Standard Costs and Variances

Standard Costs and Variances
Chapter 12
Garrison, Noreen, Brewer, Cheng & Yuen
2015 McGraw-Hill Educa4on
Standard Costs
Standards are benchmarks or norms for
measuring performance. In managerial accounting,
two types of standards are commonly used.
Quantity standards
specify how much of an
input should be used to
make a product or
provide a service.
Price standards
specify how much
should be paid for
each unit of the
input.
Examples: Firestone, Sears, McDonalds, hospitals,

construction and manufacturing companies.
Setting Direct Material Standards

Quantity
Standards
Price
Standards
Summarized in
a Bill of Materials.
Final, delivered
cost of materials,
net of discounts.
Setting Direct Labor Standards

Time
Standards
Rate
Standards
Use time and

motion studies for
each labor operation.
Often a single
rate is used that reflects
the mix of wages earned.
Setting Variable Manufacturing Overhead

Standards
Quantity
Standards
Rate
Standards
The quantity is
the activity in the
allocation base for
predetermined overhead.
The rate is the

variable portion of the
predetermined overhead
rate.
Standard Cost Card Variable Production

Cost
A standard cost card for one unit of

product might look like this:
Inputs
Direct materials
Direct labor
Variable mfg. overhead
Total standard unit cost
AxB
Standard
Quantity
or Hours
Standard
Price
or Rate
Standard
Cost
per Unit
3.0 lbs.
2.5 hours
2.5 hours
$ 4.00 per lb.

$
14.00 per hour
3.00 per hour
$
12.00
35.00
7.50
54.50
6
Using Standards in Flexible Budgets
Standard costs per unit for direct materials, direct labor,

and variable manufacturing overhead can be used to
compute activity and spending variances.
Spending variances become more

useful by breaking them down into
price and quantity variances.
A General Model for Variance Analysis

Variance Analysis
Price Variance
Quantity Variance
Difference between
actual price and
standard price
Difference between
actual quantity and
standard quantity
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 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.

Variance Analysis
Price Variance
Quantity Variance
Materials price variance

Labor rate variance
VOH rate variance
Materials quantity variance

Labor efficiency variance
VOH efficiency variance
10

Actual Quantity
Actual Price
Actual Quantity
Standard Price
Price Variance
Standard Quantity
Standard Price
Quantity Variance
11

Actual Quantity
Actual Price
Actual Quantity
Standard Price
Price Variance
Standard Quantity
Standard Price
Quantity Variance
Actual quantity is the amount of direct

materials, direct labor, and variable
manufacturing overhead actually used.
12

Actual Quantity
Actual Price
Actual Quantity
Standard Price
Price Variance
Standard Quantity
Standard Price
Quantity Variance
Standard quantity is the standard quantity

allowed for the actual output of the period.
13

Actual Quantity
Actual Price
Actual Quantity
Standard Price
Price Variance
Standard Quantity
Standard Price
Quantity Variance
Actual price is the amount actually

paid for the input used.
14

Actual Quantity
Actual Price
Actual Quantity
Standard Price
Price Variance
Standard Quantity
Standard Price
Quantity Variance
Standard price is the amount that should

have been paid for the input used.
15

Actual Quantity
Actual Price
Actual Quantity
Standard Price
Price Variance
Standard Quantity
Standard Price
Quantity Variance
(AQ AP) (AQ SP)
(AQ SP) (SQ SP)
AQ = Actual Quantity
AP = Actual Price
SP = Standard Price
SQ = Standard Quantity
16
Another Way to Look at the Problems:

The line-by-line method
Actual Quantity
x Actual Price
= AQ x AP
Price variance
Actual Quantity
x Standard Price
= AQ x SP
Quantity variance
Standard Quantity
x Standard Price
= SQ x SP
Total V ariance
SQ = ( Aouput x standard quantity for production)

= standard quantity allowed for the actual output
17
Learning Objective 1
Compute the direct

materials price and quantity
variances and explain their
significance.
18
Material Variances An Example

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.
19
Material Variances: The line-by-line method

