct Materials Efficiency Variance (from Req. 1) 375
Work-in-Process Inventory ($0.11/min. × 187,500 min.) 20,625

Direct Labor Cost Variance (from Req. 1) 3,940
Direct Labor Efficiency Variance (from Req. 1) 1,045
Wages Payable ($0.13/min. × 197,000 min.) 25,610

P23-28A, cont.
Requirement 3

= $10,835 − ($0.06 per min. × 197,000 min.)
= $985 F

= (197,000 min. – 187,500 min.(a)) × $0.06 per min.
= $570 U

= $29,765 ̶ $23,322(b)
= $6,443 U

= $23,322(b) ̶ $24,375(c)
= $1,053 F
(a)
(b)
$0.39 per mug × 59,800 mugs = $23,322
(c)
$0.13 per min. × 3 min. per mug × 62,500 mugs = $24,375
Requirement 4

Manufacturing Overhead ($10,835 VOH + $29,765 FOH) 40,600
Work-in-Process Inventory ($0.57/mug × 62,500 mugs) 35,625


Variable Overhead Efficiency Variance (from Req. 3) 570

Fixed Overhead Cost Variance (from Req. 3) 6,443
Variable Overhead Cost Variance (from Req. 3) 985
Fixed Overhead Volume Variance (from Req. 3) 1,053

P23-28A, cont.
Requirement 5
Because Moss hired more skilled workers, the $0.13 actual direct labor cost per minute was greater than
the $0.11 direct labor standard cost per minute. Therefore, the direct labor cost variance was $3,940
unfavorable for the 62,500 mugs actually produced. Hiring more skilled direct labor workers could be
expected to lead to a favorable direct labor efficiency variance, but this didn’t occur. Instead, the direct
labor efficiency variance was $1,045 unfavorable (197,000 minutes of direct labor time actually used
was more than the 187,500 direct labor minutes allowed for actual production of 62,500 mugs).
Combining the two direct labor variances, the total direct labor variance was $4,985 unfavorable (the
$3,940 unfavorable direct labor cost variance plus the $1,045 unfavorable direct labor efficiency
variance). Overall, Moss’s decision to hire more skilled direct labor workers was not wise.
Note: Problem P23-28A must be completed before attempting Problem P23-29A.
P23-29A Preparing a standard cost income statement
COGS at actual $68,080
Review your results from Problem P23-28A. Moss’s standard and actual sales price per mug is $3.
Prepare the standard cost income statement for July 2018.
SOLUTION
MOSS
Sales Revenue at standard ($3/mug × 62,500 mugs) $ 187,500

Cost of Goods Sold at standard cost (from P23-28A) $ 59,375
Manufacturing Cost Variances (from P23-28A):
Direct Materials Cost Variance $ (880)
Direct Materials Efficiency Variance (375)
Variable Overhead Cost Variance (985)
Variable Overhead Efficiency Variance 570
Operating Income / (Loss) $ 24,420

Problems (Group B)
P23-30B Preparing a flexible budget performance report
3. Static Bud. Var. for Op. Inc. $22,900 F
Cell Plus Technologies manufactures capacitors for cellular base stations and other communication
applications. The company’s July 2018 flexible budget shows output levels of 8,500, 10,000, and 12,000
units. The static budget was based on expected sales of 10,000 units.
The company sold 12,000 units during July, and its actual operating income was as follows:
Requirements
1. Prepare a flexible budget performance report for July 2018.
2. What was the effect on Cell Plus’s operating income of selling 2,000 units more than the static
budget level of sales?
3. What is Cell Plus’s static budget variance for operating income?
4. Explain why the flexible budget performance report provides more useful information to Cell Plus’s
managers than the simple static budget variance. What insights can Cell Plus’s managers draw from
this performance report?
P23-30B, cont.
SOLUTION
Requirement 1
CELL PLUS TECHNOLOGIES

1 2 3 4 5
(1) – (3) (3) – (5)
Units 12,000 0 12,000 2,000 F 10,000
Sales Revenue $ 24 $ 295,000 $ 7,000 F $ 288,000 $ 48,000 F $ 240,000(a)
Variable Expenses 13 161,100 5,100 U 156,000 26,000 U 130,000(b)
Fixed Expenses 58,000 1,000 U 57,000 0 57,000
Operating Income $ 75,900 $ 900 F $ 75,000 $ 22,000 F $ 53,000

$ 900 F $ 22,000 F

$ 22,900 F
(a)
$24 per unit × 10,000 units = $240,000
(b)
$13 per unit × 10,000 units = $130,000
Requirement 2
Selling 2,000 units more than the static budget level of sales increased Cell Plus’s operating income by
$22,000 (which is the $22,000 favorable sales volume variance calculated in Requirement 1).
Requirement 3
Cell Plus’s static budget variance for operating income is $22,900 favorable (calculated in Requirement
1).

