OpenStax Principles of Accounting, Volume 2: Managerial Accounting

Chapter 8: Standard Costs and Variances

Principles of Accounting, Volume 2: Managerial Accounting
Chapter 8: Standard Costs and Variances

Multiple Choice

1. LO 8.1 Why does a company use a standard costing system?

A. to identify variances from actual cost that assist them in maintaining profits
B. to identify nonperformers in the workplace
C. to identify what vendors are unreliable
D. to identify defective materials
Solution
A. A standard costing system assists a company in maintaining profits by helping the company
identify where there are variances so that it can investigate the cause of that variance and fix it.
2. LO 8.1 This standard is set at a level that may be reached with reasonable effort.
A. ideal standard
B. attainable standard
C. unattainable standard
D. variance from standard
Solution
B
3. LO 8.1 This standard is set at a level that could be achieved if everything ran perfectly.
A. ideal standard
B. attainable standard
C. unattainable standard
D. variance from standard
Solution
A
4. LO 8.1 This variance is the difference involving spending more or using more than the
standard amount.
A. favorable variance
B. unfavorable variance
C. no variance
D. variance
Solution
B
5. LO 8.1 This variance is the difference involving spending less, or using less than the standard
amount.
A. favorable variance
B. unfavorable variance
C. no variance
D. variance
Solution
A
6. LO 8.2 What are some possible reasons for a material price variance?
A. substandard material
B. labor rate increases

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C. labor rate decreases
D. labor efficiency
Solution
A
7. LO 8.2 When is the material price variance unfavorable?
A. when the actual quantity used is greater than the standard quantity
B. when the actual quantity used is less than the standard quantity
C. when the actual price paid is greater than the standard price
D. when the actual price is less than the standard price
Solution
C
8. LO 8.2 When is the material price variance favorable?
A. when the actual quantity used is greater than the standard quantity
B. when the actual quantity used is less than the standard quantity
C. when the actual price paid is greater than the standard price
D. when the actual price is less than the standard price
Solution
D
9. LO 8.2 What are some reasons for a material quantity variance?
A. building rental charges increase
B. labor rate decreases
C. more qualified workers
D. change in the actual cost of materials
Solution
C
10. LO 8.2 When is the material quantity variance favorable?
A. when the actual quantity used is greater than the standard quantity
B. when the actual quantity used is less than the standard quantity
C. when the actual price paid is greater than the standard price
D. when the actual price is less than the standard price
Solution
B
11. LO 8.2 When is the material quantity unfavorable?
A. when the actual quantity used is greater than the standard quantity
B. when the actual quantity used is less than the standard quantity
C. when the actual price paid is greater than the standard price
D. when the actual price is less than the standard price
Solution
A
12. LO 8.3 What are some possible reasons for a labor rate variance?
A. hiring of less qualified workers
B. an excess of material usage
C. material price increase
D. utilities usage change
Solution
A

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13. LO 8.3 When is the labor rate variance unfavorable?
A. when the actual quantity used is greater than the standard quantity
B. when the actual quantity used is less than the standard quantity
C. when the actual price is greater than the standard price
D. when the actual price is less than the standard price
Solution
C
14. LO 8.3 When is the labor rate variance favorable?
A. when the actual quantity used is greater than the standard quantity
B. when the actual quantity used is less than the standard quantity
C. when the actual price paid is greater than the standard price
D. when the actual price is less than the standard price
Solution
D
15. LO 8.3 What are some possible reasons for a direct labor time variance?
A. utility usage decrease
B. less qualified workers
C. office supplies spending
D. sales decline
Solution
B
16. LO 8.3 When is the direct labor time variance favorable?
A. when the actual quantity used is greater than the standard quantity
B. when the actual hours worked are less than the standard hours at the actual output level
C. when the actual price paid is greater than the standard price
D. when the actual price is less than the standard price
Solution
B
17. LO 8.3 When is the direct labor time variance unfavorable?
A. when the actual hours worked are greater than the standard hours at the actual output
level
B. when the actual quantity used is less than the standard quantity
C. when the actual price paid is greater than the standard price
D. when the actual price is less than the standard price
Solution
A
18. LO 8.4 A flexible budget ________.
A. predicts estimated revenues and costs at varying levels of production
B. gives actual figures for selling price
C. gives actual figures for variable and fixed overhead
D. is not used in overhead variance calculations
Solution
A
19. LO 8.4 The variable overhead rate variance is caused by the sum between which of the
following?
A. actual and standard allocation base

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Chapter 8: Standard Costs and Variances
B. actual and standard overhead rates
C. actual and budgeted units
D. actual units and actual overhead rates
Solution
B
20. LO 8.4 The variable overhead efficiency variance is caused by the difference between which
of the following?
A. actual and budgeted units
B. actual and standard allocation base
C. actual and standard overhead rates
D. actual units and actual overhead rates
Solution
B
21. LO 8.4 The fixed factory overhead variance is caused by the difference between which of the
following?
A. actual and standard allocation base
B. actual and budgeted units
C. actual fixed overhead and applied fixed overhead
D. actual and standard overhead rates
Solution
C
22. LO 8.5 Which of the following is a possible cause of an unfavorable material price variance?
A. purchasing too much material
B. purchasing higher-quality material
C. hiring substandard workers
D. buying substandard material
Solution
B
23. LO 8.5 Which of the following is a possible cause of an unfavorable material quantity
variance?
A. purchasing substandard material
B. hiring higher-quality workers
C. paying more than should have for workers
D. purchasing too much material
Solution
A
24. LO 8.5 Which of the following is a possible cause of an unfavorable labor efficiency
variance?
A. hiring substandard workers
B. making too many units
C. buying higher-quality material
D. paying too much for workers
Solution
A
25. LO 8.5 Which of the following is a possible cause of an unfavorable labor rate variance?
A. hiring too many workers

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Chapter 8: Standard Costs and Variances
B. hiring higher-quality workers at a higher wage
C. making too many units
D. purchasing too much material
Solution
B

Questions

1. LO 8.1 What two components are needed to determine a standard for materials?
Solution
The expected price of materials per unit and the expected quantity usage are needed to help
determine a standard.
2. LO 8.1 What two components are needed to determine a standard for labor?
Solution
The expected labor rate of pay and the expected amount of time required to make a unit are
necessary elements to determine a standard for labor.
3. LO 8.1 What elements require consideration before establishing an overhead standard?
Solution
Fixed overhead and variable overhead should be considered.
4. LO 8.1 What is a variance?
Solution
A variance is the difference between standards and actual performance with materials, labor, or
overhead costs.
5. LO 8.2 What causes the material price variance?
Solution
Paying more or less than the standard price.
6. LO 8.2 What causes the material quantity variance?
Solution
Using more or less than the standard amount.
7. LO 8.2 What are some possible causes of a material price variance?
Solution
Buying a different quality level of material; good or bad purchasing/negotiation.
8. LO 8.2 What are some possible causes of a material quantity variance?
Solution
Different-than-standard quality level; workers of a different experience level.
9. LO 8.3 What is the direct labor rate variance?
Solution
A direct labor rate variance is the actual rate paid being different from the standard rate.
10. LO 8.3 What is the direct labor time variance?
Solution
A direct labor time variance is the actual hours worked being different from the standard hours
allowed.
11. LO 8.3 What are some possible causes of a direct labor rate variance?
Solution
Employees have a different level of experience than standards; the labor market is tighter or
looser than expected; contract renegotiation.

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12. LO 8.3 What are some possible causes of a direct labor time variance?
Solution
Different level of experience than required, different material than standards require, machine
breakdown.
13. LO 8.3 How is the total direct labor variance calculated?
Solution
Total direct labor variance = (Actual hours × Actual rate) – (Standard hours × Standard rate) or
the total direct labor variance is also found by combining the direct labor rate variance and the
direct labor time variance.
14. LO 8.4 What causes the variable overhead rate variance?
Solution
The difference between the actual and standard variable rates causes variable overhead rate
variance.
15. LO 8.4 What causes the variable overhead efficiency variance?
Solution
The difference between the actual and standard amounts of the allocation base cause variable
overhead efficiency variance.
16. LO 8.4 What is the main difference between a flexible budget and a master budget?
Solution
The master budget has one level, whereas the flexible budget has multiple levels.
17. LO 8.5 What causes a favorable variance?
Solution
It is caused by paying or using less than the standard amount.
18. LO 8.5 What causes an unfavorable variance?
Solution
It is caused by paying or using more than the standard amount.
19. LO 8.5 When might a favorable variance not be a good outcome?
Solution
It may not be a good outcome when buying substandard material or hiring substandard
employees.
20. LO 8.5 When might an unfavorable variance be a good outcome?
Solution
It may be good when buying higher-grade material that leads to using less material and workers
working fewer hours.
21. LO 8.5 Identify several causes of a favorable material price variance.
Solution
Causes may include substandard material, quantity discount, negotiated better price, or price
drop.
22. LO 8.5 Identify several causes of an unfavorable material price variance.
Solution
Causes may include higher-quality material, price increase, and negotiated poorly.
23. LO 8.5 Identify several causes of a favorable material quantity variance.
Solution
Causes may include higher-quality material, better-qualified employees, or a change in
manufacturing process.
24. LO 8.5 Identify several causes of an unfavorable material quantity.

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Solution
Causes may include lower-quality material, less-qualified employees, or a change in
manufacturing process.
25. LO 8.5 Identify several causes of a favorable labor rate variance.
Solution
Causes may include less-qualified employees or a change in quality level of employees due to a
change in process.
26. LO 8.5 Identify several causes of an unfavorable labor rate variance.
Solution
Causes may include more-qualified employees, a change in contract with employees, or a change
in manufacturing process that changes the level of employees needed.
27. LO 8.5 Identify several causes of a favorable labor efficiency variance.
Solution
Causes may include better material, higher-quality employees, or a change in process.
28. LO 8.5 Identify several causes of an unfavorable labor efficiency variance.
Solution
Causes may include lower-quality material, less-qualified employees, or a change in the
manufacturing process.

Exercise Set A

EA1. LO 8.1 Moisha is developing material standards for her company. The operations manager
wants grade A widgets because they are the easiest to work with and are the quality the
customers want. Grade B will not work because customers do not want the lower grade, and it
takes more time to assemble the product than with grade A materials. Moisha calls several
suppliers to get prices for the widget. All are within $0.05 of each other. Since they will use
millions of widgets, she decides that the $0.05 difference is important. The supplier who has the
lowest price is known for delivering late and low-quality materials. Moisha decides to use the
supplier who is $0.02 more but delivers on time and at the right quality. This supplier charges
$0.48 per widget. Each unit of product requires four widgets. What is the standard cost per unit
for widgets?
Solution
$0.48 per widget × 4 widget = $1.92.
EA2. LO 8.1 Rene is working with the operations manager to determine what the standard labor
cost is for a spice chest. He has watched the process from start to finish and taken detailed notes
on what each employee does. The first employee selects and mills the wood, so it is smooth on
all four sides. This takes the employee 1 hour for each chest. The next employee takes the wood
and cuts it to the proper size. This takes 30 minutes. The next employee assembles and sands the
chest. Assembly takes 2 hours. The chest then goes to the finishing department. It takes 1.5 hours
to finish the chest. All employees are cross-trained so they are all paid the same amount per hour,
$17.50.
A. What are the standard hours per chest?
B. What is the standard cost per chest for labor?
Solution
A. 1 hour + 0.5 hours + 2 hours + 1.5 hour = 5 hours
B. 5 hours × $17.50 per hour = $87.50

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Chapter 8: Standard Costs and Variances
EA3. LO 8.1 Fiona cleans offices. She is allowed 5 seconds per square foot. She cleans building
A, which is 3,000 square feet, and building B, which is 2,460 square feet. Will she finish these
two buildings in an 8-hour shift? Will she have time for a break?
Solution
(3,000 sq.ft. + 2,460 sq. ft.) × 5 sec. per sq. ft. = 27,300 seconds
27,300/60 seconds = 455 minutes
455 minutes/60 minutes = 7.58 hours
Yes, she will finish in an 8-hour shift, and she can have a break of 0.42 hour, or about 25
minutes.
EA4. LO 8.1 Use the information provided to create a standard cost card for production of one
glove box switch. To make one switch it takes 16 feet of plastic-coated copper wire and 0.5
pounds of plastic material. The plastic material can usually be purchased for $20.00 per pound,
and the wire costs $2.50 per foot. The labor necessary to assemble a switch consists of two types.
The first type of labor is assembly, which takes 3.5 hours. These workers are paid $27.00 per
hour. The second type of labor is finishing, which takes 2 hours. These workers are paid $29.00
per hour. Overhead is applied using labor hours. The variable overhead rate is $14.90 per labor
hour. The fixed overhead rate is $15.60 per hour.
Solution
Manufacturing Cost Standard
 Standard Cost per Unit = Cost Summary
Information Quantity
Direct Materials
Plastic-coated copper wire 16 feet $2.50 per foot $40.00
Plastic material 0.5 pounds $20.00 per pound 10.00
Direct Labor
Assembly 3.5 hours $27.00 per hour 94.50
Finishing 2 hours $29.00 per hour 58.00
Manufacturing Overhead
Variable overhead 5.5 hours $14.90 per direct labor hour 81.95
Fixed overhead 5.5 hours $15.60 per direct labor hour 85.80
Standard Cost $370.25

EA5. LO 8.2 Sitka Industries uses a cost system that carries direct materials inventory at a
standard cost. The controller has established these standards for one ladder (unit):

Sitka Industries made 3,000 ladders in July and used 8,800 pounds of material to make these
units. Sitka Industries bought 15,500 pounds of material in the current period. There was a $250
unfavorable direct materials price variance.
A. How much in total did Sitka pay for the 15,500 pounds?
B. What is the direct materials quantity variance?
C. What is the total direct material cost variance?

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D. What if 9,500 pounds were used to make these ladders, what would be the direct
materials quantity variance?
E. If there was a $340 favorable direct materials price variance, how much did Sitka pay for
the 15,500 pounds of material?
Solution
A. (15,500 lb.  $4.50 per lb.) + $250 = $70,000
B. 3,000 ladders  3 lbs. per ladder = 9,000 lbs. (standard quantity)
$4.50  (8,800 lbs. – 9,000 std. lbs.) = –900 or $900 (favorable)
8,800 lbs. 
9,000 std. lbs. 
$4.50 std. per
$4.50 std. per lb.
lb.
$39,600 $40,500
$900 (favorable)
C. $250 U + $900 F = $650 F
D. $4.50 per lb. × (9,500 lbs. – 9,000 lbs.) = $2,250 (unfavorable)
9,500 lbs. 
9,000 std. lbs. 
$4.50 std. per
$4.50 std. per lb.
lb.
$42,750 $40,500
$2,250 (unfavorable)
E. (15,500 lbs. × $4.50 per lb.) – $340 = $69,410
EA6. LO 8.2 Use the information provided to answer the questions.

All material purchased was used in production.

A. What is the standard price for materials?
B. What is the direct materials quantity variance?
C. What is the total direct materials cost variance?
D. If the direct materials price variance was unfavorable, what would be the standard price?
Solution
A. (13,250 lbs. × $14.50 per lb.) + $4,637.50 = $196,762.50
$196,762.50/13,250 lbs. = $14.85
B. $14.85 per lb. × (13,250 – 12,500) = $11,137.50 or $11,137.50 (unfavorable)
12,500 lbs.  $14.85 std. per
13,250  $14.85 std. per lb.
lb.
$196,762.50 $196,762.50
$11,137.50 (unfavorable)
C. $4,637.50 F + $11,137.50 U = $6,500 U
D. (13,250 lbs. × $14.50 per lb.) – $4,637.50 = $187,487.50
$187,487.50/13,250 lbs. = $14.15
EA7. LO 8.2 Dog Bone Bakery, which bakes dog treats, makes a special biscuit for dogs. Each
biscuit uses 0.75 cup of pure semolina flour. They buy 4,000 cups of flour at $0.55 per cup. They
use 3,550 cups of flour to make 4,750 biscuits. The standard cost per cup of flour is $0.53.

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Chapter 8: Standard Costs and Variances
A. What are the direct materials price variance, the direct materials quantity variances, and
the total direct materials cost variance?
B. What is the standard cost per biscuit for the semolina flour?
Solution
A. 4,000 cups × ($0.55 per cup − $0.53 std. per cup) = $80 (unfavorable)
4,000 cups 
4,000 cups 
$0.53 std. per
$0.55 per cup
cup
$2,200 $2,120
$80 (unfavorable)
3,550 cups  3,562.51 std.
$0.53 std. per cups  $0.53 std.
cup per cup
$1,881.50 $1,888.13
$6.63 (favorable)
$80 U + $6.63 F = $73.37 U
B. $0.53 × $0.75 = $0.3975
EA8. LO 8.3 Queen Industries uses a standard costing system in the manufacturing of its single
product. It requires 2 hours of labor to produce 1 unit of final product. In February, Queen
Industries produced 12,000 units. The standard cost for labor allowed for the output was
$90,000, and there was an unfavorable direct labor time variance of $5,520.
A. What was the standard cost per hour?
B. How many actual hours were worked?
C. If the workers were paid $3.90 per hour, what was the direct labor rate variance?
Solution
A. 12,000 units × 2 hrs. = 24,000 standard hours. $90,000/24,000 = $3.75 standard rate.
B. $90,000 + $5,520 = 95,520 actual hours times standard rate. 95,520/$3.75 per hr. =
25,472 actual hours.
C. 25,472 hrs. × ($3.90 per hr. – $3.75 per hr.) = $3,820.80 (unfavorable) direct labor rate
variance.
EA9. LO 8.3 Penny Company manufactures only one product and uses a standard cost system.
The following information is from Penny’s records for May:

During May, the company used 12.5% more hours than the standard allowed.
A. What were the total standard hours allowed for the units manufactured during the
month? 
B. What were the actual hours worked?
C. How many actual units were produced during May?
Solution
A. $25,000/25 = 1,000 extra hours = 12.5% of standard hours. 1,000/12.5% = 8,000 standard
hours.
B. 8,000 hrs. + 1,000 hrs. = 9,000 actual hours worked.
C. 8,000 hrs./2.5 std. hrs. per unit = 3,200 units produced.

