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2010 The McGraw-Hill Companies, Inc.
Standard Costs and Operating
Performance MeasuresChapter 11
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McGraw-Hill/Irwin Slide 3
Standard Costs
DirectMaterial
Deviations from standards deemed significantare brought to the attention of management, apractice known as management by exception .
Type of Product Cost
A m o u n t
DirectLabor ManufacturingOverhead
Standard
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McGraw-Hill/Irwin Slide 4
Variance Analysis Cycle
Prepare standardcost performance
report
Analyzevariances
Begin
Identifyquestions
Receiveexplanations
Takecorrective
actions
Conduct nextperiods
operations
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McGraw-Hill/Irwin Slide 5
Accountants, engineers, purchasingagents, and production managers
combine efforts to set standards that encourage
efficient future operations.
Setting Standard Costs
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McGraw-Hill/Irwin Slide 6
Setting Standard Costs
Should we useideal standards thatrequire employees towork at 100 percent
peak efficiency?
Engineer Managerial Accountant
I recommend using practicalstandards that are currentlyattainable with reasonable
and efficient effort.
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Learning Objective 1
Explain how direct materialsstandards and direct labor
standards are set.
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Setting Direct Material Standards
PriceStandards
Summarized ina Bill of Materials.
Final, deliveredcost of materials,net of discounts.
QuantityStandards
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Setting Standards
Six Sigma advocates have sought toeliminate all defects and waste, rather than
continually build them into standards.
As a result allowances for waste andspoilage that are built into standards
should be reduced over time.
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Setting Direct Labor Standards
RateStandards
Often a singlerate is used that reflectsthe mix of wages earned.
TimeStandards
Use time andmotion studies for
each labor operation.
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Setting Variable Manufacturing OverheadStandards
RateStandards
The rate is thevariable portion of the
predetermined overhead
rate.
QuantityStandards
The quantity isthe activity in the
allocation base for
predetermined overhead.
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Standard Cost Card Variable ProductionCost
A standard cost card for one unit ofproduct might look like this:
A A x BStandard Standard StandardQuantity Price Cost
Inputs or Hours or Rate per Unit
Direct materials 3.0 lbs. 4.00$ per lb. 12.00$Direct labor 2.5 hours 14.00 per hour 35.00 Variable mfg. overhead 2.5 hours 3.00 per hour 7.50
Total standard unit cost 54.50$
B
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Price and Quantity Standards
Price and quantity standards aredetermined separately for two reasons:
The purchasing manager is responsible for rawmaterial 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 aperiod of time before being used in production.
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A General Model for Variance Analysis
Variance Analysis
Price Variance
Difference betweenactual price and
standard price
Quantity Variance
Difference betweenactual quantity andstandard quantity
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Variance Analysis
Materials price varianceLabor rate varianceVOH rate variance
Materials quantity varianceLabor efficiency varianceVOH efficiency variance
A General Model for Variance Analysis
Price Variance Quantity Variance
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Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity
Actual Price Standard Price Standard Price
A General Model for Variance Analysis
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Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity
Actual Price Standard Price Standard Price
A General Model for Variance Analysis
Actual quantity is the amount of directmaterials, direct labor, and variable
manufacturing overhead actually used.
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Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity
Actual Price Standard Price Standard Price
A General Model for Variance Analysis
Standard quantity is the standard quantityallowed for the actual output of the period.
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Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity
Actual Price Standard Price Standard Price
A General Model for Variance Analysis
Actual price is the amount actuallypaid for the input used.
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A General Model for Variance Analysis
Standard price is the amount that shouldhave been paid for the input used.
Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity
Actual Price Standard Price Standard Price
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A General Model for Variance Analysis
(AQ AP) (AQ SP) (AQ SP) (SQ SP)
AQ = A ctual Quantity SP = S tandard PriceAP = A ctual P rice SQ = S tandard Quantity
Price Variance Quantity Variance
Actual Quantity Actual Quantity S tandard Quantity
Actual P rice S tandard Price S tandard Price
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Learning Objective 2
Compute the directmaterials price and quantityvariances and explain their
significance.
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McGraw-Hill/Irwin Slide 23
Glacier Peak Outfitters has the following directmaterial 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 atotal of $1,029.