AQ x AP =
210 x AP =
1,029
(21) F Price variance
AQ x SP =
210 x 5 =
1,050
50 U Quantity variance
SQ x SP = (2000 x 0.1) x 5 =
1,000
29 U Total Variance
SQ = (Aouput x s tandard quantity for production)

= s tandard quantity allowed for the actual output
Calculation of Actual Purchase Price (AP) per unit can be done but is
not necessary because AP will not be used in subsequent calculations
and the total actual purchase cost in total is sufficient for the variance
calculation.
20
Material Variances Summary:

The tradition method
Actual Quantity
Actual Price
Actual Quantity
Standard Price
210 kgs.
$4.90 per kg.
210 kgs.
$5.00 per kg.
= $1,029
= $1,050
Price variance
$21 favorable
Standard Quantity
Standard Price
200 kgs.
$5.00 per kg.

= $1,000
Quantity variance
$50 unfavorable
21

Actual Quantity
Actual Price
210 kgs.
$4.90 per kg.
Actual Quantity
Standard Price
210 kgs.
kgs
$1,029 210
$5.00per
perkg
kg.
= $4.90
= $1,029
= $1,050
Price variance
$21 favorable
Standard Quantity
Standard Price
200 kgs.
$5.00 per kg.

= $1,000
Quantity variance
$50 unfavorable
22

Actual Quantity
Actual Price
Actual Quantity
Standard Price
Standard Quantity
Standard Price
210 kgs.
210 kgs.
200 kgs.
0.1 kg per parka 2,000 parkas

$4.90 per kg.
$5.00
$5.00 per kg.
= 200 per
kgs kg.
= $1,029
= $1,050
Price variance
$21 favorable
= $1,000
Quantity variance
$50 unfavorable
23
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
24
Isolation of Material Variances

I need the price variance
sooner so that I can better
identify purchasing problems.
You accountants just dont
understand the problems that
purchasing managers have.
Ill start computing

the price variance
when material is
purchased rather
than when its used.
25
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.
26
Responsibility for Material Variances

Materials Price Variance
Purchasing Manager
Materials Quantity Variance
Production Manager
The standard price is used to compute the quantity variance

so that the production manager is not held responsible for
the purchasing managers performance.
27
Responsibility for Material Variances

Your poor scheduling
sometimes requires me to
rush order material at a
higher price, causing
unfavorable price variances.
I am not responsible for

this unfavorable material
quantity variance.
You purchased cheap
material, so my people
had to use more of it.
28
Zippy
Quick Check
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.
29
Zippy
Quick Check
Hansons material price variance (MPV)

for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
30
Zippy
Quick Check
Hansons material quantity variance (MQV)

for the week was:
b. $170 favorable.
d. $800 favorable.
31
Quick Check
Summary: The line-by-line method
AQ x AP =
Zippy
1,700 x AP = 6,630
AQ x SP =
1,700 x
4 = 6,800
800 U Quantity variance
SQ x SP = (1000 x 1.5) x
4 = 6,000
630 U Total Variance
SQ = (Aouput x s tandard quantity for production)

32
Quick Check
Summary: The traditional method
Actual Quantity
Actual Price
Actual Quantity
Standard Price
Zippy
Standard Quantity
Standard Price
1,700 lbs.
$3.90 per lb.
1,700 lbs.
$4.00 per lb.
1,500 lbs.
$4.00 per lb.
= $6,630
= $ 6,800
= $6,000
Price variance
$170 favorable
Quantity variance
$800 unfavorable
33
Quick Check Continued
Zippy
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.
34

AQp x AP =
Zippy
2,800 x AP = 10,920
AQp x SP =
2,800 x
4 = 11,200
4,400 U Inventory @ Std cost
AQu x SP =
SQ x SP
1,700 x
= (1000 x 1.5) x
4 =
4 =
6,800
6,000
800 U Usage variance

(Quantity variance)
4,920 U Total Variance
AQp = Actual Quantity Purchased

AQu = Actual Quantity used
SQ = (Aouput x s tandard quantity for production use)
35