P23-30B, cont.
Requirement 4
The static budget is prepared for only one level of sales volume—the 10,000 units expected to be sold—
and it doesn’t change after it is developed. The $22,900 favorable static budget variance is the difference
between actual operating income ($75,900), based on 12,000 units actually sold, and the expected
operating income ($53,000) in the static budget, based on 10,000 units expected to be sold. It is not
enough for managers to know that a variance occurred. They must know why it occurred. The flexible
budget performance report (Requirement 1) provides more useful information than the simple static
budget variance because it separates the $22,900 favorable static budget variance into its components:
the $900 favorable flexible budget variance and the $22,000 favorable sales volume variance.
The primary reason for the favorable operating income results is that the 12,000 units actually sold was
more than the 10,000 units expected to be sold in the static budget. The overall $22,000 favorable sales
volume variance is the difference between the expected operating income ($75,000) in the flexible
budget for the 12,000 units actually sold and expected operating income ($53,000) in the static budget
based on 10,000 units expected to be sold. The overall favorable sales volume variance and the
individual volume variances for sales revenue ($48,000 favorable), variable expenses ($26,000
unfavorable), and contribution margin ($22,000 favorable) arise only because the company sold 12,000
units rather than the 10,000 units expected in the static budget.
The overall $900 favorable flexible budget variance is the difference between actual operating income
($75,900) for the 12,000 units actually sold and expected operating income ($75,000) in the flexible
budget for the 12,000 units actually sold. Because the $7,000 favorable flexible budget variance for sales
revenue was $900 greater than the sum of the unfavorable flexible budget variances for variable
expenses ($5,100) and fixed expenses ($1,000), the overall flexible budget variance (for operating
income) was $900 favorable. The individual flexible budget variances arise because actual sales price
per unit, variable expense per unit, and fixed expenses were different from those expected for the 12,000
units actually sold.
• The $7,000 favorable flexible budget variance for sales revenue was favorable because the
$24.58 ($295,000 / 12,000 units, rounded) actual sales price per unit was higher than the $24 per
unit budgeted.
• The $5,100 unfavorable flexible budget variance for variable expenses was unfavorable because
the $13.43 ($161,100 / 12,000 units, rounded) actual variable expense per unit was higher than
the $13 per unit budgeted.
• The $1,900 favorable flexible budget variance for contribution margin was favorable because the
$11.16 ($133,900 / 12,000 units, rounded) actual contribution margin per unit was higher than
the $11 ($24 – $13) per unit budgeted.
• The $1,000 unfavorable flexible budget variance for fixed expenses was unfavorable because the
$58,000 actual fixed expenses were higher than the $57,000 budgeted.

P23-31B Preparing a flexible budget and computing standard cost variances
2. VOH Eff. Var. $1,377 U
McKnight Recliners manufactures leather recliners and uses flexible budgeting and a standard cost
system. McKnight allocates overhead based on yards of direct materials. The company’s performance
report includes the following selected data:
Static Budget Actual
(1,025 Results (1,005
recliners) recliners)
Sales (1, 025 recliners ´ $500 each) $ 512,500
(1,005 recliners ´ $495 each) $ 497,475

Direct Materials (6,150 yds. @ $8.50/yard) 52,275
(6,300 yds. @ $8.30/yard) 52,290
Direct Labor (10,250 DLHr @ 94,300
$9.20/DLHr)
(9,850 DLHr @ 92,590
$9.40/DLHr)
Variable Overhead (6,150 yds. @ $5.10/yard) 31,365
(6,300 yds. @ $6.50/yard) 40,950
Fixed Overhead 62,730 64,730
Total Cost of Goods Sold 240,670 250,560
Gross Profit $ 271,830 $ 246,915
Requirements
1. Prepare a flexible budget based on the actual number of recliners sold.
2. Compute the cost variance and the efficiency variance for direct materials and for direct labor. For
manufacturing overhead, compute the variable overhead cost, variable overhead efficiency, fixed
overhead cost, and fixed overhead volume variances. Round to the nearest dollar.
3. Have McKnight’s managers done a good job or a poor job controlling materials, labor, and overhead
costs? Why?
4. Describe how McKnight’s managers can benefit from the standard cost system.

P23-31B, cont.
SOLUTION
Requirement 1
MCKNIGHT RECLINERS
Flexible Budget
Budget
Amounts
per Unit
Actual Units (Recliners) 1,005
Sales $ 500.00 $ 502,500(d)
Direct Materials 51.00(a) 51,255(e)
Direct Labor 92.00(b) 92,460(f)
Variable Overhead 30.60(c) 30,753(g)
Fixed Overhead 62,730
Total Cost of Goods Sold 237,198
(a)
(b)
(c)
(d)
$ 500.00 per recliner × 1,005 recliners = $ 502,500
(e)
(f)
(g)
Requirement 2

= $1,260 F

= $2,295 U

= $1,970 U

P23-31B, cont.

