Accounting Questions. 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

Februar

$

y

March

April

May

June

500 F

1,600 U

1,400 U

1,800 U

2,100 U

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.

b.

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.

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*

Uni Ma Sta Act

ts chin nda ual

Pro e rd Dir

duc Hou Dir ected rs ect- Lab

Lab or

or Hou

Hou rs

Direct-Labor

Efficiency

Variance

*Source of data: Alan S. Levitan and Sidney J. Baxendale, “Analyzing the Labor Efficiency

Variance to Signal Process Engineering Problems,” Journal of Cost Management 6, 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 directlabor 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.)

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

DirectLabor

Rate

Varianc

e

Direct-Labor Efficiency Variance

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.)

Percentag

Variance

e of

Month

Amount

Type

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 Favorable variances occur more often as activity levels rise

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

Standard

variableoverhead rate

Standard

quantity of

$

7.00 per directlabor hour

2 hours per unit

of output

direct labor

Budgeted

fixed overhead

Budgeted

output

$

96,000

24,000 units

Actual results for February are as follows:

Actual output

Actual variable overhead

Actual fixed overhead

Actual direct labor

19,000 units

$ 342,000

$

93,000

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.

2.

3.

4.

Variable-overhead

spending variance

Variable-overhead

efficiency variance

Fixed-overhead budget variance

Fixed-overhead volume variance

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

Standard variableoverhead rate

Standard quantity of direct labor

Budgeted

fixed overhead

$

per directlabor hour

16

hours per unit

of output

2.5

$

370,000

Budgeted

output

28,500 units

Actual results for February are as follows:

Actual

output

Actual

variable

overhead

Actual

fixed

overhead

Actual

direct

labor

19,600 units

$ 855,950

$ 326,000

50,350 hours

Required:

Use the following diagrams below (similar to Exhibit 11-6 and 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: