/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Problem 16 Metal Shelf Company's standard c... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 7: Problem 16

Metal Shelf Company's standard cost for raw materials is \(\$ 4.00\) per pound and it is expected that each metal shelf uses two pounds of material. During 0ctober Year 2,25,000 pounds of materials are purchased from a new supplier for \(\$ 97,000\) and 13,000 shelves are produced using 27,000 pounds of materials. Which statement is a possible explanation concerning the direct materials variances? a. The production department had to use more materials since the quality of the materials was inferior. b. The purchasing manager paid more than expected for materials. c. Production workers were more efficient than anticipated. d. The overall materials variance is positive; no further analysis is necessary.

Short Answer

Expert verified
= \$ 100,000 #tag_title# Step 2: Calculate the actual cost of materials purchased#tag_content# The actual cost is given, which is \$ 97,000. #tag_title# Step 3: Calculate the standard quantity for actual production#tag_content# Each metal shelf uses 2 pounds of material, and 13,000 shelves were produced. So, the standard quantity of material for the actual production is: Standard quantity = \(2 \times 13,000\) shelves = 26,000 pounds #tag_title# Step 4: Calculate the actual quantity used#tag_content# The actual quantity used is given, which is 27,000 pounds of materials. #tag_title# Step 5: Analyze the materials price and quantity variances#tag_content# Now we can analyze the materials price variance (MPV) and materials quantity variance (MQV): MPV = (Standard cost - Actual cost) = (\$ 100,000 - \$ 97,000) = \$ 3,000 (Favorable) MQV = (Standard quantity - Actual quantity) 脳 Standard price = (26,000 - 27,000) 脳 \$ 4 = -\$ 4,000 (Unfavorable) Since the materials price variance is favorable but the materials quantity variance is unfavorable, the correct statement is: _a. The production department had to use more materials since the quality of the materials was inferior._

Step by step solution

01

Calculate standard cost for purchased materials

First, calculate the standard cost of 25,000 pounds of materials. The standard cost for raw materials is $4.00 per pound, so we can calculate the standard cost as follows: Standard cost = \(\$ 4.00 \times 25,000\) pounds

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Standard Cost Calculation
Understanding the standard cost calculation is essential for any student diving into the world of cost accounting. It's the baseline against which actual costs are compared, allowing businesses to assess financial performance. In our Metal Shelf Company example, the formula for standard cost is straightforward. For each pound of metal, the cost is set at \(\$4.00\). If you are manufacturing a product that requires two pounds of material, the standard cost would be doubled accordingly.

For larger quantities, you simply multiply the standard cost per unit by the total number of units purchased or used. This step is critical as it sets the stage for variance analysis. In our case, 25,000 pounds of materials would have a standard cost of \[\$4.00 \times 25,000 = \$100,000\]. This calculation is the foundation upon which further variance analysis is built.
Materials Quantity Variance
Next, let's look at the materials quantity variance. This measures how well the business kept to its standards in terms of the quantity of materials used. In the Metal Shelf Company scenario, each shelf should ideally use two pounds of material. Over time, deviations occur, and these deviations are what we're analyzing.

The formula for materials quantity variance is \(\text{Standard Quantity} - \text{Actual Quantity}) \times \text{Standard Cost per Unit}\). If more materials are being used than the standard allows, then this results in an unfavorable quantity variance, indicating inefficiency. Conversely, if less is used, it could signal efficiency or it could mean that output quality is being compromised. In the case study provided, the actual usage was 27,000 pounds for 13,000 shelves, suggesting more material per shelf than standard, leading to an unfavorable variance.
Materials Price Variance
Now, let's discuss the price variance for materials. This variance comes into play when a business pays a different price than the standard for its materials. It can happen due to changes in market prices, or in the case of the Metal Shelf Company, changing suppliers.

