chapter 9 standard costs powerpoint authors: jon a. booker, ph.d., cpa, cia charles w. caldwell,...

Chapter 9Standard Costs

PowerPoint Authors:Jon A. Booker, Ph.D., CPA, CIACharles W. Caldwell, D.B.A., CMASusan Coomer Galbreath, Ph.D., CPA

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

Standard CostsStandards are benchmarks or “norms” for

measuring performance. In managerial accounting,two types of standards are commonly used.

Quantity standardsspecify how much of aninput should be used to

make a product orprovide a service.

Price standardsspecify how muchshould be paid foreach unit of the

input.

Examples: Firestone, Sears, McDonald’s, hospitals, construction, and manufacturing companies.

9-2

Standard Costs

DirectMaterial

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

Type of Product Cost

Am

ou

nt

DirectLabor

ManufacturingOverhead

Standard

9-3

Variance Analysis Cycle

Prepare standard Prepare standard cost performance cost performance

reportreport

Analyze variances

Begin

Identifyquestions

Receive explanations

Takecorrective

actions

Conduct next period’s

operations

9-4

Accountants, engineers, purchasingagents, and production managers

combine efforts to set standards that encourage efficient future operations.

Setting Standard Costs

9-5

Setting Standard CostsShould we use

ideal standards that require employees towork at 100 percent

peak efficiency?

Engineer Managerial Accountant

I recommend using practical standards that are currently

attainable with reasonable and efficient effort.

9-6

Learning Objective 1

Explain how direct materials standards and

direct laborstandards are set.

9-7

Setting Direct Material Standards

Summarized in a Bill of Materials.

Final, deliveredcost of materials,net of discounts.

StandardQuantity Per Unit

Standard PricePer Unit

9-8

Setting StandardsSix Sigma advocates have sought to

eliminate 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.

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.

9-9

Setting Direct Labor Standards

Standard RatePer Hour

Often a singlerate is used that reflectsthe mix of wages earned.

Standard HoursPer Unit

Use time and motion studies for

each labor operation.

9-10

Setting Variable Manufacturing Overhead Standards

PriceStandard

The rate is the variable portion of the

predetermined overhead rate.

QuantityStandard

The quantity is the activity in the

allocation base for predetermined overhead.

9-11

Standard Cost Card

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

(1) (1) x (2)Standard Standard StandardQuantity 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$

(2)

9-12

Price and Quantity StandardsPrice 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 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.

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.

9-13

Price and Quantity Variances

Variance Analysis

Price VariancePrice Variance

Difference betweenDifference betweenactual price and actual price and standard pricestandard price

Quantity Variance

Difference betweenactual quantity andstandard quantity

9-14

Variance Analysis

•Materials price variance•Labor rate variance•VOH rate variance

•Materials quantity variance•Labor efficiency variance•VOH efficiency variance

Price and Quantity Variances

Price Variance Quantity Variance

9-15

Price Variance Quantity Variance

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

Price and Quantity Variances

9-16

Price Variance Quantity Variance

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

Price and Quantity Variances

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

manufacturing overhead actually used.

9-17

Price Variance Quantity Variance

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

Price and Quantity Variances

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

9-18

Price Variance Quantity Variance

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

Price and Quantity Variances

Actual price is the amount actuallypaid for the input used.

9-19

Price and Quantity Variances

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

Price Variance Quantity Variance

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

9-20

Price and Quantity Variances

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

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

Price Variance Quantity Variance

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

9-21

Learning Objective 2

Compute the direct materials price and

quantity variances and explain their significance.

9-22

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.

Let’s calculate the material price and quantity variances.

Glacier Peak Outfitters – An Example

9-23

210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg.

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

Price variance$21 favorable

Quantity variance$50 unfavorable

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

Material Variances Summary

9-24

210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg.

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

Price variance$21 favorable

Quantity variance$50 unfavorable

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

$1,029 210 kgs = $4.90 per

kg

Material Variances Summary

9-25

210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg.

