Chap12 Standard Costs and Variances

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

Chapter 12
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
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.
10

Variance Analysis
Price Variance
Quantity Variance
Materials price variance

Labor rate variance
VOH rate variance
Materials quantity variance

Labor efficiency variance
VOH efficiency variance
11

Actual Quantity
Actual Price
Actual Quantity
Standard Price
Price Variance
Standard Quantity
Standard Price
Quantity Variance
12

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.
13

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.
14

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.
15

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.
16

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
17
Another Way to Look at the Problems:

The line-by-line method
18
Learning Objective 1
Compute the direct

materials price and
quantity variances and
explain their
significance.
19
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.
20
Material Variances: The line-by-line method
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.
21
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
22

Actual Quantity
Actual Price
210 kgs.
$4.90 per kg.

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

= $1,000
Quantity variance
$50 unfavorable
23

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
24
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
25
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.
26
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.
27
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.
28
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.
29
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.
30
Zippy
Quick Check
Hansons
Hansons material
material price
price variance
variance (MPV)
(MPV)
for
for the
the week
week was:
was:
a.
a. $170
$170 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
d.
d. $800
$800 favorable.
favorable.
31
Quick Check
Zippy
MPV = AQ(AP - SP)

MPV = 1,700 lbs. ($3.90 - 4.00)
MPV = $170 Favorable
Hansons
Hansons material
material price
price variance
variance (MPV)
(MPV)
for
for the
the week
week was:
was:
a.
a. $170
$170 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
d.
d. $800
$800 favorable.
favorable.
32
Zippy
Quick Check
Hansons
Hansons material
material quantity
quantity variance
variance (MQV)
(MQV)
for
for the
the week
week was:
was:
a.
a. $170
$170 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
d.
d. $800
$800 favorable.
favorable.
33
Zippy
Quick Check
Hansons
Hansons material
material quantity
quantity variance
variance (MQV)
(MQV)
for
for the
the week
week was:
was:
a.
a. $170
$170 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
d.
d. $800
$800 favorable.
favorable.
MQV = SP(AQ - SQ)

MQV = $4.00(1,700 lbs - 1,500 lbs)
MQV = $800 unfavorable
34
Quick Check
Summary: The line-by-line method
Zippy
35
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
36
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.
37

Zippy
38

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

because quantity
purchased increases.
39

Quantity
Actual Quantity
Used
Standard Price
1,700 lbs.
$4.00 per lb.

= $6,800
Quantity variance is
unchanged because
actual and standard
quantities are unchanged.
Zippy
Standard
Standard Price
1,500 lbs.
$4.00 per lb.

= $6,000
Quantity variance
$800 unfavorable
40
Compute the direct

labor rate and
efficiency variances
and explain
their significance.
41
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.
42
Labor Variances
43
Labor Variances Summary:

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

= $24,000
Efficiency variance
$1,000 unfavorable
44
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
= $24,000
Rate variance
$1,250 unfavorable
Standard Hours
Standard Rate
Efficiency variance
$1,000 unfavorable
45
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
46
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)
47
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.
48
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.
49
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.
50
Zippy
Quick Check
Hansons
Hansons labor
labor rate
rate variance
variance (LRV)
(LRV) for
for the
the
week
week was:
was:
a.
a. $310
$310 unfavorable.
unfavorable.
b.
b. $310
$310 favorable.
favorable.
c.
c. $300
$300 unfavorable.
unfavorable.
d.
d. $300
$300 favorable.
favorable.
51
Zippy
Quick Check
Hansons
Hansons labor
labor rate
rate variance
variance (LRV)
(LRV) for
for the
the
week
week was:
was:
a.
a. $310
$310 unfavorable.
unfavorable.
b.
b. $310
$310 favorable.
favorable.
LRV = AH(AR - SR)
c.
c. $300
$300 unfavorable.
unfavorable.
LRV = 1,550 hrs($12.20 - $12.00)
d.
$300
favorable.
d. $300 favorable.
LRV = $310 unfavorable
52
Zippy
Quick Check
Hansons
Hansons labor
labor efficiency
efficiency variance
variance (LEV)
(LEV)
for
for the
the week
week was:
was:
a.
a. $590
$590 unfavorable.
unfavorable.
b.
b. $590
$590 favorable.
favorable.
c.
c. $600
$600 unfavorable.
unfavorable.
d.
d. $600
$600 favorable.
favorable.
53
Zippy
Quick Check
Hansons
Hansons labor
labor efficiency
efficiency variance
variance (LEV)
(LEV)
for
for the
the week
week was:
was:
a.
a. $590
$590 unfavorable.
unfavorable.
b.
b. $590
$590 favorable.
favorable.
c.
c. $600
$600 unfavorable.
unfavorable.
d.
d. $600
$600 favorable.
favorable.
LEV = SR(AH - SH)
LEV = $12.00(1,550 hrs - 1,500 hrs)
LEV = $600 unfavorable
54
Quick Check :
Summary of the line-by-line method
55
Quick Check :
Summary of the traditional method
Actual Hours
Actual Rate
1,550 hours
$12.20 per hour

