Standard Costs

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Standard Costs

Standard

Costs are

Predetermined.

Used for planning labor, material

and overhead requirements.

Benchmarks for

measuring performance.

Used to simplify the

accounting system.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Standard Costs

Direct Material

Managers focus on quantities and costs

that exceed standards, a practice known as

management by exception.

Type of Product Cost

Am

ou

nt

Direct Labor

Manufacturing Overhead

Standard

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Accountants, engineers, personnel

administrators, and production managers

combine efforts to set standards based on

experience and expectations.

Setting Standard Costs

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Accountants, engineers, personnel

administrators, and production managers

combine efforts to set standards based on

experience and expectations.

Setting Standard Costs

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Setting Standard Costs

Should we use

practical standards

or ideal standards?

Engineer Managerial Accountant

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Setting Standard Costs Practical standards should be

set at levels that are currently

attainable with reasonable and

efficient effort.

Production manager

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Setting Standard Costs I agree. Ideal standards,

based on perfection,

are unattainable and

discourage most

employees.

Human Resources Manager

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Note

The argument that ideal standards are discouraging has been persuasive for many years. So “normal” defects and waste were built into the standards.

In recent years, TQM and other initiatives have sought to eliminate all defects and waste.

Ideal standards, that allow for no waste, have become more popular.

The emphasis is on improvement over time, not attaining the ideal standards right now.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Small Business Guide

To Quality Management,

DoD

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Image from Steel Warehouse

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Setting Direct Material

Standards

Price

Standards

Final, delivered

cost of materials,

net of discounts.

Quantity

Standards

Use product

design specifications.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Setting Direct Labor

Standards

Rate

Standards

Use wage

surveys and

labor contracts.

Time

Standards

Use time and

motion studies for

each labor operation.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Setting Variable Overhead

Standards

Rate

Standards

The rate is the

variable portion of the

predetermined overhead

rate.

Activity

Standards

The activity is the

base used to calculate

the predetermined

overhead.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Standard Cost Card – Variable Production Cost

A standard cost card for one unit of

product might look like this:

A A x B

Standard Standard Standard

Quantity 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

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

A A x B

Standard Standard Standard

Quantity 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

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Standard Cost Variances C

ost

Standard

This variance is unfavorable

because the actual cost

exceeds the standard cost.

A standard cost variance is the amount by which

an actual cost differs from the standard cost.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Standard Cost Variances

I see that there is an unfavorable

variance.

But why are variances

important to me?

First, they point to causes of problems and directions

for improvement.

Second, they trigger investigations in departments

having responsibility for incurring the costs.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Variance Analysis Cycle

Prepare standard

cost performance

report

Analyze

variances

Begin

Identify

questions

Receive

explanations

Take

corrective

actions

Conduct next

period’s

operations

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Standard Cost Variances

Standard Cost Variances

Price Variance

The difference between

the actual price and the

standard price

Quantity Variance

The difference between

the actual quantity and

the standard quantity

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Standard price is the amount that should

have been paid for the resources acquired.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Price Variance Quantity Variance

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

A General Model for Variance Analysis

Standard quantity is the quantity allowed for

the actual good output.

Standard input per unit of output

times amount of good output.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

A General Model for Variance Analysis

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

AQ = Actual Quantity SP = Standard Price

AP = Actual Price SQ = Standard Quantity

Price Variance Quantity Variance

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Standard Costs

Let’s use the general model

to calculate standard cost

variances for

direct material.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Image from:

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Glacier Peak Outfitters has the following direct material 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 a total of $1,029.

Material Variances Example

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

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

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

Material Variances Summary

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

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

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

$1,029 210 kgs

= $4.90 per kg

Material Variances Summary

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

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

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

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Note: Using the formulas

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

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Quick Check

Suppose only 190 kgs of fiberfill were used to

make 2,000 parkas. What is the materials

quantity variance? Remember that the

standards call for 0.1 kg of fiberfill per parka at a

cost of $5 per kg of fiberfill.

a. $50 F

b. $50 U

c. $100 F

d. $100 U

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Suppose only 190 kgs of fiberfill were used to

make 2,000 parkas. What is the materials

quantity variance? Remember that the

standards call for 0.1 kg of fiberfill per parka at a

cost of $5 per kg of fiberfill.

a. $50 F

b. $50 U

c. $100 F

d. $100 U

Quick Check

MQV = SP (AQ - SQ)

= $5.00/kg (190 kgs-(0.1 kg/parka 2,000 parkas))

= $5.00/kg (190 kgs - 200 kgs)

= $5.00/kg (-10 kgs)

= $50 F

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

If the material quantity standard specifies

exactly how much material should be in the final

product without any wastage, is a favorable (F)

materials quantity variance a good thing?

a. Yes

b. No

Quick Check

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Quick Check

If the material quantity standard specifies

exactly how much material should be in the final

product without any wastage, is a favorable (F)

materials quantity variance a good thing?

a. Yes

b. No

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Standard Costs

Let’s use the general model

to calculate all standard cost

variances, starting with

direct material.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

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.