The traditional method
Actual Quantity
Purchased
Actual Price
Actual Quantity
Purchased
Standard Price
2,800 lbs.
$3.90 per lb.
2,800 lbs.
$4.00 per lb.
= $10,920
= $11,200
Price variance
$280 favorable
Zippy
Price variance increases

because quantity
purchased increases.
36

Actual Quantity
Used
Standard Price
Standard Quantity
Standard Price
1,700 lbs.
$4.00 per lb.
1,500 lbs.
$4.00 per lb.
= $6,800
= $6,000
Quantity variance is
unchanged because
actual and standard
quantities are unchanged.
Zippy
Quantity variance
$800 unfavorable
37
Compute the direct labor

rate and efficiency variances
and explain
their significance.
38
Labor Variances An Example

Glacier Peak Outfitters has the following direct labor
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 labor cost of $26,250 to make 2,000
parkas.
39
Labor Variances
AH x AR
2,500 x AR = 26,250
1,250 U Rate variance
AH x SR
2,500 x 10 = 25,000
1,000 U Efficiency variance
SH x SR
= (2000 x 1.2) x 10 = 24,000

AH = Actual hour paid (and worked in this case)

AR = Actual rate per hour
SR = Standard rate per hour
SH = (Aouput x s tandard hours for the production)
= s tandard hours allowed for the actual output
40
Labor Variances Summary:

The Traditional Method
Actual Hours
Actual Rate
Actual Hours
Standard Rate
Standard Hours
Standard Rate
2,500 hours
$10.50 per hour
2,500 hours
$10.00 per hour.
2,400 hours
$10.00 per hour
= $26,250
= $25,000
Rate variance
$1,250 unfavorable
= $24,000
Efficiency variance
$1,000 unfavorable
41
Labor Variances Summary

Actual Hours
Actual Rate
2,500 hours
$10.50 per hour

= $26,250
Actual Hours
Standard Rate
2,500 hours
2,400 hours
2,500 hours
$26,250
$10.00
per hour.
= $10.50
per hour $10.00 per hour
= $25,000
Rate variance
$1,250 unfavorable
Standard Hours
Standard Rate
= $24,000
Efficiency variance
$1,000 unfavorable
42
Labor Variances Summary

Actual Hours
Actual Rate
Actual Hours
Standard Rate
Standard Hours
Standard Rate
2,500 hours
2,500 hours
2,400 hours
1.2 hours per

parka 2,000
$10.50 per hour parkas
$10.00
per hour.
$10.00 per hour
= 2,400
hours
= $26,250
= $25,000
Rate variance
$1,250 unfavorable
= $24,000
Efficiency variance
$1,000 unfavorable
43
Labor Variances:
Using the Factored Equations
Labor 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 unfavorable
Labor efficiency variance

LEV = SR (AH - SH)
= $10.00 per hour (2,500 hours 2,400 hours)
= $10.00 per hour (100 hours)
44
Responsibility for Labor Variances

Production managers are
usually held accountable
for labor variances
because they can
influence the:
Mix of skill levels

assigned to work tasks.
Level of employee
motivation.
Quality of production
supervision.
Production Manager
Quality of training
provided to employees.
45
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.
I think it took more time

to process the
materials because the
Maintenance
Department has poorly
maintained your
equipment.
46
Zippy
Quick Check
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.
47
Zippy
Quick Check
Hansons labor rate variance (LRV) for the

week was:
b. $310 favorable.
d. $300 favorable.
48
Zippy
Quick Check
Hansons labor efficiency variance (LEV)

for the week was:
b. $590 favorable.
d. $600 favorable.
49
Quick Check :
Summary of the line-by-line method
AH x AR
1,550 x AR = 18,910
310 U Rate variance
AH x SR
1,550 x 12 = 18,600
600 U Efficiency variance
SH x SR
= (1000 x 1.5) x 12 = 18,000


50
Quick Check :
Summary of the traditional method
Actual Hours
Actual Rate
Actual Hours
Standard Rate
1,550 hours
$12.20 per hour
1,550 hours
$12.00 per hour
= $18,910
= $18,600
Rate variance
$310 unfavorable
Zippy
Standard Hours
Standard Rate
1,500 hours
$12.00 per hour

= $18,000
Efficiency variance
$600 unfavorable
51
Compute the variable

manufacturing overhead rate
and efficiency variances.
52
Variable Manufacturing Overhead Variances

