Garrison Chapter 011

8/10/2019 Garrison Chapter 011

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2010 The McGraw-Hill Companies, Inc.

Standard Costs and Operating

Performance MeasuresChapter 11


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McGraw-Hill/Irwin Slide 3

Standard Costs

DirectMaterial

Deviations from standards deemed significantare brought to the attention of management, apractice known as management by exception .

Type of Product Cost

A m o u n t

DirectLabor ManufacturingOverhead

Standard


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Variance Analysis Cycle

Prepare standardcost performance

report

Analyzevariances

Begin

Identifyquestions

Receiveexplanations

Takecorrective

actions

Conduct nextperiods

operations


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Accountants, engineers, purchasingagents, and production managers

combine efforts to set standards that encourage

efficient future operations.

Setting Standard Costs


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Setting Standard Costs

Should we useideal standards thatrequire employees towork at 100 percent

peak efficiency?

Engineer Managerial Accountant

I recommend using practicalstandards that are currentlyattainable with reasonable

and efficient effort.


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Learning Objective 1

Explain how direct materialsstandards and direct labor

standards are set.



Setting Direct Material Standards

PriceStandards

Summarized ina Bill of Materials.

Final, deliveredcost of materials,net of discounts.

QuantityStandards



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.



Setting Direct Labor Standards

RateStandards

Often a singlerate is used that reflectsthe mix of wages earned.

TimeStandards

Use time andmotion studies for

each labor operation.



Setting Variable Manufacturing OverheadStandards

RateStandards

The rate is thevariable portion of the

predetermined overhead

rate.

QuantityStandards

The quantity isthe activity in the

allocation base for

predetermined overhead.



Standard Cost Card Variable ProductionCost

A standard cost card for one unit ofproduct might look like this:

A A x BStandard Standard StandardQuantity Price Cost

Inputs or Hours or Rate per Unit

Direct materials 3.0 lbs. 4.00$ per lb. 12.00$Direct labor 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



Price and Quantity Standards

Price and quantity standards aredetermined separately for two reasons:

The purchasing manager is responsible for rawmaterial 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 aperiod of time before being used in production.



A General Model for Variance Analysis

Variance Analysis

Price Variance

Difference betweenactual price and

standard price

Quantity Variance

Difference betweenactual quantity andstandard quantity



Variance Analysis

Materials price varianceLabor rate varianceVOH rate variance

Materials quantity varianceLabor efficiency varianceVOH efficiency variance


Price Variance Quantity Variance




Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price








Actual quantity is the amount of directmaterials, direct labor, and variable

manufacturing overhead actually used.







Standard quantity is the standard quantityallowed for the actual output of the period.







Actual price is the amount actuallypaid for the input used.




Standard price is the amount that shouldhave been paid for the input used.







(AQ AP) (AQ SP) (AQ SP) (SQ SP)

AQ = A ctual Quantity SP = S tandard PriceAP = A ctual P rice SQ = S tandard Quantity


Actual Quantity Actual Quantity S tandard Quantity

Actual P rice S tandard Price S tandard Price




Compute the directmaterials price and quantityvariances and explain their

significance.


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Glacier Peak Outfitters has the following directmaterial standard for the fiberfill in its mountain

parka.

0.1 kg. of fiberfill per parka at $5.00 per kg.

Last month 210 kgs. of fiberfill were purchased and

used to make 2,000 parkas. The material cost atotal of $1,029.

Material Variances An Example


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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 favorable

Quantity variance$50 unfavorable



Material Variances Summary


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210 kgs. 210 kgs. 200 kgs.


= $1,029 = $1,050 = $1,000





$1,029 210 kgs= $4.90 per kg



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210 kgs. 210 kgs. 200 kgs.


= $1,029 = $1,050 = $1,000





0.1 kg per parka 2,000 parkas= 200 kgs



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Material Variances:Using the Factored Equations

Materials price varianceMPV = AQ (AP - SP)

= 210 kgs ($4.90/kg - $5.00/kg)= 210 kgs (-$0.10/kg)= $21 F

Materials quantity varianceMQV = 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


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Isolation of Material Variances

I need the price variancesooner so that I can better identify purchasing problems.