= $1,840 F
VOH Cost Variance = (AC ̶ SC) × AQ

= $8,820 U

= $1,377 U

= $64,730 ̶ $62,730
= $2,000 U

= $62,730 ̶ $61,506(c)
= $1,224 U
(a)
6,150 yards / 1,025 recliners = 6 yards per recliner
Thus:
6 yards per recliner × 1,005 recliners = 6,030 yards
(b)
10,250 DLHr / 1,025 recliners = 10 DLHr per recliner
Thus:
10 DLHr per recliner × 1,005 recliners = 10,050 DLHr
(c)
$62,730 / 6,150 yards = $10.20 per yard
Thus:
$10.20 per yard × 6,030 yards = $61,506

P23-31B, cont.
Requirement 3
The $1,260 favorable direct materials cost variance indicates that McKnight’s managers did a good job
keeping actual direct materials cost per yard within standard. The $8.30 actual cost per yard was less
than the $8.50 standard cost per yard.
The $2,295 unfavorable direct materials efficiency variance and $1,377 unfavorable variable overhead
efficiency variance indicate that McKnight’s managers did not do a good job keeping actual usage of
direct materials within standard. The 6,300 total yards actually used was greater than the 6,030 total
yards allowed to manufacture 1,005 recliners.
The $1,970 unfavorable direct labor cost variance indicates that McKnight’s managers did not do a good
job keeping actual direct labor cost per hour within standard. The $9.40 actual cost per direct labor hour
was greater than the $9.20 standard cost per direct labor hour.
The $1,840 favorable direct labor efficiency variance indicates that McKnight’s managers did a good
job keeping actual usage of direct labor hours within standard. The 9,850 total direct labor hours actually
used was less than the 10,050 total direct labor hours allowed to manufacture 1,005 recliners.
The $8,820 unfavorable variable overhead cost variance indicates that McKnight’s managers did not do
a good job keeping actual variable overhead cost per yard within standard. The $6.50 actual cost per
yard was greater than the $5.10 standard cost per yard (the standard variable overhead allocation rate per
yard).
The $2,000 unfavorable fixed overhead cost variance indicates that McKnight’s managers did not do a
good job keeping actual total fixed cost within budget. The $64,730 actual total fixed overhead cost was
greater than the $62,730 budgeted total fixed overhead cost.
manufactured fewer recliners (1,005) than budgeted (1,025). Therefore, total fixed overhead cost
allocated to recliners was $1,224 less than the total budgeted fixed overhead cost ($61,506 total fixed
overhead cost was allocated compared with the $62,730 total budgeted fixed overhead cost).
variances.

P23-31B, cont.
Requirement 4
McKnight’s managers can benefit from the standard costing system in the following ways:
P23-32B Computing standard cost variances and reporting to management
Learning Objectives 3, 4, 5
Headset manufactures headphone cases. During September 2018, the company produced 106,000 cases
and recorded the following cost data:
Standard Cost Information
Quantity Cost
Direct Materials 2 parts $ 0.16 per part
Direct Labor 0.02 hours 8.00 per hour
Variable Manufacturing Overhead 0.02 hours 11.00 per hour
Fixed Manufacturing Overhead ($30,720 for static budget volume of
96,000 units and 1,920 hours, or $16 per hour)
Actual Information
Direct Materials (209,000 parts @ $0.21 per part) $ 43,890
Direct Labor (1,620 hours @ $8.10 per hour) 13,122
Variable Manufacturing Overhead 9,000
Fixed Manufacturing Overhead 30,000
Requirements
3. Headset’s management used better-quality materials during September. Discuss the trade-off
between the two direct material variances.

P23-32B
SOLUTION
Requirement 1

= ($0.21 per part – $0.16 per part) × 209,000 parts
= $10,450 U

= (209,000 parts – 212,000 parts(a)) × $0.16 per part
= $480 F

= $162 U

= $4,000 F
(a)
2 parts per case × 106,000 cases = 212,000 parts
(b)
0.02 DLHr per case × 106,000 cases = 2,120 DLHr

P23-32B, cont.
Requirement 2

= $9,000 − ($11 per DLHr × 1,620 DLHr)
= $8,820 F

= (1,620 DLHr – 2,120 DLHr(a)) × $11 per DLHr
= $5,500 F

= $30,000 ̶ $30,720
= $720 F

= $30,720 ̶ $33,920(b)
= $3,200 F
(a)
(b)
$16 per DLHr × 2,120 DLHr = $33,920
Requirement 3
for the production manager. Perhaps Headset used better quality direct materials, indicated by the fact
that the $0.21 actual direct materials cost per part was greater than the $0.16 direct materials standard
cost per part. Therefore, the direct materials cost variance was $10,450 unfavorable for the 209,000 parts
actually purchased. If so, then the better quality direct materials likely contributed to the $480 favorable
direct materials efficiency variance (209,000 parts actually used was less than the 212,000 parts allowed
for actual production of 106,000 cases). However, the total direct materials variance was $9,970
unfavorable (the $10,450 unfavorable direct materials cost variance minus the $480 favorable direct
materials efficiency variance), indicating that the more efficient usage of direct materials did not
outweigh the higher cost of the direct materials purchased. However, the higher quality components may
result in higher quality and durable final products which may lead to fewer returns and warranty claims
due to product failures and higher customer satisfaction.

