Standard Costs and OperatingStandard Costs and Operating ...docenti.luiss.it/.../12/20121210163950-chap011.pdf · Standard CostsStandard Costs Standards are benchmarks or “norms”

Standard Costs and OperatingStandard Costs and Operating Performance Measures

Chapter 11

© 2010 The McGraw-Hill Companies, Inc.

Standard CostsStandard Costs

Standards are benchmarks or “norms” formeasuring performance. In managerial accounting,

two types of standards are commonly used.yp y

Quantity standards Price standardsQ yspecify how much of aninput should be used to

Price standardsspecify how muchshould be paid for

make a product orprovide a service.

each unit of theinput.

Examples: Firestone, Sears, McDonald’s, hospitals, i d f i i

McGraw‐Hill/Irwin Slide 2

construction and manufacturing companies.

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

Standard

Directmou

nt Standard

MaterialAm

DirectLabor

ManufacturingOverhead

T f P d t C t


Type of Product Cost

Variance Analysis CycleVariance Analysis Cycle

Identifyquestions

Receive explanations

Takecorrective

actionsactions

Analyze Conduct next

period’svariances

period s operations

Prepare standard Prepare standard cost performance cost performance

reportreport

Begin


reportreport

Setting Standard Costs

Accountants engineers purchasing

Setting Standard Costs

Accountants, engineers, purchasingagents, and production managers

bi ff t t t t d d th tcombine efforts to set standards that encourage efficient future operations.


Setting Standard CostsSetting Standard CostsShould we use I recommend using practical

ideal standards that require employees towork at 100 percent

standards that are currently attainable with reasonable

and efficient effortwork at 100 percentpeak efficiency?

and efficient effort.

E i


Engineer Managerial Accountant

Learning Objective 1Learning Objective 1

E l i h di i l E l i h di i l Explain how direct materials Explain how direct materials standards and direct laborstandards and direct labor

standards are set.standards are set.


Setting Direct Material StandardsSetting Direct Material Standards

PriceStandards

QuantityStandards

Summarized in a Bill of Materials.

Final, deliveredcost of materials, a Bill of Materials.,net of discounts.


Setting StandardsSetting 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 StandardsSetting Direct Labor Standards

RateStandards

TimeStandards

Often a singlerate is used that reflects

Use time and motion studies for

the mix of wages earned. each labor operation.


Setting Variable Manufacturing Overhead StandardsStandards

RateStandards

QuantityStandards

The rate is the variable portion of the

The quantity is the activity in the

predetermined overheadrate.

allocation base for predetermined overhead.


Standard Cost Card – Variable Production CostCost

f fA standard cost card for one unit of product might look like this:product might look like this:

A A x BBA A x BStandard Standard StandardQuantity Price Cost

B

Inputs or Hours or Rate per Unit

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


Total standard unit cost 54.50$

Price and Quantity StandardsPrice and Quantity Standards

P i d i d dPrice and quantity standards are determined separately for two reasons:

Th h i i ibl fThe purchasing manager is responsible for rawmaterial purchase prices and the production manageris responsible for the quantity of raw material usedis 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.

A General Model for Variance AnalysisA General Model for Variance Analysis

Variance Analysis

Price Variance Quantity Variance

Difference betweenDifference between Difference betweenDifference betweenDifference betweenDifference betweenactual price and actual price and standard pricestandard price

Difference betweenDifference betweenactual quantity andactual quantity andstandard quantitystandard quantity



Variance Analysis


Materials price variance Materials quantity varianceMaterials price varianceLabor rate varianceVOH rate variance

Materials quantity varianceLabor efficiency varianceVOH efficiency variance



Actual Quantity Actual Quantity Standard Quantity× × ×

Actual Price Standard Price Standard Price







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

manufacturing overhead actually used.






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






Actual price is the amount actuallypaid for the input used.






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






(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)

AQ = Actual Quantity SP = Standard PriceAP = Actual Price SQ = Standard Quantity


AP Actual Price SQ Standard Quantity


C h di C h di Compute the direct Compute the direct materials price and quantity materials price and quantity p q yp q yvariances and explain their variances and explain their

significancesignificancesignificance.significance.