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EA10. LO 8.4 ThingOne Company has the following information available for the past year.
They use machine hours to allocate overhead.

What is the variable overhead efficiency variance?

Solution
$4.50 std. rate × (10,000 hrs. – 9500 hrs.) = $2,250 unfavorable variable overhead efficiency
variance
10,000 hrs.  9,500 std. hrs. 
$4.50 std. per $4.50 std. per
hr. hr.
$45,000 $42,750
$2,250 unfavorable

EA11. LO 8.4 A manufacturer planned to use $78 of variable overhead per unit produced, but in
the most recent period, it actually used $76 of variable overhead per unit produced. During this
same period, the company planned to produce 500 units but actually produced 540 units. What is
the variable overhead spending variance?
Solution
540 units × ($76 var. OH per unit – $78 std. var. OH per unit) = $1,080 favorable variable
overhead spending variance
540 units  $76 540 units  $78
var. OH per std. var. OH per
unit unit
$41,040 $42,120
$1,080 favorable

EA12. LO 8.5 Acme Inc. has the following information available:

A. Compute the material price and quantity, and the labor rate and efficiency variances.
B. Describe the possible causes for this combination of favorable and unfavorable variances.
Solution
A. Material price variance: 100 actual material units× ($1 per unit of material − $1.2 std. per
unit of material) = $20 favorable
100 actual 100 actual
material units  material units 
$1per unit of $1.20 std. per

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material unit of material
$100 $120
$20 favorable
Material quantity variance: $1.2 × (100 − 110) = $12 favorable
100 units of 110 std. units of
material  material 
$1.20 std. per $1.20 std. per
unit of material unit of material
$120 $132
$12 favorable
Labor rate variance: 200 × ($15 − $16) = $200 favorable
$15 per hr.  $16 std. per hr.
200 hrs.  200 hrs.
$3,000 $3,200
$200 favorable
Labor efficiency variance: $16 × (200 − 220) = $320 favorable
$16 std. per hr. $16 std. per hr.
 200 hrs.  220 std. hrs.
$3,200 $3,520
$320 favorable
B. An answer might be that we found a great new manufacturer of the material we use, it
costs us less for the product, the material is such high quality that it takes us less time to fit it into
assembly, and it costs us less for our labor workers per hour. Another option is that we just
estimated high in all categories.
EA13. LO 8.5 Acme Inc. has the following information available:

A. Compute the material price and quantity, and the labor rate and efficiency variances.
B. Describe the possible causes for this combination of favorable and unfavorable variances.
Solution
A. Material price variance: 100 × (1 − $0.9) = $10 unfavorable
100 units of 100 units of
material used  material used 
$1 per unit of $0.90 std. per
material unit of material
$100 $90
$10 unfavorable
Material quantity variance: $0.9 × (100 − 110) = $9 favorable
100 units of 110 std. units of
material used  material 

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$0.90 per unit $0.90 per unit
of material of material
$90 $99
$9 favorable
Labor rate variance: 200 × ($15 − $16) = $200 favorable
$15 per hr.  $16 std. per hr.
200 hrs.  200 hrs.
$3,000 $3,200
$200 favorable
Labor efficiency variance: $16 × (200 − 220) = $320 favorable
$16 std. per hr. $16 std. per hr.
 200 hrs.  220 std. hrs.
$3,200 $3,520
$320 favorable
B. A possible solution is we found a better material, and because we paid more for it, it increased
our productivity the rest of the way around.
EA14. LO 8.5 Acme Inc. has the following information available:

A. Compute the material price and quantity, and the labor rate and efficiency variances.
B. Describe the possible causes for this combination of favorable and unfavorable variances.
Solution
A. Material price variance: 100 units of materials used  ($1 per unit of material − $0.9 per
unit of material) = $10 unfavorable
100 units of 100 units of
material  $1 material 
per unit of $0.90 std. per
material unit of material
$100 $90
$10 unfavorable
Material quantity variance: $0.9  (100 − 110) = $9 favorable
100 units of 110 std. units of
material  material 
$0.90 per unit $0.90 std. per
of material unit of material
$90 $99
$9 favorable
Labor rate variance: 200  ($15 − $14) = $200 unfavorable
$15 per hr.  $14 std. per hr.
200 hrs.  200 hrs.

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$3,000 $2,800
$200 unfavorable
Labor efficiency variance: $14  (200 − 220) = $280 favorable
$14 std. per hr. $14 std. per hr.
 200 hrs.  220 std. hrs.
$2,800 $3,080
$280 favorable
B. A possible answer is that we purchased higher-quality materials, and we had to pay more
for workers to work in our organizations.

Exercise Set B

EB1. LO 8.1 Bristol is developing material standards for her company. The operations manager
wants grade A plastic tops because they are the easiest to work with and are the quality the
customers want. Grade B will not work because customers do not want the lower grade, and it
takes more time to assemble the product than with grade A materials. Bristol calls several
suppliers to get prices for the plastic top. All are within $0.10 of each other. Since the company
will use millions of the plastic tops, she decides that the $0.10 difference is important. The
supplier who has the lowest price is known for delivering late and low-quality materials. Bristol
decides to use the supplier who is $0.04 more but delivers on time and at the right quality. This
supplier charges $0.52 per plastic top. Each unit of product requires six plastic tops. What is the
standard cost per unit for plastic tops?
Solution
$0.52 × 6 = $3.12
EB2. LO 8.1 Salley is developing material and labor standards for her company. She finds that it
costs $0.55 per pound of material per widget. Each widget requires 6 pounds of material per
widget. Salley is also working with the operations manager to determine what the standard labor
cost is for a widget. Upon observation, Salley notes that it takes 3 hours in the assembly
department and 1 hour in the finishing department to complete one widget. All employees are
paid $10.50 per hour.
A. What is the standard materials cost per unit for a widget?
B. What is the standard labor cost per unit for a widget?
Solution
A. $0.55 × 6 = $3.30. B. $10.50 × 4 hours = $42.
EB3. LO 8.1 Use the following information to create a standard cost card for production of one
photography drone from Drone Experts.
To make one drone it takes 2 pounds of plastic material. The material can usually be purchased
for $25.00 per pound. The labor necessary to build a drone consists of two types. The first type
of labor is assembly, which takes 10.5 hours. These workers are paid $21.00 per hour. The
second type of labor is finishing, which takes 7 hours. These workers are paid $25.00 per hour.
Overhead is applied using labor hours. The variable overhead rate is $14.00 per labor hour. The
fixed overhead rate is $16.00 per hour.
Solution
Manufacturing Cost Standard
 Standard Cost per Unit = Cost Summary
Information Quantity
Direct Materials

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Plastic material 2 pounds $25.00 per pound $50.00
Direct Labor
Assembly 10.5 hours $21.00 per hour $220.50
Finish 7 hours $25.00 per hour $175.00
Manufacturing Overhead
Variable overhead 17.5 hours $14.00 per direct labor hour $245.00
Fixed overhead 17.5 hours $16.00 per direct labor hour $280.00
Standard Cost $970.50

EB4. LO 8.1 Mateo makes gizmos. He would like to set up a system to help him manage his
business. The gizmos are made in a standard process. There is a certain amount of material and
labor that goes into each gizmo. The only difference between the gizmo is the color of the
material. What information should Mateo collect, how should he format it, and what kind of
reports should he prepare to help him run his business?
Solution
Mateo should collect standard material prices, standard material quantities, standard labor rates,
standard amounts of labor, variable overhead, and fixed overhead rates. He should create a
standard cost card so he can predict and control his costs. This will help him know when
something is not going according to plan.
EB5. LO 8.2 Smith Industries uses a cost system that carries direct materials inventory at a
standard cost. The controller has established these standards for the cost of one basket (unit):

Smith Industries made 3,000 baskets in July and used 15,500 pounds of material to make these
units. Smith Industries paid $39,370 for the 15,500 pounds of material.
A. What was the direct materials price variance for July?
B. What was the direct materials quantity variance for July?
C. What is the total direct materials cost variance?
D. If Smith Industries used 15,750 pounds to make the baskets, what would be the direct
materials quantity variance?
Solution
A. 39,370 – 40,300 = $930 favorable
B. [(15,500 lbs. – (3,000 lbs. × 5 lbs. per unit)] × 2.60 per lb. = $1,300 (unfavorable)
15,500 lbs.  15,000 std. lbs.
$2.60 std. per  $2.60 std. per
lb. lb.
$40,300 $39,000
$1,300 (unfavorable)
C. $930 F + $1,300 U = $370 U
D. (15,750 lbs. × 2.60 per lb.) – 39,000 = $1,950 (unfavorable)
15,750 lbs.  15,000 std. lbs.
$2.60 std. per × $2.60 std.

