The director of cost management for Odessa Company uses a statistical control chart to help management

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Description

1.The director of cost management for Odessa
Company uses a statistical control chart to help management determine when to
investigate variances. The critical value is 1 standard deviation. The
company incurred the following direct-labor efficiency variances during the
first six months of the current year.

January

$

500

F

February

1,600

U

March

1,400

U

April

1,800

U

May

2,100

U

June

2,400

U


The standard direct-labor cost
during each of these months was $38,000. The controller has estimated that
the firm’s monthly direct-labor variances have a standard deviation of
$1,900.

Required:

a.

Determine the cutoff value for investigation if the
controller’s rule of thumb is to investigate all variances equal to or
greater than 6 percent of standard cost.

b.

Based on the cutoff value, which of the month(s) will have
their direct-labor efficiency variance investigated?(Select all that
apply.)

January
variance

February
variance

March
variance

April
variance

May variance

June
variance

2.The following data pertain to Colgate
Palmolive’s liquid filling line during the first 10 months of a particular
year. The standard ratio of direct-labor hours to machine hours is 4:1. The
standard direct-labor rate is $15.98.

Colgate Palmolive: Direct-Labor Efficiency Variance Data*


Units
Produced

Machine
Hours

Standard
Direct-Labor
Hours

Actual
Direct-Labor
Hours

Direct-Labor
Efficiency
Variance

January

50,658

174.5

698.00

392.00

$

4,890

February

32,123

109.3

437.20

232.00

3,279

March

186,079

570.0

2,280.00

1,104.00

18,792

April

214,074

726.4

2,905.60

1,522.75

22,098

May

49,290

169.0

676.00

382.00

4,698

June

83,066

250.0

1,000.00

572.50

6,831

July

36,568

113.0

452.00

301.00

2,413

August

33,843

105.0

420.00

356.50

1,015

September

32,010

105.0

420.00

354.50

1,047

October

28,641

81.0

324.00

194.00

2,077


*Source of data: Alan S. Levitan and Sidney J. Baxendale,
“Analyzing the Labor Efficiency Variance to Signal Process Engineering
Problems,” Journal of Cost Management6, no. 2 (Summer 1992), p.
70.

Required:

1-a.

Which of the following amounts did Colgate Palmolive use in
calculating its standard direct labor hours for the month of January?(Select all that apply.)

Units produced

Machine hours

Actual direct-labor hours

Standard ratio of direct-labor
hours to machine hours

1-b.

Which of the following amounts did Colgate Palmolive use in
calculating its direct-labor efficiency variance for the month of January?
(Select all that apply.)

Units produced

Standard direct-labor hours

Actual direct-labor hours

Standard direct-labor rate

2.

Calculate the following amounts.

a.

The standard direct-labor cost for each of the 10 months.(Round intermediate
calculation to 2 decimal places and final answers to nearest whole dollar
amount.)

Standard Direct-Labor Cost

January

February

March

April

May

June

July

August

September

October

b.

For each month, (expression error) percent of the standard
direct-labor cost.(Round your final answers to the nearest whole dollar amount.)

20% of the
Standard Direct-Labor Cost

January

February

March

April

May

June

July

August

September

October

3.

Suppose management investigates all variances in excess of
(expression error) percent of standard cost. Which months contain a
variance that would be investigated?(Select all that apply.)

January

February

March

April

May

June

July

August

September

October

6.

Which of the following could be a reason why the direct-labor
efficiency variances for March, April and June are larger than in the other
months?

Production volume was significantly higher.

The standard direct-labor rate was significantly higher.

The actual direct-labor rate was significantly higher.

3.McKeag Corporation manufactures agricultural
machinery. At a recent staff meeting, the following direct-labor variance
report for the year just ended was presented by the controller.

MCKEAG CORPORATION
Direct-labor Variance Report

Direct-Labor Rate Variance

Direct-Labor Efficiency Variance



Amount

Standard Cost, %

Amount

Standard Cost, %

January

$

1,600

F

0.16

%

$

10,000

U

1.00

%

February

9,800

F

0.98

%

15,000

U

1.50

%

March

200

U

0.02

%

19,400

U

1.94

%

April

4,000

U

0.40

%

25,600

U

2.56

%

May

7,600

F

0.76

%

40,200

U

4.02

%

June

7,800

F

0.78

%

34,000

U

3.40

%

July

8,400

F

0.84

%

57,000

U

5.70

%

August

10,200

F

1.02

%

76,000

U

7.60

%

September

9,600

F

0.96

%

74,000

U

7.40

%

October

11,400

F

1.14

%

84,000

U

8.40

%

November

8,400

F

0.84

%

120,000

U

12.00

%

December

8,600

F

0.86

%

104,000

U

10.40

%


McKeag’s controller uses the following rule of thumb:
Investigate all variances equal to or greater than $60,000, which is 6
percent of standard cost.