The price variance is calculated as \(\text{Standard Price} - \text{Actual Price}) \times \text{Actual Quantity Purchased}\). A negative result indicates that you鈥檝e paid more than planned (an unfavorable variance), while a positive result suggests savings (a favorable variance). Given that the Metal Shelf Company paid \$97,000 for 25,000 pounds, the price paid per pound was \(\$3.88\). This is less than the standard cost of \$4.00, leading to a favorable materials price variance.
Cost Accounting
Lastly, integrating these variances falls under cost accounting, a key factor in making strategic business decisions. In cost accounting, managers analyze variances to understand where the company is deviating from its planned costs. This encompasses materials, labor, and overhead.

Such analyses can unearth a range of insights. For example, you might discover that while purchasing got a good deal (price variance was favorable), production needed to use more of those materials (unfavorable quantity variance). The goal here is to detect inefficiencies, negotiate better deals, improve operations, and ultimately, protect the company's bottom line.

The Metal Shelf Company must look at both quantity and price variances to assess its overall financial health. A significant variance, positive or negative, often prompts a deeper dive into the 'why' behind the numbers, helping address potential issues before they become costly.

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Amalgamated Manipulation Manufacturing's (AMM) standards anticipate that there will be 3 pounds of raw material used for every unit of finished goods produced. AMM began the month of May with 5,000 pounds of raw material, purchased 15,000 pounds for \(\$ 19,500\) and ended the month with 4,000 pounds on hand. The company produced 5,000 units of finished goods. The company estimates standard costs at \(\$ 1.50\) per pound. The materials price and efficiency variances for the month of May were:$$\begin{array}{lc} \text { Price Variance } & \text { Efficiency Variance } \\ \hline 1 . \$ 3,000 \mathrm{U} & \$ 1,500 \mathrm{F} \\ 2 . \$ 3,000 \mathrm{F} & \$ 0 \\ 3 . \$ 3,000 \mathrm{F} & \$ 1,500 \mathrm{U} \\ 4.53,200 \mathrm{F} & \$ 1,500 \mathrm{U} \end{array}$$

Dawson, Inc., is a privately held furniture manufacturer. For August 2017, Dawson had the following standards for one of its products, a wicker chair The following data were compiled regarding actual performance: actual output units (chairs) produced, 2,\(200 ;\) square yards of input purchased and used, 6,\(200 ;\) price per square yard, \(\$ 5.70 ;\) direct manufacturing labor costs, \(\$ 9,844 ;\) actual hours of input, \(920 ;\) labor price per hour, \(\$ 10.70\) 1\. Show computations of price and efficiency variances for direct materials and direct manufacturing labor. Give a plausible explanation of why each variance occurred. 2\. Suppose 8,700 square yards of materials were purchased (at \(\$ 5.70\) per square yard), even though only 6,200 square yards were used. Suppose further that variances are identified at their most timely control point; accordingly, direct materials price variances are isolated and traced at the time of purchase to the purchasing department rather than to the production department. Compute the price and efficiency variances under this approach.

List three causes of a favorable direct materials price variance.

Sunshine Foods manufactures pumpkin scones. For January 2017 it budgeted to purchase and use 14,750 pounds of pumpkin at \(\$ 0.92\) a pound. Actual purchases and usage for January 2017 were 16,000 pounds at \(\$ 0.85\) a pound. Sunshine budgeted for 59,000 pumpkin scones. Actual output was 59,200 pumpkin scones. 1\. Compute the flexible-budget variance. 2\. Compute the price and efficiency variances. 3\. Comment on the results for requirements 1 and 2 and provide a possible explanation for them.

What are two possible sources of information a company might use to compute the budgeted amount in variance analysis?
See all solutions

Recommended explanations on Math Textbooks

Geometry

Read Explanation

Theoretical and Mathematical Physics

Read Explanation

Discrete Mathematics

Read Explanation

Mechanics Maths

Read Explanation

Applied Mathematics

Read Explanation

Decision Maths

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.