Standard Costs and Variances

Chapter 10

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
 10-2

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 Price standards
of an specify how much
input should be should be paid for
used to each unit of the
make a product or input.
provide a service.
Examples: Firestone, Sears, McDonald’s, hospitals,
construction, and manufacturing companies.
 10-3

Standard Costs
Deviations from standards deemed significant
are brought to the attention of management, a
practice known as management by exception.

Standard
Amount

Direct
Material
Direct Manufacturing
Labor Overhead

Type of Product Cost

 10-4

Variance Analysis Cycle

 10-5

Setting Standard Costs

Should we use I recommend using practical
ideal standards that standards that are currently
require employees to attainable with reasonable
work at 100 percent and efficient effort.
peak efficiency?

Engineer Managerial Accountant

 10-6

Setting Direct Materials Standards

Standard Price Standard Quantity
per Unit per Unit

Final, delivered Summarized in

cost of materials, a Bill of Materials.
net of discounts.
 10-7

Setting Direct Labor Standards

Standard Rate Standard Hours
per Hour per Unit

Often a single Use time and

rate is used that reflects motion studies for
the mix of wages earned. each labor operation.
 10-8

Setting Variable Manufacturing

Overhead Standards
Price Quantity
Standard Standard

The rate is the The quantity is

variable portion of the the activity in the
predetermined overhead allocation base for
rate. predetermined overhead.
 10-9

The Standard Cost Card

A standard cost card for one unit
of product might look like this:
 10-10

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
quantity and price variances.
 10-11

A General Model for Variance Analysis

Variance Analysis

Quantity Variance Price Variance

Difference between Difference between

actual quantity and actual price and
standard quantity standard price
 10-12

Quantity and Price Standards

Quantity and price standards are
determined separately for two reasons:

❶ The purchasing manager is responsible for raw

material purchase prices and the production manager
is responsible for the quantity of raw material used.

❷ 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.
 10-13

A General Model for Variance Analysis

Variance Analysis

Quantity Variance Price Variance

Materials quantity variance Materials price variance

Labor efficiency variance Labor rate variance
VOH efficiency variance VOH rate variance
 10-14

A General Model for Variance Analysis

(1) (2) (3)

Standard Quantity Actual Quantity Actual Quantity
Allowed for Actual Output, of Input, of Input,
at Standard Price at Standard Price at Actual Price
(SQ × SP) (AQ × SP) (AQ × AP)

Quantity Variance Price Variance

(2) – (1) (3) – (2)

Spending Variance
(3) – (1)
 10-15

A General Model for Variance Analysis

Actual quantity is the amount of direct materials, direct
labor, and variable manufacturing overhead actually used.

(1) (2) (3)

Standard Quantity Actual Quantity Actual Quantity
Allowed for Actual Output, of Input, of Input,
at Standard Price at Standard Price at Actual Price
(SQ × SP) (AQ × SP) (AQ × AP)

Quantity Variance Price Variance

(2) – (1) (3) – (2)

Spending Variance
(3) – (1)
 10-16

A General Model for Variance Analysis

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

(1) (2) (3)

Standard Quantity Actual Quantity Actual Quantity
Allowed for Actual Output, of Input, of Input,
at Standard Price at Standard Price at Actual Price
(SQ × SP) (AQ × SP) (AQ × AP)

Quantity Variance Price Variance

(2) – (1) (3) – (2)

Spending Variance
(3) – (1)
 10-17

A General Model for Variance Analysis

Actual price is the amount actually
paid for the input used.

(1) (2) (3)

Standard Quantity Actual Quantity Actual Quantity
Allowed for Actual Output, of Input, of Input,
at Standard Price at Standard Price at Actual Price
(SQ × SP) (AQ × SP) (AQ × AP)

Quantity Variance Price Variance

(2) – (1) (3) – (2)

Spending Variance
(3) – (1)
 10-18

A General Model for Variance Analysis

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

(1) (2) (3)

Standard Quantity Actual Quantity Actual Quantity
Allowed for Actual Output, of Input, of Input,
at Standard Price at Standard Price at Actual Price
(SQ × SP) (AQ × SP) (AQ × AP)

Quantity Variance Price Variance

(2) – (1) (3) – (2)

Spending Variance
(3) – (1)
 10-19

Learning Objective 1

Compute the direct

materials quantity and
price variances and
explain their
significance.
 10-20

Materials Variances – An Example

Glacier Peak Outfitters has the following direct
materials 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 materials cost a
total of $1,029.
 10-21

Materials Variances Summary

Standard Quantity Actual Quantity Actual Quantity
× × ×
Standard Price Standard Price Actual Price
200 kgs. 210 kgs. 210 kgs.
× × ×
$5.00 per kg. $5.00 per kg. $4.90 per kg.
= $1,000 = $1,050 = $1,029

Quantity variance Price variance

$50 unfavorable $21 favorable
 10-22

Materials Variances Summary

Standard Quantity Actual Quantity Actual Quantity
× × ×
Standard Price Standard Price Actual Price
200 kgs. 210 kgs. 210 kgs.
0.1 kg per parka × 2,000 parkas
× × ×
= 200 kgs
$5.00 per kg. $5.00 per kg. $4.90 per kg.
= $1,000 = $1,050 = $1,029

