Smith Co uses a standard cost system for its single product in which variable

manufacturing overhead is applied on the basis of direct labor hours. The following
information is given:
4
Standard costs per unit:
Raw materials (1.5 grams at $16) $24.00
Direct labor (0.75 hour at $8) 6.00
Variable manuf. overhead (0.75 hour at $3)... 2.25

Actual experience for current year:
Units produced 22,400 units
Purchases of raw materials (21,000 grams at $17) $357,000
Raw materials used 33,400 grams
Direct labor (16,750 hours at $8) $134,000
Variable manuf. overhead cost incurred $ 48,575

Required:
I. Compute the following variances for raw materials, direct labor, and variable
manufacturing overhead, assuming that the price variance for materials is
recognized at point of purchase:
a. Direct materials price variance
b. Direct materials quantity variance
c. Direct labor rate variance
d. Direct labor efficiency variance
e. Variable overhead spending variance
f. Variable overhead efficiency variance

II. Why are many companies supplementing, or even replacing, standard cost
systems with operating performance measures?

To compute the variances for raw materials, direct labor, and variable manufacturing overhead, we need to compare the standard cost to the actual cost.

I. Variances for Raw Materials:

a. Direct materials price variance:
This variance measures the difference between the actual price paid for the raw materials and the standard price. It is calculated as:
Actual Quantity Purchased x (Actual Price - Standard Price)
= 21,000 grams x ($17 - $16)
= 21,000 grams x $1
= $21,000

b. Direct materials quantity variance:
This variance measures the difference between the actual quantity used and the standard quantity. It is calculated as:
Standard Quantity - Actual Quantity Used
= 33,400 grams - 21,000 grams
= 12,400 grams

II. Variances for Direct Labor:

c. Direct labor rate variance:
This variance measures the difference between the actual rate paid for labor and the standard rate. It is calculated as:
Actual Hours Worked x (Actual Rate - Standard Rate)
= 16,750 hours x ($8 - $8)
= 16,750 hours x $0
= $0

d. Direct labor efficiency variance:
This variance measures the difference between the actual hours worked and the standard hours. It is calculated as:
Standard Hours - Actual Hours Worked
= 0.75 hour - 16,750 hours
= -16,749.25 hours

III. Variances for Variable Manufacturing Overhead:

e. Variable overhead spending variance:
This variance measures the difference between the actual variable manufacturing overhead cost incurred and the standard cost. It is calculated as:
Actual Hours Worked x (Actual Overhead Rate - Standard Overhead Rate)
= 16,750 hours x ($3 - $3)
= 16,750 hours x $0
= $0

f. Variable overhead efficiency variance:
This variance measures the difference between the actual hours worked and the standard hours. It is calculated as:
Standard Hours - Actual Hours Worked
= 0.75 hour - 16,750 hours
= -16,749.25 hours

II. Companies are supplementing or replacing standard cost systems with operating performance measures due to several reasons:

1. Changing business environment: Standard cost systems were developed in a more stable business environment, where costs were predictable and manufacturing processes were relatively consistent. However, with increasing competition and technological advancements, business environments have become more dynamic and complex. Operating performance measures provide more real-time and flexible information to track and manage costs in such environments.

2. Focus on value creation: Standard cost systems primarily focus on cost control and variance analysis. However, modern companies are more concerned with creating value for customers and shareholders. Operating performance measures can help companies assess their overall performance in terms of financial and non-financial indicators, such as customer satisfaction, quality, innovation, and time-to-market, which are essential for value creation.

3. Continuous improvement: Standard cost systems often encourage a focus on meeting predetermined standards and targets without necessarily driving continuous improvement. Operating performance measures, on the other hand, emphasize the identification of opportunities for improvement through methods like benchmarking, best practices sharing, and performance feedback. This helps companies adapt to changing market dynamics and continuously enhance their performance.

4. Information accuracy and relevance: Standard cost systems rely on predetermined standards that may not always reflect current market conditions or changing business strategies. Operating performance measures provide more accurate and relevant information by capturing real-time data and aligning performance metrics with strategic objectives.

In summary, supplementing or replacing standard cost systems with operating performance measures allows companies to better adapt to dynamic business environments, focus on value creation, promote continuous improvement, and ensure accurate and relevant performance information.