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Copyright © 2012 McGraw-Hill Ryerson Limited
10-1
PowerPoint Author:
Robert G. Ducharme, MAcc, CAUniversity of Waterloo, School of Accounting and Finance
MANAGERIALACCOUNTINGNinth Canadian Edition GARRISON, CHESLEY, CARROLL, WEBB, LIBBY
MANAGERIALACCOUNTINGNinth Canadian Edition GARRISON, CHESLEY, CARROLL, WEBB, LIBBY
Standard Costs and Overhead Analysis
Chapter 10
10-2
Copyright © 2012 McGraw-Hill Ryerson Limited
Standard Costs
Standards are benchmarks or “norms”for measuring performance. Two types
of standards are commonly used.
Quantity standardsspecify how much of aninput should be used to
make a product orprovide a service.
Cost (price)standards specify
how much should be paid for each unit
of the input.
LO 1
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Copyright © 2012 McGraw-Hill Ryerson Limited
Standard Costs
DirectMaterial
Deviations from standards deemed significantare brought to the attention of management, apractice known as management by exception.
Type of Product Cost
Am
ou
nt
DirectLabour
ManufacturingOverhead
Standard
LO 1
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Copyright © 2012 McGraw-Hill Ryerson Limited
Variance Analysis Cycle
Prepare standard cost performance
report
Analyze variances
Begin
Identifyquestions
Receive explanations
Takecorrective
actions
Conduct next period’s
operations
Exhibit10-1
LO 1
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Copyright © 2012 McGraw-Hill Ryerson Limited
Accountants, engineers, purchasingagents, and production managers
combine efforts to set standards that encourage efficient future production.
Setting Standard Costs
LO 1
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Copyright © 2012 McGraw-Hill Ryerson Limited
Setting Standard Costs
Should we useideal standards that require employees to
work at 100% peak efficiency?
Engineer ManagerialAccountant
I recommend using practical standards that are currently
attainable with reasonable and efficient effort.
LO 1
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Copyright © 2012 McGraw-Hill Ryerson Limited
Setting Direct Material Standards
Standard Priceper Unit
Summarized in a Bill of Materials.
Final, deliveredcost of materials,net of discounts.
Standard Quantityper Unit
LO 1
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Copyright © 2012 McGraw-Hill Ryerson Limited
Setting Standards
Six Sigma advocates have sought toeliminate all defects and waste, rather than
continually build them into standards.
As a result allowances for waste andspoilage that are built into standards
should be reduced over time.
Six Sigma advocates have sought toeliminate all defects and waste, rather than
continually build them into standards.
As a result allowances for waste andspoilage that are built into standards
should be reduced over time.
LO 1
10-9
Copyright © 2012 McGraw-Hill Ryerson Limited
Setting Direct Labour Standards
Standard Rateper Hour
Often a singlerate is used that reflectsthe mix of wages earned.
Standard Hoursper Unit
Use time and motion studies for
each labour operation.
LO 1
10-10
Copyright © 2012 McGraw-Hill Ryerson Limited
Setting Variable Overhead Standards
PriceStandards
The rate is the variable portion of the
predetermined overhead rate.
QuantityStandards
The quantity is the activity in the allocation
base used to calculate the predetermined overhead.
LO 1
10-11
Copyright © 2012 McGraw-Hill Ryerson Limited
Standard Cost Card – Variable Production Cost
A standard cost card for one unit of product might look like this:
A A × BStandard Standard StandardQuantity Price Cost
Inputs or Hours or Rate per Unit
Direct materials 3.0 lbs. 4.00$ per lb. 12.00$ Direct labour 2.5 hours 14.00 per hour 35.00 Variable mfg. overhead 2.5 hours 3.00 per hour 7.50 Total standard unit cost 54.50$
B
LO 1
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Copyright © 2012 McGraw-Hill Ryerson Limited
Are standards the same as budgets?
A budget is set for total costs.
Standards vs. Budgets
A standard is a per unit cost.
Standards are often used when
preparing budgets.
LO 1
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Copyright © 2012 McGraw-Hill Ryerson Limited
Price and Quantity Standards
Price and quantity standards are determined separately for two reasons:
The purchasing manager is responsible for raw material purchase prices and the production manager is responsible for the quantity of raw material used.
The purchasing manager is responsible for raw material purchase prices and the production manager is responsible for the quantity of raw material used.
The buying and using activities occur at different times. Raw material purchases may be held in inventory for a period of time before being used in production.
The buying and using activities occur at different times. Raw material purchases may be held in inventory for a period of time before being used in production.