You accountants just dontunderstand the problems thatpurchasing managers have.

Ill start computingthe price variancewhen material is

purchased ratherthan when its used.


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Material Variances

Hanson purchased andused 1,700 pounds.

How are the variancescomputed if the amountpurchased differs from

the amount used?

The price variance iscomputed on the entire

quantity purchased .

The quantity varianceis computed only on

the quantity used .


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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 managers performance.

Responsibility for Material Variances


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Hanson Inc. has the following direct materialstandard to manufacture one Zippy:

1.5 pounds per Zippy at $4.00 per poundLast week, 1,700 pounds of material were

purchased and used to make 1,000 Zippies. Thematerial cost a total of $6,630.

ZippyQuick Check


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Quick CheckZippy

Hansons material price variance (MPV)for the week was:

a. $170 unfavorable.b. $170 favorable.c. $800 unfavorable.

d. $800 favorable.


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Hansons material price variance (MPV)for the week was:

a. $170 unfavorable .b. $170 favorable.c. $800 unfavorable.

d. $800 favorable.MPV = AQ(AP - SP)MPV = 1,700 lbs. ($3.90 - 4.00)MPV = $170 Favorable

Quick CheckZippy


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Quick Check

Hansons material quantity variance (MQV)for the week was:a. $170 unfavorable.b. $170 favorable.c. $800 unfavorable.

d. $800 favorable.

Zippy


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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





ZippyQuick Check


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Hanson Inc. has the following material standard tomanufacture one Zippy:

1.5 pounds per Zippy at $4.00 per pound

Last week, 2,800 pounds of material werepurchased at a total cost of $10,920, and 1,700

pounds were used to make 1,000 Zippies.

ZippyQuick Check Continued


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Actual Quantity Actual QuantityPurchased 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 increasesbecause quantity

purchased increases.



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Actual QuantityUsed 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 isunchanged becauseactual and standard

quantities are unchanged.



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Compute the direct laborrate and efficiency variances

and explaintheir significance.


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Glacier Peak Outfitters has the following direct laborstandard 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 labor cost of $26,250 to make 2,000

parkas.

Labor Variances An Example


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Rate variance$1,250 unfavorable

Efficiency variance$1,000 unfavorable

Actual Hours Actual Hours Standard Hours Actual Rate Standard Rate Standard Rate

Labor 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


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= $26,250 = $25,000 = $24,000


$26,250 2,500 hours= $10.50 per hour




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= $26,250 = $25,000 = $24,000


1.2 hours per parka 2,000parkas = 2,400 hours



L b V i


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Labor Variances:Using the Factored Equations

Labor rate varianceLRV = AH (AR - SR)

= 2,500 hours ($10.50 per hour $10.00 per hour)= 2,500 hours ($0.50 per hour)= $1,250 unfavorable

Labor efficiency varianceLEV = SR (AH - SH)

= $10.00 per hour (2,500 hours 2,400 hours)= $10.00 per hour (100 hours)= $1,000 unfavorable


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Responsibility for Labor Variances

Production Manager

Production managers areusually held accountable

for labor variancesbecause they can

influence the:

Mix of skill levelsassigned to work tasks.

Level of employeemotivation.

Quality of productionsupervision.

Quality of trainingprovided to employees.


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I am not responsible for the unfavorable labor efficiency variance!

You purchased cheapmaterial, so it took more

time to process it.

I think it took more timeto process thematerials because the

MaintenanceDepartment has poorly

maintained yourequipment.

Responsibility for Labor Variances


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Hanson Inc. has the following direct labor standard to manufacture one Zippy:

1.5 standard hours per Zippy at$12.00 per direct labor hour

Last week, 1,550 direct labor hours wereworked at a total labor cost of $18,910

to make 1,000 Zippies.

ZippyQuick Check


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Hansons labor rate variance (LRV) for theweek was:a. $310 unfavorable.b. $310 favorable.c. $300 unfavorable.

d. $300 favorable.

Quick CheckZippy


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Hansons labor rate variance (LRV) for theweek was:a. $310 unfavorable.b. $310 favorable.c. $300 unfavorable.

d. $300 favorable.