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lb. per lb.
$40,950 $39,000
$1,950 (unfavorable)

EB6. LO 8.2 Lizbeth, Inc., makes ice cream. The toffee coffee ice cream takes 4 quarts of cream,
3 cups of sugar, 2 tablespoons of toffee flavoring, and 1.5 tablespoons of coffee flavoring per
gallon. The standard prices are $2.00 per quart of cream, $0.40 per cup of sugar, $0.50 per
tablespoon of toffee flavoring, and $0.75 per tablespoon of coffee flavoring.
A. What is the standard material cost for a gallon of toffee coffee ice cream?
B. If Lizbeth makes 35 gallons of toffee coffee ice cream, how much of each of the
ingredients should she use?
C. If Lizbeth uses 105 quarts of cream to make 25 gallons of ice cream, what would be the
cream (direct materials) quantity variance?
D. If Lizbeth uses 45 tablespoons of toffee flavoring to make 25 gallons of ice cream, what
would be the toffee flavoring (direct materials) quantity variance?
Solution
A. Cream 4 × $2 = $8.00. Sugar 3 × $0.40 = $1.20. Toffee 2 × $0.50 = $1.00. Coffee 1.5 ×
$0.75 = $1.13. Total $11.33.
B. Cream 35 × 4 = 140 quarts. Sugar 35 × 3 = 105 cups, Toffee 35 × 2 = 70 tablespoons.
Coffee 35 × 1.5 = 52.5 tablespoons.
C. 25 × 4 = 100 quarts of cream as standard quantity. [(105 actual quarts of cream – (100
standard quarts of cream) × $2 standard price of cream) = $10 (unfavorable direct materials
quantity variance for cream.]
D. 25 × 2 = 50 tablespoons as standard quantity of toffee flavoring. [(45 tablespoons actual
toffee flavoring – 50 tablespoons standard toffee flavoring) × $0.50 per tablespoons of toffee
flavoring] = $2.50 (favorable direct materials quantity variance for toffee flavoring).
EB7. LO 8.2 Woodpecker manufactures sawmill equipment. They use a standard costing system
and recognize material price variance at the time of material purchases. They use carbide to
make the teeth on their band-saw blades. They received an order for 250 band-saw blades, but
they did not have any carbide in stock. They purchased 3,500 pounds of carbide for $14,875 but
should have spent $16,275. Each saw blade has a standard carbide direct materials quantity of
7.8 pounds.
A. If they used 8 pounds per blade, what would be the direct materials quantity variance?
B. If they used 7.5 pounds per blade, what would be the direct materials quantity variance?
C. Compute the direct materials price variance, based on 7.5 pounds of carbide per blade
actually used.
Solution
A. $16,275/3,500 = $4.65 (standard price per pound)
250 blades × 8 lbs. per blade = 2,000 lbs.
250 blades × 7.8 lbs. per blade= 1,950 lbs.
$4.65 per lb. × (2,000 lbs. – 1,950 lbs.) = $232.50 (unfavorable)
2,000 lbs.  1,950 std. lbs.
$4.65 std. per  $4.65 std.
lb. per lb.
$9,300 $9,067.50
$232.50 (unfavorable)

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B. 250 blades × 7.5 lbs. per blade= 1,875
250 blades × 7.8 lbs. per blade = 1,950 lbs.
$4.65 per lb. × (1,875 lbs. – 1,950 lbs.) = –$348.75 or $348.75 (favorable)
1,875 lbs.  1,950 std. lbs. 
$4.65 std. per lb. $4.65 std. per lb.
$8,718.75 $9,067.50
$348.75 (favorable)
C. $14,875 / 3,500 = $4.25
$16,275 / 3,500 = $4.65
250 blades × 7.5 lbs. per blade = 1,875 lbs.
1,875 lbs. × ($4.25 per lb. – $4.65 std. per lb.) = –$750 or $750 (favorable)
1,875 lbs. × 4.25 per lb. 1,875 lbs. × 4.65 std. per
7,968.75 lb.
8,718.75
$750 (favorable)

EB8. LO 8.3 Case made 24,500 units during June, using 32,000 direct labor hours. They
expected to use 31,450 hours per the standard cost card. Their employees were paid $15.75 per
hour for the month of June. The standard cost card uses $15.50 as the standard hourly rate.
A. Compute the direct labor rate and time variances for the month of June, and also calculate
the total direct labor variance.
B. If the standard rate per hour was $16.00, what would change?
Solution
A. 32,000 hrs. × ($15.75 per hr. − $15.50 per hr.) = $8,000 (unfavorable)
32,000 hrs. 
32,000 hrs. 
$15.50 std. per
$15.75 per hr.
hr.
$504,000 $496,000
$8,000 (unfavorable)
$15.50 × (32,000 – 31,450) = $8,525 (unfavorable)
32,000 hrs.  31,450 hrs. 
$15.50 std. per $15.50 std. per
hr. hr.
$496,000 $487,475
$8,525 (unfavorable)
$8,000 U direct labor rate variance + $8,525 U direct labor time variance = $16,525 U total
direct labor variance
B. 32,000 hrs. × ($15.75 per hr. – $16 std. per hr.) = $8,000 (favorable)
32,000 hrs.  32,000 hrs. 
$15.75 per hr. $16 std. per hr.
$504,000 $512,000
$8,000 (favorable)
16 std. per hr. × (32,000 hrs. – 31,450 std. hrs.) = $8,800 (unfavorable)
31,450 std. hrs.
32,000 hrs. 
 $16 std. per
$16 std. per hr.
hr.

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$512,000 $503,200
$8,800 (unfavorable)

EB9. LO 8.3 Eagle Inc. uses a standard cost system. During the most recent period, the company
manufactured 115,000 units. The standard cost sheet indicates that the standard direct labor cost
per unit is $1.50. The performance report for the period includes an unfavorable direct labor rate
variance of $3,700 and a favorable direct labor time variance of $10,275.
What was the total actual cost of direct labor incurred during the period?
Solution
115,000 units × $1.50 per unit = $172,500. $172,500 – $10,275 = $162,225 actual hours times
standard rate. $162,225 + $3,700 = $165,925 actual cost of direct labor.
EB10. LO 8.4 A manufacturer planned to use $45 of variable overhead per unit produced, but in
the most recent period, it actually used $47 of variable overhead per unit produced. During this
same period, the company planned to produce 200 units but actually produced 220 units. What is
the variable overhead spending variance?
Solution
220 units × ($47 Var OH rate – $45Std Var OH rate) = $440 unfavorable overhead spending
variance
220 units  $45
220 units  $47
std. Var OH
Var OH rate
rate
$10,340 $9,900
$440 unfavorable

EB11. LO 8.4 Fitzgerald Company manufactures sewing machines, and they produced 2,500 this
past month. The standard variable manufacturing overhead (MOH) rate used by the company is
$6.75 per machine hour. Each sewing machine requires 13.5 machine hours. Actual machine
hours used last month were 33,500, and the actual variable MOH rate last month was $7.00.
Calculate the variable overhead rate variance and the variable overhead efficiency variance.
Solution
Variable overhead rate variance = (Actual variable overhead rate – Standard variable overhead
rate)  Actual hours worked, so ($7.00 – $6.75)(33,500) = $8,375 unfavorable. Variable
overhead efficiency rate = (Actual labor hours – Standard labor hours) × Standard overhead rate.
Standard labor hours = 13.5 × 2,500 = 33,750. Variable overhead efficiency rate =
(33,500 – 33,750)($6.75), so 250 × $6.75 = $1,687.50 favorable.
EB12. LO 8.5 Acme Inc. has the following information available:

A. Compute the material price and quantity, and the labor rate and efficiency variances.
B. Describe the possible causes for this combination of favorable and unfavorable variances.
Solution