Required:

1.

Which variances would have been investigated during the year?
(Indicate month and type of variance.)(Indicate the effect of each variance by
selecting “Favorable” or “Unfavorable”. Select
“None” and enter “0” for no effect (i.e., zero
variance). Round “Percentage of Standard Cost” to 2 decimal
places.)

Variance Type

Month

Amount

Percentage of Standard Cost

%

%

%

%

%

2.

What characteristics of the variance pattern shown in the
report should draw the controller’s attention, regardless of the usual
investigation rule?(Select all that apply.)

The company’s
direct-labor efficiency variances exhibit a consistent unfavorable trend
through the year.

The
company’s direct-labor rate variances exhibit a favorable trend through
most of the year.

The
unfavorable trend of the direct-labor efficiency is on the increase through
most of the year.

The
favorable trend of the direct-labor rate is on the increase through the
year.

The
unfavorable trend of the direct-labor efficiency is under control till July
with regard to the limits of the investigation rule.

None of the
above.

3.

Which of the following is the best reason to also follow up on
favorable variances?

Bias in investigation targets and subsequent reports is
reduced.

Production efficiencies may be able to be replicated
elsewhere in the organization.

Favorable variances occur more often as activity levels rise

4.Starlight Glassware Company has the
following standards and flexible-budget data.

Standard variable-overhead rate

$

7.00

per direct-labor hour

Standard quantity of direct labor

2

hours per unit of output

Budgeted fixed overhead

$

96,000

Budgeted output

24,000

units


Actual results for February are as follows:

Actual output

19,000

units

Actual variable overhead

$

342,000

Actual fixed overhead

$

93,000

Actual direct labor

45,000

hours


Required:

Use the variance
formulas to compute the following variances.(Indicate the effect of each variance by
selecting “Favorable” or “Unfavorable”. Select
“None” and enter “0” for no effect (i.e., zero
variance).)

1.

Variable-overhead spending
variance

2.

Variable-overhead efficiency
variance

3.

Fixed-overhead budget variance

4.

Fixed-overhead volume variance

5.

Starlight Glassware
Company has the following standards and flexible-budget data.

Standard
variable-overhead rate

$

16

per direct-labor
hour

Standard
quantity of direct labor

2.5

hours per unit
of output

Budgeted
fixed overhead

$

370,000

Budgeted
output

28,500

units


Actual results for
February are as follows:

Actual
output

19,600

units

Actual
variable overhead

$

855,950

Actual
fixed overhead

$

326,000

Actual
direct labor

50,350

hours


Required:

Use the following diagrams below (similar to.mhhe.com/connect/0077632451/Exhibit%2011%E2%80%936.jpg”>Exhibit 11-6 and.mhhe.com/connect/0077632451/Exhibit%2011%E2%80%938.jpg”>Exhibit 11-8 to compute (1) the
variable-overhead spending and efficiency variances, and (2) the
fixed-overhead budget and volume variances.(Round your “per hour” answers to
2 decimal places. Indicate the effect of each variance by selecting
“Favorable” or “Unfavorable”. Select “None” and
enter “0” for no effect (i.e., zero variance).)

Variable overhead
variances:

Variable-Overhead Spending And Efficiency Variances

(Hours = Direct-Labor Hours)

(1)

(2)

(3)

(4)

Actual
Variable Overhead

Projected
Variable Overhead

Flexible
Budget: Variable Overhead

Variable Overhead Applied To Work-In-Process

Actual Hours
(AQ)

×

Actual Rate
(AVR)

Actual
Hours (AQ)

×

Standard
Rate (SVR)

Standard
Allowed Hours (SQ)

×

Standard
Rate (SVR)

Standard
Allowed Hours (SQ)

×

Standard
Rate (SVR)

×

×

×

×

hours

per hour

hours

per hour

hours

per hour

hours

per hour

Variable-overhead spending variance

Variable-overhead efficiency variance

Fixed-Overhead
Budget And Volume Variances

(Hours = Direct-Labor Hours)

(1)

(2)

(3)

Actual Fixed Overhead

Budgeted
Fixed Overhead

Fixed Overhead Applied To Work In Process

Standard
Allowed Hours

×

Standard
Fixed-Overhead Rate

×

hours

per hour

Fixed-overhead
budget variance

Fixed-overhead
volume variance

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