P23-33B Computing and journalizing standard cost variances
3. VOH Cost Var. $985 F
Middleton manufactures coffee mugs that it sells to other companies for customizing with their own
logos. Middleton prepares flexible budgets and uses a standard cost system to control manufacturing
costs. The standard unit cost of a coffee mug is based on static budget volume of 59,800 coffee mugs per
month:
Direct Materials (0.2 lbs. @ $0.25 per lb.) $ 0.05
Direct Labor (3 minutes @ $0.14 per minute) 0.42
Manufacturing Overhead:
Variable (3 minutes @ $0.06 per minute) $ 0.18
Fixed (3 minutes @ $0.13 per minute) 0.39 0.57
Total Cost per Coffee Mug $ 1.04
Actual cost and production information for July 2018 follows:

a. There were no beginning or ending inventory balances. All expenditures were on account.
b. Actual production and sales were 62,500 coffee mugs.
c. Actual direct materials usage was 11,000 lbs. at an actual cost of $0.17 per lb.
d. Actual direct labor usage of 197,000 minutes at a cost of $33,490.
e. Actual overhead cost was $10,835 variable and $29,965 fixed.
f. Selling and administrative costs were $130,000.
Requirements
2. Journalize the purchase and usage of direct materials and the assignment of direct labor, including
the related variances.
4. Journalize the actual manufacturing overhead and the allocated manufacturing overhead. Journalize
the movement of all production from Work-in-Process Inventory. Journalize the adjusting of the
Manufacturing Overhead account.
5. Middleton intentionally hired more highly skilled workers during July. How did this decision affect
the cost variances? Overall, was the decision wise?

P23-33B, cont.
SOLUTION
Requirement 1

= ($0.17 per lb. – $0.25 per lb.) × 11,000 lbs.
= $880 F

= (11,000 lbs. – 12,500 lbs.(a)) × $0.25 per lb.
= $375 F

(b)
= ($0.17 per min. – $0.14 per min.) × 197,000 min.
= $5,910 U

= (197,000 min. – 187,500 min.(c)) × $0.14 per min.
= $1,330 U
(a)
0.2 lbs. per mug × 62,500 mugs = 12,500 lbs.
(b)
$33,490 total cost / 197,000 minutes = $0.17 cost per minute
(c)
3 minutes per mug × 62,500 mugs = 187,500 minutes

P23-33B, cont.
Requirement 2

Direct Materials Cost Variance (from Req. 1) 880
Accounts Payable ($0.17/lb. × 11,000 lbs.) 1,870
Work-in-Process Inventory ($0.25/lb. × 12,500 lbs.) 3,125

Direct Materials Efficiency Variance (from Req. 1) 375
Work-in-Process Inventory ($0.14/min. × 187,500 min.) 26,250

Direct Labor Cost Variance (from Req.1 ) 5,910
Direct Labor Efficiency Variance (from Req. 1) 1,330
Wages Payable ($0.17/min × 197,000 min.) 33,490
Requirement 3

= $10,835 − ($0.06 per min. × 197,000 min.)
= $985 F

= (197,000 min. – 187,500 min.(a)) × $0.06 per min.
= $570 U

= $29,965 ̶ $23,322(b)
= $6,643 U

= $23,322(b) ̶ $24,375(c)
= $1,053 F
(a)
(b)
$0.39 per mug × 59,800 mugs = $23,322
(c)
$0.13 per min. × 3 min. per mug × 62,500 mugs = $24,375

P23-33B, cont.
Requirement 4

Manufacturing Overhead ($10,835 + $29,965) 40,800
Work-in-Process Inventory ($0.57/mug × 62,500 mugs) 35,625


Variable Overhead Efficiency Variance (from Req. 3) 570

Fixed Overhead Cost Variance (from Req. 3) 6,643
Variable Overhead Cost Variance (from Req. 3) 985
Fixed Overhead Volume Variance (from Req. 3) 1,053
Requirement 5
Because Middleton hired more skilled workers, the $0.17 actual direct labor cost per minute was greater
than the $0.14 direct labor standard cost per minute. Therefore, the direct labor cost variance was $5,910
unfavorable for the 62,500 mugs actually produced. Hiring more skilled direct labor workers could be
expected to lead to a favorable direct labor efficiency variance, but this didn’t occur. Instead, the direct
labor efficiency variance was $1,330 unfavorable (197,000 minutes of direct labor time actually used
was more than the 187,500 direct labor minutes allowed for actual production of 62,500 mugs).
Combining the two direct labor variances, the total direct labor variance was $7,240 unfavorable (the
$5,910 unfavorable direct labor cost variance plus the $1,330 unfavorable direct labor efficiency
variance). Overall, Middleton’s decision to hire more skilled direct labor workers was not wise.

Note: Problem P23-33B must be completed before attempting Problem P23-34B.
P23-34B Preparing a standard cost income statement
COGS at actual $76,160
Review your results from Problem P23-33B. Middleton’s actual and standard sales price per mug is $5.
Prepare the standard cost income statement for July 2018.
MIDDLETON
Sales Revenue at standard ($5/mug × 62,500 mugs) $ 312,500

Cost of Goods Sold at standard cost (from P23-33B) $ 65,000
Manufacturing Cost Variances (from P23-33B):
Direct Materials Cost Variance $ (880)
Direct Materials Efficiency Variance (375)
Variable Overhead Cost Variance (985)
Variable Overhead Efficiency Variance 570