An Example
Glacier Peak Outfitters has the following direct variable
manufacturing 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 manufacturing
overhead for the month was $10,500.
53
Variable Manufacturing Overhead Variances:

AH x AR
2,500 x
AR = 10,500
500 U Rate variance
AH x SR
2,500 x
4 = 10,000
SH x SR
= (2000 x 1.2) x
4 =
9,600

54

Actual Hours
Actual Rate
Actual Hours
Standard Rate
Standard Hours
Standard Rate
2,500 hours
$4.20 per hour
2,500 hours
$4.00 per hour
2,400 hours
$4.00 per hour
= $10,500
= $10,000
= $9,600
Rate variance
$500 unfavorable
Efficiency variance
$400 unfavorable
55

Actual Hours
Actual Rate
2,500 hours
$4.20 per hour

= $10,500
Actual Hours
Standard Rate
2,500 hours
$10,500 2,500 hours
$4.00
per per
hourhour
= $4.20
= $10,000
Rate variance
$500 unfavorable
Standard Hours
Standard Rate
2,400 hours
$4.00 per hour

= $9,600
Efficiency variance
$400 unfavorable
56

Actual Hours
Actual Rate
Actual Hours
Standard Rate
2,500 hours
2,500 hours
1.2 hours per

parka 2,000
$4.20 per hour parkas
$4.00
per hour
= 2,400
hours
= $10,500
= $10,000
Rate variance
$500 unfavorable
Standard Hours
Standard Rate
2,400 hours
$4.00 per hour

= $9,600
Efficiency variance
$400 unfavorable
57
Variable Manufacturing Overhead Variances:

Using Factored Equations
Variable manufacturing overhead rate variance
VMRV = AH (AR - SR)
= 2,500 hours ($4.20 per hour $4.00 per hour)
= 2,500 hours ($0.20 per hour)
= $500 unfavorable
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 unfavorable
58
Zippy
Quick Check
Hanson Inc. has the following variable
manufacturing 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 make

1,000 Zippies, and $5,115 was spent for
variable manufacturing overhead.
59
Zippy
Quick Check
Hansons rate variance (VMRV) for variable
manufacturing overhead for the week was:
b. $400 favorable.
d. $300 favorable.
60
Zippy
Quick Check
Hansons efficiency variance (VMEV) for

variable manufacturing overhead for the week
was:
b. $435 favorable.
d. $150 favorable.
61
Quick Check
Summary: The line-by-line method
AH x AR
1,550 x
AR =
5,115
465 U Rate variance
AH x SR
1,550 x
3 =
4,650
SH x SR
= (1000 x 1.5) x
3 =
4,500

62
Quick Check
Zippy
Actual Hours
Actual Rate
Actual Hours
Standard Rate
Standard Hours
Standard Rate
1,550 hours
$3.30 per hour
1,550 hours
$3.00 per hour
1,500 hours
$3.00 per hour
= $5,115
= $4,650
Rate variance
$465 unfavorable
= $4,500
Efficiency variance
$150 unfavorable
63
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.
64
A Statistical Control Chart

Warning signals for investigation
Favorable Limit
Desired Value
Unfavorable Limit
Variance Measurements
65
Advantages of Standard Costs

Management by
exception
Promotes economy
and efficiency
Advantages
Enhances
responsibility
accounting
Simplified
bookkeeping
66
Potential Problems with Standard Costs

Emphasizing standards
may exclude other
important objectives.
Favorable
variances may
be misinterpreted.
Potential
Problems
Standard cost
reports may
not be timely.
Invalid assumptions
about the relationship
between labor
cost and output.
Emphasis on
negative may
impact morale.
Continuous
improvement may
be more important
than meeting standards.
67
Generalized Model of the Row by Row Approach

and Its Preparation of the Performance Report
(Reconcile Actual Results to the Budgeted Figures)
Supplementary Note
Generalized Model of the Row by Row Approach and Its

Preparation of the Performance Report
(Reconcile Actual Results to the Budgeted Figures)
Actual Quantity
x Actual Price
= AQ x AP
Price variance
Actual Quantity
x Standard Price
= AQ x SP
Quantity variance
Standard Quantity
x Standard Price
= SQ x SP
Total Flexible Variance
Activity Variance
Budgeted Quantity x Standard Price
= BQ x SP
Static variance
SQ = ( Aouput x standard quantity for production)