Quick Check

LRV = AH(AR - SR)

LRV = 1,550 hrs($12.20 - $12.00)LRV = $310 unfavorable

Zippy


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Hansons labor efficiency variance (LEV)for the week was:

a. $590 unfavorable.b. $590 favorable.c. $600 unfavorable.

d. $600 favorable.

Quick CheckZippy


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Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate

Rate variance$310 unfavorable

Efficiency variance$600 unfavorable


$12.20 per hour $12.00 per hour $12.00 per hour

= $18,910 = $18,600 = $18,000

ZippyQuick Check


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Compute the variablemanufacturing overhead rate

and efficiency variances.

Variable Manufacturing Overhead Variances


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Glacier Peak Outfitters has the following direct variablemanufacturing overhead labor 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 manufacturingoverhead for the month was $10,500.

Variable Manufacturing Overhead Variances An Example



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= $10,500 = $10,000 = $9,600




Variable Manufacturing Overhead VariancesSummary



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= $10,500 = $10,000 = $9,600



$10,500 2,500 hours= $4.20 per hour




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= $10,500 = $10,000 = $9,600



1.2 hours per parka 2,000parkas = 2,400 hours


Variable Manufacturing Overhead Variances:


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Variable Manufacturing Overhead Variances:Using Factored Equations

Variable manufacturing overhead rate varianceVMRV = AH (AR - SR)

= 2,500 hours ($4.20 per hour $4.00 per hour)= 2,500 hours ($0.20 per hour)

= $500 unfavorableVariable 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 unfavorable


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Hanson Inc. has the following variablemanufacturing overhead standard to

manufacture one Zippy:

1.5 standard hours per Zippy at$3.00 per direct labor hour

Last week, 1,550 hours were worked to make1,000 Zippies, and $5,115 was spent for

variable manufacturing overhead.

ZippyQuick Check


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Hansons rate variance (VMRV) for variablemanufacturing overhead for the week was:

a. $465 unfavorable.b. $400 favorable.c. $335 unfavorable.d. $300 favorable.

Quick Check

VMRV = AH(AR - SR)VMRV = 1,550 hrs($3.30 - $3.00)

VMRV = $465 unfavorable

Zippy


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Hansons efficiency variance (VMEV) forvariable manufacturing overhead for the weekwas:a. $435 unfavorable.b. $435 favorable.c. $150 unfavorable.d. $150 favorable.

Quick CheckZippy


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Hansons efficiency variance (VMEV) forvariable manufacturing overhead for the weekwas:a. $435 unfavorable.b. $435 favorable.c. $150 unfavorable.d. $150 favorable.

Quick Check

VMEV = SR(AH - SH)VMEV = $3.00(1,550 hrs - 1,500 hrs)VMEV = $150 unfavorable

1,000 units 1.5 hrs per unit

Zippy


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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

Variance Analysis and Management by


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Variance Analysis and Management byException

How do I knowwhich variances to

investigate?

Larger variances, indollar amount or asa percentage of the

standard, areinvestigated first.


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A Statistical Control Chart

1 2 3 4 5 6 7 8 9Variance Measurements

Favorable Limit

Unfavorable Limit

Warning signals for investigation

Desired Value


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Advantages of Standard Costs

Management byexception

Advantages

Promotes economyand efficiency

Simplifiedbookkeeping

Enhancesresponsibility

accounting


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PotentialProblems

Emphasis onnegative may

impact morale.

Emphasizing standardsmay exclude other important objectives.

Favorablevariances maybe misinterpreted.

Continuousimprovement maybe more important

than meeting standards.

Standard costreports may

not be timely.

Invalid assumptionsabout the relationship

between labor cost and output.

Potential Problems with Standard Costs


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Compute delivery cycle time,throughput time, andmanufacturing cycle

efficiency (MCE).


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Process time is the only value-added time.

