Chapter 11 - Standard Costs and Variances(Through page 656 only – LO 1-4)10.1Budget for a Single Unit- What it “should” cost to make a single unit- Each component of manufacturing cost (DM, DL,MOH) has ao Price/ Rate Standardo Quantity/ Efficiency Standards- Standards need to be reviewed and kept up to date - Service and Merchandising firms also use standard costsIdeal vs. Practical Standards- Ideal (or Perfection) Standardso Do not allow for waste or down timeo May be hard to motivate employees- Practical (or Attainable) Standardso Include allowances for normal waste and down timeo Used by most companieso Better for motivation as employees feel they can reach goalsPrice/ Rate Standards- Accountants help operating managers set direct material price standardso Direct materials  Purchasing manager Purchase price (after early-pay discount) + freight-in + receiving costso Direct labor  Human resources or personnel managers Basic pay rates + payroll taxes + fringe benefitso Overhead – Separate rates for variable and fixed overheadQuantity/Efficiency Standards- Set by engineers and production managers o Material standards - allow for unavoidable waste and spoilageo Labor standards - allow for unavoidable work interruptions and normal downtimeo Manufacturing overhead – determine resources needed for support activitiesHodge Confections is known for its creamy milk chocolate fudge. Hodge sells its fudge to local retailers. A unit of fudge is a 10-pound batch. The standard quantity for a batch of fudge follows:Granulated sugar7 cupsChocolate chips23 ouncesButter 1 poundEvaporated milk18 ouncesThe ingredients are purchased in the following quantities at the listed prices:Granulated sugar20 lb. bag(approximately 2 cups per pound)$6.80Chocolate chips 10 lb. bag $28.80Butter 8 lb. package $14.08Evaporated milk Gallon $17.92Determine the standard direct material cost per batch of fudge.Cost per unit Units neededTotalGranulated sugar7 cupsChocolate chips23 ouncesButter 1 poundEvaporated milk18 ounces10.2Variance Analysis Actual Flexible Master Results Budget Budget Master Budget Variance Flexible Budget Variance Volume VarianceFlexible Budget Variance- Difference between Actual Results and the Flexible Budget (for actual volume)- Master Budget is NOT RELEVANT Donahue Company utilizes the following standard costs:the following standards: Direct material $3.20 per unit produced Direct labor $1.40 per unit producedActual Flexible Budget Flexible BudgetVariance10,000 unitsVariable Expenses Direct Materials $35,000 Direct Labor $12,000Direct Material Variances- Explains “WHY” the direct materials variance was $3,000 Unfavorableo Did they pay too much for the materials? Price Varianceo Did they use too much of the materials? Quantity Variance Actual Flexible Master Results Budget Budget Master Budget Variance Flexible Budget Variance Volume Variance Price QuantityPrice Variance(Actual Price x Actual Quantity Purchased) – (Standard Price x Actual Quantity Purchased ) or(Actual Price – Standard Price) x Actual Quantity Purchased or (AP-SP) AQpPrice refers to PER UNIT price of inputActual Quantity refers to TOTAL quantity PURCHASED- Purchasing Manager is usually responsible for the price varianceQuantity Variance(Standard Price x Actual Quantity Used) – (Standard Price x Standard Quantity ) or(Actual Quantity Used – Standard Quantity) x Standard Price or(AQu – SQ) SPPrice refers to PER UNIT price of inputActual Quantity refers to actual total quantity USEDStandard Quantity refers to TOTAL STANDARD QUANTITY ALLOWED FOR THE ACTUAL OUTPUT- Production Manager is usually responsible for the efficiency varianceUniversity Rings produces class rings. Its best-selling model has a direct material standard of 12 grams of a special alloy per ring that has a standard cost of $65 per gram. In the past month, the company purchased 12,300 grams of the alloy for a total cost of $797,040. A total of 12,100 grams were used last month to produce 1,000 rings.1. Actual cost per gram of alloy is 2. Compute the direct materials price varianceDirect materials price variance:Actual price−Standard price × Actual quantityper input unit per input unit purchased 3. Compute the direct materials quantity varianceDirect materials quantity variance:Actual quantity − Standard quantity of input × Standard priceof input used allowed for actual outputs per input unit 4. Give a possible explanation for these variances.Direct Labor Variances- Explains “WHY” the direct labor variance was $2,000 Favorableo Did they payless per hour for labor than planned? Rate Varianceo Did they use less hours of labor per unit than planned? Efficiency VarianceRate Variance(Actual Rate x Actual Quantity) – (Standard Rate x Actual Quantity) or(Actual Rate – Standard Rate) x Actual Quantity or (AR-SR) AQRate refers to PER HOUR rateQuantity refers to TOTAL hours USED- The Human Resource Manager or the Production manager would probably be responsible for the direct labor rate varianceEfficiency Variance(Standard Rate x Actual Quantity) – (Standard Rate x Standard Quantity) or(Actual Quantity – Standard Quantity) x Standard Rate or(AQ – SQ) SRRate refers to PER HOUR rateStandard Quantity refers to TOTAL STANDARD HOURS ALLOWED FOR THE ACTUAL OUTPUT- Production Manager is usually responsible for the efficiency varianceVariance analysis summarized: Price Variance Efficiency Variance Flexible Budget Variance Secaur Tax Services prepares tax returns for senior citizens. The standards in terms of time spent oneach return is 2 hours. The direct labor standard wage rate is $16 per hour. Last month, 1590 direct labor hours were used to prepare 800 tax returns. Total wages were $26,235.1. What is the actual direct labor