LO 1
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Copyright © 2012 McGraw-Hill Ryerson Limited
A General Model for Variance Analysis
Variance Analysis
Price Variance
Difference betweenactual price and standard price
Quantity Variance
Difference betweenactual quantity andstandard quantity
LO 1
10-15
Copyright © 2012 McGraw-Hill Ryerson Limited
Variance Analysis
Price Variance Quantity Variance
Materials price varianceLabour rate variance
VOH spending variance
Materials quantity varianceLabour efficiency varianceVOH efficiency variance
A General Model for Variance Analysis
LO 1
10-16
Copyright © 2012 McGraw-Hill Ryerson Limited
Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
A General Model for Variance Analysis
LO 1
Spending Variance
10-17
Copyright © 2012 McGraw-Hill Ryerson Limited
Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
A General Model for Variance Analysis
LO 1
Spending Variance
Actual quantity is the amount of direct materials, direct labour, and variable manufacturing overhead actually used.
10-18
Copyright © 2012 McGraw-Hill Ryerson Limited
Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
A General Model for Variance Analysis
LO 1
Spending Variance
Standard quantity is the standard quantity allowed for the actual output of the period.
10-19
Copyright © 2012 McGraw-Hill Ryerson Limited
Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
A General Model for Variance Analysis
LO 1
Spending Variance
Actual price is the amount actuallypaid for the input used.
10-20
Copyright © 2012 McGraw-Hill Ryerson Limited
Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
A General Model for Variance Analysis
LO 1
Spending Variance
Standard price is the amount that shouldhave been paid for the input used.
10-21
Copyright © 2012 McGraw-Hill Ryerson Limited
Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
A General Model for Variance Analysis
LO 1
Spending Variance
(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)
AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity
10-22
Copyright © 2012 McGraw-Hill Ryerson Limited
Glacier Peak Outfitters has the following direct material standard for the fibrefill in its mountain
parka.
0.1 kg. of fibrefill per parka at $5.00 per kg.
Last month 210 kgs of fibrefill were purchased and used to make 2,000 parkas. The material
cost a total of $1,029.
Material Variances Example
LO 2
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Copyright © 2012 McGraw-Hill Ryerson Limited
210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000
Price variance$21 favourable
Quantity variance$50 unfavourable
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Material Variances Summary
LO 2$29 unfavourable
10-24
Copyright © 2012 McGraw-Hill Ryerson Limited
210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000
Price variance$21 favourable
Quantity variance$50 unfavourable
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
$1,029 210 kgs = $4.90 per
kg
Material Variances Summary
LO 2$29 unfavourable
10-25
Copyright © 2012 McGraw-Hill Ryerson Limited
210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000
Price variance$21 favourable
Quantity variance$50 unfavourable
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
0.1 kg per parka 2,000 parkas = 200 kgs
Material Variances Summary
LO 2$29 unfavourable
10-26
Copyright © 2012 McGraw-Hill Ryerson Limited
Material Variances:Using the Factored Equations
Materials price variance
MPV = AQ (AP – SP)
= 210 kgs ($4.90/kg – $5.00/kg)
= 210 kgs (-$0.10/kg)
= $21 F
Materials quantity variance
MQV = SP (AQ – SQ)
= $5.00/kg (210 kgs – (0.1 kg/parka 2,000 parkas))
= $5.00/kg (210 kgs – 200 kgs)
= $5.00/kg (10 kgs)
= $50 U
LO 2
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Copyright © 2012 McGraw-Hill Ryerson Limited
Materials Price VarianceMaterials Quantity Variance
Production Manager Purchasing Manager
The standard price is used to compute the quantity varianceso that the production manager is not held responsible for
the purchasing manager’s performance.
The standard price is used to compute the quantity varianceso that the production manager is not held responsible for
the purchasing manager’s performance.
Responsibility for Material Variances
LO 2
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Copyright © 2012 McGraw-Hill Ryerson Limited
I am not responsible for this unfavourable material
quantity variance.
You purchased cheapmaterial, so my peoplehad to use more of it.
Your poor scheduling sometimes requires me to
rush order material at a higher price, causing
unfavourable price variances.
Responsibility for Material Variances
LO 2
10-29
Copyright © 2012 McGraw-Hill Ryerson Limited
Hanson Inc. has the following direct material standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 1,700 pounds of material were purchased and used to make 1,000 Zippies.
The material cost a total of $6,630.
ZippyQuick Check
LO 2
10-30
Copyright © 2012 McGraw-Hill Ryerson Limited
Quick Check Zippy
Hanson’s material price variance (MPV)for the week was:
a. $170 unfavourable.
b. $170 favourable.
c. $800 unfavourable.
d. $800 favourable.
Hanson’s material price variance (MPV)for the week was:
a. $170 unfavourable.
b. $170 favourable.
c. $800 unfavourable.
d. $800 favourable.
LO 2
10-31
Copyright © 2012 McGraw-Hill Ryerson Limited
Hanson’s material price variance (MPV)for the week was:
a. $170 unfavourable.
b. $170 favourable.
c. $800 unfavourable.
d. $800 favourable.