= $18,910
Actual Hours
Standard Rate
1,550 hours
$12.00 per hour

= $18,600
Rate variance
$310 unfavorable
Zippy
Standard Hours
Standard Rate
1,500 hours
$12.00 per hour

= $18,000
Efficiency variance
$600 unfavorable
56
Compute the variable

manufacturing
overhead rate and
efficiency variances.
57
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.
58
Variable Manufacturing Overhead

Variances:
59

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
60

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
61

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
62
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
63
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.
64
Zippy
Quick Check
Hansons
Hansons rate
rate variance
variance (VMRV)
(VMRV) for
for variable
variable
manufacturing
manufacturing overhead
overhead for
for the
the week
week was:
was:
a.
a. $465
$465 unfavorable.
unfavorable.
b.
b. $400
$400 favorable.
favorable.
c.
c. $335
$335 unfavorable.
unfavorable.
d.
d. $300
$300 favorable.
favorable.
65
Zippy
Quick Check
Hansons
Hansons rate
rate variance
variance (VMRV)
(VMRV) for
for variable
variable
manufacturing
overhead for
for the
the week
week was:
was:
a.
a. $465
$465 unfavorable.
unfavorable.
b.
b. $400
$400 favorable.
favorable.
VMRV = AH(AR - SR)
c.
$335
unfavorable.
c. $335 unfavorable.VMRV = 1,550 hrs($3.30 - $3.00)
d.
d. $300
$300 favorable.
favorable. VMRV = $465 unfavorable
66
Zippy
Quick Check
Hansons
Hansons efficiency
efficiency variance
variance (VMEV)
(VMEV) for
for
variable
variable manufacturing
overhead for
for the
the week
week
was:
was:
a.
a. $435
$435 unfavorable.
unfavorable.
b.
b. $435
$435 favorable.
favorable.
c.
c. $150
$150 unfavorable.
unfavorable.
d.
d. $150
$150 favorable.
favorable.
67
Zippy
Quick Check
Hansons
Hansons efficiency
efficiency variance
variance (VMEV)
(VMEV) for
for
variable
variable manufacturing
overhead for
for the
the week
week
was:
was:
a.
a. $435
$435 unfavorable.
unfavorable.
b.
b. $435
$435 favorable.
favorable.
1,000 units 1.5 hrs per unit
c.
c. $150
$150 unfavorable.
unfavorable.
d.
d. $150
$150 favorable.
favorable.
VMEV = SR(AH - SH)
VMEV = $3.00(1,550 hrs - 1,500 hrs)
VMEV = $150 unfavorable
68
Quick Check
Summary: The line-by-line method
69
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
70
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.
71
A Statistical Control Chart

Warning signals for investigation
Favorable Limit
Desired Value
Unfavorable Limit
Variance Measurements
72
Advantages of Standard Costs

Management by
exception
Promotes economy
and efficiency
Advantages
Enhances
responsibility
accounting
Simplified
bookkeeping
73
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.
74
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)
76
Performance Report for Variance Analysis:

Recall Example from Chapter 11
77
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.
79
Fixed Manufacturing Overhead Variances:

80
Fixed Overhead Budget Variance:

Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
Fixed
Overhead
Applied
Budget
variance
Budget
variance
Actual
fixed
overhead
Budgeted
fixed
overhead
81
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
82
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
83
Computing Fixed Overhead Variances
84
Computing Fixed Overhead Variances
85
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
86
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

87
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
88
Fixed Manufacturing Overhead Variances

89
Computing the Budget Variance:

Budget
variance
Actual
fixed
overhead
Budget
variance
$280,000 $270,000
Budget
variance
$10,000 Unfavorable
Budgeted
fixed
overhead
90
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
91
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
92
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

93
Fixed Overhead Variances

A Graphic Approach
Lets look at a
graph showing
fixed overhead
variances. We will
use ColaCos
numbers from the
previous example.
94
Graphic Analysis of Fixed