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

Price variance$21 favorable

Quantity variance$50 unfavorable

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

0.1 kg per parka 2,000 parkas = 200 kgs

Material Variances Summary

9-26

Material Variances:Using the Factored EquationsMaterials price variance

MPV = AQ (AP - SP) = 210 kgs ($4.90/kg - $5.00/kg) = 210 kgs (-$0.10/kg) = $21 F

Materials quantity varianceMQV = 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

9-27

Direct Materials Variances – Points of Clarification

I need the price variancesooner so that I can better

identify purchasing problems.

You accountants just don’tunderstand the problems thatpurchasing managers have.

I’ll start computingthe price variancewhen material is

purchased rather than when it’s used.

9-28

Direct Materials Variances – Points of Clarification

Glacier purchased and used 210 kilograms.

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.

9-29

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 standard price is used to compute the quantity varianceso that the production manager is not held responsible for

the purchasing manager’s performance.

Direct Materials Variances – Points of Clarification

9-30

I am not responsible for this unfavorable material

quantity variance.

You purchased cheapmaterial, so my peoplehad to use more of it.

Your poor scheduling sometimes requires me to

rush order material at a higher price, causing

unfavorable price variances.

Direct Materials Variances – Points of Clarification

9-31

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.

ZippyQuick Check

9-32

Quick Check

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

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

Zippy

9-33

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

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

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

Quick Check Zippy

9-34

Quick Check

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

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

Zippy

9-35

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

Hanson’s material quantity variance (MQV)for the week was:a. $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 unfavorable

Quick Check Zippy

9-36

1,700 lbs. 1,700 lbs. 1,500 lbs. × × × $3.90 per lb. $4.00 per lb. $4.00 per lb.

= $6,630 = $ 6,800 = $6,000

Price variance$170 favorable

Quantity variance$800 unfavorable

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

Quick Check Zippy

9-37

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.

Quick Check Continued Zippy

9-38

Actual Quantity Actual Quantity Purchased Purchased × × Actual Price Standard Price 2,800 lbs. 2,800 lbs. × × $3.90 per lb. $4.00 per lb.

= $10,920 = $11,200

Price variance$280 favorable

Price variance increases because quantity

purchased increases.

Quick Check Continued Zippy

9-39

Actual Quantity Used Standard Quantity × × Standard Price Standard Price 1,700 lbs. 1,500 lbs. × × $4.00 per lb. $4.00 per lb.

= $6,800 = $6,000

Quantity variance$800 unfavorable

Quantity variance is unchanged because actual and standard

quantities are unchanged.

Quick Check Continued Zippy

9-40

Learning Objective 3

Compute the direct labor rate and efficiency

variances and explain their significance.

9-41

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.

Let’s calculate the labor rate and efficiency variances?

Glacier Peak Outfitters - An Example

9-42

Rate variance$1,250 unfavorable

Efficiency variance$1,000 unfavorable

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

Labor Variances Summary

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

9-43

Rate variance$1,250 unfavorable

Efficiency variance$1,000 unfavorable

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

Labor Variances Summary

$26,250 2,500 hours = $10.50 per hour

9-44

Rate variance$1,250 unfavorable

Efficiency variance$1,000 unfavorable

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

Labor Variances Summary

1.2 hours per parka 2,000 parkas = 2,400 hours

9-45

Labor Variances:Using the Factored EquationsLabor 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 varianceLEV = SR (AH - SH) = $10.00 per hour (2,500 hours – 2,400 hours) = $10.00 per hour (100 hours) = $1,000 unfavorable

9-46

Direct Labor Variances – Points of Clarification

Production Manager

Production managers areusually held accountable

for labor variancesbecause they can

influence the:

Mix of skill levelsassigned to work tasks.

Level of employee motivation.

Quality of production supervision.

Quality of training provided to employees.

9-47

I am not responsible for the unfavorable labor

efficiency variance!

You purchased cheapmaterial, 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.

Direct Labor Variances – Points of Clarification

9-48

Hanson Inc. has the following direct laborstandard 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.

Quick Check Zippy

9-49

Hanson’s labor rate variance (LRV) for the week was:

a. $310 unfavorable.

b. $310 favorable.

c. $300 unfavorable.

d. $300 favorable.