Hanson’s material price variance (MPV)for the week was:
a. $170 unfavourable.
b. $170 favourable.
c. $800 unfavourable.
d. $800 favourable. MPV = AQ (AP – SP) MPV = 1,700 lbs. × ($3.90 – 4.00) MPV = $170 favourable
Quick Check Zippy
LO 2
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Copyright © 2012 McGraw-Hill Ryerson Limited
Quick Check
Hanson’s material quantity variance (MQV)for the week was:
a. $170 unfavourable.
b. $170 favourable.
c. $800 unfavourable.
d. $800 favourable.
Hanson’s material quantity variance (MQV)for the week was:
a. $170 unfavourable.
b. $170 favourable.
c. $800 unfavourable.
d. $800 favourable.
Zippy
LO 2
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Copyright © 2012 McGraw-Hill Ryerson Limited
Hanson’s material quantity variance (MQV)for the week was:
a. $170 unfavourable.
b. $170 favourable.
c. $800 unfavourable.
d. $800 favourable.
Hanson’s material quantity variance (MQV)for the week was:
a. $170 unfavourable.
b. $170 favourable.
c. $800 unfavourable.
d. $800 favourable. MQV = SP (AQ – SQ) MQV = $4.00 × (1,700 lbs – 1,500 lbs) MQV = $800 unfavourable
Quick Check Zippy
LO 2
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Copyright © 2012 McGraw-Hill Ryerson Limited
1,700 lbs. 1,700 lbs. 1,500 lbs. × × × $3.90 per lb. $4.00 per lb. $4.00 per lb.
= $6,630 = $ 6,800 = $6,000
Price variance$170 favourable
Quantity variance$800 unfavourable
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
ZippyQuick Check
LO 2$630 unfavourable
10-35
Copyright © 2012 McGraw-Hill Ryerson Limited
Isolation of Material Variances
I need the price variancesooner so that I can better
identify purchasing problems.
You accountants just don’tunderstand the problems thatpurchasing managers have.
I’ll start computingthe price variancewhen material is
purchased rather thanwhen it’s used.
LO 2
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Copyright © 2012 McGraw-Hill Ryerson Limited
Material Variances
Hanson purchased and used 1,700 pounds.
How are the variances computed if the amount purchased differs from
the amount used?
The price variance is computed on the entire
quantity purchased.
The quantity variance is computed only on
the quantity used.
LO 2
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Copyright © 2012 McGraw-Hill Ryerson Limited
Hanson Inc. has the following material standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 2,800 pounds of material were purchased at a total cost of $10,920, and 1,700
pounds were used to make 1,000 Zippies.
ZippyQuick Check Continued
LO 2
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Copyright © 2012 McGraw-Hill Ryerson Limited
Actual Quantity Actual Quantity Purchased Purchased × × Actual Price Standard Price 2,800 lbs. 2,800 lbs. × × $3.90 per lb. $4.00 per lb.
= $10,920 = $11,200
Price variance$280 favourable
Price variance increases because quantity
purchased increases.
ZippyQuick Check Continued
LO 2
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Copyright © 2012 McGraw-Hill Ryerson Limited
Actual Quantity Used Standard Quantity × × Standard Price Standard Price 1,700 lbs. 1,500 lbs. × × $4.00 per lb. $4.00 per lb.
= $6,800 = $6,000
Quantity variance$800 unfavourable
Quantity variance is unchanged because actual and standard
quantities are unchanged.
ZippyQuick Check Continued
LO 2
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Copyright © 2012 McGraw-Hill Ryerson Limited
Glacier Peak Outfitters has the following direct labour standard for its mountain parka.
1.2 standard hours per parka at $10.00 per hour
Last month, employees actually worked 2,500 hours at a total labour cost of $26,250 to make 2,000
parkas.