Overhead Variances
Budget
$270,000
t
a
d
lie
r
p
u
p
o
a
h
d
d
a
r
e
a
h
er tand
v
o
s
r
d
e
e
p
x
i
0
F
0
.
$3
Denominator
hours
0
0
Machine-hours (000)
90
95

Overhead Variances
Actual
$280,000
Budget
$270,000
Budget Variance 10,000 U
t
a
d
lie
r
p
u
p
o
a
h
d
d
a
r
e
a
h
er tand
v
o
s
r
d
e
e
p
x
i
0
F
0
.
$3
Denominator
hours
0
0
Machine-hours (000)
90
96

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

Volume Variance 18,000 U
t
a
d
lie
r
p
u
p
o
a
h
d
d
a
r
e
a
h
er tand
v
o
s
r
d
e
e
p
x
i
Standard
0
F
.0
hours
3
$
Denominator
hours
0
0
Machine-hours (000)
84
90
97
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.
98
Reconciling Overhead Variances and

Underapplied or Overapplied Overhead
99
Variable Overhead Variances:

100
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)
101
Computing the Variable Overhead Variances

Variable manufacturing overhead efficiency variance

VMEV = (AH SR) (SH SR)
= $88,000 (84,000 hours $1.00 per hour)
102
Computing the Sum of All Variances
103
Journal Entries to Record

Variances
Appendix 12B
(Appendix 12B)
Prepare journal entries
to record standard
costs and variances.
105
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
Material
AQ
AQ AP
AP == $1,029
$1,029
AQ
AQ SP
SP == $1,050
$1,050
SQ
SQ SP
SP == $1,000
$1,000
MPV
MPV == $21
$21 FF
MQV
MQV == $50
$50 U
U
Labor
Labor
AH
AH AR
AR == $26,250
$26,250
AH
AH SR
SR == $25,000
$25,000
SH
SH SR
SR == $24,000
$24,000
LRV
LRV == $1,250
$1,250 U
U
LEV
LEV == $1,000
$1,000 U
U
Now, lets prepare the entries to record

the labor and material variances.
106
Appendix 12B
Recording Material Variances
107
Appendix 12B
Recording Labor Variances
108
Cost 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.
Unfavorable variances increase cost of goods sold.
Favorable variances decrease cost of goods sold.
109
End of Chapter 12
110

Chap12 Standard Costs and Variances

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chap12 Standard Costs and Variances

Uploaded by

Copyright:

Available Formats

2015 McGraw-Hill Education

Garrison, Noreen, Brewer, Cheng & Yuen

Standard Costs and Variances

Garrison, Noreen, Brewer, Cheng & Yuen

2015 McGraw-Hill Education

Examples: Firestone, Sears, McDonalds, hospitals,

Garrison, Noreen, Brewer, Cheng & Yuen

Setting Direct Material Standards

2015 McGraw-Hill Education

Garrison, Noreen, Brewer, Cheng & Yuen

Setting Direct Labor Standards

Use time and

2015 McGraw-Hill Education

Garrison, Noreen, Brewer, Cheng & Yuen

Setting Variable Manufacturing Overhead

The rate is the

2015 McGraw-Hill Education

Garrison, Noreen, Brewer, Cheng & Yuen

Standard Cost Card Variable Production

A standard cost card for one unit

$ 4.00 per lb.

Garrison, Noreen, Brewer, Cheng & Yuen

Using Standards in Flexible Budgets

Garrison, Noreen, Brewer, Cheng & Yuen

A General Model for Variance Analysis

2015 McGraw-Hill Education

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 Education

Garrison, Noreen, Brewer, Cheng & Yuen

A General Model for Variance Analysis

2015 McGraw-Hill Education

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 Education

Garrison, Noreen, Brewer, Cheng & Yuen

A General Model for Variance Analysis

Actual price is the amount actually

2015 McGraw-Hill Education

Garrison, Noreen, Brewer, Cheng & Yuen

A General Model for Variance Analysis

Standard price is the amount that should

2015 McGraw-Hill Education

Garrison, Noreen, Brewer, Cheng & Yuen

A General Model for Variance Analysis

(AQ AP) (AQ SP)

(AQ SP) (SQ SP)

2015 McGraw-Hill Education

Garrison, Noreen, Brewer, Cheng & Yuen

Another Way to Look at the Problems:

2015 McGraw-Hill Education

Garrison, Noreen, Brewer, Cheng & Yuen

Compute the direct

2015 McGraw-Hill Education

Garrison, Noreen, Brewer, Cheng & Yuen