Hanson’s labor rate variance (LRV) for the week was:

a. $310 unfavorable.

b. $310 favorable.

c. $300 unfavorable.

d. $300 favorable.

Quick Check Zippy

9-50

Hanson’s labor rate variance (LRV) for the week was:

a. $310 unfavorable.

b. $310 favorable.

c. $300 unfavorable.

d. $300 favorable.

Hanson’s labor rate variance (LRV) for the week was:

a. $310 unfavorable.

b. $310 favorable.

c. $300 unfavorable.

d. $300 favorable.

Quick Check

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

Zippy

9-51

Hanson’s labor efficiency variance (LEV)for the week was:

a. $590 unfavorable.

b. $590 favorable.

c. $600 unfavorable.

d. $600 favorable.

Hanson’s labor efficiency variance (LEV)for the week was:

a. $590 unfavorable.

b. $590 favorable.

c. $600 unfavorable.

d. $600 favorable.

Quick Check Zippy

9-52

Hanson’s labor efficiency variance (LEV)for the week was:

a. $590 unfavorable.

b. $590 favorable.

c. $600 unfavorable.

d. $600 favorable.

Hanson’s labor efficiency variance (LEV)for the week was:

a. $590 unfavorable.

b. $590 favorable.

c. $600 unfavorable.

d. $600 favorable.

Quick Check

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

Zippy

9-53

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

Rate variance$310 unfavorable

Efficiency variance$600 unfavorable

1,550 hours 1,550 hours 1,500 hours × × × $12.20 per hour $12.00 per hour $12.00 per hour

= $18,910 = $18,600 = $18,000

Quick Check Zippy

9-54

Learning Objective 4

Compute the variable manufacturing overhead

rate and efficiency variances.

9-55

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

1.2 standard hours per parkaat $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.

Glacier Peak Outfitters – An Example

9-56

2,500 hours 2,500 hours 2,400 hours × × × $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

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

Variable Manufacturing Overhead Variances Summary

9-57

2,500 hours 2,500 hours 2,400 hours × × × $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

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

$10,500 2,500 hours = $4.20 per hour

Variable Manufacturing Overhead Variances Summary

9-58

2,500 hours 2,500 hours 2,400 hours × × × $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

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

1.2 hours per parka 2,000 parkas = 2,400 hours

Variable Manufacturing Overhead Variances Summary

9-59

Variable Manufacturing Overhead Variances: Using Factored Equations

Variable manufacturing overhead rate varianceVMRV = 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 varianceVMEV = SR (AH - SH) = $4.00 per hour (2,500 hours – 2,400 hours) = $4.00 per hour (100 hours) = $400 unfavorable

9-60

Hanson Inc. has the following variablemanufacturing 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 make1,000 Zippies, and $5,115 was spent for

variable manufacturing overhead.

Quick Check Zippy

9-61

Hanson’s rate variance (VMRV) for variable manufacturing overhead for the week was:

a. $465 unfavorable.

b. $400 favorable.

c. $335 unfavorable.

d. $300 favorable.

Hanson’s rate variance (VMRV) for variable manufacturing overhead for the week was:

a. $465 unfavorable.

b. $400 favorable.

c. $335 unfavorable.

d. $300 favorable.

Quick Check Zippy

9-62

Hanson’s rate variance (VMRV) for variable manufacturing overhead for the week was:

a. $465 unfavorable.

b. $400 favorable.

c. $335 unfavorable.

d. $300 favorable.

Hanson’s rate variance (VMRV) for variable manufacturing overhead for the week was:

a. $465 unfavorable.

b. $400 favorable.

c. $335 unfavorable.

d. $300 favorable.

Quick Check

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

Zippy

9-63

Hanson’s efficiency variance (VMEV) for variable manufacturing overhead for the week was:

a. $435 unfavorable.

b. $435 favorable.

c. $150 unfavorable.

d. $150 favorable.

Hanson’s efficiency variance (VMEV) for variable manufacturing overhead for the week was:

a. $435 unfavorable.

b. $435 favorable.

c. $150 unfavorable.

d. $150 favorable.