Delivery Performance Measures

Wait TimeProcess Time + Inspection Time

+ Move Time + Queue Time

Delivery Cycle Time

OrderReceived ProductionStarted GoodsShipped

Throughput Time


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ManufacturingCycle

Efficiency

Value-added timeManufacturing cycle time=

Wait TimeProcess Time + Inspection Time

+ Move Time + Queue Time

Delivery Cycle Time

OrderReceived ProductionStarted GoodsShipped

Throughput Time

Delivery Performance Measures


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Quick Check

A TQM team at Narton Corp has recorded thefollowing average times for production:

Wait 3.0 days Move 0.5 daysInspection 0.4 days Queue 9.3 daysProcess 0.2 days

What is the throughput time?a. 10.4 days.b. 0.2 days.c. 4.1 days.d. 13.4 days.


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What is the throughput time?a. 10.4 days.b. 0.2 days.c. 4.1 days.d. 13.4 days.

Quick Check

Throughput time = Process + Inspection + Move + Queue= 0.2 days + 0.4 days + 0.5 days + 9.3 days= 10.4 days


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Quick Check


Wait 3.0 days Move 0.5 days

Inspection 0.4 days Queue 9.3 daysProcess 0.2 days

What is the Manufacturing Cycle Efficiency (MCE)?a. 50.0%.b. 1.9%.c. 52.0%.d. 5.1%.


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Wait 3.0 days Move 0.5 days

Inspection 0.4 days Queue 9.3 daysProcess 0.2 days

What is the Manufacturing Cycle Efficiency (MCE)?a. 50.0%.b. 1.9%.c. 52.0%.d. 5.1%.

Quick Check

MCE = Value-added time Throughput time= Process time Throughput time= 0.2 days 10.4 days= 1.9%


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Quick Check



What is the delivery cycle time (DCT)?a. 0.5 days.b. 0.7 days.c. 13.4 days.d. 10.4 days.


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What is the delivery cycle time (DCT)?a. 0.5 days.b. 0.7 days.c. 13.4 days.d. 10.4 days.

Quick Check

DCT = Wait time + Throughput time= 3.0 days + 10.4 days= 13.4 days


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Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System

Appendix 11A


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(Appendix 11A)

Compute and interpret the

fixed overhead budget andvolume variances.


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Budgetvariance

Fixed Overhead Budget VarianceActualFixed

Overhead

FixedOverheadApplied

BudgetedFixed

Overhead

Budgetvariance

Budgetedfixed

overhead

Actualfixed

overhead=


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Volumevariance

Fixed Overhead Volume VarianceActualFixed

Overhead


BudgetedFixed

Overhead

Volumevariance

Fixedoverheadapplied to

work in process

Budgetedfixed

overhead=


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FPOHR = Fixed portion of the predetermined overhead rateDH = Denominator hoursSH = Standard hours allowed for actual output

SH FRDH FR

Fixed Overhead Volume VarianceActualFixed

Overhead


BudgetedFixed

Overhead

Volume variance FPOHR (DH SH)=

Volumevariance


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Computing Fixed Overhead Variances

Budgeted production 30,000 units Standard machine-hours per unit 3 hours Budgeted machine-hours 90,000 hours Actual production 28,000 units Standard machine-hours allowed for the actual production 84,000 hours

Actual machine-hours 88,000 hours

Production and Machine-Hour DataColaCo


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Computing Fixed Overhead Variances

Budgeted variable manufacturing overhead 90,000$Budgeted fixed manufacturing overhead 270,000

Total budgeted manufacturing overhead 360,000$

Actual variable manufacturing overhead 100,000$Actual fixed manufacturing overhead 280,000 Total actual manufacturing overhead 380,000$

ColaCoCost Data


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Predetermined Overhead Rates

Predeterminedoverhead rate

Estimated total manufacturing overhead costEstimated total amount of the allocation base=


$360,00090,000 Machine-hours=

Predeterminedoverhead rate = $4.00 per machine-hour


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l f h d


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Applying Manufacturing Overhead

Overheadapplied


Standard hours allowedfor the actual output=

Overheadapplied

$4.00 per machine-hour 84,000 machine-hours=

Overhead

applied$336,000=

C i h d i


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Computing the Budget Variance