= standard quantity allowed for the actual output
BQ = Budgeted quantity
69
Performance Report for Variance Analysis:

Recall Example from Chapter 11
Larry's Lawn Service
Flexible Budget Performance Report
For the Month Ended June 30
Revenue/Cost
Formulas
Planning
Budget
Number of lawns (Q)

Revenue
Expenses:
Wages and salaries
Gasoline and supplies
Equipment maintenance
Office and shop utilities
Office and shop rent
Equipment Depreciation
Insurance
Total expenses
Net operating income
Activity
Variances
Flexible
Budget
500
Revenue and
Spending
Variances
Actual
Results
550
550
($75Q)
37,500
3,750 F
41,250
1,750 F
43,000
($5,000 + $30Q)
($9Q)
($3Q)
($1,000)
($2,000)
($2,500)
($1,000)
20,000
4,500
1,500
1,000
2,000
2,500
1,000
32,500
5,000
1,500
450
150
2,100
1,650
21,500
4,950
1,650
1,000
2,000
2,500
1,000
34,600
6,650
2,000
150
350
50
200
1,950
200
23,500
5,100
1,300
950
2,000
2,500
1,200
36,550
6,450
U
U
U
U
F
U
U
F
F
U
U
U
70
Predetermined Overhead Rates and Overhead

Analysis in a Standard Costing System
Appendix 12A
(Appendix 12A)
Compute and interpret the
fixed overhead budget and
volume variances.
72
Fixed Manufacturing Overhead Variances:

Actual Fixed Overhead
Budget variance
Budgeted Fixed Overhead
= BH x SR
(Spending variance)
Volume variance
Applied Fixed Overhead
= SH x SR
Total Variance
BH = Budgeted hours (a.k.a. Denominator hours)

73
Fixed Overhead Budget Variance:

Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
Fixed
Overhead
Applied
Budget
variance
Budget
variance
Actual
fixed
overhead
Budgeted
fixed
overhead
74
Fixed Overhead Volume Variance:

Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
Fixed
Overhead
Applied
Volume
variance
Volume
variance
Budgeted
fixed
overhead
Fixed
overhead
applied to
work in process
75
Fixed Overhead Volume Variance:

Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
DH FR
Fixed
Overhead
Applied
SH FR
Volume
variance
Volume variance
FPOHR (DH SH)
FPOHR = Fixed portion of the predetermined overhead rate

DH = Denominator hours
SH = Standard hours allowed for actual output
76
Computing Fixed Overhead Variances
ColaCo
Production and Machine-Hour Data
Budgeted production
Standard machine-hour per unit
Budgeted machine-hour
Actual production
Standard machine-hour allowed for the actual production
Actual machine-hour
30,000
3
90,000
28,000
84,000
88,000
units
hours
hours
units
hours
hours
77
Computing Fixed Overhead Variances

ColaCo
Cost Data
Budgeted variable manufacturing overhead
Budgeted fixed manufacturing overhead
Total budgeted manufacturing overhead
Actual variable manufacturing overhead

Actual fixed manufacturing overhead
Total actual manufacturing overhead
90,000
270,000
360,000
100,000
280,000
380,000
78
Predetermined Overhead Rates

Predetermined
Estimated total manufacturing overhead cost
=
overhead rate
Estimated total amount of the allocation base
Predetermined
$360,000
=
overhead rate
90,000 Machine-hour
Predetermined
= $4.00 per machine-hour
overhead rate
79
Predetermined Overhead Rates

Variable component of the
predetermined overhead rate
$90,000
=
90,000 Machine-hour
Variable component of the

Fixed component of the

$270,000
=
90,000 Machine-hour
Fixed component of the

80
Applying Manufacturing Overhead

Overhead
applied
Predetermined
overhead rate
Standard hours allowed

for the actual output
Overhead
applied
$4.00 per
machine-hour
84,000 machine-hour
Overhead
applied
$336,000
81
Fixed Manufacturing Overhead Variances