Quick Check Zippy

9-64

Hanson’s efficiency variance (VMEV) for variable manufacturing overhead for the week was:

a. $435 unfavorable.

b. $435 favorable.

c. $150 unfavorable.

d. $150 favorable.

Hanson’s efficiency variance (VMEV) for variable manufacturing overhead for the week was:

a. $435 unfavorable.

b. $435 favorable.

c. $150 unfavorable.

d. $150 favorable.

Quick Check

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

1,000 units × 1.5 hrs per unit

Zippy

9-65

Rate variance$465 unfavorable

Efficiency variance$150 unfavorable

1,550 hours 1,550 hours 1,500 hours × × × $3.30 per hour $3.00 per hour $3.00 per hour

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

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

Quick Check Zippy

9-66

Variance Analysis and Management by Exception

How do I knowwhich variances to

investigate?

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

standard, are investigated first.

9-67

A Statistical Control Chart

1 2 3 4 5 6 7 8 9

Variance Measurements

Favorable Limit

Unfavorable Limit

• • •• •

••

••

Warning signals for investigation

Desired Value

9-68

Advantages of Standard CostsManagement by

exception

Advantages

Promotes economy and efficiency

Simplifiedbookkeeping

Enhances responsibility

accounting

9-69

PotentialProblems

Emphasis onnegative may

impact morale.

Emphasizing standardsmay exclude other

important objectives.

Favorablevariances may

be misinterpreted.

Continuous improvement maybe more important

than meeting standards.

Standard costreports may

not be timely.

Invalid assumptionsabout the relationship

between laborcost and output.

Potential Problems with Standard Costs

9-70

Predetermine Overhead Rates and Overhead Analysis in a Standard Costing System

Appendix 9A

PowerPoint Authors:Jon A. Booker, Ph.D., CPA, CIACharles W. Caldwell, D.B.A., CMASusan Coomer Galbreath, Ph.D., CPA

Learning Objective 5

Compute and interpret the fixed overhead budget and volume

variances.

9-72

Budget variance

Fixed Overhead Budget Variance

ActualFixed

Overhead

FixedOverheadApplied

BudgetedFixed

Overhead

Budgetvariance

Budgetedfixed

overhead

Actualfixed

overhead= –

9-73

Volumevariance

Fixed Overhead Volume Variance

Volumevariance

Fixed overheadapplied to

work in process

Budgetedfixed

overhead= –

ActualFixed

Overhead

FixedOverheadApplied

BudgetedFixed

Overhead

9-74

FPOHR = Fixed portion of the predetermined overhead rate DH = Denominator hours SH = Standard hours allowed for actual output

SH × FRDH × FR

Fixed Overhead Volume Variance

Volume variance FPOHR × (DH – SH)=

Volumevariance

ActualFixed

Overhead

FixedOverheadApplied

BudgetedFixed

Overhead

9-75

Computing Fixed Overhead Variances

Budgeted production 30,000 units Standard machine-hours per unit 3 hours Budgeted machine-hours 90,000 hours Actual production 28,000 units Standard machine-hours allowed for the actual production 84,000 hours Actual machine-hours 88,000 hours

Production and Machine-Hour DataColaCo

9-76

Computing Fixed Overhead Variances

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$

ColaCoCost Data

9-77

Predetermined Overhead Rates

Predetermined overhead rate

Estimated total manufacturing overhead costEstimated total amount of the allocation base