Material Variances Example

Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

What is the actual price per pound

paid for the material?

a. $4.00 per pound.

b. $4.10 per pound.

c. $3.90 per pound.

d. $6.63 per pound.

Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

What is the actual price per pound

paid for the material?

a. $4.00 per pound.

b. $4.10 per pound.

c. $3.90 per pound.

d. $6.63 per pound.

AP = $6,630 ÷ 1,700 lbs.

AP = $3.90 per lb.

Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Hanson’s material price variance (MPV)

for the week was:

a. $170 unfavorable.

b. $170 favorable.

c. $800 unfavorable.

d. $800 favorable.

Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Hanson’s 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 Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

The standard quantity of material that

should have been used to produce

1,000 Zippies is:

a. 1,700 pounds.

b. 1,500 pounds.

c. 2,550 pounds.

d. 2,000 pounds.

Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

The standard quantity of material that

should have been used to produce

1,000 Zippies is:

a. 1,700 pounds.

b. 1,500 pounds.

c. 2,550 pounds.

d. 2,000 pounds. SQ = 1,000 units × 1.5 lbs per unit

SQ = 1,500 lbs

Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Quick Check

Hanson’s material quantity variance (MQV)

for the week was:

a. $170 unfavorable.

b. $170 favorable.

c. $800 unfavorable.

d. $800 favorable.

Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

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 favorable

Quantity variance

$800 unfavorable

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

Material Variances Summary

Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

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.

Material Variances Continued

Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

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 favorable

Price variance increases

because quantity

purchased increases.

Zippy Material Variances

Continued

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

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 unfavorable

Quantity variance is

unchanged because

actual and standard

quantities are unchanged.

Material Variances Continued

Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Photo from Norfolk Southern

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Isolation of Material Variances

I need the price variance sooner so that I can better

identify purchasing problems.

You accountants just don’t understand the problems that purchasing managers have.

I’ll start computing

the price variance

when material is

purchased rather than

when it’s used.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Responsibility for Material Variances

I am not responsible for this unfavorable material

quantity variance.

You purchased cheap material, so my people had to use more of it.

You used too much material because of poorly trained

workers and poorly maintained equipment.

Also, your poor scheduling sometimes requires me to

rush order material at a higher price, causing

unfavorable price variances.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Photo from Norfolk Southern

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Standard Costs

Now let’s calculate

standard cost

variances for

direct labor.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Note

Materials variances:

Material price variance

MPV = AQ (AP - SP)

Material quantity variance

MQV = SP (AQ - SQ)

Labor variances:

Labor rate variance

LRV = AH (AR - SR)

Labor efficiency variance

LEV = SR (AH - SH)

Actual hours

Actual rate

Standard rate

Standard hours allowed

for the actual good output

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

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 were worked at a total labor cost of $18,910

to make 1,000 Zippies.

Labor Variances Example Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

What was Hanson’s actual rate (AR)

for labor for the week?

a. $12.20 per hour.

b. $12.00 per hour.

c. $11.80 per hour.

d. $11.60 per hour.

Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

What was Hanson’s actual rate (AR)

for labor for the week?

a. $12.20 per hour.

b. $12.00 per hour.

c. $11.80 per hour.

d. $11.60 per hour.

Quick Check

AR = $18,910 ÷ 1,550 hours

AR = $12.20 per hour

Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Hanson’s labor rate variance (LRV) for

the week was:

a. $310 unfavorable.

b. $310 favorable.

c. $300 unfavorable.

d. $300 favorable.

Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Hanson’s labor rate variance (LRV) for

the week 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

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

The standard hours (SH) of labor that

should have been worked to produce

1,000 Zippies is:

a. 1,550 hours.

b. 1,500 hours.

c. 1,700 hours.

d. 1,800 hours.

Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

The standard hours (SH) of labor that

should have been worked to produce

1,000 Zippies is:

a. 1,550 hours.

b. 1,500 hours.

c. 1,700 hours.

d. 1,800 hours.

Quick Check

SH = 1,000 units × 1.5 hours per unit

SH = 1,500 hours

Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Hanson’s labor efficiency variance (LEV)

for the week was:

a. $590 unfavorable.

b. $590 favorable.

c. $600 unfavorable.

d. $600 favorable.

Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Hanson’s labor efficiency variance (LEV)

for the week was:

a. $590 unfavorable.

b. $590 favorable.

c. $600 unfavorable.

d. $600 favorable.

Quick Check

LEV = SR(AH - SH)

LEV = $12.00(1,550 hrs - 1,500 hrs)

LEV = $600 unfavorable

Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

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

Labor Variances Summary

Rate variance

$310 unfavorable

Efficiency variance

$600 unfavorable

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

Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Labor Rate Variance – A Closer Look

Production managers who make work assignments

are generally responsible for rate variances.

High skill,

high rate

Low skill,

low rate

Using highly paid skilled workers to

perform unskilled tasks results in an

unfavorable rate variance.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Labor Efficiency Variance – A Closer Look

Unfavorable

Efficiency

Variance

Poor supervision of workers

Poorly maintained equipment

Poorly trained workers

Poor quality

materials

Insufficient demand

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Responsibility for Labor Variances

I am not responsible for the unfavorable labor

efficiency variance!

You purchased cheap material, so it took more

time to process it.

You used too much time because of poorly

trained workers and poor supervision.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Responsibility for Labor Variances

Maybe I can attribute the labor

and material variances to personnel

for hiring the wrong people

and training them poorly.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Standard Costs

Now let’s calculate

standard cost

variances for the

last of the variable

production costs –

variable

manufacturing

overhead.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Note

Labor variances:

Labor rate variance

LRV = AH (AR - SR)

Labor efficiency variance

LEV = SR (AH - SH)

Variable overhead variances:

Variable overhead spending variance

VOSV = AH (AR - SR)

Variable overhead efficiency variance

VOEV = SR (AH Quick Check

Actual hours of

the allocation

base

Actual variable

overhead rate

Standard

variable

overhead rate

Standard hours allowed

for the actual good output

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Hanson’s spending variance (VOSV) for

variable manufacturing overhead for

the week was:

a. $465 unfavorable.

b. $400 favorable.

c. $335 unfavorable.

d. $300 favorable.

Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Hanson’s spending variance (VOSV) for

variable manufacturing overhead for

the week was:

a. $465 unfavorable.

b. $400 favorable.

c. $335 unfavorable.

d. $300 favorable.

Quick Check

SV = AH(AR - SR)

SV = 1,550 hrs($3.30 - $3.00)

SV = $465 unfavorable

Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Hanson’s efficiency variance (VOEV) for

variable manufacturing overhead for the

week was:

a. $435 unfavorable.

b. $435 favorable.

c. $150 unfavorable.

d. $150 favorable.

Quick Check Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Hanson’s efficiency variance (VOEV) for

variable manufacturing overhead for the

week was:

a. $435 unfavorable.

b. $435 favorable.

c. $150 unfavorable.

d. $150 favorable.

Quick Check

EV = SR(AH - SH)

EV = $3.00(1,550 hrs - 1,500 hrs)

EV = $150 unfavorable

1,000 units × 1.5 hrs per unit

Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Spending variance

$465 unfavorable

Efficiency variance

$150 unfavorable

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

Variable Manufacturing Overhead Variances

Zippy

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Variable Manufacturing Overhead Variances – A Closer Look

If variable overhead is applied on the basis

of direct labor hours, the labor efficiency

and variable overhead efficiency variances

will move in tandem.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Variance Analysis and Management by Exception

How do I know which

variances to

investigate?

Larger variances, in dollar amount or as a percentage of the

standard, are investigated first.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Osborne Books

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Advantages of Standard Costs

Management by

exception

Improved cost control

and performance

evaluation

Better Information

for planning and

decision making

Possible reductions

in production costs

Advantages

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

Potential

Problems

Emphasis on negative may

impact morale.

Emphasizing standards may exclude other

important objectives.

Favorable variances may be

misinterpreted.

Continuous improvement may be more

important than meeting standards.

Standard cost reports may

not be timely.

Incentives to build inventories.

Disadvantages of

Standard Costs

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

End of Chapter 10