Material Variances An ExampleMaterial Variances – An Example

Glacier Peak Outfitters has the following direct material standard for the fiberfill in its mountainmaterial standard for the fiberfill in its mountain

parka.

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

L t th 210 k f fib fill h d dLast month 210 kgs. of fiberfill were purchased and used to make 2,000 parkas. The material cost a

t t l f $1 029total of $1,029.


Material Variances Summary

Actual Quantity Actual Quantity Standard Quantity




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







210 kgs. 210 kgs. 200 kgs.× × ×

$ $ $$1,029 ÷ 210 kgs

$4.90 per kg. $5.00 per kg. $5.00 per kg.

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

, g= $4.90 per kg









210 kgs. 210 kgs. 200 kgs.× × ×

$ $ $0.1 kg per parka × 2,000 parkas

$4.90 per kg. $5.00 per kg. $5.00 per kg.

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

g p p , p= 200 kgs




Material Variances:Using the Factored EquationsUsing the Factored Equations

M t i l i iMaterials price varianceMPV = AQ (AP - SP)

= 210 kgs ($4 90/kg $5 00/kg)= 210 kgs ($4.90/kg - $5.00/kg)= 210 kgs (-$0.10/kg)= $21 F= $21 F

Materials quantity varianceMQV = SP (AQ - SQ)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 (210 kgs 200 kgs)= $5.00/kg (10 kgs) = $50 U


Isolation of Material VariancesIsolation of Material VariancesI need the price variance I’ll start computing

sooner so that I can betteridentify purchasing problems.

Y t t j t d ’t

the price variancewhen material is

purchased ratherYou accountants just don’tunderstand the problems thatpurchasing managers have.

purchased rather than when it’s used.

p g g


Material VariancesMaterial Variances

Hanson purchased and The price variance is computed on the entireused 1,700 pounds.

How are the variances computed if the amount

computed on the entire quantity purchased.

The quantity variancecomputed if the amount purchased differs from

the amount used?

The quantity variance is computed only on

the quantity used.


q y

Responsibility for Material VariancesResponsibility for Material Variances

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 purchasing manager s performance.

Responsibility for Material Variances

Y h d li

Responsibility for Material Variances

I am not responsible forthis unfavorable material

Your poor scheduling sometimes requires me to

rush order material at a quantity variance.

You purchased cheaphigher price, causing

unfavorable price variances. material, so my peoplehad to use more of it.


ZippyQuick CheckQuick Check

Hanson Inc. has the following direct material standard to manufacture one Zippy: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 Thepurchased and used to make 1,000 Zippies. The

material cost a total of $6,630.


Quick CheckZippy

Quick Check

Hanson’s material price variance (MPV)for the week was:a. $170 unfavorable.b. $170 favorable.c $800 unfavorablec. $800 unfavorable.d. $800 favorable.


Quick CheckZippy

Quick Check

Hanson’s material price variance (MPV)for the week was:a. $170 unfavorable.b. $170 favorable.c $800 unfavorablec. $800 unfavorable.d. $800 favorable.MPV = AQ(AP - SP)

MPV = 1,700 lbs. × ($3.90 - 4.00), ( )MPV = $170 Favorable


Quick CheckZippy

Quick Check

Hanson’s material quantity variance (MQV)Hanson s material quantity variance (MQV)for the week was:a $170 unfavorablea. $170 unfavorable.b. $170 favorable.c. $800 unfavorable.d. $800 favorable.


Quick CheckZippy

Quick Check

Hanson’s material quantity variance (MQV)Hanson s material quantity variance (MQV)for the week was:a $170 unfavorablea. $170 unfavorable.b. $170 favorable.c. $800 unfavorable.d. $800 favorable.

MQV = SP(AQ - SQ)MQV = $4.00(1,700 lbs - 1,500 lbs)MQV $800 nfa orable


MQV = $800 unfavorable



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 f bl

Quantity variance$800 f bl


$170 favorable $800 unfavorable

ZippyQuick Check ContinuedQuick Check Continued

Hanson Inc. has the following material standard to man fact re one Zippmanufacture one Zippy:

1.5 pounds per Zippy at $4.00 per pound1.5 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

A t l Q tit A t l Q tit

Quick Check Continued

Actual Quantity Actual QuantityPurchased Purchased

× ×A l P i S d d P iActual Price Standard Price

2,800 lbs. 2,800 lbs. , ,× ×

$3.90 per lb. $4.00 per lb.