Material Variances An Example
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McGraw-Hill/Irwin Slide 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
Material Variances Summary
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McGraw-Hill/Irwin Slide 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
$1,029 210 kgs= $4.90 per kg
Material Variances Summary
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McGraw-Hill/Irwin Slide 26
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
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McGraw-Hill/Irwin Slide 27
Material Variances:Using the Factored Equations
Materials price varianceMPV = 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
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McGraw-Hill/Irwin Slide 28
Isolation of Material Variances
I need the price variancesooner so that I can better identify purchasing problems.
You accountants just dontunderstand the problems thatpurchasing managers have.
Ill start computingthe price variancewhen material is
purchased ratherthan when its used.
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McGraw-Hill/Irwin Slide 29
Material Variances
Hanson purchased andused 1,700 pounds.
How are the variancescomputed if the amountpurchased differs from
the amount used?
The price variance iscomputed on the entire
quantity purchased .
The quantity varianceis computed only on
the quantity used .
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McGraw-Hill/Irwin Slide 30
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 managers performance.
Responsibility for Material Variances
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McGraw-Hill/Irwin Slide 32
Hanson Inc. has the following direct materialstandard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per poundLast week, 1,700 pounds of material were
purchased and used to make 1,000 Zippies. Thematerial cost a total of $6,630.
ZippyQuick Check
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McGraw-Hill/Irwin Slide 33
Quick CheckZippy
Hansons material price variance (MPV)for the week was:
a. $170 unfavorable.b. $170 favorable.c. $800 unfavorable.
d. $800 favorable.
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McGraw-Hill/Irwin Slide 34
Hansons 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 CheckZippy
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McGraw-Hill/Irwin Slide 35
Quick Check
Hansons material quantity variance (MQV)for the week was:a. $170 unfavorable.b. $170 favorable.c. $800 unfavorable.
d. $800 favorable.
Zippy
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McGraw-Hill/Irwin Slide 37
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
ZippyQuick Check
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McGraw-Hill/Irwin Slide 38
Hanson Inc. has the following material standard tomanufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 2,800 pounds of material werepurchased at a total cost of $10,920, and 1,700
pounds were used to make 1,000 Zippies.
ZippyQuick Check Continued
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McGraw-Hill/Irwin Slide 39
Actual Quantity Actual QuantityPurchased 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 increasesbecause quantity
purchased increases.
ZippyQuick Check Continued
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McGraw-Hill/Irwin Slide 40
Actual QuantityUsed 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 isunchanged becauseactual and standard
quantities are unchanged.
ZippyQuick Check Continued
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McGraw-Hill/Irwin Slide 41
Learning Objective 3
Compute the direct laborrate and efficiency variances
and explaintheir significance.
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McGraw-Hill/Irwin Slide 42
Glacier Peak Outfitters has the following direct laborstandard 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 An Example
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McGraw-Hill/Irwin Slide 43
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
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McGraw-Hill/Irwin Slide 44
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
Actual Hours Actual Hours Standard Hours Actual Rate Standard Rate Standard Rate
$26,250 2,500 hours= $10.50 per hour
Rate variance$1,250 unfavorable
Efficiency variance$1,000 unfavorable
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McGraw-Hill/Irwin Slide 45
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
Actual Hours Actual Hours Standard Hours Actual Rate Standard Rate Standard Rate
1.2 hours per parka 2,000parkas = 2,400 hours
Rate variance$1,250 unfavorable
Efficiency variance$1,000 unfavorable
L b V i
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McGraw-Hill/Irwin Slide 46
Labor Variances:Using the Factored Equations
Labor rate varianceLRV = 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
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McGraw-Hill/Irwin Slide 47
Responsibility for Labor Variances
Production Manager
Production managers areusually held accountable
for labor variancesbecause they can
influence the:
Mix of skill levelsassigned to work tasks.
Level of employeemotivation.
Quality of productionsupervision.
Quality of trainingprovided to employees.
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McGraw-Hill/Irwin Slide 48
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 timeto process thematerials because the
MaintenanceDepartment has poorly
maintained yourequipment.
Responsibility for Labor Variances
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McGraw-Hill/Irwin Slide 49
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 wereworked at a total labor cost of $18,910
to make 1,000 Zippies.
ZippyQuick Check
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McGraw-Hill/Irwin Slide 50
Hansons labor rate variance (LRV) for theweek was:a. $310 unfavorable.b. $310 favorable.c. $300 unfavorable.
d. $300 favorable.