Using Excel
P23-35 Using Excel to prepare a flexible budget performance report
Download an Excel template for this problem online in MyAccountingLab or at

http://www.pearsonhighered.com/Horngren.
Pilchuck Company manufactures tote bags and has provided the following information for September
2018:
Actual Results Static Budget
Units 11,000 12,000
Sales Revenue $368,000 $384,000
Variable Costs 183,000 198,000
Contribution Margin 185,000 186,000
Fixed Costs 76,000 77,184
Operating Income $109,000 $108,816
Requirements
1. Prepare a flexible budget performance report, including the heading. Use the ABS function when
calculating variances, and use the drop-down selections for F or U when describing the variances.
2. Calculate the Static Budget Variance for operating income, and label it as a F (favorable) or U
(unfavorable) variance.
SOLUTION
The student templates for Using Excel are available online in MyAccountingLab in the Multimedia
Library or at http://www.pearsonhighered.com/Horngren. The solution to Using Excel is available online
in MyAccountingLab in the Instructor Resource Center or at
http://www.pearsonhighered.com/Horngren.

Continuing Problem
P23-36 Preparing a flexible budget and performance report
This continues the Piedmont Computer Company situation from Chapter 22. Assume Piedmont
Computer Company has created a standard cost card for the PCC model tablet computer, with overhead
allocated based on direct labor hours:
Direct materials $ 300 per tablet
Direct labor 3 hours per tablet at $26 per hour
Variable overhead 3 hours per tablet at $5 per hour
Fixed overhead $54,000 per month
During the month of September, Piedmont Computer Company incurred the following costs while
manufacturing 1,100 PCC model tablets:
Direct materials $ 341,000
Direct labor 88,000
Variable overhead 17,600
Fixed overhead 56,320
Requirements
1. Prepare a flexible budget for September for 900, 1,000, and 1,100 PCC model tablets. The tablet has
a standard sales price of $675. List variable costs separately.
2. Using 1,000 PCC model tablets for the static budget, prepare a flexible budget performance report
for September. Total sales revenue for the month was $767,800. The company sold 1,100 tablets.
3. What insights can the management of Piedmont Computer Company draw from the performance
report?

SOLUTION
Requirement 1
PIEDMONT COMPUTER COMPANY

Monthly Flexible Budget
Budget
Amounts
per Unit
Units 900 1,000 1,100
Sales Revenue $ 675 $ 607,500 $ 675,000 $ 742,500
Variable Costs:
Direct Materials 300 270,000 300,000 330,000
Direct Labor* 78 70,200 78,000 85,800
Variable Overhead** 15 13,500 15,000 16,500
Total Variable Costs 353,700 393,000 432,300
Contribution Margin 253,800 282,000 310,200
Fixed Costs 54,000 54,000 54,000
Operating Income $ 199,800 $ 228,000 $ 256,200
*3 hours × $26 per hour

** 3 hours × $5 per hour

P23-36, cont.
Requirement 2
PIEDMONT COMPUTER COMPANY

For the Month Ended September 30
1 2 3 4 5
(1) – (3) (3) – (5)
Units 1,100 1,100 1,000
Sales Revenue $ 675 $ 767,800 $ 25,300 F $ 742,500 $ 67,500 F $ 675,000
Variable Costs:
Direct Materials 300 341,000 11,000 U 330,000 30,000 U 300,000
Direct Labor* 78 88,000 2,200 U 85,800 7,800 U 78,000
Variable Overhead** 15 17,600 1,100 U 16,500 1,500 U 15,000
Total Variable Costs 446,600 14,300 U 432,300 39,300 U 393,000
Fixed Expenses 56,320 2,320 U 54,000 0 54,000
Operating Income $ 264,880 $ 8,680 F $ 256,200 $ 28,200 F $ 228,000

$ 8,680 F $ 28,200 F

$ 36,880 F
*3 hours x $26 per hour

**3 hours x $5 per hour
Requirement 3
The increase in sales volume, from the expected sales of 1,000 tablets to the actual sales of 1,100 tablets,
resulted in an increase in operating income of $28,200 for the month, the amount of the sales volume
variance. Additionally, the tablet sold for an average of $23 each more than expected (total sales
revenue of $767,800 / 1,100 tablets = $698 each). However, management should investigate why all
flexible budget variances for costs were unfavorable. The actual variable cost per unit exceeds the
standard variable cost per unit. Actual fixed costs also exceed the standard budgeted.
variances.

