GNBCY Chap12 Standard Costs and Variances With Cover Page

2015
McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen

Standard Costs and Variances
Chapter 12
Garrison, Noreen, Brewer, Cheng & Yuen 2015 McGraw-Hill Education

Standard Costs
Standards are benchmarks or norms for
measuring performance. In managerial accounting,
two types of standards are commonly used.
Quantity standards Price standards

specify how much of an specify how much
input should be used to should be paid for
make a product or each unit of the
provide a service. input.
Examples: Firestone, Sears, McDonalds, hospitals,

construction and manufacturing companies.
2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 2
Setting Direct Material Standards
Quantity Price
Standards Standards
Summarized in Final, delivered

a Bill of Materials. cost of materials,
net of discounts.

Setting Direct Labor Standards
Time Rate
Standards Standards
Use time and Often a single

motion studies for rate is used that reflects
each labor operation. the mix of wages earned.

Setting Variable Manufacturing Overhead
Standards
Quantity Rate
Standards Standards
The quantity is The rate is the

the activity in the variable portion of the
allocation base for predetermined overhead
predetermined overhead. rate.

Standard Cost Card Variable Production
Cost
A standard cost card for one unit of

product might look like this:
A B AxB
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

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 Difference between

actual price and actual quantity and
standard price 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
Materials price variance Materials quantity variance

Labor rate variance Labor efficiency variance
VOH rate variance VOH 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 actually

paid 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 Price
AP = Actual Price SQ = Standard Quantity

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 Variance
SQ = (Aouput x standard quantity for production)

= standard quantity allowed for the actual output

Learning Objective 1
Compute the direct

materials price and quantity
variances and explain their
significance.

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.

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

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.

Material Variances Summary:
The tradition method

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 Quantity variance

$21 favorable $50 unfavorable


210 kgs. 210 kgs. 200 kgs.
$1,029 210 kgs
$4.90 per kg. $5.00per
= $4.90 perkg
kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000



210 kgs. 210 kgs. 200 kgs.
0.1 kg per parka2,000 parkas
$4.90 per kg. $5.00
= 200 per
kgskg. $5.00 per kg.
= $1,029 = $1,050 = $1,000


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

Isolation of Material Variances
I need the price variance Ill start computing
sooner so that I can better the price variance
identify purchasing problems. when material is
You accountants just dont purchased rather
understand the problems that than when its used.
purchasing managers have.

Material Variances
Hanson purchased and The price variance is

used 1,700 pounds. computed on the entire
How are the variances quantity purchased.
computed if the amount The quantity variance
purchased differs from is computed only on
the amount used? the quantity used.

Responsibility for Material Variances
Materials Price Variance Materials Quantity Variance
Purchasing Manager 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.

Responsibility for Material Variances
Your poor scheduling
sometimes requires me to
rush order material at a I am not responsible for
higher price, causing this unfavorable material
unfavorable price variances. quantity variance.
You purchased cheap
material, so my people
had to use more of it.

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.

Zippy
Quick Check
Hansons material price variance (MPV)

for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.

Zippy
Quick Check
MPV = AQ(AP - SP)
MPV = 1,700 lbs. ($3.90 - 4.00)
MPV = $170 Favorable
Hansons material price variance (MPV)
for the week was:
b. $170 favorable.
d. $800 favorable.
AQ x AP = 1,700 x AP = 6,630
AQ x SP = 1,700 x 4 = 6,800

Zippy
Quick Check
Hansons material quantity variance (MQV)

for the week was:
b. $170 favorable.
d. $800 favorable.

Zippy
Quick Check
AQ x SP = 1,700 x 4 = 6,800
SQ x SP = (1000 x 1.5) x 4 = 6,000
Hansons material quantity variance (MQV)

for the week was:
b. $170 favorable.
d. $800 favorable.
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 lbs - 1,500 lbs)
MQV = $800 unfavorable
Quick Check
Zippy
Summary: The line-by-line method
AQ x AP = 1,700 x AP = 6,630
AQ x SP = 1,700 x 4 = 6,800
SQ x SP = (1000 x 1.5) x 4 = 6,000
630 U Total Variance


Quick Check
Zippy
Summary: The traditional method

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

Zippy
Quick Check Continued
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.

Zippy
AQp x AP = 2,800 x AP = 10,920

AQp x SP = 2,800 x 4 = 11,200
4,400 U Inventory @ Std cost
AQu x SP = 1,700 x 4 = 6,800
800 U Usage variance
SQ x SP = (1000 x 1.5) x 4 = 6,000 (Quantity variance)
4,920 U Total Variance
AQp = Actual Quantity Purchased
AQu = Actual Quantity used
SQ = (Aouput x standard quantity for production use)

Zippy
The traditional method
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 increases

Price variance because quantity
$280 favorable purchased increases.
Zippy
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 is
unchanged because
actual and standard Quantity variance
quantities are unchanged. $800 unfavorable
Compute the direct labor

rate and efficiency variances
and explain
their significance.