Quick CheckZippy
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McGraw-Hill/Irwin Slide 51
Hansons labor rate variance (LRV) for theweek 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
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McGraw-Hill/Irwin Slide 52
Hansons labor efficiency variance (LEV)for the week was:
a. $590 unfavorable.b. $590 favorable.c. $600 unfavorable.
d. $600 favorable.
Quick CheckZippy
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McGraw-Hill/Irwin Slide 54
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
ZippyQuick Check
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McGraw-Hill/Irwin Slide 55
Learning Objective 4
Compute the variablemanufacturing overhead rate
and efficiency variances.
Variable Manufacturing Overhead Variances
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McGraw-Hill/Irwin Slide 56
Glacier Peak Outfitters has the following direct variablemanufacturing 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 manufacturingoverhead for the month was $10,500.
Variable Manufacturing Overhead Variances An Example
Variable Manufacturing Overhead Variances
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McGraw-Hill/Irwin Slide 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
Variable Manufacturing Overhead VariancesSummary
Variable Manufacturing Overhead Variances
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McGraw-Hill/Irwin Slide 58
Actual Hours Actual Hours Standard Hours Actual Rate Standard Rate Standard Rate
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
$10,500 2,500 hours= $4.20 per hour
Variable Manufacturing Overhead VariancesSummary
Variable Manufacturing Overhead Variances
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McGraw-Hill/Irwin Slide 59
Actual Hours Actual Hours Standard Hours Actual Rate Standard Rate Standard Rate
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
1.2 hours per parka 2,000parkas = 2,400 hours
Variable Manufacturing Overhead VariancesSummary
Variable Manufacturing Overhead Variances:
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McGraw-Hill/Irwin Slide 60
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 unfavorableVariable 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
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McGraw-Hill/Irwin Slide 61
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.
ZippyQuick Check
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McGraw-Hill/Irwin Slide 63
Hansons rate variance (VMRV) for variablemanufacturing 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
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McGraw-Hill/Irwin Slide 64
Hansons efficiency variance (VMEV) forvariable manufacturing overhead for the weekwas:a. $435 unfavorable.b. $435 favorable.c. $150 unfavorable.d. $150 favorable.
Quick CheckZippy
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McGraw-Hill/Irwin Slide 65
Hansons efficiency variance (VMEV) forvariable manufacturing overhead for the weekwas: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
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McGraw-Hill/Irwin Slide 66
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
ZippyQuick Check
Variance Analysis and Management by
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McGraw-Hill/Irwin Slide 67
Variance Analysis and Management byException
How do I knowwhich variances to
investigate?
Larger variances, indollar amount or asa percentage of the
standard, areinvestigated first.
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McGraw-Hill/Irwin Slide 68
A Statistical Control Chart
1 2 3 4 5 6 7 8 9Variance Measurements
Favorable Limit
Unfavorable Limit
Warning signals for investigation
Desired Value
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McGraw-Hill/Irwin Slide 69
Advantages of Standard Costs
Management byexception
Advantages
Promotes economyand efficiency
Simplifiedbookkeeping
Enhancesresponsibility
accounting
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McGraw-Hill/Irwin Slide 70
PotentialProblems
Emphasis onnegative may
impact morale.
Emphasizing standardsmay exclude other important objectives.
Favorablevariances maybe misinterpreted.
Continuousimprovement maybe more important
than meeting standards.
Standard costreports may
not be timely.
Invalid assumptionsabout the relationship
between labor cost and output.
Potential Problems with Standard Costs
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McGraw-Hill/Irwin Slide 71
Learning Objective 5
Compute delivery cycle time,throughput time, andmanufacturing cycle
efficiency (MCE).
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McGraw-Hill/Irwin Slide 72
Process time is the only value-added time.
Delivery Performance Measures
Wait TimeProcess Time + Inspection Time
+ Move Time + Queue Time
Delivery Cycle Time
OrderReceived ProductionStarted GoodsShipped
Throughput Time
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McGraw-Hill/Irwin Slide 73
ManufacturingCycle
Efficiency
Value-added timeManufacturing cycle time=
Wait TimeProcess Time + Inspection Time
+ Move Time + Queue Time
Delivery Cycle Time
OrderReceived ProductionStarted GoodsShipped
Throughput Time
Delivery Performance Measures
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McGraw-Hill/Irwin Slide 74
Quick Check
A TQM team at Narton Corp has recorded thefollowing average times for production:
Wait 3.0 days Move 0.5 daysInspection 0.4 days Queue 9.3 daysProcess 0.2 days
What is the throughput time?a. 10.4 days.b. 0.2 days.c. 4.1 days.d. 13.4 days.