Critical Thinking
Tying It All Together Case 23-1
Before you begin this assignment, review the Tying It All Together feature in the chapter.
Kellogg Company manufacturers and markets ready-to-eat cereal and convenience foods including
Raisin Bran, Pop Tarts, Rice Krispies Treats, and Pringles. In addition to the raw materials used when
producing its products, Kellogg Company also has significant labor costs associated with the products.
As of January 2, 2016, Kellogg Company had approximately 33,577 employees. A shortage in the labor
pool, regulatory measures, and other pressures could increase the company’s labor cost, having a
negative impact on the company’s operating income.
Requirements
1. Suppose Kellogg Company noticed an increase in its actual direct labor costs compared to the
budgeted amount. How could Kellogg Company investigate this?
2. What is the direct labor cost variance and how would a company calculate this variance?
3. What is the direct labor efficiency variance and how would a company calculate this variance?
4. Suppose that Kellogg Company found an unfavorable total direct labor variance that was due
completely to the direct labor cost variance. What measures could Kellogg Company take to control
this variance?
5. Suppose that Kellogg Company found an unfavorable total direct labor variance that was due
completely to the direct labor efficiency variance. What measures could Kellogg Company take to
control this variance?
SOLUTION
Requirement 1
An increase in its actual direct labor cost compared to the budgeted amount would result in a direct labor
variance. The direct labor variance should be investigated by exploring both the direct labor cost
variance and the direct labor efficiency variance.
Requirement 2
The direct labor cost variance measures the difference between the actual amount paid for direct labor
(actual cost) and the amount that should have been paid (standard cost). This variance measures how
well the business keeps its unit costs of labor input within standards. It is calculated as (AC – SC) × AQ.
Requirement 3
The direct labor efficiency variance measures the difference between the actual labor hours (actual
quantity) and the labor hours that should have been used (standard quantity). This variance measures
how well the business uses its human resources. It is calculated as (AQ – SQ) × SC.
Requirement 4
If the total direct labor variance is unfavorable and it is due to the direct labor cost variance, this means
that the actual cost of labor was higher than the budgeted cost. Kellogg Company should investigate
why its cost of labor increased. For example, did the company pay their employees more than expected?
Were there more workers?
Requirement 5
If the total direct labor variance is unfavorable and it is due to the direct labor efficiency variance, this
means that the company’s workers were not as efficient as the company expected them to be. Kellogg
Company should investigate why it took the workers longer to produce the product than expected. For
example, were the materials inferior? Was there a training issue? Did machinery break down requiring
downtime on the job?

Decision Case 23-1
Suppose you manage the local Scoopy’s ice cream parlor. In addition to selling ice cream cones, you
make large batches of a few flavors of milk shakes to sell throughout the day. Your parlor is chosen to
test the company’s “Made-for-You” system. This new system enables patrons to customize their milk
shakes by choosing different flavors.
Customers like the new system and your staff appears to be adapting, but you wonder whether this new
made-to-order system is as efficient as the old system in which you just made a few large batches.
Efficiency is a special concern because your performance is evaluated in part on the restaurant’s
efficient use of materials and labor. Your superiors consider efficiency variances greater than 5% to be
unacceptable.
You decide to look at your sales for a typical day. You find that the parlor used 390 pounds of ice cream
and 72 hours of direct labor to produce and sell 2,000 shakes. The standard quantity allowed for a shake
is 0.2 pound of ice cream and 0.03 hour of direct labor. The standard costs are $1.50 per pound for ice
cream and $8 per hour for labor.
Requirements
1. Compute the efficiency variances for direct labor and direct materials.
2. Provide likely explanations for the variances. Do you have reason to be concerned about your
performance evaluation? Explain.
3. Write a memo to Scoopy’s national office explaining your concern and suggesting a remedy.
Requirement 1

= (72 DLHr – 60 DLHr(a)) × $8 per DLHr
= $96 U

= (390 pounds – 400 pounds(b)) × $1.50 per pound
= $15 F
(a)
0.03 DLHr per shake × 2,000 shakes = 60 DLHr
(b)
0.2 pound per shake × 2,000 shakes = 400 pounds
Requirement 2
The $15 favorable direct materials efficiency variance indicates that actual usage of direct materials (ice
cream) was kept within standard. The 390 pounds of ice cream actually used was less than the 400
pounds allowed to produce 2,000 shakes. Although favorable, the variance is relatively small—only
2.5% under the $600 total direct materials standard allowed to produce 2,000 shakes(a).
The $96 unfavorable direct labor efficiency variance indicates that actual usage of direct labor hours was
not kept within standard. The 72 total direct labor hours actually used was more than the 60 total direct

labor hours allowed to produce and sell 2,000 shakes.
The unfavorable direct labor efficiency variance may be due to employees (1) taking longer to set up
equipment and clean it after each order and (2) waiting for customers to choose from the variety of
flavors available. While the new “Made-for-You” system may help differentiate Scoopy’s from its
competitors, management may have underestimated the system’s cost. The $96 unfavorable direct labor
efficiency variance is 20% over the $480 total direct labor standard allowed to produce 2,000 shakes (b).
Because this is greater than the 5% tolerated by your superiors, your performance evaluation could be
negatively impacted.
(a)
400 pounds × $1.50 per pound = $600
Thus:
$15 / $600 = 2.5%
(b)
60 DLHr × $8 per DLHr = $480
Thus:
$96 / $480 = 20%
Requirement 3
DATE:
TO: Scoopy’s National Office
FROM:
SUBJECT: “Made-for-You” System
The “Made-for-You” system test has yielded some benefits. Customers enjoy being able to customize
their shakes, employees appear to be adapting, and the direct materials efficiency variance is favorable.
However, employees are relatively less efficient under the new system. The unfavorable direct labor
efficiency variance is 20% over the current direct labor standard allowed for actual shakes produced.
I suggest that the national office consider whether additional training is needed to improve employee
efficiency in preparing customized orders. Additionally, the unfavorable direct labor efficiency variance
may be due to employees (1) taking longer to set up equipment and clean it after each order and (2)
waiting for customers to choose from the variety of flavors available. As such, an assessment of whether
existing direct labor standards are appropriate for the new system should also be considered.