= $10,920 = $11,200

Price variance$280 f bl

Price variance increases because quantity


$280 favorable purchased increases.

ZippyQuick Check Continued

A t l Q tit

Quick Check Continued

Actual QuantityUsed Standard Quantity

× ×S d d P i S d d P iStandard Price Standard Price

1,700 lbs. 1,500 lbs., ,× ×

$4.00 per lb. $4.00 per lb.

= $6,800 = $6,000 Quantity variance is

Quantity variance$800 f bl

Qua y a a ce sunchanged because actual and standard


$800 unfavorablequantities are unchanged.


C h di l b C h di l b Compute the direct labor Compute the direct labor rate and efficiency variances rate and efficiency variances yy

and explainand explaintheir significance their significance their significance. their significance.


Labor Variances An ExampleLabor Variances – An Example

Glacier Peak Outfitters has the following direct labor standard for its mountain parkastandard for its mountain parka.

1.2 standard hours per parka at $10.00 per hour

Last month, employees actually worked 2,500 hours t t t l l b t f $26 250 t k 2 000at a total labor cost of $26,250 to make 2,000

parkas.


Labor Variances Summary

Actual Hours Actual Hours Standard Hours

Labor Variances Summary

Actual Hours Actual Hours Standard Hours× × ×

Actual Rate Standard Rate Standard Rate

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 unfavorable

Efficiency variance$1,000 unfavorable


Labor Variances SummaryLabor Variances Summary

Actual Hours Actual Hours Standard HoursActual Hours Actual Hours Standard Hours× × ×



$ $ $$26,250 ÷ 2,500 hours

$10.50 per hour $10.00 per hour. $10.00 per hour

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

, ,= $10.50 per hour




Labor Variances SummaryLabor Variances Summary

Actual Hours Actual Hours Standard HoursActual Hours Actual Hours Standard Hours× × ×



$ $ $1.2 hours per parka × 2,000

$10.50 per hour $10.00 per hour. $10.00 per hour

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

p p ,parkas = 2,400 hours




Labor Variances:Using the Factored EquationsUsing the Factored Equations

L b t iLabor rate varianceLRV = AH (AR - SR)

= 2 500 hours ($10 50 per hour $10 00 per hour)= 2,500 hours ($10.50 per hour – $10.00 per hour)= 2,500 hours ($0.50 per hour)= $1 250 unfavorable= $1,250 unfavorable

Labor efficiency varianceLEV = SR (AH - SH)LEV = SR (AH - SH)

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


Responsibility for Labor VariancesResponsibility for Labor Variances

Production managers areusually held accountable

for labor variances

Mix of skill levelsassigned to work tasks.

for labor variancesbecause they can

influence the: Level of employee ti timotivation.

Quality of productionQuality of production supervision.

Production Manager

Quality of training provided to employees.


Production Manager p p y

Responsibility for Labor Variances

I think it took more time

Responsibility for Labor Variances

I am not responsible forth f bl l b

I think it took more time to process the

materials because the M i tthe unfavorable labor

efficiency variance!You purchased cheap

Maintenance Department has poorly

maintained your You purchased cheapmaterial, so it took more

time to process it.

yequipment.

p



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

1 5 standard hours per Zippy at1.5 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.


Quick CheckZippy

Quick Check

Hanson’s labor rate variance (LRV) for theHanson s labor rate variance (LRV) for the week was:a $310 unfavorablea. $310 unfavorable.b. $310 favorable.

$c. $300 unfavorable.d. $300 favorable.


Quick CheckZippy

Quick Check

Hanson’s labor rate variance (LRV) for theHanson s labor rate variance (LRV) for the week was:a $310 unfavorablea. $310 unfavorable.b. $310 favorable.

$c. $300 unfavorable.d. $300 favorable.

LRV = AH(AR - SR)LRV = 1,550 hrs($12.20 - $12.00)LRV = $310 unfavorableLRV = $310 unfavorable


Quick CheckZippy

Quick Check

Hanson’s labor efficiency variance (LEV)for the week was:a. $590 unfavorable.b. $590 favorable.c $600 unfavorablec. $600 unfavorable.d. $600 favorable.