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Chapter 8: Standard Costs and Variances
A. Material price variance: 100 units of material  ($1 per unit of material − $0.9 std. per
unit of material) = $10 unfavorable
100 units of 100 units of
material  $1 material 
per unit of $0.90 std. per
material unit of material
$100 $90
$10 unfavorable
Material quantity variance: $0.9  (100 − 90) = $9 unfavorable
100 units of
90 std. units 
material 
$0.90 std. per
$0.90 std. per
unit of material
unit of material
$90 $81
$9 unfavorable
Labor rate variance: 200  ($15 − $14) = $200 unfavorable
200 hrs.  $15 200 hrs.  $14
rate per hr. std. rate per hr.
$3,000 $2,800
$200 unfavorable
Labor efficiency variance: $14  (200 − 190) = $140 unfavorable
190 std. hrs. 
200 hrs.  $14
$14 std. rate per
std. rate per hr.
hr.
$2,800 $2,660
$140 unfavorable
B. A possible answer is that we did not set our standards as attainable standards but rather as
ideal standards.
EB13. LO 8.5 Acme Inc. has the following information available:

A. Compute the material price and quantity, and the labor rate and efficiency variances.
B. Describe the possible causes for this combination of favorable and unfavorable variances.
Solution
A. Material price variance: 100 units of material  ($1 per unit of material− $1.10 std. per
unit of material) = $10 favorable
100 units of 100 units of
material  $1 material 
per unit of $1.10 std. per
material unit of material

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Chapter 8: Standard Costs and Variances
$100 $110
$10 favorable
Material quantity variance: $1.10  (100 − 110) = $11 favorable
100 units of 110 std. units of
material  material 
$1.10 std. per $1.10 std. per
unit of material unit of material
$110 $121
$11 favorable
Labor rate variance: 200  ($15 − $14) = $200 unfavorable
200 hrs.  $15 200 hrs.  $14
per hr. std. per hr.
$3,000 $2,800
$200 unfavorable
Labor efficiency variance: $14  (200 − 190) = $140 unfavorable
200 hrs.  $14 190 std. hrs. 
std. per hr. $14 std. per hr.
$2,800 $2,660
$140 unfavorable
B. A possible reason is that you have new assembly workers who are in training and are not
working as efficiently as if they were seasoned workers, and the workers earn more than
anticipated for new hires.
EB14. LO 8.5 Acme Inc. has the following information available:

A. Compute the material price and quantity, and the labor rate and efficiency variances.
B. Describe the possible causes for this combination of favorable and unfavorable variances.
Solution
A. Material price variance: 100 units of material  ($1 per unit of material − $0.9 std. per
unit of material) = $10 unfavorable
100 units of 100 units of
material  $1 material 
per unit of $0.90 std. per
material unit of material
$100 $90
$10 unfavorable
Material quantity variance: $0.9  (100 − 90) = $9 unfavorable
100 units of 90 std. units of
material  material  0.90
$0.90 std. per std. per unit of

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Chapter 8: Standard Costs and Variances
unit of material material
$90 $81
$9 unfavorable
Labor rate variance: 200  ($15 − $16) = $200 favorable
200 hrs.  $15 200 hrs.  $16
per hr. std. per hr.
$3,000 $3,200
$200 favorable
Labor efficiency variance: $16  (200 − 220) = $320 favorable
200 hrs.  $16 220 std. hrs. 
per hr. $16 std. per hr.
$3,200 $3,520
$320 favorable
B. The unfavorable materials price variance indicates that the cost of materials was higher
than expected. Possible reasons the materials cost could be higher are that the regular suppliers
charged a higher price, materials had to be purchased from a different supplier that charged a
higher price, or the standard (expected) cost of materials was improperly estimated. The
unfavorable materials quantity variance indicates the materials used were higher than expected.
Possible reasons more materials were used could be new workers who are less efficient, lower
quality materials that lead to more waste, or the amount of materials needed was improperly
estimated. The favorable labor rate variance indicates the wage paid per hour was less than
expected. Possible reasons the labor rate was lower are newer workers being utilized who are
paid less per hour than experienced workers, anticipated pay raises that would have increased the
hourly rate were not implemented, or the standard (expected) hourly labor rate was improperly
estimated. The favorable labor efficiency variance indicates that the number of labor hours used
was less than the standard (expected) hours. Possible reasons the labor hours were less than
expected are that workers were more efficient than anticipated by the standard or the expected
(standard) hours were improperly estimated.

Problem Set A

PA1. LO 8.1 The comptroller wants to set the standards according to a study done by a
consulting firm for a company. The consulting firm used the following assumptions: The
machines never break down. Workers never take a break. The material used is perfect. The
material arrives on time. No one takes a day off. Workers are well trained. Workers do not make
defective units. What kinds of standards are these? Will the workers be motivated to achieve
these standards?
Solution
These are ideal standards. Everything is perfect, and production is maximized. Workers would
not be very motivated by this type of standard. The standards would be very difficult if not
impossible to meet.
PA2. LO 8.1 Stan is opening a coffee shop next to Big State University. He knows that
controlling his costs will be important to the success of the shop. He will not be able to work all
the hours the shop is open, so the employees will need some guidelines to perform their jobs
correctly. After talking to an accounting professor, he decides he needs a standard cost system

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Chapter 8: Standard Costs and Variances
for his shop. Describe the process Stan should follow in setting his standards for materials and
labor.
Solution
Stan should determine the standard amount of coffee per cup; the standard cost for the various
types of coffee; and the standard costs for the cups, lids, and creamer. He will then need to
determine how many cups of coffee per hour an employee could make.
PA3. LO 8.1 What makes a variance favorable? Give an example of a favorable variance
involving materials. What makes a variance unfavorable? Give an example of an unfavorable
variance involving labor.
Solution
A favorable variance occurs when a company spends less, or uses less, than the standard amount.
Answers will vary. A sample response might identify using fewer materials to produce a good
than expected. A variance is unfavorable when a company spends more, or uses more, than the
standard amount. Answers will vary. Responses should include paying employees at a higher
rate per hour than expected.
PA4. LO 8.2 April Industries employs a standard costing system in the manufacturing of its sole
product, a park bench. They purchased 60,000 feet of raw material for $300,000, and it takes 5
feet of raw materials to produce one park bench. In August, the company produced 10,000 park
benches. The standard cost for material output was $100,000, and there was an unfavorable
direct materials quantity variance of $6,000.
A. What is April Industries’ standard price for one unit of material?
B. What was the total number of units of material used to produce the August output?
C. What was the direct materials price variance for August?
Solution
A. $100,000/10,000 park benches = $10.00 per park bench. Since each park bench requires 5
feet of raw material, $10.00 per park bench/5 feet = $2.00, which is the standard cost per unit
(board foot) of raw material.
B. Material quantity variance = (Actual quantity feet – Standard quantity feet) × Standard
price. $6,000 = (Actual quantity feet – [5 feet × 10,000 benches] × $2 per board foot). $6,000 =
([2 × actual quantity feet] × [2 × 50,000 feet]). $6,000 = (2 × actual quantity feet) – $100,000. 2
× actual quantity feet = $106,000. Actual quantity feet = 53,000.
C. Direct materials price variance = $300,000/60,000 feet = $5.00 per foot actual cost;
53,000 actual feet × (5.00 − 2.00) = 159,000 unfavorable.
PA5. LO 8.2 Ed Co. manufactures two types of O rings, large and small. Both rings use the same
material but require different amounts. Standard materials for both are shown.
Large Small
Rubber 3 feet at $0.25 per foot 1.25 feet at $0.25 per foot
Connector 1 at $0.03 1 at $0.03
At the beginning of the month, Ed Co. bought 25,000 feet of rubber for $6,875. The company
made 3,000 large O rings and 4,000 small O rings. The company used 14,500 feet of rubber.
A. What are the direct materials price variance, the direct materials quantity variance, and
the total direct materials cost variance?
B. If they bought 10,000 connectors costing $310, what would the direct materials price
variance be for the connectors?
C. If there was an unfavorable direct materials price variance of $125, how much did they
pay per foot for the rubber?