Fraud Case 23–1
Drew Castello, general manager of Sunflower Manufacturing, was frustrated. He wanted the budgeted
results, and his staff was not getting them to him fast enough. Drew decided to pay a visit to the
accounting office, where Jeff Hollingsworth was supposed to be working on the reports. Jeff had
recently been hired to update the accounting system and speed up the reporting process.
“What’s taking so long?” Drew asked. “When am I going to get the variance reports?” Jeff sighed and
attempted to explain the problem. “Some of the variances appear to be way off. We either have a serious
problem in production, or there is an error in the spreadsheet. I want to recheck the spreadsheet before I
distribute the report.” Drew pulled up a chair, and the two men went through the spreadsheet together.
The formulas in the spreadsheet were correct and showed a large unfavorable direct labor efficiency
variance. It was time for Drew and Jeff to do some investigating.
After looking at the time records, Jeff pointed out that it was unusual that every employee in the
production area recorded exactly eight hours each day in direct labor. Did they not take breaks? Was no
one ever five minutes late getting back from lunch? What about clean-up time between jobs or at the end
of the day?
Drew began to observe the production laborers and noticed several disturbing items. One employee was
routinely late for work, but his time card always showed him clocked in on time. Another employee took
10- to 15-minute breaks every hour, averaging about 1 1 2 each day, but still reported eight hours of
direct labor each day. Yet another employee often took an extra 30 minutes for lunch, but his time card
showed him clocked in on time. No one in the production area ever reported any “down time” when they
were not working on a specific job, even though they all took breaks and completed other tasks such as
doing clean-up and attending department meetings.
Requirements
1. How might the observed behaviors cause an unfavorable direct labor efficiency variance?
2. How might an employee’s time card show the employee on the job and working when the employee
was not present?
3. Why would the employees’ activities be considered fraudulent?
SOLUTION
Requirement 1
The direct labor efficiency variance measures actual labor usage compared to standard labor usage. If
employees report they are working more hours than they are actually working, then it will appear that
production is using more direct labor than necessary. This variance will, therefore, be unfavorable.
Requirement 2
An employee’s time card might show the employee on the job and working when not present if the
employee has made arrangements for another employee to clock him or her in. This means that the
employees are working together to circumvent company procedures.

Requirement 3
The employees’ activities would be considered fraudulent because they are reporting that they worked
more hours than they actually did. This false documentation results in the company paying for work that
was not completed.
Team Project 23-1
Lynx Corp. manufactures windows and doors. Lynx has been using a standard cost system that bases
cost and efficiency standards on Lynx’s historical long-run average performance. Suppose Lynx’s
controller has engaged your team of management consultants to advise him or her whether Lynx should
use some basis other than historical performance for setting standards.
Requirements
1. List the types of variances you recommend that Lynx compute (for example, direct materials cost
variance for glass). For each variance, what specific standards would Lynx need to develop? In
addition to cost standards, do you recommend that Lynx develop any nonfinancial standards?
2. There are many approaches to setting standards other than simply using long-run average historical
costs and quantities.
a. List three alternative approaches that Lynx could use to set standards, and explain how Lynx
could implement each alternative.
b. Evaluate each alternative method of setting standards, including the pros and cons of each
method.
c. Write a memo to Lynx’s controller detailing your recommendations. First, should Lynx retain its
historical data-based standard cost approach? If not, which of the alternative approaches should it
adopt?
Requirement 1
Lynx should compute cost variances and efficiency variances for each type of direct material (for
example, glass, wood, door handles, and window cranks), each type of direct labor (for example, skilled
labor and unskilled labor), and each type of variable manufacturing overhead cost (for example, machine
maintenance and utilities). Lynx should also compute a fixed overhead cost variance and fixed overhead
volume variance for each type of fixed manufacturing overhead (e.g. rent, salaries, and depreciation).
Finally, Lynx should also develop nonfinancial standards for key factors such as on-time delivery,
product quality, and customer satisfaction (for example, the number of defects, inspections, products
returned, warranty claims, and customer complaints).

Requirement 2
Part a
Three alternative approaches that Lynx could use to set standards include the following:
(1) Engineering analysis/time-and-motion studies.

This approach reveals the minimum amount of direct materials, direct labor, and manufacturing
overhead resources required for production. Using this information, the engineers may be able to suggest
reorganization of plant layout or changes in the production process to increase efficiency. Lynx’s own
engineers or outside consultants could perform this analysis.
(2) Continuous improvement.

Lynx would begin with its historical data-based standards. The company would then tighten these
standards incrementally every quarter or year.
(3) Benchmarking.
Benchmarking standards are based on “best practices.” Best practices are either internal (within the
company) or external (based on other companies). Internal benchmarks are standards from the best
practice within the company. If this plant is not the most efficient in the company, then benchmarks
could be adopted from the most efficient of the company’s other plants. External benchmarks are
standards based on the best practice of other companies. Lynx might be able to obtain benchmark data
from industry trade publications or from consultants. Or Lynx might enter into a partnering relationship
with another company, where the partner companies exchange benchmark information.
Part b

This approach usually allows for unavoidable waste and spoilage, but it could result in tight, or difficult-
to-achieve, standards. Employees who believe that standards are not attainable may be demoralized. If
Lynx uses outside consultant engineers, this is a costly approach. However, the analyses often identify
opportunities for increasing production efficiency, which could make the company more profitable.
(2) Continuous improvement.