Labour Variances Example
LO 3
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Copyright © 2012 McGraw-Hill Ryerson Limited
2,500 hours 2,500 hours 2,400 hours × × ×$10.50 per hour $10.00 per hour $10.00 per hour
= $26,250 = $25,000 = $24,000
Rate variance$1,250 unfavourable
Efficiency variance$1,000 unfavourable
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
Labour Variances Summary
LO 3$2,250 unfavourable
10-42
Copyright © 2012 McGraw-Hill Ryerson Limited
Labour Variances Summary
2,500 hours 2,500 hours 2,400 hours × × ×$10.50 per hour $10.00 per hour $10.00 per hour
= $26,250 = $25,000 = $24,000
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
$26,250 2,500 hours = $10.50 per hour
Rate variance$1,250 unfavourable
Efficiency variance$1,000 unfavourable
LO 3$2,250 unfavourable
10-43
Copyright © 2012 McGraw-Hill Ryerson Limited
Labour Variances Summary
2,500 hours 2,500 hours 2,400 hours × × ×$10.50 per hour $10.00 per hour $10.00 per hour
= $26,250 = $25,000 = $24,000
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
1.2 hours per parka 2,000 parkas = 2,400 hours
Rate variance$1,250 unfavourable
Efficiency variance$1,000 unfavourable
LO 3$2,250 unfavourable
10-44
Copyright © 2012 McGraw-Hill Ryerson Limited
Labour Variances:Using the Factored Equations
Labour rate variance
LRV = AH (AR – SR)
= 2,500 hours ($10.50 per hour – $10.00 per hour)
= 2,500 hours ($0.50 per hour)
= $1,250 unfavourable
Labour efficiency variance
LEV = SR (AH – SH)
= $10.00 per hour (2,500 hours – 2,400 hours)
= $10.00 per hour (100 hours)
= $1,000 unfavourable
LO 3
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Copyright © 2012 McGraw-Hill Ryerson Limited
Responsibility for Labour Variances
Production Manager
Production managers areusually held accountable
for labour variancesbecause they can
influence the:
Mix of skill levelsassigned to work tasks.
Level of employee motivation.
Quality of production supervision.
Quality of training provided to employees.
LO 3
10-46
Copyright © 2012 McGraw-Hill Ryerson Limited
Responsibility for Labour Variances
I am not responsible for the unfavourable labour
efficiency variance!
You purchased cheapmaterial, so it took more
time to process it.
I think it took more time to process the
materials because the Maintenance
Department has poorly maintained your
equipment.
LO 3
10-47
Copyright © 2012 McGraw-Hill Ryerson Limited
Hanson Inc. has the following direct labour standard to manufacture one Zippy:
1.5 standard hours per Zippy at $12.00 perdirect labour hour
Last week, 1,550 direct labour hours were worked at a total labour cost of $18,910
to make 1,000 Zippies.
ZippyQuick Check
LO 3
10-48
Copyright © 2012 McGraw-Hill Ryerson Limited
Hanson’s labour rate variance (LRV) for the week was:
a. $310 unfavourable.
b. $310 favourable.
c. $300 unfavourable.
d. $300 favourable.
Hanson’s labour rate variance (LRV) for the week was:
a. $310 unfavourable.
b. $310 favourable.
c. $300 unfavourable.
d. $300 favourable.
Quick Check Zippy
LO 3
10-49
Copyright © 2012 McGraw-Hill Ryerson Limited
Hanson’s labour rate variance (LRV) for the week was:
a. $310 unfavourable.
b. $310 favourable.
c. $300 unfavourable.
d. $300 favourable.
Hanson’s labour rate variance (LRV) for the week was:
a. $310 unfavourable.
b. $310 favourable.
c. $300 unfavourable.
d. $300 favourable.
Quick Check
LRV = AH (AR – SR) LRV = 1,550 hrs × ($12.20 – $12.00) LRV = $310 unfavourable
Zippy
LO 3
10-50
Copyright © 2012 McGraw-Hill Ryerson Limited
Hanson’s labour efficiency variance (LEV)for the week was:
a. $590 unfavourable.
b. $590 favourable.
c. $600 unfavourable.
d. $600 favourable.
Hanson’s labour efficiency variance (LEV)for the week was:
a. $590 unfavourable.
b. $590 favourable.
c. $600 unfavourable.
d. $600 favourable.
Quick Check Zippy
LO 3
10-51
Copyright © 2012 McGraw-Hill Ryerson Limited
Hanson’s labour efficiency variance (LEV)for the week was:
a. $590 unfavourable.
b. $590 favourable.
c. $600 unfavourable.
d. $600 favourable.
Hanson’s labour efficiency variance (LEV)for the week was:
a. $590 unfavourable.
b. $590 favourable.
c. $600 unfavourable.
d. $600 favourable.
Quick Check
LEV = SR (AH – SH) LEV = $12.00 × (1,550 hrs – 1,500 hrs) LEV = $600 unfavourable
Zippy
LO 3
10-52
Copyright © 2012 McGraw-Hill Ryerson Limited
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
Rate variance$310 unfavourable
Efficiency variance$600 unfavourable
1,550 hours 1,550 hours 1,500 hours × × × $12.20 per hour $12.00 per hour $12.00 per hour
= $18,910 = $18,600 = $18,000
ZippyQuick Check
LO 3$910 unfavourable
10-53
Copyright © 2012 McGraw-Hill Ryerson Limited
Glacier Peak Outfitters has the following direct variable manufacturing overhead labour
standard for its mountain parka.
1.2 standard hours per parka at $4.00 per hour
Last month, employees actually worked 2,500 hours to make 2,000 parkas. Actual variable manufacturing overhead for the month was
$10,500.