Quick CheckZippy

Quick Check

Hanson’s labor efficiency variance (LEV)for the week was:a. $590 unfavorable.b. $590 favorable.c $600 unfavorablec. $600 unfavorable.d. $600 favorable.

LEV SR(AH SH)LEV = SR(AH - SH)LEV = $12.00(1,550 hrs - 1,500 hrs)LEV = $600 unfavorable


LEV $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

Rate variance$310 f bl

Efficiency variance$600 f bl


$310 unfavorable $600 unfavorable


C h i bl C h i bl Compute the variable Compute the variable manufacturing overhead rate manufacturing overhead rate gg

and efficiency variances.and efficiency variances.


Variable Manufacturing Overhead Variances An Example– An Example

Glacier Peak Outfitters has the following direct variable manufacturing overhead labor standard for its mountain g

parka.

1 2 standard hours per parka at $4 00 per hour1.2 standard hours per parka at $4.00 per hour

Last month, employees actually worked 2,500 hours to make 2 000 parkas Actual variable manufacturingmake 2,000 parkas. Actual variable manufacturing

overhead for the month was $10,500.


Variable Manufacturing Overhead Variances Summary


Summary




$ $ $$4.20 per hour $4.00 per hour $4.00 per hour

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

Rate variance$500 unfavorable

Efficiency variance$400 unfavorable




Summary




$ $ $$10,500 ÷ 2,500 hours


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

, ,= $4.20 per hour






Summary




$ $ $1.2 hours per parka × 2,000


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

parkas = 2,400 hours




Variable Manufacturing Overhead Variances: Using Factored EquationsUsing Factored Equations

V i bl f t i h d t iVariable manufacturing overhead rate varianceVMRV = AH (AR - SR)

= 2 500 hours ($4 20 per hour $4 00 per hour)= 2,500 hours ($4.20 per hour – $4.00 per hour)= 2,500 hours ($0.20 per hour)= $500 unfavorable= $500 unfavorable

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

= $4.00 per hour (2,500 hours – 2,400 hours)= $4.00 per hour (100 hours) $4.00 per hour (100 hours) = $400 unfavorable



Hanson Inc. has the following variablemanufacturing overhead standard tomanufacturing overhead standard to

manufacture one Zippy:

1 d d h Zi1.5 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, pp , $ , p

variable manufacturing overhead.


Quick CheckZippy

Quick Check

Hanson’s rate variance (VMRV) for variable f t i h d f th kmanufacturing overhead for the week was:

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


Quick CheckZippy

Quick Check

Hanson’s rate variance (VMRV) for variable f t i h d f th kmanufacturing overhead for the week was:

a. $465 unfavorable.b. $400 favorable.c $335 unfavorableVMRV = AH(AR - SR)c. $335 unfavorable.d. $300 favorable.

VMRV = 1,550 hrs($3.30 - $3.00)VMRV = $465 unfavorable


Quick CheckZippy

Quick Check

Hanson’s efficiency variance (VMEV) for i bl f t i h d f th kvariable manufacturing overhead for the week

was:a. $435 unfavorable.b. $435 favorable.c. $150 unfavorable.d $150 favorabled. $150 favorable.


Quick CheckZippy

Quick Check

Hanson’s efficiency variance (VMEV) for i bl f t i h d f th kvariable manufacturing overhead for the week

was:a. $435 unfavorable.b. $435 favorable. 1 000 units × 1 5 hrs per unitc. $150 unfavorable.d $150 favorable

1,000 units × 1.5 hrs per unit

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


( )VMEV = $150 unfavorable



1,550 hours 1,550 hours 1,500 hours


, , ,× × ×


= $5,115 = $4,650 = $4,500

Rate variance$465 f bl

Efficiency variance$150 f bl


$465 unfavorable $150 unfavorable

Variance Analysis and Management by ExceptionException

How do I knowLarger variances, in dollar amount or as

which variances to investigate?

a percentage of the standard, are

investigated first


investigated first.