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McGraw-Hill/Irwin Slide 75
A TQM team at Narton Corp has recorded thefollowing average times for production:
Wait 3.0 days Move 0.5 daysInspection 0.4 days Queue 9.3 daysProcess 0.2 days
What is the throughput time?a. 10.4 days.b. 0.2 days.c. 4.1 days.d. 13.4 days.
Quick Check
Throughput time = Process + Inspection + Move + Queue= 0.2 days + 0.4 days + 0.5 days + 9.3 days= 10.4 days
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McGraw-Hill/Irwin Slide 76
Quick Check
A TQM team at Narton Corp has recorded thefollowing average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 daysProcess 0.2 days
What is the Manufacturing Cycle Efficiency (MCE)?a. 50.0%.b. 1.9%.c. 52.0%.d. 5.1%.
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McGraw-Hill/Irwin Slide 77
A TQM team at Narton Corp has recorded thefollowing average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 daysProcess 0.2 days
What is the Manufacturing Cycle Efficiency (MCE)?a. 50.0%.b. 1.9%.c. 52.0%.d. 5.1%.
Quick Check
MCE = Value-added time Throughput time= Process time Throughput time= 0.2 days 10.4 days= 1.9%
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McGraw-Hill/Irwin Slide 78
Quick Check
A TQM team at Narton Corp has recorded thefollowing average times for production:
Wait 3.0 days Move 0.5 daysInspection 0.4 days Queue 9.3 daysProcess 0.2 days
What is the delivery cycle time (DCT)?a. 0.5 days.b. 0.7 days.c. 13.4 days.d. 10.4 days.
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McGraw-Hill/Irwin Slide 79
A TQM team at Narton Corp has recorded thefollowing average times for production:
Wait 3.0 days Move 0.5 daysInspection 0.4 days Queue 9.3 daysProcess 0.2 days
What is the delivery cycle time (DCT)?a. 0.5 days.b. 0.7 days.c. 13.4 days.d. 10.4 days.
Quick Check
DCT = Wait time + Throughput time= 3.0 days + 10.4 days= 13.4 days
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2010 The McGraw-Hill Companies, Inc.
Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System
Appendix 11A
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McGraw-Hill/Irwin Slide 81
Learning Objective 6
(Appendix 11A)
Compute and interpret the
fixed overhead budget andvolume variances.
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McGraw-Hill/Irwin Slide 82
Budgetvariance
Fixed Overhead Budget VarianceActualFixed
Overhead
FixedOverheadApplied
BudgetedFixed
Overhead
Budgetvariance
Budgetedfixed
overhead
Actualfixed
overhead=
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McGraw-Hill/Irwin Slide 83
Volumevariance
Fixed Overhead Volume VarianceActualFixed
Overhead
FixedOverheadApplied
BudgetedFixed
Overhead
Volumevariance
Fixedoverheadapplied to
work in process
Budgetedfixed
overhead=
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McGraw-Hill/Irwin Slide 84
FPOHR = Fixed portion of the predetermined overhead rateDH = Denominator hoursSH = Standard hours allowed for actual output
SH FRDH FR
Fixed Overhead Volume VarianceActualFixed
Overhead
FixedOverheadApplied
BudgetedFixed
Overhead
Volume variance FPOHR (DH SH)=
Volumevariance
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McGraw-Hill/Irwin Slide 85
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
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McGraw-Hill/Irwin Slide 86
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
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McGraw-Hill/Irwin Slide 87
Predetermined Overhead Rates
Predeterminedoverhead rate
Estimated total manufacturing overhead costEstimated total amount of the allocation base=
Predeterminedoverhead rate
$360,00090,000 Machine-hours=
Predeterminedoverhead rate = $4.00 per machine-hour
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l f h d
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McGraw-Hill/Irwin Slide 89
Applying Manufacturing Overhead
Overheadapplied
Predeterminedoverhead rate
Standard hours allowedfor the actual output=
Overheadapplied
$4.00 per machine-hour 84,000 machine-hours=
Overhead
applied$336,000=
C i h d i
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McGraw-Hill/Irwin Slide 90
Computing the Budget Variance
Budgetvariance
Budgetedfixed
overhead
Actualfixed
overhead=
Budgetvariance = $280,000 $270,000
Budgetvariance = $10,000 Unfavorable
C i h V l V i
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McGraw-Hill/Irwin Slide 91
