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# Standard cost vs Actual cost

Phoenix Manufacturers makes blank computer disks. It takes one-eighth of a pound of direct materials and one minute of direct labor at standard per disk. Direct materials cost \$2.60 per pound at standard, and the standard direct labor rate is \$6.00 per hour.

During April, 35,200 disks were made, and the company experienced a \$260 unfavorable material quantity variance. The purchasing agent had purchased 400 pounds of material more than the company used, incurring a favorable price variance of \$200. Six hundred total direct labor hours were incurred in making disks, and a total unfavorable labor variance of \$120 occurred.

1. Determine the following:
a. Standard quantity of materials allowed.
b. actual quantity of materials used.
c. actual quantity of materials purchased.
d. actual price of materials purchased.
e. standard hours allowed for production
f. labor efficiency variance
g. actual labor rate paid

2. The use of variance analysis often results in "management by exception." discuss the meaning and behavioral implications of "management by exception." explain how employee behavior could be adversely affected when "actual to standard" comparisons are used as the basis for performance evaluation.

#### Solution Preview

Solutions to Question One
a. The Standard quantity of materials allowed is calculated as follows:
35,200 * 1/8 lbs = 4,400 lbs

b. The actual quantity of materials used is calculated using the following formula: Material Quantity Variance = Standard price * (standard Quantity - Actual Quantity)

Therefore the actual quantity used will be equal to:
[\$260 U = (4400 - X) * \$2.60] = 4,500 lbs

c. The actual quantity of materials purchased will therefore amount to:
4500lbs + 400lbs = 4,900 lbs

d. The actual price of materials purchased is calculated using the following formula:
Material price variance = Actual Quantity used * (Standard price - Actual price)

Therefore the actual price is ...

#### Solution Summary

This solution uses Variance Analysis to make several decisions for a manufacturing firm. Variance analysis helps us determine the quantity of materials that a manufacturer should use to produce each unit of its product; the actual quantity of materials that were used for each unit produced; the actual amount of materials that the manufacturer purchased; the actual price that was paid for the materials purchased; the number of hours that the firm should have spent to manufacture each unit of product; whether labor was handled efficiently; etc.

In addition, this question tackles the problem of "Management by Exception" which often occurs when a manufacturer uses a standard cost system.

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