A Statistical Control ChartA Statistical Control Chart

W i i l f i ti ti

•Warning signals for investigation

Favorable Limit

• • • • ••Desired Value

Unfavorable Limit

• • •Desired Value

Unfavorable Limit

•1 2 3 4 5 6 7 8 9

Variance Measurements


Advantages of Standard CostsAdvantages of Standard Costs

Management byexception

Promotes economyand efficiency

Ad tAdvantagesEnhances

Simplifiedbookkeeping

responsibilityaccounting


Potential Problems with Standard Costs

Emphasizing standards Favorable

Potential Problems with Standard Costs

Potential

Emphasizing standardsmay exclude other

important objectives.

Favorablevariances may

be misinterpreted.PotentialProblems

Emphasis onnegative may

impact morale.

Standard costreports may

not be timely. impact morale.

Continuous

not be timely.

Invalid assumptions Continuousimprovement maybe more important

th ti t d d

Invalid assumptionsabout the relationship

between labort d t t


than meeting standards.cost and output.


C d li l i C d li l i Compute delivery cycle time, Compute delivery cycle time, throughput time, and throughput time, and g pg pmanufacturing cycle manufacturing cycle

efficiency (MCE)efficiency (MCE)efficiency (MCE).efficiency (MCE).


Delivery Performance MeasuresDelivery Performance Measures

Order P d ti GoodsOrder Received

ProductionStarted

Goods Shipped

Wait TimeProcess Time + Inspection Time

+ Move Time + Queue Time+ Move Time + Queue Time

Throughput Time

Delivery Cycle Time

Throughput Time

Process time is the only value added time


Process time is the only value-added time.

Delivery Performance Measures

Order P d ti Goods

Delivery Performance Measures

Order Received

ProductionStarted

Goods Shipped

Wait TimeProcess Time + Inspection Time

+ Move Time + Queue Time+ Move Time + Queue Time

Throughput Time

Delivery Cycle Time

Throughput Time

ManufacturingCycle

Value-added timeM f i l i=


Cyc eEfficiency Manufacturing cycle time

Quick CheckQuick Check

A TQM team at Narton Corp has recorded theA TQM team at Narton Corp has recorded the following 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?What is the throughput time? a. 10.4 days.b 0 2 daysb. 0.2 days.c. 4.1 days.d 13 4 days


d. 13.4 days.

Quick Check

A TQM team at Narton Corp has recorded the

Quick Check

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


What is the throughput time?What is the throughput time? a. 10.4 days.b 0 2 daysb. 0.2 days.c. 4.1 days.d 13 4 days

Throughput time = Process + Inspection + Move + Queue= 0.2 days + 0.4 days + 0.5 days + 9.3 days= 10 4 days


d. 13.4 days. = 10.4 days




What is the Manufacturing Cycle Efficiency (MCE)?What is the Manufacturing Cycle Efficiency (MCE)? a. 50.0%.b 1 9%b. 1.9%.c. 52.0%.d 5 1%


d. 5.1%.

Quick Check


Quick Check



What is the Manufacturing Cycle Efficiency (MCE)?What is the Manufacturing Cycle Efficiency (MCE)? a. 50.0%.b 1 9% MCE = Value-added time ÷ Throughput timeb. 1.9%.c. 52.0%.d 5 1%

= Process time ÷ Throughput time= 0.2 days ÷ 10.4 days


d. 5.1%. = 1.9%



W it 3 0 d M 0 5 dWait 3.0 days Move 0.5 daysInspection 0.4 days Queue 9.3 daysProcess 0.2 days

What is the delivery cycle time (DCT)? y y ( )a. 0.5 days.b. 0.7 days.b. 0.7 days.c. 13.4 days.d 10 4 days


d. 10.4 days.

Quick Check


Quick Check


W it 3 0 d M 0 5 dWait 3.0 days Move 0.5 daysInspection 0.4 days Queue 9.3 daysProcess 0.2 days

What is the delivery cycle time (DCT)? y y ( )a. 0.5 days.b. 0.7 days.b. 0.7 days.c. 13.4 days.d 10 4 days

DCT = Wait time + Throughput time= 3.0 days + 10.4 days= 13 4 days


d. 10.4 days. = 13.4 days

Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System

Appendix 11A



(A di 11A)(A di 11A)(Appendix 11A)(Appendix 11A)

Compute and interpret the Compute and interpret the fixed overhead budget and

volume variances.