Variable Manufacturing Overhead Variances Example
LO 4
10-54
Copyright © 2012 McGraw-Hill Ryerson Limited
2,500 hours 2,500 hours 2,400 hours × × × $4.20 per hour $4.00 per hour $4.00 per hour
= $10,500 = $10,000 = $9,600
Spending variance$500 unfavourable
Efficiency variance$400 unfavourable
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
Variable Manufacturing Overhead Variances Summary
LO 4$900 unfavourable
10-55
Copyright © 2012 McGraw-Hill Ryerson Limited
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours × × × $4.20 per hour $4.00 per hour $4.00 per hour
= $10,500 = $10,000 = $9,600
Spending variance$500 unfavourable
Efficiency variance$400 unfavourable
$10,500 2,500 hours = $4.20 per hour
Variable Manufacturing Overhead Variances Summary
LO 4$900 unfavourable
10-56
Copyright © 2012 McGraw-Hill Ryerson Limited
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours × × × $4.20 per hour $4.00 per hour $4.00 per hour
= $10,500 = $10,000 = $9,600
Spending variance$500 unfavourable
Efficiency variance$400 unfavourable
1.2 hours per parka 2,000 parkas = 2,400 hours
Variable Manufacturing Overhead Variances Summary
LO 4$900 unfavourable
10-57
Copyright © 2012 McGraw-Hill Ryerson Limited
Variable Manufacturing Overhead Variances: Using Factored Equations
Variable manufacturing overhead spending variance
VMSV = AH (AR – SR)
= 2,500 hours ($4.20 per hour – $4.00 per hour)
= 2,500 hours ($0.20 per hour)
= $500 unfavourable
Variable manufacturing overhead efficiency variance
VMEV = SR (AH – SH)
= $4.00 per hour (2,500 hours – 2,400 hours)
= $4.00 per hour (100 hours)
= $400 unfavourable
LO 4
10-58
Copyright © 2012 McGraw-Hill Ryerson Limited
Hanson Inc. has the following variable manufacturing overhead standard to
manufacture one Zippy:
1.5 standard hours per Zippy at $3.00 perdirect labour hour
Last week, 1,550 hours were worked to make 1,000 Zippies, and $5,115 was spent for
variable manufacturing overhead.
ZippyQuick Check
LO 4
10-59
Copyright © 2012 McGraw-Hill Ryerson Limited
Hanson’s spending variance (VOSV) for variable manufacturing overhead forthe week was:
a. $465 unfavourable.
b. $400 favourable.
c. $335 unfavourable.
d. $300 favourable.
Hanson’s spending variance (VOSV) for variable manufacturing overhead forthe week was:
a. $465 unfavourable.
b. $400 favourable.
c. $335 unfavourable.
d. $300 favourable.
Quick Check Zippy
LO 4
10-60
Copyright © 2012 McGraw-Hill Ryerson Limited
Hanson’s spending variance (VOSV) for variable manufacturing overhead forthe week was:
a. $465 unfavourable.
b. $400 favourable.
c. $335 unfavourable.
d. $300 favourable.
Hanson’s spending variance (VOSV) for variable manufacturing overhead forthe week was:
a. $465 unfavourable.
b. $400 favourable.
c. $335 unfavourable.
d. $300 favourable.
Quick Check
VOSV = AH (AR – SR) VOSV = 1,550 hrs × ($3.30 – $3.00) VOSV = $465 unfavourable
Zippy
LO 4
10-61
Copyright © 2012 McGraw-Hill Ryerson Limited
Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was:
a. $435 unfavourable.
b. $435 favourable.
c. $150 unfavourable.
d. $150 favourable.
Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was:
a. $435 unfavourable.
b. $435 favourable.
c. $150 unfavourable.
d. $150 favourable.
Quick Check Zippy
LO 4
10-62
Copyright © 2012 McGraw-Hill Ryerson Limited
Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was:
a. $435 unfavourable.
b. $435 favourable.
c. $150 unfavourable.
d. $150 favourable.
Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was:
a. $435 unfavourable.
b. $435 favourable.
c. $150 unfavourable.
d. $150 favourable.
Quick Check
VOEV = SR (AH – SH) VOEV = $3.00 × (1,550 hrs – 1,500 hrs) VOEV = $150 unfavourable
1,000 units × 1.5 hrs per unit
Zippy
LO 4
10-63
Copyright © 2012 McGraw-Hill Ryerson Limited
Spending variance$465 unfavourable
Efficiency variance$150 unfavourable
1,550 hours 1,550 hours 1,500 hours × × × $3.30 per hour $3.00 per hour $3.00 per hour
= $5,115 = $4,650 = $4,500
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
ZippyQuick Check
LO 4$615 unfavourable
10-64
Copyright © 2012 McGraw-Hill Ryerson Limited
Overhead Rates and Overhead Analysis
Overhead from theflexible budget for the
denominator level of activityPOHR =
Recall that overhead costs are assigned to products and services using a
predetermined overhead rate (POHR):
Assigned Overhead = POHR × Standard Activity
Denominator level of activity
LO 5
10-65
Copyright © 2012 McGraw-Hill Ryerson Limited
The predetermined overhead ratecan be broken down into fixed
and variable components.