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Solution
A. $6,875/25,000 = $0.275
14,500 × (0.275 – $0.25) = $362.50 (unfavorable) direct materials price variance
14,500 × $0.275 14,500 × $0.25
$3,987.50 $3,625
$362.50 (unfavorable)
(14,500 × $0.25) – {[(3,000 × 3) + (4,000 × 1.25)] × $0.25} = $125 (unfavorable) direct
materials quantity variance
14,500  $0.25 14,000  $0.25
$3,625 $3,500
$125 (unfavorable)
$362.50 U + $125 U = $487.50 unfavorable direct material cost variance
B. $310/10,000 = $0.031
3,000 + 4,000 = 7,000
7,000 × ($0.03 – $0.031) = $7 (unfavorable)
7,000 × $0.03 7,000 × $0.031
$210 $217
$7 (unfavorable)
C. (14,500 × Actual price) – (14,500 × $0.25) = $125 (unfavorable)
14,500 × Actual price = $3,750
Actual price = $0.26 (rounded)
PA6. LO 8.2 The Whizbang Company makes a special type of toy. Each toy takes 6 ounces of a
special material that costs $3 per ounce. Whizbang bought 4,000 ounces of the material at a cost
of $11,300. They used 3,400 ounces to make 534 toys. Compute the direct materials price
variance, the direct materials quantity variance and the direct materials quantity variance.
Solution
AP per ounce = $11,300/4,000 ounces = $2.825 per ounce
MPV = ($2.825 – $3) × 4,000 ounces = $700 favorable
MQV = [3,400 – (534 units × 6 ounces) × $3 = $588 unfavorable
Using the Tree Diagram requires an extra step because quantity of material purchased differs
from quantity of materials actually used:
MPV (4,000 × $3) – (4,000 × $2.825) = $700 favorable
MQV (3,400* × $3) – [(534 × 6 ounces) × $3] = $588 unfavorable
*Note: When the quantity or materials purchased differs from the quantity of materials used, the
MQV must be adjusted to reflect the actual materials used, not the materials purchased. In most
other problems, the materials purchased and used have been the same.
PA7. LO 8.3 Ellis Company’s labor information for September is as follows:

A. Compute the standard direct labor rate per hour.

B. Compute the direct labor time variance.
C. Compute the standard direct labor rate if the direct labor rate variance was $2,712.50
(unfavorable).
Solution

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Chapter 8: Standard Costs and Variances
A. 10,850 × $32 = $347,200 + $8,137.5 = $355,337.50 actual hours times standard rate.
$355,337.5/10,850 = $32.75 standard rate.
B. $355,337.5 – (11,000 × $32.75) = $4,912.50 (favorable).
C. 10,850 × $32 = $347,200 – $2,712.50 = $344,487.50. $344,487.50/10,850 = $31.75
standard labor rate.
PA8. LO 8.3 Breakaway Company’s labor information for May is as follows:

A. What is the actual direct labor rate per hour?

B. What is the standard direct labor rate per hour?
C. What was the total standard direct labor cost for May?
D. What was the direct labor rate variance for May?
Solution
A. $1,128,000/48,000 = $23.50.
B. $13,800/(48,000 – 47,400) = $23.00.
C. 47,400 × $23.00 = $1,090,200.
D. 48,000 × ($23.50 – $23.00) = $24,000 (unfavorable).
PA9. LO 8.3 Power Co.’s labor information for June is as follows:

A. What was the actual labor rate per hour?

B. What was the standard labor rate per hour?
C. What was the total standard labor cost for units produced in June?
D. What was the direct labor time variance for June?
Solution
A. $823,200/67,200 = $12.25
B. $823,200 – $23,520 = $799,680/67,200 = $11.90
C. 70,000 × $11.90 = $833,000
D. $799,680 – $833,000 = $33,320 (favorable)
PA10. LO 8.4 Prepare a flexible budget for overhead based on the following data:

Solution
Units 900 1,000 1,100

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Chapter 8: Standard Costs and Variances
$67.50 per unit Direct material $60,750 $67,500 $74,250
*$94.00 per unit Direct labor $84,600 $94,000 $103,400
*$4.00 per unit Variable overhead $3,600 $4,000 $4,400
Fixed overhead $6,000 $6,000 $6,000
Total $154,950 $171,500 $188,050
*Direct labor per unit = $23.50 per hour × 4 hours per unit = $94.00 per unit. Variable overhead
per unit = $1.00 per direct labor hour × 4 hours per unit = $4.00 per unit.
PA11. LO 8.4 Reddy Corporation has collected the following data for the month of June:

What is the variable overhead efficiency variance?

Solution
$1.55 × (17,000 – 18,000) = $1,550 unfavorable
$42,000/15,000 = $2.80: fixed overhead rate
$4.35 – $2.80 = $1.55: variable overhead rate
17,000  $1.55 18,000  $1.55
$26,350 $27,900
$1,550 unfavorable

PA12. LO 8.4 ABC Inc. spent a total of $48,000 on factory overhead. Of this, $28,000 was fixed
overhead. ABC Inc. had budgeted $27,000 for fixed overhead. Actual machine hours were 5,000.
Standard hours for units made were 4,800. The standard variable overhead rate was $4.10. What
is the variable overhead rate variance?
Solution
$48,000 – $28,000 = $20,000: actual variable overhead
$20,000 – (5,000 × $4.10) = $500 favorable
$48,000 – $28,000 5,000  $4.10
$20,000 $20,500
$500 favorable

PA13. LO 8.5 Recompute the variances from EA13 using $0.725 as the standard cost of the
material and $14 as the standard labor cost per hour. How has your explanation of the variances
changed?
Solution
Material price variance: 100  ($1.00 − $0.725) = $27.50 unfavorable
100  $1.00 100  $0.725
$100 $72.5
$27.50 unfavorable
Material quantity variance: $0.725  (100 – 90) = $7.25 unfavorable
100  $0.725 90  $0.725
$72.50 $65.25
$7.25 unfavorable

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Chapter 8: Standard Costs and Variances
Labor rate variance: 200  ($15 – $14) = $200 unfavorable
200 × $15 200 × $14
$3,000 $2,800
$200 unfavorable
Labor efficiency variance: $14  (200 − 220) = $280 favorable
200  $14 220  $14
$2,800 $3,080
$280 favorable
The materials price variance is even more unfavorable now because the standard price of the
materials was even less than in the prior example. The materials quantity variance is still
unfavorable, but less so, simply because the standard price of materials changed but neither the
actual materials used nor the standard materials used changed; therefore, this does not mean
materials usage was more efficient than in the prior example, merely that the dollar value of the
variance changed to the constant multiplier for that variance—standard materials price. The labor
rate variance became unfavorable because the actual rate is now greater than the standard rate.
The labor efficiency variance is still favorable, but less so because the standard labor rate
dropped; however, the actual hours and standard hours did not drop. Thus, it does not mean there
was a change in efficiency, just that the dollar value of the variance changed due to the constant
multiplier—the standard labor rate per hour.

Problem Set B

PB1. LO 8.1 Sameerah is trying to determine the standard hours to make one unit. She has
studied the manufacturing process and is trying to determine what portion of the employees’ time
should be included in the standard time to make the product. She knows that the actual time the
worker is assembling, cutting, and painting should be part of the standard hours. She is
questioning whether setup, down time, rest periods, and cleanup should be part of the standard
hours. Explain why you would or would not include these times.
Solution
All of these amounts should be included in overhead. None of them is directly used in making
the product.
PB2. LO 8.1 Carl cleans offices. He has the following buildings to clean every day: building A,
which is 12,500 square feet; building B, which is 24,500 square feet; building C, which is 10,500
square feet; and building D, which is 6,700 square feet. He is allowed 5 seconds per square foot.
Each employee is allowed one 30-minute lunch per shift. How many employees will he need to
hire?
Solution
12,500 + 24,500 +10,500 + 6,700 = 54,200 square feet
54,200 × 5 = 271,000 seconds
271,000/60 seconds = 4,517 minutes
4,517/60 minutes = 75.28 hours
Each employee works 7.5 hours per day, which is an 8-hour day, less a half-hour for lunch, so
75.28/7.5 = 10 employees. Someone would need to work 0.5 hours overtime so as not to hire an
employee who would be idle 7 hours a day.
PB3. LO 8.1 Freidrich is working with the operations manager to determine what the standard
material cost is for a spice chest. He has watched the process from start to finish and taken