Actual
= 280,000
10,000 U Budget variance
Budgeted =
= 270,000
18,000 U Volume variance
SH x SR
= (28000 x 3) x 3 = 252,000
28,000 U Total Underapplied overhead

82
Computing the Budget Variance:

Actual
fixed
overhead
Budgeted
fixed
overhead
Budget
variance
Budget
variance
$280,000 $270,000
Budget
variance
$10,000 Unfavorable
83
Computing the Volume Variance:

Budgeted
fixed
overhead
Fixed
overhead
applied to
work in process
Volume
variance
Volume
variance
= $270,000
Volume
variance
= $18,000 Unfavorable
$3.00 per
$84,000
machine-hour
machine-hour
84
Computing the Volume Variance:

Volume variance
FPOHR (DH SH)
FPOHR = Fixed portion of the predetermined overhead rate

DH = Denominator hours
SH = Standard hours allowed for actual output
90,000
84,000
machine-hour machine-hour
Volume
variance
$3.00 per
=
machine-hour
Volume
variance
= 18,000 Unfavorable
85
A Pictorial View of the Variances

Actual
Fixed
Overhead
280,000
Budgeted
Fixed
Overhead
270,000
Budget variance,
$10,000 unfavorable
Fixed Overhead
Applied to
Work in Process
252,000
Volume variance,
$18,000 unfavorable
Total variance, $28,000 unfavorable

86
Fixed Overhead Variances

A Graphic Approach
Lets look at a
graph showing
fixed overhead
variances. We will
use ColaCos
numbers from the
previous example.
87
Graphic Analysis of Fixed

Overhead Variances
Budget
$270,000
Denominator
hours
0
0
Machine-hours (000)
90
88

Overhead Variances
Actual
$280,000
Budget
$270,000
Budget Variance 10,000 U
Denominator
hours
0
0
Machine-hours (000)
90
89

Overhead Variances
Actual
$280,000
Budget
$270,000
Applied
$252,000
{
{
Budget Variance 10,000 U

Volume Variance 18,000 U
Standard
hours
Denominator
hours
0
0
Machine-hours (000)
84
90
90
Reconciling Overhead Variances and

Underapplied or Overapplied Overhead
In a standard
cost system:
Unfavorable
variances are equivalent
to underapplied overhead.
Favorable
variances are equivalent
to overapplied overhead.
The sum of the overhead variances

equals the under- or overapplied
overhead cost for the period.
91
Reconciling Overhead Variances and

Underapplied or Overapplied Overhead
ColaCo
Computation of Underapplied Overhead
Predetermined overhead rate (a)
Standard hours allowed for the actual output (b)
Manufacturing overhead applied (a) (b)
Actual manufacturing overhead
Manufacturing overhead underapplied or
overapplied
$
$
$
$
4.00 per machine-hour

84,000 machine hours
336,000
380,000
44,000 underapplied
92
Variable Overhead Variances:

AH x AR
= 100,000
12,000 U Rate variance
AH x SR
88,000 x
1 = 88,000
4,000 U Efficiency variance
SH x SR
84,000 x 1 = 84,000
(= 28,000 x 3)

= Total underapplied
variable overhead
93
Computing the Variable Overhead Variances:

The factored equation method
Variable manufacturing overhead rate variance

VMRV = (AH AR) (AH SR)
= $100,000 (88,000 hours $1.00 per hour)
94
Computing the Variable Overhead Variances

Variable manufacturing overhead efficiency variance

VMEV = (AH SR) (SH SR)
= $88,000 (84,000 hours $1.00 per hour)
95
Computing the Sum of All Variances
ColaCo
Computing the Sum of All variances
Variable overhead rate variance
Variable overhead efficiency variance
Fixed overhead budget variance
Fixed overhead volume variance
Total of the overhead variances
12,000
4,000
10,000
18,000
44,000
U
U
U
U
U
96
Journal Entries to Record