The variablecomponent is useful
for preparing and analyzingvariable overhead
variances.
The fixedcomponent is useful
for preparing and analyzingfixed overhead
variances.
Overhead Rates and Overhead Analysis
LO 5
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Copyright © 2012 McGraw-Hill Ryerson Limited
Normal versus Standard Cost Systems
In a normal costsystem, overhead isapplied to work inprocess based onthe actual numberof hours worked
in the period.
In a standard costsystem, overhead isapplied to work inprocess based onthe standard hours
allowed for the actualoutput of the period.
LO 6
10-67
Copyright © 2012 McGraw-Hill Ryerson Limited
Budget Variance
VolumeVariance
FR = Standard Fixed Overhead RateSH = Standard Hours AllowedDH = Denominator Hours
SH × FR
Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied DH × FR
Fixed Overhead Variances
LO 6
10-68
Copyright © 2012 McGraw-Hill Ryerson Limited
ColaCo prepared this budget for overhead:
Overhead Rates and OverheadAnalysis – Example
Total Variable Total FixedMachine Variable Overhead Fixed Overhead
Hours Overhead Rate Overhead Rate
3,000 6,000$ ? 9,000$ ?
4,000 8,000 ? 9,000 ?
ColaCo applies overhead basedon machine-hour activity.
ColaCo applies overhead basedon machine-hour activity.
Let’s calculate overhead rates.
LO 6
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Copyright © 2012 McGraw-Hill Ryerson Limited
Rate = Total Variable Overhead ÷ Machine Hours
This rate is constant at all levels of activity.
Total Variable Total FixedMachine Variable Overhead Fixed Overhead
Hours Overhead Rate Overhead Rate
3,000 6,000$ 2.00$ 9,000$ ?
4,000 8,000 2.00 9,000 ?
ColaCo prepared this budget for overhead:
Overhead Rates and OverheadAnalysis – Example
LO 6
10-70
Copyright © 2012 McGraw-Hill Ryerson Limited
Total Variable Total FixedMachine Variable Overhead Fixed Overhead
Hours Overhead Rate Overhead Rate
3,000 6,000$ 2.00$ 9,000$ 3.00$
4,000 8,000 2.00 9,000 2.25
Rate = Total Fixed Overhead ÷ Machine Hours
This rate decreases when activity increases.
ColaCo prepared this budget for overhead:
Overhead Rates and OverheadAnalysis – Example
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Total Variable Total FixedMachine Variable Overhead Fixed Overhead
Hours Overhead Rate Overhead Rate
3,000 6,000$ 2.00$ 9,000$ 3.00$
4,000 8,000 2.00 9,000 2.25
The total POHR is the sum ofthe fixed and variable ratesfor a given activity level.
ColaCo prepared this budget for overhead:
Overhead Rates and OverheadAnalysis – Example
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Copyright © 2012 McGraw-Hill Ryerson Limited
ColaCo’s actual production required 3,200 standard machine hours. Actual fixed overhead was $8,450. The predetermined overhead rate is based
on 3,000 machine hours.
Fixed Overhead Variances – Example
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Overhead Variances
Now let’s turn our attention to calculating
fixed overhead variances.
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Fixed Overhead Variances – Example
Budget variance$550 favourable
$8,450 $9,000
Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied
LO 6
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Copyright © 2012 McGraw-Hill Ryerson Limited
Fixed Overhead Variances –A Closer Look
Budget Variance
Results from spendingmore or less thanexpected for fixedoverhead items.
Now, let’s use the standard hours allowed
to compute the fixed overhead volume
variance.
Now, let’s use the standard hours allowed
to compute the fixed overhead volume
variance.
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Copyright © 2012 McGraw-Hill Ryerson Limited
3,200 hours × $3.00 per hour
Budget variance$550 favourable
Fixed Overhead Variances – Example
$8,450 $9,000 $9,600
Volume variance$600 favourable
SH × FR
Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied
LO 6$1,150 favourable
10-77
Copyright © 2012 McGraw-Hill Ryerson Limited
Volume Variance – A Closer Look
VolumeVariance
Results when standard hoursallowed for actual output differsfrom the denominator activity.
Unfavourablewhen standard hours< denominator hours
Favourablewhen standard hours> denominator hours
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Volume Variance – A Closer Look
VolumeVariance
Results when standard hoursallowed for actual output differsfrom the denominator activity.