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detailed notes on what material is used. The easiest material to measure is the wood. Each chest
uses 5 board feet and produces 1.5 feet of scrap. He is not sure what to do with the scrap that is
produced; the company cannot buy the boards in any other dimensions. What amount of
materials should be included in the standard for material costs?
Solution
The standard amount of material is the 5 feet of wood used for each chest. The 1.5 feet of scrap
should be included in the overhead standard but not the materials standard.
PB4. LO 8.2 A company bought 45,000 pounds of plastic pellets to make DVDs at a cost of
$9,900. The standard cost per pound for the pellets is 20.5 cents. Some of these pellets were used
in three jobs. The first job called for 7,500 pounds but used 7,250 pounds. The second job called
for 8,800 pounds but used 9,000 pounds. The third job called for 2,300 pounds but used 2,250
pounds. Compute the direct materials price variance and the direct materials quantity variance
for each job and in total. Why would you want to calculate the direct materials quantity variance
for each job?
Solution
Price variance:
$9,900/45,000 = $0.22
$18,500 × ($0.22 – $0.205) = $277.50 (unfavorable)
$18,500 × $0.22 $18,500  0.205
$4,070 $3,792.50
$277.50 (unfavorable)
Total quantity variance:
$0.205 × [(7,250 + 9,000 + 2,250) – (7,500 + 8,800 + 2,300)] = –$20.50 or $20.50 (favorable)
$18,500  0.205 $18,600  0.205
$3,792.50 $3,813
$20.50 (favorable)
First job quantity variance:
$0.205 × (7,250 – 7,500) = –$51.25 or $51.25 (favorable)
7,250  $0.205 7,500  $0.205
$1,486.25 $1,537.50
$51.25 (favorable)
Second job quantity variance:
$0.205 × (9,000 – 8,800) = $41 (unfavorable)
9,000  $0.205 8,800  $0.205
$1,845 $1,804
$41 (unfavorable)
Third job quantity variance:
$0.205 × (2,250 – 2,300) = –$10.25 or $10.25 (favorable)
2,250  $0.205 2,300  $0.205
$461.25 $471.50
$10.25 (favorable)
You would want to calculate the direct materials quantity variance for each job because each job
is different. You would want to evaluate each job separately.
PB5. LO 8.2 Illinois Company is a medium-sized company that makes dresses. During the
month of June, 8,575 dresses were made. All material purchases were used to make the dresses.
The company had this information: standard per dress of 6 yards of material at $6.20 per yard.

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The actual quantity was 52,000 yards at a cost of $325,520. Compute the direct materials price
variance, the direct materials quantity variance, and the total direct materials cost variance.
Solution
52,000 × ($6.26 – $6.20) = $3,120 (unfavorable); $325,520/52,000 = $6.26
52,000  $6.26 52,000  $6.20
$325,520 $322,400
$3,120 (unfavorable)
6.2 × (52,000 – 51,450) = $3,410 (unfavorable)
52,000  $6.20 51,450  $6.20
$322,400 $318,990
$3,410 (unfavorable)
$3,120 U + $3,410 U = $6,530 U
PB6. LO 8.2 Corolla Manufacturing has a standard cost for steel of $20 per pound for a product
that uses 4 pounds of steel. During September, Corolla purchased and used 4,200 pounds of steel
to make 1,040 units. They paid $20.75 per pound for the steel. Compute the direct materials price
variance, the direct materials quantity variance, and the total direct materials cost variance for the
month of September. What would change if Corolla had made 2,200 units?
Solution
4,200 × ($20.75 – $20) = $3,150 (unfavorable)
4,200  $20.75 4,200  $20
$87,150 $84,000
$3,150 (unfavorable)
$20 × [4,200 – (1,040 × 4)] = $800 (unfavorable)
4,200  $20 4,160  $20
$84,000 $83,200
$800 (unfavorable)
$3,150 U + $800 U = $3,950 U
If Corolla made 2,200 units, the direct materials price variance might change; if they bought
more raw material, the direct materials quantity variance might change.
PB7. LO 8.3 Marymount Company makes one product. In the month of April, it made 3,500
units. Workers were paid $32 per hour for labor, for a total of $718,848. The standard hours per
unit are 6.4, and the standard labor wage rate is $38.40 per hour.
A. What are the actual hours worked?
B. What are the standard hours for the units made?
C. What is the direct labor rate variance for April?
D. What is the direct labor time variance for April?
E. What is the total direct labor variance for April?
Solution
A. $718,848/$32 = 22,464 actual hours.
B. 3,500 × 6.4 = 22,400 standard hours.
C. 22,464 × ($32 − $38.40) = –$143,769.60 or $143,769.60 (favorable).
D. $38.40 × (22,464 – 22,400) = $2,457.60 (unfavorable).
E. $143,769.60 F + $2,457.60 U = $141,312 favorable total direct labor variance.
PB8. LO 8.3 Adam Inc.’s records for May include the following information:

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Chapter 8: Standard Costs and Variances

A. What are Adam’s standard labor hours for the units made?
B. What is Adam’s total standard labor cost for the units made?
Solution
A. $40,000 + $8,000 = $48,000. $48,000/3,200 = 15 standard hours.
B. $40,000 + $8,000 = $48,000. $48,000 – $4,800 = $43,200. $43,200/15 = $2,880 standard
labor cost.
PB9. LO 8.3 Ribco’s labor cost information for making its only product for March is as follows:

A. What is the direct labor rate variance?

B. What is the direct labor time variance?
C. What is the total direct labor variance?
Solution
A. $414,000/$36 = 11,500 actual hours worked. 11,500 × ($36 – $40) = –$46,000 or
$46,000 (favorable).
B. $40 × (11,500 – 12,500) = –$40,000 or $40,000 (favorable). 10,000 × 1.25 = 12,500
standard hours.
C. $46,000 F + $40,000 F = $86,000 (favorable).
PB10. LO 8.5 Use the following standard cost card for 1 gallon of ice cream to answer the
questions.

Actual direct costs incurred to make 50 gallons of ice cream:

 275 quarts of cream at $1.05 per quart
 832 ounces of sugar at $0.075 per ounce
 165 minutes of labor at $37 per hour
All material used was bought during the current period.
A. Compute the material and labor variances.
B. Comment on the results and possible causes of the variances.
Solution
A. Cream: Material price variance: 275  ($1.05 − $1.15) = $27.50 favorable

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Chapter 8: Standard Costs and Variances
275  $1.05 275  $1.15
$288.75 $316.25
$27.50 favorable
Material quantity variance: $1.15 × (275 – [50 × 5]) = $28.75 unfavorable
275  $1.15 250  $1.15
$316.25 $287.50
$28.75 unfavorable
Sugar: Material price variance: 832 × ($0.075 − $0.08) = $4.16 favorable
832  $0.075 832  $0.08
$62.40 $66.56
$4.16 favorable
Material quantity variance: $0.08 × (832 – [50 × 16]) = $2.56 unfavorable
832  $0.08 800  $0.08
$66.56 $64
$2.56 unfavorable
Direct labor: Labor rate variance: 2.75 × ($37 − $36) = $2.75 unfavorable
2.75  $37 2.75  $36
$101.75 $99
$2.75 unfavorable
Labor efficiency variance: $36 × (2.75 – 2.50) = $9 unfavorable
2.75  $36 2.50  $36
$99 $90
$9 unfavorable
50 × 3/60 = 2.50
B. Causes of a favorable material price variance may include substandard material quantity
discount, negotiated better price, quantity discount, or price drop. Causes of an unfavorable
material price variance may include higher-quality material, price increase, and negotiated
poorly. Causes of a favorable material quantity variance may include higher-quality material,
better-qualified employees, or a change in manufacturing process. Causes of an unfavorable
material quantity variance may include lower-quality material, less-qualified employees, or a
change in manufacturing process. Causes of a favorable labor rate variance may include less-
qualified employees or a change in quality level of employees due to a change in process. Causes
of an unfavorable labor rate variance may include more-qualified employees, a change in
contract with employees, or a change in manufacturing process that changes the level of
employees needed. Causes of a favorable labor efficiency variance may include better material,
higher-quality employees, or a change in process. Causes of an unfavorable labor efficiency
variance may include lower-quality material, less-qualified employees, or a change in the
manufacturing process.
PB11. LO 8.5 Use the following standard cost card for 1 gallon of ice cream to answer the
questions.

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Chapter 8: Standard Costs and Variances

Actual direct costs incurred to make 50 gallons of ice cream:

 275 quarts of cream at $1.05 per quart
 832 ounces of sugar at $0.075 per ounce
 165 minutes of labor at $37 per hour
All materials used were bought during the current period.
A. Compute the material and labor variances.
B. Comment on the results and possible causes of the variances.
Solution
A. Cream: Material price variance: 275  ($1.05 − $1.00) = $13.75 unfavorable
275  $1.05 275  $1.00
$288.75 $275
$13.75 unfavorable
Material quantity variance: $1.00 × (275 – [50 × 6]) = $25 favorable
275  $1.00 300  $1.00
$275 $300
$25 favorable
Sugar: Material price variance: 832 × ($0.075 − $0.07) = $4.16 unfavorable
832  $0.075 832  $0.07
$62.40 $58.24
$4.16 unfavorable
Material quantity variance: $0.07 × (832 − 750) = $5.74 unfavorable
832  $0.07 750  $0.07
$58.24 $52.50
$5.74 unfavorable
Direct labor: Labor rate variance: 2.75 × ($37 − $38) = $2.75 favorable
2.75  $37 2.75  $38
$101.75 $104.50
$2.75 favorable
Labor efficiency variance: $38 × (2.75 − 2.50) = $9.50 unfavorable
2.75  $38 2.50  $38
$104.50 $95
$9.50 unfavorable
B. Causes of a favorable material price variance may include substandard material quantity
discount, negotiated better price, quantity discount, or price drop. Causes of an unfavorable
material price variance may include higher-quality material, price increase, and negotiated
poorly. Causes of a favorable material quantity variance may include higher-quality material,

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Chapter 8: Standard Costs and Variances
better-qualified employees, or a change in manufacturing process. Causes of an unfavorable
material quantity variance may include lower-quality material, less-qualified employees, or a
change in manufacturing process. Causes of a favorable labor rate variance may include less-
qualified employees or a change in quality level of employees due to a change in process. Causes
of an unfavorable labor rate variance may include more-qualified employees, a change in
contract with employees, or a change in manufacturing process that changes the level of
employees needed. Causes of a favorable labor efficiency variance may include better material,
higher-quality employees, or a change in process. Causes of an unfavorable labor efficiency
variance may include lower-quality material, less-qualified employees, or a change in the
manufacturing process.