Variances
Appendix 12B
(Appendix 12B)
Prepare journal entries
to record standard
costs and variances.
98
Appendix 12B
Journal Entries to Record Variances
We will use information from the Glacier Peak Outfitters
example presented earlier in the chapter to illustrate journal
entries for standard cost variances. Recall the following:
Material
AQ AP = $1,029
AQ SP = $1,050
SQ SP = $1,000
MPV = $21 F
MQV = $50 U
Labor
AH AR = $26,250
AH SR = $25,000
SH SR = $24,000
LRV = $1,250 U
LEV = $1,000 U
Now, lets prepare the entries to record

the labor and material variances.
99
Appendix 12B
Recording Material Variances
GENERAL JOURNAL
Date
Description
Raw Materials
Post.
Ref.
Page 4
Debit
Credit
1,050
Materials Price Variance
21
Accounts Payable
1,029
To record the purchase of material

Work in Process
1,000
Materials Quantity Variance

Raw Materials
50
1,050
To record the use of material

100
Appendix 12B
Recording Labor Variances
GENERAL JOURNAL
Date
Description
Work in Process
Post.
Ref.
Page 4
Debit
Credit
24,000
Labor Rate Variance
1,250
Labor Efficiency Variance
1,000
Wages Payable
26,250
To record direct labor
101
Cost Flows in a Standard Cost System

Inventories are recorded at standard cost.
Variances are recorded as follows:
w Favorable variances are credits, representing
savings in production costs.
w Unfavorable variances are debits, representing
excess production costs.
Standard cost variances are usually closed out

to cost of goods sold.
w Unfavorable variances increase cost of goods sold.
w Favorable variances decrease cost of goods sold.
102
End of Chapter 12
103

Standard Costs and Variances

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Standard Costs and Variances

Garrison, Noreen, Brewer, Cheng & Yuen

2015 McGraw-Hill Educa4on

Examples: Firestone, Sears, McDonalds, hospitals,

Garrison, Noreen, Brewer, Cheng & Yuen

Setting Direct Material Standards

2015 McGraw-Hill Educa4on

Garrison, Noreen, Brewer, Cheng & Yuen

Setting Direct Labor Standards

Use time and

2015 McGraw-Hill Educa4on

Garrison, Noreen, Brewer, Cheng & Yuen

Setting Variable Manufacturing Overhead

The rate is the

2015 McGraw-Hill Educa4on

Garrison, Noreen, Brewer, Cheng & Yuen

Standard Cost Card Variable Production

A standard cost card for one unit of

$ 4.00 per lb.

Garrison, Noreen, Brewer, Cheng & Yuen

Using Standards in Flexible Budgets

Standard costs per unit for direct materials, direct labor,

Spending variances become more

Garrison, Noreen, Brewer, Cheng & Yuen

A General Model for Variance Analysis

2015 McGraw-Hill Educa4on

Garrison, Noreen, Brewer, Cheng & Yuen

Price and Quantity Standards

The buying and using activities occur at different times.

Garrison, Noreen, Brewer, Cheng & Yuen

A General Model for Variance Analysis

Materials price variance

Materials quantity variance

2015 McGraw-Hill Educa4on

Garrison, Noreen, Brewer, Cheng & Yuen

A General Model for Variance Analysis

2015 McGraw-Hill Educa4on

Garrison, Noreen, Brewer, Cheng & Yuen

A General Model for Variance Analysis

Actual quantity is the amount of direct

Garrison, Noreen, Brewer, Cheng & Yuen

A General Model for Variance Analysis

Standard quantity is the standard quantity

2015 McGraw-Hill Educa4on

Garrison, Noreen, Brewer, Cheng & Yuen

A General Model for Variance Analysis

Actual price is the amount actually

2015 McGraw-Hill Educa4on

Garrison, Noreen, Brewer, Cheng & Yuen

A General Model for Variance Analysis

Standard price is the amount that should

2015 McGraw-Hill Educa4on

Garrison, Noreen, Brewer, Cheng & Yuen

A General Model for Variance Analysis

(AQ AP) (AQ SP)

(AQ SP) (SQ SP)

2015 McGraw-Hill Educa4on

Garrison, Noreen, Brewer, Cheng & Yuen

Another Way to Look at the Problems:

SQ = ( Aouput x standard quantity for production)

2015 McGraw-Hill Educa4on

Garrison, Noreen, Brewer, Cheng & Yuen

Compute the direct