Unfavourablewhen standard hours< denominator hours
Favourablewhen standard hours> denominator hours
Does not measure over- or under spending
It results from treating fixedoverhead as if it were a
variable cost.
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Copyright © 2012 McGraw-Hill Ryerson Limited
Quick Check
Yoder Enterprises’ actual production for the period required 2,100 standard direct labour hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labour hour. What was the budget variance?
a. $350 Ub. $350 Fc. $100 Fd. $100 U
Yoder Enterprises’ actual production for the period required 2,100 standard direct labour hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labour hour. What was the budget variance?
a. $350 Ub. $350 Fc. $100 Fd. $100 U
LO 6
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Copyright © 2012 McGraw-Hill Ryerson Limited
Yoder Enterprises’ actual production for the period required 2,100 standard direct labour hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labour hour. What was the budget variance?
a. $350 Ub. $350 Fc. $100 Fd. $100 U
Yoder Enterprises’ actual production for the period required 2,100 standard direct labour hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labour hour. What was the budget variance?
a. $350 Ub. $350 Fc. $100 Fd. $100 U
Quick Check
Budget variance
= Actual fixed overhead – Budgeted fixed overhead
= $14,800 – $14,450
= $350 U
LO 6
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Copyright © 2012 McGraw-Hill Ryerson Limited
Quick Check
Yoder Enterprises’ actual production for the period required 2,100 standard direct labour hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labour hour. What was the volume variance?
a. $250 Ub. $250 Fc. $100 Fd. $100 U
Yoder Enterprises’ actual production for the period required 2,100 standard direct labour hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labour hour. What was the volume variance?
a. $250 Ub. $250 Fc. $100 Fd. $100 U
LO 6
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Copyright © 2012 McGraw-Hill Ryerson Limited
Yoder Enterprises’ actual production for the period required 2,100 standard direct labour hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labour hour. What was the volume variance?
a. $250 Ub. $250 Fc. $100 Fd. $100 U
Yoder Enterprises’ actual production for the period required 2,100 standard direct labour hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labour hour. What was the volume variance?
a. $250 Ub. $250 Fc. $100 Fd. $100 U
Quick Check
Volume variance
= Budgeted fixed overhead – (SH FR)
= $14,450 – (2,100 hours $7 per hour)
= $14,450 – $14,700
= $250 F
LO 6
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Copyright © 2012 McGraw-Hill Ryerson Limited
2,100 hours × $7.00 per hour
Budget variance$350 unfavourable
$14,800 $14,450 $14,700
Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied
Volume variance$250 favourable
SH × FR
Quick Check Summary
LO 6$1,150 favourable
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Fixed Overhead Variances –A Graphic Approach
Let’s look at a graph showing fixed overhead
variances. We will use ColaCo’s
numbers from the previous example.
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Activity
Cost
3,000 Hours ExpectedActivity
$9,000 budgeted fixed OH
Fixed overhead
applied to products
Fixed Overhead Variances –A Graphic Approach
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$8,450 actual fixed OH
Activity
Cost
3,000 Hours ExpectedActivity
$9,000 budgeted fixed OH
Fixed overhead
applied to products
$8,450 actual fixed OH$550Favourable
Budget Variance
{
Fixed Overhead Variances –A Graphic Approach
LO 6
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{$8,450 actual fixed OH
3,200 machine hours × $3.00 fixed overhead rate
$600Favourable
Volume Variance
$9,600 applied fixed OH
3,200 Standard
Hours
Activity
Cost
3,000 Hours ExpectedActivity
$9,000 budgeted fixed OH
Fixed overhead
applied to products
$550Favourable
Budget Variance
{ $8,450 actual fixed OH
Fixed Overhead Variances –A Graphic Approach
LO 6
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Overhead Variances and Under- or Overapplied Overhead Cost
In a standardcost system:
Unfavourablevariances are equivalent
to underapplied overhead.
Favourablevariances are equivalentto overapplied overhead.
The sum of the overhead variancesequals the under- or overapplied
overhead cost for a period.LO 6
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Theoretical capacity is the volume of
capacity if all available production time is used and no waste
occurs. (i.e. operations conducted 24 hours per day, 7 days per week, 365 days per year, with no downtime)
Theoretical vs. Practical Capacity
Practical capacity represents what
could be produced with operations at
theoretical capacity less unavoidable
downtime.
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Variance Analysis andManagement by Exception
How do I knowwhich variances to
investigate?
Larger variances, in dollar amount or as a percentage of the
standard, are investigated first.
