Question

Solve question 1 of P10-9

Standard Costs and Variances Santiago was shocked to see the loss for the month particularly because sales were exactly eted. He stated, "I sure hope the plant has a standard cost system in oration. If it doesn't have the slightest idea of where to start looking for the problem." he plant does use a standard cost system, with the following standard variable cost per impot T Standard Quantity or Hours Standard Price or Rate Standard Cou $10.00 Direct materials. .... Direct labor.... Variable manufacturing overhead .. landard variable cost 4.0 pounds 0.5 hours 0.3 hours $2.50 per pound $9.00 per hour $200 per hour . 060 $1600 Based on machine-hours During October the plant produced 5,000 ingots and incurred the following costs Purchased 25.000 pounds of materials at a cost of $2.95 per pound. There were no raw maten als in inventory at the beginning of the month. Used 19.800 pounds of materials in production. (Finished goods and work in process invento ries are insignificant and can be ignored.) Worked 3.600 direct labor hours at a cost of $8.70 per hour. Issumed a total variable manufacturing overhead cost of $4.320 for the month. A total of 1.800 machine-hours was recorded It is the company's policy to close all variances to cost of goods sold on a monthly basis Required 1. Compute the following variances for October Direct materials price and quantity variances b Direct laborate and efficiency variances Variable overhead rate and efficiency variances. 2 Summarize the variances that you computed in (1) above by showing the net overall favor able or unfavorable variance for October. What impact did this figure have on the company's income statement? 3. Pick out the two most significant variances that you computed in (1) above. Explain to Mr. Santiago possible causes of these variances PROBLEM 10-10 Variance Analysis in a Hospital LOL, LO2. LO31 "What's going on in that lab!" asked Derek Warren, chief administrator for Cottonwood Hospital as he studied the prior month's reports. "Every month the lab teeters between a profit and a loss Are we going to have to increase our lab fees again? "We can't replied Lois Ankers, the controller. "We're getting lots of complaints about the last crease, particularly from the insurance companies and governmental health units. They're now paying only about of what we bill. I'm beginning to think the problem is on the cost side. To determine if lab costs are in line with other hospitals, Mr. Warren has asked you to evaluate costs for the past month. Ms. Ankers has provided you with the following information: wo basic types of tests are performed in the labsmears and blood tests. During the past month, 2,700 smears and 900 blood tests were performed in the lab. small glass plates are used in both types of tests. During the past month, the hospital pur chased 16,000 plates at a cost of $38,400. This cost is net of a 4 purchase discount. A local 2000 of these plates were unused at the end of the month; no plates were on hand at the beginning of the month. C During the past month, 1.800 hours of labor time were used in performing smears and blood tests. The cost of this labor time was $18.450. The lab's variable overhead cost last month totaled $11.700. onwood Hospital has never used standard costs. By searching industry literature, however, lave determined the following nationwide averapes for hospital labs Three plates are required per lab test. These plates cost $2.50 each and are disposed of the the test is completed. or! Each smear should require 0.3 hours to complete, and each blood test should require 06 hours to complete. The average cost of this lab time is 12 per hour. hrad: Overhead cost is based on direct labor-hours. The average rate of variable overhead is per hour.

Answer 1

Problem: P - 9 :

1.a.

Direct materials price variance = ( SP - AP ) * AQ = $ ( 2.50 - 2.95 ) * 25,000 pounds = $ 11,250 U

Direct materials quantity variance = ( SQ - AQ ) * SP = ( 5,000 x 4 - 19,800 ) pounds * $ 2.50 = $ 500 F

b. Direct labor rate variance = ( SR - AR ) * AH = $ ( 9.00 - 8.70 ) * 3,600 hours = $ 1,080 F

Direct labor efficiency variance = ( SH - AH ) * SR = ( 5,000 x 0.60 - 3,600) * $ 9.00 = $ 5,400 U

c. Variable overhead rate variances = ( SR - AR) * AMH = $ ( 2.00 - 2.40) * 1,800 MH = $ 720 U

Variable overhead efficiency variance = ( SMH - AMH ) * SR = ( 5,000 x 0.30 - 1,800) * $ 2.00 = $ 600 U

2.

Direct materials price variance	$ 11,250 U
Direct materials quantity variance	500 F	$ 10,750 U
Direct labor rate variance	1,080 F
Direct labor efficiency variance	5,400 U	4,320 U
Variable overhead rate variance	720 U
Variable overhead efficiency variance	600 U	1,320 U
Total		$ 16,390 U

Total variable cost of goods sold was higher than budgeted by $ 16,390, and as a result, net operating income was lower by the same value.

3. The two most significant variances would be: Direct Materials Price Variance ( $ 11,250 U ), and Direct Labor Efficiency Variance ( $ 5,400 U ).

Possible causes leading to unfav. direct materials price variance:

• Scarcity of raw materials
• Backdated standard price used.
• Not availed of quantity discount.
• Different specification/ quality of materials purchased.
• High transportation costs for raw materials.

Possible causes leading to unfav, direct labor efficiency variance:

• Untrained or inept workforce.
• Unskilled or semi-skilled workers used on processes requiring shilled workers
• Poor production supervision
• Power outage
• Machine breakdown.