Ever-tightening standards can give employees incentives to increase efficiency. This approach is
inexpensive, because it starts with the existing historical data-based standards, and then simply requires
that these be tightened by certain amounts each quarter or year. A problem with this approach is that
after some point, further reductions may not be possible. Management must be careful not to make
demands that employees believe are unattainable.
(3) Benchmarking.
Using “best practice” as a standard gives employees incentives to increase efficiency. Employees should
see these standards as attainable, because others have attained these standards. Internal benchmark
information is easier and less expensive to obtain. External benchmark data are inexpensive if obtained
from industry trade publications or from partnering relationships, but can be expensive to obtain from
consultants.

Team Project 23-1, cont.
Part c
MEMO
DATE:
TO: Controller, Lynx Corporation
FROM: _______________, Management Consultants
SUBJECT: Standard Costs
We recommend that Lynx move from its historical data-based standard cost approach to adopt one of the
following alternative approaches:

(2) Continuous improvement
(3) Benchmarking (best practices).
Any of these three approaches should provide employee incentives to reduce costs and increase
operating efficiency. Without more information on the costs of each approach, we cannot definitively
recommend a single method.
However, we suggest that Lynx examine trade publications for relevant benchmark data, and explore the
possibilities of partnering with other manufacturers to obtain external benchmark data. If benchmark
data are too costly or impossible to obtain, then we recommend conducting time-and-motion studies in
order to set tight, but achievable, standards. In future years, these standards could form the baseline for
continuous improvement adjustments that would give employees incentives to increase efficiency.
Communication Activity 23-1
In 75 words or fewer, explain what a cost variance is and describe its potential causes.
A cost variance measures how well a company keeps unit costs of production inputs within standards.
The cost variance is the difference in costs (actual cost per unit minus standard cost per unit) of an input,
multiplied by the actual quantity used of the input. A cost variance is favorable (unfavorable) if the
actual unit cost of an input (direct materials and direct labor) is less (greater) than the input’s expected
standard unit cost.

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What is a variance and how is it calculated?

What is a variance and how is it calculated?

What is the difference between a flexible budget and a static budget?

What is the difference between a flexible budget and a static budget?

Chapter 23

Flexible Budgets and Standard Cost Systems

2. Explain the difference between a favorable and an unfavorable variance.

3. What is a static budget performance report?

4. How do flexible budgets differ from static budgets?

5. How is a flexible budget used?

7. What is a flexible budget performance report?

8. What is a standard cost system?

© 2018 Pearson Education, Inc. 23-3

17. What is management by exception?

Variance Manager Responsible

© 2018 Pearson Education, Inc. 23-4

Journal entries differ in a standard cost system in the following ways:

• Raw Materials Inventory: Actual quantity at standard cost.

20. What is a standard cost income statement?

© 2018 Pearson Education, Inc. 23-5

Match each term to the correct definition.

c. Sales volume 2. A budget prepared for only one level of sales.

e. Variance 4. The difference arising because the company

S23-2 Preparing flexible budgets

© 2018 Pearson Education, Inc. 23-6

S23-3 Calculating flexible budget variances

© 2018 Pearson Education, Inc. 23-7

Actual Flexible Budget Flexible

S23-4 Matching terms

Match each term to the correct definition.

© 2018 Pearson Education, Inc. 23-8

© 2018 Pearson Education, Inc. 23-9

Direct Materials Cost Variance = (AC ̶ SC) × AQ

Direct Materials Efficiency Variance = (AQ ̶ SQ) × SC

S23-7 Calculating labor variances

© 2018 Pearson Education, Inc. 23-10

Direct Labor Cost Variance = (AC ̶ SC) × AQ

Direct Labor Efficiency Variance = (AQ ̶ SQ) × SC

S23-8 Interpreting material and labor variances

Refer to your results from Short Exercises S23-6 and S23-7.

Variance Manager Responsible

S23-9 Computing standard overhead allocation rates

Standard VOH Budgeted VOH

= $6.00 per DLHr

Standard FOH Budgeted FOH

= $3.00 per DLHr

© 2018 Pearson Education, Inc. 23-12

VOH Cost Variance = Actual VOH − (SC × AQ)

VOH Efficiency Variance = (AQ ̶ SQ) × SC

FOH Cost Variance = Actual FOH ̶ Budgeted FOH

FOH Volume Variance = Budgeted FOH ̶ Allocated FOH

© 2018 Pearson Education, Inc. 23-13

S23-11 Understanding variance relationships

Complete the table below for the missing variances.

© 2018 Pearson Education, Inc. 23-14

Total Flexible Budget Product Cost Variance

Calculations (in the order worked):

© 2018 Pearson Education, Inc. 23-15

Date Accounts and Explanation Debit Credit