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.

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
2,250 U Total Variance
AH = Actual hour paid (and worked in this case)
AR = Actual rate per hour
SR = Standard rate per hour
SH = (Aouput x standard hours for the production)
= standard hours allowed for the actual output

Labor Variances Summary:
The Traditional Method
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 Efficiency variance

$1,250 unfavorable $1,000 unfavorable

Labor Variances Summary

$26,250 2,500 hours
$10.50 per hour $10.00 per hour.
= $10.50 per hour $10.00 per hour
= $26,250 = $25,000 = $24,000


Labor Variances Summary

1.2 hours per parka 2,000
$10.50 per hour parkas
$10.00 per hour.
= 2,400 hours $10.00 per hour
= $26,250 = $25,000 = $24,000


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)

Responsibility for Labor Variances
Production managers are Mix of skill levels

usually held accountable assigned to work tasks.
for labor variances
because they can
Level of employee
influence the:
motivation.
Quality of production
supervision.
Quality of training
provided to employees.
Production Manager

Responsibility for Labor Variances
I think it took more time
to process the
I am not responsible for materials because the
the unfavorable labor Maintenance
efficiency variance! Department has poorly
maintained your
You purchased cheap
equipment.
material, so it took more
time to process it.

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.

Zippy
Quick Check
Hansons labor rate variance (LRV) for the

week was:
b. $310 favorable.
d. $300 favorable.

Zippy
Quick Check
AH x AR = 1,550 x AR = 18,910
310 U Rate variance
AH x SR = 1,550 x 12 = 18,600
Hansons labor rate variance (LRV) for the
week was:
b. $310 favorable.
LRV = AH(AR - SR)
LRV = 1,550 hrs($12.20 - $12.00)
d. $300 favorable.
LRV = $310 unfavorable

Zippy
Quick Check
Hansons labor efficiency variance (LEV)

for the week was:
b. $590 favorable.
d. $600 favorable.

Zippy
Quick Check
AH x SR = 1,550 x 12 = 18,600
600 U Efficiency variance
SH x SR = (1000 x 1.5) x 12 = 18,000
Hansons labor efficiency variance (LEV)
for the week was:
b. $590 favorable.
d. $600 favorable.
LEV = SR(AH - SH)
LEV = $12.00(1,550 hrs - 1,500 hrs)
LEV = $600 unfavorable

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
SH x SR = (1000 x 1.5) x 12 = 18,000

Quick Check :
Summary of the traditional method Zippy


$12.20 per hour $12.00 per hour $12.00 per hour
= $18,910 = $18,600 = $18,000

$310 unfavorable $600 unfavorable
Compute the variable

manufacturing overhead rate
and efficiency variances.

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.

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



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



$10,500 2,500 hours
$4.20 per hour $4.00 per per
= $4.20 hourhour $4.00 per hour
= $10,500 = $10,000 = $9,600



1.2 hours per parka 2,000
$4.20 per hour parkas$4.00 per hour
= 2,400 hours $4.00 per hour
= $10,500 = $10,000 = $9,600


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

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.

Zippy
Quick Check
Hansons rate variance (VMRV) for variable

manufacturing overhead for the week was:
b. $400 favorable.
d. $300 favorable.

Zippy
Quick Check
AH x AR = 1,550 x AR = 5,115
465 U Rate variance
AH x SR Hansons
= 1,550rate
x 3 variance
= 4,650 (VMRV) for variable
manufacturing overhead for the week was:
b. $400 favorable.
c. $335 unfavorable. VMRV = AH(AR - SR)
VMRV = 1,550 hrs($3.30 - $3.00)
d. $300 favorable. VMRV = $465 unfavorable

Zippy
Quick Check
Hansons efficiency variance (VMEV) for

variable manufacturing overhead for the week
was:
b. $435 favorable.
d. $150 favorable.

Zippy
Quick Check
AH x SR = 1,550 x 3 = 4,650
SH x SR = (1000 x 1.5) x 3 = 4,500
Hansons efficiency variance (VMEV) for
variable manufacturing overhead for the week
was:
b. $435 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
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

Quick Check Zippy


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

Variance Analysis and Management by
Exception
Larger variances, in
How do I know dollar amount or as
which variances to a percentage of the
investigate? standard, are
investigated first.

A Statistical Control Chart
Warning signals for investigation
Favorable Limit

Desired Value

Unfavorable Limit

1 2 3 4 5 6 7 8 9
Variance Measurements

Advantages of Standard Costs
Management by Promotes economy

exception and efficiency
Advantages
Enhances
Simplified responsibility
bookkeeping accounting

Potential Problems with Standard Costs
Emphasizing standards Favorable
may exclude other variances may
important objectives. be misinterpreted.
Potential
Problems
Standard cost Emphasis on
reports may negative may
not be timely. impact morale.
Invalid assumptions Continuous

about the relationship improvement may
between labor be more important
cost and output. than meeting standards.
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
BQ = Budgeted quantity

Performance Report for Variance Analysis:
Recall Example from Chapter 11

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.