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A Statistical Control Chart
1 2 3 4 5 6 7 8 9
Variance Measurements
Favourable Limit
Unfavourable Limit
• • •• •
••
••
Warning signals for investigation
Desired Value
Exhibit10-9
LO 7
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Advantages of Standard Costs
Management byexception
Advantages
Promotes economy and efficiency
Simplifiedbookkeeping
Enhances responsibility
accounting
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Copyright © 2012 McGraw-Hill Ryerson Limited
PotentialProblems
Emphasis onnegative may
impact morale.
Emphasizing standardsmay exclude other
important objectives.
Favourablevariances may
be misinterpreted.
Continuous improvement maybe more important
than meeting standards.
Standard costreports may
not be timely.
Invalid assumptionsabout the relationship
between labourcost and output.
Potential Problems with Standard Costs
LO 7
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Copyright © 2012 McGraw-Hill Ryerson Limited
Appendix 10A
Further Analysis of Materials Variances
LO 8
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Appendix 10A – Further Analysis of Materials Variances: Mix and Yield
When the production process requires the input of more than one material, the material quantity variance (MQV) can be further broken down into mix variance and yield variance.
LO 8
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Appendix 10A – Mix and Yield Variances
SP (AQ – M) SP (M – SQ)
AQ = Actual Quantity M = AQ @ Std. Mix SP = Standard Price SQ = Standard Quantity
Mix Variance Yield Variance
Actual Quantity Actual Quantity Standard Quantity @ Std. Mix (M) × × × Standard Price Standard Price Standard Price
Material Quantity Variance
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Appendix 10A – Example of Mix and Yield Variances
One unit of finished goods requires the following input mix: 2 kgs of A with a standard price of $1.50/kg 3 kgs of B with a standard price of $2.50/kg
The standard mix is thus 2A:3B During the period, 150 units of finished goods
were produced using 350 kgs of A and 450 kgs of B.
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Appendix 10A – Mix and Yield Variances
Mix Variance: SP(AQ – M)
Material A: $1.50 × [350 – 2/5 (350 + 450)] = $45 U
Material B: $2.50 × [450 – 3/5 (350 + 450)] = $75 F
Yield Variance: SP(M – SQ) Material A: $1.50 × [2/5 (350 + 450) – 150 (2)] = $30 U
Material B: $2.50 × [3/5 (350 + 450) – 150 (3)] = $75 U
Material Quantity Variance: SP(AQ – SQ) Material A: $1.50 × [350 – 150 (2)] = $75 U
Material B: $2.50 × [450 – 150 (3)] = $-0- U
LO 8
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Copyright © 2012 McGraw-Hill Ryerson Limited
Appendix 10A – Material Mix and Yield Variances
-80
-60
-40
-20
0
20
40
60
80
A B
MixYieldQuantity
LO 8
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Appendix 10B
General Ledger Entriesto Record Variances
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Appendix 10BJournal Entries to Record Variances
We will use information from the Glacier Peak Outfittersexample presented earlier in the chapter to illustrate journal
entries for standard cost variances. Recall the following:
Material
AQ × AP = $1,029AQ × SP = $1,050SQ × SP = $1,000MPV = $21 FMQV = $50 U
Material
AQ × AP = $1,029AQ × SP = $1,050SQ × SP = $1,000MPV = $21 FMQV = $50 U
Labour
AH × AR = $26,250AH × SR = $25,000SH × SR = $24,000LRV = $1,250 ULEV = $1,000 U
Labour
AH × AR = $26,250AH × SR = $25,000SH × SR = $24,000LRV = $1,250 ULEV = $1,000 U
Now, let’s prepare the entries to recordthe labour and material variances.
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GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Raw Materials 1,050
Materials Price Variance 21
Accounts Payable 1,029
To record the purchase of material
Work in Process 1,000
Materials Quantity Variance 50
Raw materials 1,050
To record the use of material
Appendix 10BRecording Material Variances
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GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Work in Process 24,000
Labour Rate Variance 1,250
Labour Efficiency Variance 1,000
Wages Payable 26,250
To record incurrence of direct labour cost
Appendix 10BRecording Labour Variances
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Variable manufacturingoverhead variances are usually not
recorded in the accounts separately, but are determined as part of the
general analysis of overhead.
Appendix 10B – Recording Variable Manufacturing Overhead Variances
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Appendix 10BCost Flows in a Standard Cost System
Inventories are recorded at standard cost. Variances are recorded as follows:
Favourable variances are credits, representing savings in production costs.
Unfavourable variances are debits, representing excess production costs.
Standard cost variances are usually closed to cost of goods sold. Unfavourable variances increase cost of goods sold. Favourable variances decrease cost of goods sold.
Inventories are recorded at standard cost. Variances are recorded as follows:
Favourable variances are credits, representing savings in production costs.
Unfavourable variances are debits, representing excess production costs.
Standard cost variances are usually closed to cost of goods sold. Unfavourable variances increase cost of goods sold. Favourable variances decrease cost of goods sold.
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End of Chapter 10