Fixed Overhead Budget VarianceFixed Overhead Budget VarianceActual FixedBudgetedFixed

OverheadOverheadApplied

FixedOverhead

Budget ivariance

Budgetvariance

Budgetedfixed

overhead

Actualfixed

overhead= –


overheadoverhead

Fixed Overhead Volume VarianceFixed Overhead Volume VarianceActual FixedBudgetedFixed


FixedOverhead

Volumeivariance

FixedVolumevariance

Fixedoverheadapplied to

Budgetedfixed

overhead= –


ppwork in processoverhead

Fixed Overhead Volume VarianceFixed Overhead Volume VarianceActual FixedBudgetedFixed


FixedOverhead

SH × FRDH × FR

Volumei

Volume variance FPOHR × (DH – SH)=

variance

FPOHR = Fixed portion of the predetermined overhead rateDH = Denominator hours


DH = Denominator hoursSH = Standard hours allowed for actual output

Computing Fixed Overhead VariancesComputing Fixed Overhead Variances

Budgeted production 30 000 unitsProduction and Machine-Hour Data

ColaCo

Budgeted production 30,000 units Standard machine-hours per unit 3 hours Budgeted machine-hours 90,000 hours

Actual production 28 000 units Actual production 28,000 units Standard machine-hours allowed for the actual production 84,000 hours Actual machine-hours 88,000 hours


Computing Fixed Overhead VariancesComputing Fixed Overhead Variances

ColaCoCost Data

Budgeted variable manufacturing overhead 90,000$ Budgeted fixed manufacturing overhead 270,000 Total budgeted manufacturing overhead 360,000$ g g ,$

Actual variable manufacturing overhead 100,000$ A t l fi d f t i h d 280 000 Actual fixed manufacturing overhead 280,000

Total actual manufacturing overhead 380,000$


Predetermined Overhead RatesPredetermined Overhead Rates

Predetermined overhead rate

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

P d t i d $360 000Predetermined overhead rate

$360,00090,000 Machine-hours=

Predetermined overhead rate = $4.00 per machine-houroverhead rate p


Predetermined Overhead RatesPredetermined Overhead Rates

Variable component of the $90 000Variable component of thepredetermined overhead rate


V i bl f hVariable component of thepredetermined overhead rate = $1.00 per machine-hour

Fixed component of the $270 000Fixed component of thepredetermined overhead rate


Fixed component of thepredetermined overhead rate = $3.00 per machine-hour


Applying Manufacturing OverheadApplying Manufacturing Overhead

Overheadapplied

Predetermined overhead rate

Standard hours allowedfor the actual output= ×applied overhead rate for the actual output

Overhead $4 00 perOverheadapplied

$4.00 permachine-hour 84,000 machine-hours= ×

Overheadapplied $336,000=


Computing the Budget VarianceComputing the Budget Variance

Budgetvariance

Budgetedfixed

Actualfixed= –variance overheadoverhead

Budgetvariance = $280,000 – $270,000

BudgetBudgetvariance = $10,000 Unfavorable


Computing the Volume VarianceComputing the Volume VarianceFixed

h dBudgetedVolumevariance

overheadapplied to

work in process

Budgetedfixed

overhead= –

work in process

Volumevariance = $270,000 – $3.00 per

machine-hour( × $84,000machine-hours)variance machine-hour( machine-hours)

Volumevariance = $18,000 Unfavorable


Computing the Volume VarianceComputing the Volume Variance

Volume variance FPOHR × (DH – SH)=

FPOHR = Fixed portion of the predetermined overhead rateDH = Denominator hours

Volume variance O ( S )

DH = Denominator hoursSH = Standard hours allowed for actual output

V l $3 00 per ( 90 000 84 000 )Volumevariance

= $3.00 permachine-hour (× 90,000

mach-hours – 84,000mach-hours)

Volumevariance

= 18,000 Unfavorable


A Pictorial View of the VariancesA Pictorial View of the Variances

A t l Fi d O h dB d t dActualFixed

Overhead

Fixed OverheadApplied to

Work in Process

BudgetedFixed

OverheadOverhead Work in Process Overhead252,000270,000280,000

Budget variance,$10,000 unfavorable

Volume variance,$18,000 unfavorable

Total variance, $28,000 unfavorable


Total variance, $28,000 unfavorable

Fixed Overhead Variances –A Graphic ApproachA Graphic Approach

Let’s look at a graph showing fixed overhead

variances. We will use ColaCo’s

numbers from the previous example.