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)

Fixed Overhead Budget Variance:
Actual Budgeted Fixed
Fixed Fixed Overhead
Overhead Overhead Applied
Budget
variance
Actual Budgeted
Budget
= fixed fixed
variance
overhead overhead

Fixed Overhead Volume Variance:
Volume
variance
Fixed
Budgeted
Volume overhead
= fixed
variance applied to
overhead
work in process
Fixed Overhead Volume Variance:
DH FR 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
Computing Fixed Overhead Variances
ColaCo
Production and Machine-Hour Data
Budgeted production 30,000 units
Standard machine-hour per unit 3 hours
Budgeted machine-hour 90,000 hours
Actual production 28,000 units
Standard machine-hour allowed for the actual production 84,000 hours
Actual machine-hour 88,000 hours

Computing Fixed Overhead Variances
ColaCo
Cost Data
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

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

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

predetermined overhead rate
Fixed component of the $270,000

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

predetermined overhead rate

Applying Manufacturing Overhead
Overhead Predetermined Standard hours allowed

=
applied overhead rate for the actual output
Overhead $4.00 per

= 84,000 machine-hour
applied machine-hour
Overhead
= $336,000
applied

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

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

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

$84,000
machine-hour )
Volume
= $18,000 Unfavorable
variance

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
Volume
variance
=
$3.00 per
machine-hour
( 90,000 84,000
machine-hour machine-hour )
Volume = 18,000 Unfavorable
variance

A Pictorial View of the Variances
Actual Budgeted Fixed Overhead

Fixed Fixed Applied to
Overhead Overhead Work in Process
280,000 270,000 252,000
Budget variance, Volume variance,

Total variance, $28,000 unfavorable

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

Graphic Analysis of Fixed
Overhead Variances
Budget
$270,000
Denominator
hours
0
0 Machine-hours (000) 90

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

Overhead Variances
Actual
$280,000
Budget { Budget Variance 10,000 U
$270,000
Applied { Volume Variance 18,000 U
$252,000
Standard Denominator
hours hours
0
0 Machine-hours (000) 84 90

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

equals the under- or overapplied
overhead cost for the period.
Reconciling Overhead Variances and
Underapplied or Overapplied Overhead
ColaCo
Computation of Underapplied Overhead
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
Manufacturing overhead underapplied or
overapplied $ 44,000 underapplied

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) 16,000 U Total Variance
SR = Standard rate per hour = Total underapplied
SH = (Aouput x standard hours for the production) variable overhead

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)
Computing the Variable Overhead Variances
Variable manufacturing overhead efficiency variance

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

(Appendix 12B)
Prepare journal entries
to record standard
costs and variances.
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 Labor
AQ AP = $1,029 AH AR = $26,250
AQ SP = $1,050 AH SR = $25,000
SQ SP = $1,000 SH SR = $24,000
MPV = $21 F LRV = $1,250 U
MQV = $50 U LEV = $1,000 U
Now, lets prepare the entries to record

the labor and material variances.
Appendix 12B
Recording Material Variances
GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Raw Materials 1,050
Materials Price Variance 21
Accounts Payable 1,029
To record the purchase of material
Work in Process 1,000

Materials Quantity Variance 50
Raw Materials 1,050
To record the use of material
Appendix 12B
Recording Labor Variances
GENERAL JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
Work in Process 24,000
Labor Rate Variance 1,250
Labor Efficiency Variance 1,000
Wages Payable 26,250
To record direct labor
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.
End of Chapter 12

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2015

McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen

Garrison, Noreen, Brewer, Cheng & Yuen 2015 McGraw-Hill Education

Quantity standards Price standards

Examples: Firestone, Sears, McDonalds, hospitals,

Summarized in Final, delivered

2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 3

Use time and Often a single

2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 4

The quantity is The rate is the

2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 5

A standard cost card for one unit of

2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 6

Standard costs per unit for direct materials, direct labor,

Spending variances become more

2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 7

Price Variance Quantity Variance

Difference between Difference between

2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 8

Price and quantity standards are

The purchasing manager is responsible for raw

The buying and using activities occur at different times.

Price Variance Quantity Variance

Materials price variance Materials quantity variance

2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 10

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

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Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Actual quantity is the amount of direct

2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 12

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Standard quantity is the standard quantity

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Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Actual price is the amount actually

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Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Standard price is the amount that should

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Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

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

2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 16

Actual Quantity x Actual Price = AQ x AP

SQ = (Aouput x standard quantity for production)

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Compute the direct

2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 18

Glacier Peak Outfitters has the following direct

2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 19

SQ = (Aouput x standard quantity for production)

2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 20

Price variance Quantity variance

2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 21

Price variance Quantity variance

2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 22

Price variance Quantity variance

2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 23

Materials price variance