Computing the Volume Variance
Volumevariance
Fixedoverheadapplied to
work in process
Budgetedfixedoverhead
=
Volumevariance = $18,000 Unfavorable
Volumevariance = $270,000
$3.00 per machine-hour ( $84,000machine-hours )
C i h V l V i
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McGraw-Hill/Irwin Slide 92
Computing the Volume Variance
FPOHR = Fixed portion of the predetermined overhead rateDH = Denominator hoursSH = Standard hours allowed for actual output
Volume variance FPOHR (DH SH)=
Volumevariance
= $3.00 per machine-hour ( 90,000mach-hours 84,000mach-hours )Volume
variance= 18,000 Unfavorable
A Pi i l Vi f h V i
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McGraw-Hill/Irwin Slide 93
A Pictorial View of the Variances
ActualFixed
Overhead
Fixed OverheadApplied to
Work in Process
BudgetedFixed
Overhead252,000270,000280,000
Total variance, $28,000 unfavorable
Budget variance,
$10,000 unfavorable
Volume variance,
$18,000 unfavorable
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Graphic Analysis of FixedO h d V i
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McGraw-Hill/Irwin Slide 95
Overhead Variances
Machine-hours (000)
Budget$270,000
90
Denominator hours
00
Graphic Analysis of FixedO h d V i
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McGraw-Hill/Irwin Slide 96
Overhead VariancesActual
$280,000
Machine-hours (000)
Budget$270,000
90
Denominator hours
00
Budget Variance 10,000 U{
Graphic Analysis of FixedO h d V i
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McGraw-Hill/Irwin Slide 97
Actual
$280,000
Applied$252,000
Machine-hours (000)
Budget$270,000
Overhead Variances
908400
Standardhours
Denominator hours
Budget Variance 10,000 U
Volume Variance 18,000 U{{
Reconciling Overhead Variances andUnderapplied or Overapplied Overhead
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McGraw-Hill/Irwin Slide 98
Underapplied or Overapplied Overhead
In a standardcost system:
Unfavorablevariances are equivalent
to underapplied overhead.
Favorablevariances are equivalentto overapplied overhead.
The sum of the overhead variancesequals the under- or overapplied
overhead cost for the period.
Reconciling Overhead Variances andUnderapplied or O erapplied O erhead
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McGraw-Hill/Irwin Slide 99
Underapplied or Overapplied Overhead
Predetermined overhead rate (a) 4.00$ per machine-hour Standard hours a llowed 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
Computing the Variable Overhead Variances
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McGraw-Hill/Irwin Slide 100
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
Computing the Variable Overhead Variances
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McGraw-Hill/Irwin Slide 101
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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2010 The McGraw-Hill Companies, Inc.
Journal Entriesto Record Variances
Appendix 11B
Learning Objective 7
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McGraw-Hill/Irwin Slide 104
Learning Objective 7
(Appendix 11B)
Prepare journal entriesto record standardcosts and variances.
Appendix 11BJournal Entries to Record Variances
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McGraw-Hill/Irwin Slide 105
Journal Entries to Record Variances
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 = $1,029 AQ SP = $1,050SQ SP = $1,000MPV = $21 FMQV = $50 U
Labor
AH AR = $26,250 AH SR = $25,000SH SR = $24,000LRV = $1,250 ULEV = $1,000 U
Now, lets prepare the entries to recordthe labor and material variances.
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Appendix 11BRecording Labor Variances
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McGraw-Hill/Irwin Slide 107
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 d i rec t labo r
Recording Labor Variances
Cost Flows in a Standard Cost System
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McGraw-Hill/Irwin Slide 108
Cost Flows in a Standard Cost System
Inventories are recorded at standard cost.Variances are recorded as follows:
Favorable variances are credits, representingsavings in production costs.Unfavorable variances are debits, representingexcess 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.
End of Chapter 11
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End of Chapter 11