Graphic Analysis of FixedOverhead VariancesOverhead Variances

Budget$270,000

Denominator

90

Denominatorhours

00


Machine-hours (000) 900

Graphic Analysis of FixedOverhead VariancesOverhead Variances

Actual$280 000 {$280,000Budget

$270,000Budget Variance 10,000 U{

Denominator

90

Denominatorhours

00



Graphic Analysis of FixedOverhead Variances

Actual$280 000

Overhead Variances

{$280,000

A li d

Budget$270,000

Budget Variance 10,000 U

Volume Variance 18,000 U

{{Applied

$252,000

Volume Variance 18,000 U{

Standard Denominator

908400

hoursDenominator

hours



Reconciling Overhead Variances and Underapplied or Overapplied OverheadU de app ed o O e app ed O e ead

In a standardcost system:y

Unfavorable FavorableUnfavorablevariances 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 and Underapplied or Overapplied OverheadUnderapplied or Overapplied Overhead

Predetermined overhead rate (a) 4.00$ per machine-hourComputation of Underapplied Overhead

ColaCo

Predetermined overhead rate (a) 4.00$ per machine hour Standard hours allowed for the actual output (b) 84,000 machine hours Manufacturing overhead applied (a) × (b) 336,000$ Actual manufacturing overhead 380,000$ g , Manufacturing overhead underapplied or overapplied 44,000$ underapplied


Computing the Variable Overhead VariancesComputing the Variable Overhead Variances

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

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


Computing the Variable Overhead VariancesComputing the Variable Overhead Variances

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

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


Computing the Sum of All VariancesComputing the Sum of All Variances

ColaCo

Variable overhead rate variance 12 000$ UComputing the Sum of All variances

ColaCo

Variable overhead rate variance 12,000$ U Variable overhead efficiency variance 4,000 U

Fixed overhead budget variance 10 000 U Fixed overhead budget variance 10,000 U Fixed overhead volume variance 18,000 U Total of the overhead variances 44,000$ U,


Journal EntriesJournal Entriesto Record Variances

Appendix 11B



(A di 11B)(A di 11B)(Appendix 11B)(Appendix 11B)

Prepare journal entriesPrepare journal entriesPrepare journal entriesPrepare journal entriesto record standardto record standardcosts and variances. costs and variances.


Appendix 11BJournal Entries to Record VariancesJournal Entries to Record Variances

We will use information from the Glacier Peak Outfitterse use o at o o t e G ac e ea Out tte sexample presented earlier in the chapter to illustrate journal

entries for standard cost variances. Recall the following:

Material Labor

AQ × AP = $1,029AQ × SP = $1,050SQ × SP $1 000

AH × AR = $26,250AH × SR = $25,000SH × SR $24 000SQ × SP = $1,000

MPV = $21 FMQV = $50 U

SH × SR = $24,000LRV = $1,250 ULEV = $1,000 UMQV $50 U LEV $1,000 U

Now, let’s prepare the entries to record


the labor and material variances.

Appendix 11BRecording Material VariancesRecording Material Variances

GENERAL JOURNAL Page 4Post.

Date Description Ref. Debit CreditRaw Materials 1,050

Materials Price Variance 21Materials Price Variance 21 Accounts Payable 1,029

To record the purchase of materialp

Work in Process 1,000 Materials Quantity Variance 50 Raw Materials 1,050


To record the use of material

Appendix 11BRecording Labor VariancesRecording Labor Variances

GENERAL JOURNAL Page 4GENERAL JOURNAL Page 4

Date DescriptionPost. Ref. Debit Credit

Work in Process 24,000 Labor Rate Variance 1,250 L b Effi i V i 1 000Labor Efficiency Variance 1,000

Wages Payable 26,250 To record direct laborTo record direct labor


Cost Flows in a Standard Cost SystemCost Flows in a Standard Cost System

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

Favorable variances are credits, representing savings in production costs.Unfavorable variances are debits, representing excess production costs.

Standard cost variances are usually closed out to cost of goods sold.g

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


g

End of Chapter 11End of Chapter 11


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