=

Predetermined overhead rate

$360,00090,000 Machine-hours

=

Predetermined overhead rate

= $4.00 per machine-hour

9-78

Predetermined Overhead RatesVariable component of the

predetermined overhead rate$90,000

90,000 Machine-hours=

Variable component of thepredetermined overhead rate

= $1.00 per machine-hour

Fixed component of thepredetermined overhead rate

$270,00090,000 Machine-hours

=

Fixed component of thepredetermined overhead rate

= $3.00 per machine-hour

9-79

Applying Manufacturing Overhead

Overheadapplied

Predetermined overhead rate

Standard hours allowedfor the actual output

= ×

Overheadapplied

$4.00 permachine-hour

84,000 machine-hours= ×

Overheadapplied

$336,000=

9-80

Computing the Budget Variance

Budgetvariance

Budgetedfixed

overhead

Actualfixed

overhead= –

Budgetvariance

= $280,000 – $270,000

Budgetvariance

= $10,000 Unfavorable

9-81

Computing the Volume VarianceVolumevariance

Fixed overheadapplied to

work in process

Budgetedfixed

overhead= –

Volumevariance

= $18,000 Unfavorable

Volumevariance

= $270,000 –$3.00 per

machine-hour( ×84,000

machine-hours)

9-82

Computing the Volume Variance

FPOHR = Fixed portion of the predetermined overhead rate DH = Denominator hours SH = Standard hours allowed for actual output

Volume variance FPOHR × (DH – SH)=

Volumevariance =

$3.00 permachine-hour (×

90,000machine-hours – 84,000

machine-hours)

Volumevariance

= $18,000 Unfavorable

9-83

A Pictorial View of the VariancesActualFixed

Overhead

Fixed OverheadApplied to

Work in Process

BudgetedFixed

Overhead

$252,000$270,000$280,000

Total variance, $28,000 unfavorable

Budget variance,$10,000 unfavorable

Volume variance,$18,000 unfavorable

9-84

ColaCo: A Graphic Analysis of the Variances

Let’s look at a graph showing fixed

overhead variances. We will use ColaCo’s

numbers from the previous example.

9-85

ColaCo: A Graphic Analysis of the Variances

Machine-hours (000)

Budget$270,000

90

Denominatorhours

00

Fixed overhead applied at

$3.00 per standard hour

9-86

ColaCo: A Graphic Analysis of the Variances

Actual$280,000

Machine-hours (000)

Budget$270,000

90

Denominatorhours

00

Fixed overhead applied at

$3.00 per standard hour

Budget Variance 10,000 U{

9-87

Actual$280,000

Applied$252,000

Machine-hours (000)

Budget$270,000

ColaCo: A Graphic Analysis of the Variances

908400

Standardhours

Fixed overhead applied at

$3.00 per standard hour

Denominatorhours

Budget Variance 10,000 U

Volume Variance 18,000 U

{{

9-88

ColaCo: Reconciling Overhead Variances and Underapplied or Overapplied Overhead

In a standardcost system:

Unfavorablevariances 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.

9-89

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

Computation of Underapplied OverheadColaCo

ColaCo: Reconciling Overhead Variances and Underapplied or Overapplied Overhead

9-90

Computing 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

9-91

Computing 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

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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

Computing the Sum of All variancesColaCo

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Appendix 9BGeneral Ledger Entries to Record Variances

PowerPoint Authors:Jon A. Booker, Ph.D., CPA, CIACharles W. Caldwell, D.B.A., CMASusan Coomer Galbreath, Ph.D., CPA

Learning Objective 6

Prepare journal entries to record standard costs

and variances.

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Glacier Peak Outfitters - Revisited

We will use information from the Glacier Peak Outfittersexample presented earlier in the chapter to illustrate journal

entries for standard cost variances. Recall the following:

Material

AQ × AP = $1,029AQ × SP = $1,050SQ × SP = $1,000MPV = $21 FMQV = $50 U

Material

AQ × AP = $1,029AQ × SP = $1,050SQ × SP = $1,000MPV = $21 FMQV = $50 U

Labor

AH × AR = $26,250AH × SR = $25,000SH × SR = $24,000LRV = $1,250 ULEV = $1,000 U

Labor

AH × AR = $26,250AH × SR = $25,000SH × SR = $24,000LRV = $1,250 ULEV = $1,000 U

Now, let’s prepare the entries to recordthe labor and material variances.

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GENERAL JOURNAL Page 4

Date DescriptionPost. 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

Recording Material Variances

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GENERAL JOURNAL Page 4

Date DescriptionPost. 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

Recording Direct Labor Variances

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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.

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.

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End of Chapter 9

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