Thought Provokers

TP1. LO 8.1 How do you balance a firm’s need to succeed and the need for not asking the
workers for perfection?
Solution
Reasonable attainable standards should be used. Workers will try to reach attainable standards
but not perfect standards. Perfect standards could cause employees to do things they would not
normally do. They could falsify records or produce less than they are able to.
TP2. LO 8.1 What type of firm would use standard costing? What type of firm would not use
standard costing?
Solution
Answers will vary. Responses should include the following: Firms that have a standard repetitive
process are good candidates for standard costing. Auto manufacturers are a good example of
firms that could use standard costing. A research and development firm would not be a good
candidate for standard costing. Each project is different, and a standard process is not followed.
TP3. LO 8.2 You started your own construction business and need to determine the cost of
materials used to build one house, and how many materials you will need to do so.
 Where would you begin to determine the standard price and quantity needs to build one
house?
 What would produce a difference between the standard cost to build a house and the
actual cost? What would cause a favorable outcome? What would cause an unfavorable
outcome?
 What action might your company take if you had an unfavorable total direct materials
cost variance?
Solution
Answers will vary. Responses should include the following: A company could set a standard
price for materials and quantity from past experience or industry standards. A variance between
standard and actual costs could arise from a difference in prices paid or quantities used. A
favorable outcome results when the actual price or quantity is less than the standard. An
unfavorable outcome results when the actual price or quantity is more than the standard. If total
direct materials cost variance was unfavorable, the company might consider retraining the
workforce to reduce waste, find a new supplier with lower materials costs, or raise prices to
cover the higher cost of materials.
TP4. LO 8.3 Is labor a true variable cost?
Solution

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Chapter 8: Standard Costs and Variances
Direct labor has traditionally been treated as a variable cost, but firms do not hire employees by
the unit or by the hour. Employees are hired for an indefinite time period. More and more firms
are considering direct labor as a fixed and semifixed cost.
TP5. LO 8.4 Why would managers use a flexible budget? What information does it provide that
a regular budget does not?
Solution
Flexible budgets provide various levels of activity instead of one level, as regular budgets do.
This allows management to compare actual results to a budget at the same activity level.
TP6. LO 8.4 Fill in the blanks in the following flexible budget:

Solution
Percent of Capacity 90% 100% 110%
Direct labor hours 3,600 4,000 4,400
Units of output 1,800 2,000 2,200
Variable overhead $7,200 $8,000 $8,800
Fixed overhead $10,000 $10,000 $10,000
Total overhead $17,200 $18,000 $18,800
TP7. LO 8.4 Before automation became more prevalent, overhead was often calculated and
allocated as a function of direct labor costs or direct labor hours. Why was this the case, and has
this pattern changed?
Solution
Direct labor was up to 50% of total costs in the past, when overhead allocation started. Overhead
was only 5%–15% of total product cost. All units were processed the same since most factories
only made one product.
TP8. LO 8.5 In your opinion, is it important that an organization set standards and measure them
monthly? Why or why not?
Solution
Answers will vary. Sample answer: It is extremely important to set standards and review them on
a monthly basis because a variance can highlight where the company has changed within that
one-month period, and that one month’s time does not allow for the variance to get too far out of
line that the company starts accumulating large losses.

Feature Boxes

Your Turn: Developing a Standard Cost Card

Solution

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Chapter 8: Standard Costs and Variances

Think It Through: Chocolate Cow Ice Cream Company

Solution
A standard is needed as a baseline to compare to actual results. If a variance occurs, the company
can evaluate the results and better manage costs to help stay on budget. Some factors the
company may need to consider before implementation are attainability, past performance, and
industry standards.

Your Turn: Sweet and Fresh Shampoo Materials

Solution
Actual price per pound: $74,760/89,000 = $0.84
Material price variance: 89,000 × ($0.84 − $0.85) = $890 favorable
Material quantity variance: $0.85 × (89,000 – 88,000) = $850 unfavorable

Think It Through: Don’t “Skirt” the Issue

Solution
When an unfavorable price variance occurs, it could be as a result of changes in the price paid
for materials, or the amount of materials purchased. When an unfavorable quantity variance
exists, it could be as a result of changes in the amount of materials used, or ineffective labor

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Chapter 8: Standard Costs and Variances
training. This overall unfavorable result with price and quantity variances would produce an
unfavorable outcome for the total direct materials variance.

Your Turn: Sweet and Fresh Shampoo Labor

Solution

Think It Through: Package Deliveries

Solution
It is hard to say if the driver can service the customer and drive the route efficiently without more
information. What needs to be taken into consideration is the standard set by management for
efficiency. Is the standard feasible? Does it take into consideration various lengths of customer
interactions? If not, the company may want to reevaluate the standard to be more realistic to
environmental factors. Both customer service and driving the route efficiently are important, and
management needs to consider the financial impact of each to decide how best to handle any
unfavorable variances with efficiency.

Your Turn: Sweet and Fresh Shampoo Overhead

Solution
90% = $315,000/14,000 = $22.50, 100% = $346,000/16,000 = $21.63 (rounded), 110% =
$378,000/18,000 = $21.00.

Think It Through: Purchasing Planes

Solution
With either bid amount, the total fixed cost would remain constant, allowing the fixed cost per
unit to be reduced with the larger bid of 100 planes. The variable cost per unit would remain
constant over the product capacity level (100 percent), but the total variable cost would increase
with more planes. Knowing that the military is more likely to buy 50 planes, XYZ may want to
give a bid at both 50 planes and 100 planes, showing the difference in price with the increased
purchase.

Your Turn: Barley, Inc. Production

Solution

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Chapter 8: Standard Costs and Variances
A. Materials price variance:
$50,000 unfavorable = ($16* – $15) × 50,000 lb.
*$800,000/50,000
An unfavorable materials price variance occurred because the actual cost of materials was
greater than the expected or standard cost. This could occur if a higher-quality material was
purchased or the suppliers raised their prices.
Materials quantity variance:
$150,000 unfavorable = (50,000 lb. – 40,000* lb.) × $15 per lb.
*4 lb. × 10,000 units
An unfavorable materials quantity variance occurred because the pounds of materials used were
greater than the pounds expected to be used. This could occur if there were inefficiencies in
production or the quality of the materials was such that more needed to be used to meet safety or
other standards.
Materials inputs:

B. Labor rate variance:

$50,000 favorable = ($18* per hour – $20 per hour) × 25,000 hours
*$450,000/25,000
A favorable labor rate variance occurred because the rate paid per hour was less than the rate
expected to be paid (standard) per hour. This could occur because the company was able to hire
workers at a lower rate, because of negotiated union contracts, or because of a poor labor rate
estimate used in creating the standard.
Labor quantity variance:
$100,000 unfavorable = (25,000 hours – 20,000* hours) × $20 per hour
*2 hours × 10,000 units
An unfavorable labor quantity variance occurred because the actual hours worked to make the
10,000 units were greater than the expected hours to make that many units. This could occur
because of inefficiencies of the workers, defects and errors that caused additional time reworking
items, or the use of new workers who were less efficient.
Labor inputs:

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Think It Through: Explaining Differences in Expected and Actual Operational Outcomes

Solution
She might have used a standard costing system to discover these differences. There might have
been more scrap due to material inconsistencies, untrained labor, or production process changes.
Employees may have worked more hours than expected because they were improperly trained,
production capacity demands were greater, or there were labor shortages. She would need to get
a more definitive answer about where exactly these variances occurred, what environmental
factors contributed to the outcomes, if the variance was temporary, or if the budget was
improperly determined. Then she could fix the specific area of concern, make changes to the
production process, update pricing to cover these costs, or update the budget, if needed.

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