Budgetvariance

Budgetedfixed

overhead

Actualfixed

overhead=

Budgetvariance = $280,000 $270,000

Budgetvariance = $10,000 Unfavorable

C i h V l V i


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Computing the Volume Variance

Volumevariance

Fixedoverheadapplied to

work in process

Budgetedfixedoverhead

=

Volumevariance = $18,000 Unfavorable

Volumevariance = $270,000

$3.00 per machine-hour ( $84,000machine-hours )

C i h V l V i


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Computing the Volume Variance

FPOHR = Fixed portion of the predetermined overhead rateDH = Denominator hoursSH = Standard hours allowed for actual output

Volume variance FPOHR (DH SH)=

Volumevariance

= $3.00 per machine-hour ( 90,000mach-hours 84,000mach-hours )Volume

variance= 18,000 Unfavorable

A Pi i l Vi f h V i


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A Pictorial View of the Variances

ActualFixed

Overhead

Fixed OverheadApplied to

Work in Process

BudgetedFixed

Overhead252,000270,000280,000

Total variance, $28,000 unfavorable

Budget variance,

$10,000 unfavorable

Volume variance,

$18,000 unfavorable


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Graphic Analysis of FixedO h d V i


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Overhead Variances

Machine-hours (000)

Budget$270,000

90

Denominator hours

00



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Overhead VariancesActual

$280,000

Machine-hours (000)

Budget$270,000

90

Denominator hours

00

Budget Variance 10,000 U{



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Actual

$280,000

Applied$252,000

Machine-hours (000)

Budget$270,000

Overhead Variances

908400

Standardhours

Denominator hours

Budget Variance 10,000 U

Volume Variance 18,000 U{{

Reconciling Overhead Variances andUnderapplied or Overapplied Overhead


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Underapplied or Overapplied Overhead

In a standardcost system:

Unfavorablevariances are equivalent

to underapplied overhead.

Favorablevariances are equivalentto overapplied overhead.

The sum of the overhead variancesequals the under- or overapplied

overhead cost for the period.

Reconciling Overhead Variances andUnderapplied or O erapplied O erhead


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Underapplied or Overapplied Overhead

Predetermined overhead rate (a) 4.00$ per machine-hour Standard hours a llowed for the actual output (b) 84,000 machine hours Manufacturing overhead applied (a) (b) 336,000$

Actual manufacturing overhead 380,000$Manufacturing overhead underapplied or

overapplied 44,000$ underapplied

Computation of Underapplied OverheadColaCo

Computing the Variable Overhead Variances


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Variable manufacturing overhead rate varianceVMRV = (AH AR) (AH SR)

= $100,000 (88,000 hours $1.00 per hour)= $12,000 unfavorable



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Variable manufacturing overhead efficiency varianceVMEV = (AH SR) (SH SR)

= $88,000 (84,000 hours $1.00 per hour)= $4,000 unfavorable


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Journal Entriesto Record Variances

Appendix 11B



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(Appendix 11B)

Prepare journal entriesto record standardcosts and variances.

Appendix 11BJournal Entries to Record Variances


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Journal 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 = $1,029 AQ SP = $1,050SQ SP = $1,000MPV = $21 FMQV = $50 U

Labor

AH AR = $26,250 AH SR = $25,000SH SR = $24,000LRV = $1,250 ULEV = $1,000 U

Now, lets prepare the entries to recordthe labor and material variances.


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Appendix 11BRecording Labor Variances


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GENERAL JOURNAL Page 4

Date DescriptionPost.Ref. Debit Credit

Work in Process 24,000

Labor Rate Variance 1,250

Labor Efficiency Variance 1,000

Wages Payable 26,250

To record d i rec t labo r

Recording Labor Variances

Cost Flows in a Standard Cost System


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Cost Flows in a Standard Cost System

Inventories are recorded at standard cost.Variances are recorded as follows:

Favorable variances are credits, representingsavings in production costs.Unfavorable variances are debits, representingexcess production costs.

Standard cost variances are usually closed out

to cost of goods sold.Unfavorable variances increase cost of goods sold.Favorable variances decrease cost of goods sold.

End of Chapter 11


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End of Chapter 11

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Garrison Chapter 011