Quantity variance Price variance

$50 unfavorable $21 favorable
 10-23

Materials Variances Summary

Standard Quantity Actual Quantity Actual Quantity
× × ×
Standard Price Standard Price Actual Price
200 kgs. 210 kgs. 210 kgs.
× × ÷ 210 kgs
$1,029 ×
$5.00 per kg. $5.00 per kg.
= $4.90 per kg $4.90 per kg.
= $1,000 = $1,050 = $1,029

Quantity variance Price variance

$50 unfavorable $21 favorable
 10-24

Materials Variances:
Using the Factored Equations
Materials quantity variance
MQV = (AQ × SP) – (SQ × SP)
= 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

Materials price variance

MPV = (AQ × AP) – (AQ × SP)
= AQ(AP – SP)
= 210 kgs ($4.90/kg – $5.00/kg)
= 210 kgs (– $0.10/kg) = $21 F
 10-25

Responsibility for Materials

Variances
Materials Quantity Variance Materials Price Variance

Production Manager Purchasing Manager

The standard price is used to compute the quantity variance

so that the production manager is not held responsible for
the purchasing manager’s performance.
 10-26

Responsibility for Materials Variances

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

Production Manager Purchasing Manager

 10-27

Quick Check ✓ Zippy

Hanson Inc. has the following direct materials

standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 1,700 pounds of materials were
purchased and used to make 1,000 Zippies. The
materials cost a total of $6,630.
 10-28

Quick Check ✓ Zippy

How many pounds of materials should Hanson

have used to make 1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
c. 1,200 pounds.
d. 1,000 pounds.
 10-29

Quick Check ✓ Zippy

How many pounds of materials should Hanson

have used to make 1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
c. 1,200 pounds.
The standard quantity is:
d. 1,000 pounds.
1,000 × 1.5 pounds per Zippy.
 10-30

Quick Check ✓ Zippy

Hanson’s materials quantity variance (MQV)

for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
 10-31

Quick Check ✓ Zippy

Hanson’s materials 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
 10-32

Quick Check ✓ Zippy

Hanson’s materials price variance (MPV)

for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
 10-33

Quick Check ✓ Zippy

Hanson’s materials 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
 10-34

Quick Check ✓ Zippy

Standard Quantity Actual Quantity Actual Quantity

× × ×
Standard Price Standard Price Actual Price

1,500 lbs. 1,700 lbs. 1,700 lbs.

× × ×
$4.00 per lb. $4.00 per lb. $3.90 per lb.
= $6,000 = $ 6,800 = $6,630

Quantity variance Price variance

$800 unfavorable $170 favorable
 10-35

Quick Check ✓ Zippy

Recall that the standard quantity for 1,000 Zippies
is 1,000 × 1.5 pounds per Zippy = 1,500 pounds.

Standard Quantity Actual Quantity Actual Quantity

× × ×
Standard Price Standard Price Actual Price

1,500 lbs. 1,700 lbs. 1,700 lbs.

× × ×
$4.00 per lb. $4.00 per lb. $3.90 per lb.
= $6,000 = $ 6,800 = $6,630

Quantity variance Price variance

$800 unfavorable $170 favorable
 10-36

Learning Objective 2

Compute the direct labor

efficiency and rate
variances and explain
their significance.
 10-37

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.
 10-38

Labor Variances Summary

Standard Hours Actual Hours Actual Hours
× × ×
Standard Rate Standard Rate Actual Rate
2,400 hours 2,500 hours 2,500 hours
× × ×
$10.00 per hour $10.00 per hour $10.50 per hour
= $24,000 = $25,000 = $26,250

Efficiency variance Rate variance

$1,000 unfavorable $1,250 unfavorable
 10-39

Labor Variances Summary

Standard Hours Actual Hours Actual Hours
× × ×
Standard Rate Standard Rate Actual Rate
2,400 hours 2,500 hours 2,500 hours
× 1.2 hours ×per parka × 2,000 ×
$10.00 per hour parkasper
$10.00 = 2,400
hour hours$10.50 per hour
= $24,000 = $25,000 = $26,250

Efficiency variance Rate variance

$1,000 unfavorable $1,250 unfavorable
 10-40

Labor Variances Summary

Standard Hours Actual Hours Actual Hours
× × ×
Standard Rate Standard Rate Actual Rate
2,400 hours 2,500 hours 2,500 hours
× × hours
$26,250 ÷ 2,500 ×
$10.00 per hour = $10.50
$10.00per
perhour
hour $10.50 per hour
= $24,000 = $25,000 = $26,250

Efficiency variance Rate variance

$1,000 unfavorable $1,250 unfavorable
 10-41

Labor Variances: Using the

Factored Equations
Labor efficiency variance
LEV = (AH × SR) – (SH × SR)
= SR (AH – SH)
= $10.00 per hour (2,500 hours – 2,400 hours)
= $10.00 per hour (100 hours)
= $1,000 unfavorable
Labor rate variance
LRV = (AH × AR) – (AH × SR)
= AH (AR – SR)
= 2,500 hours ($10.50 per hour – $10.00 per hour)
= 2,500 hours ($0.50 per hour)
= $1,250 unfavorable
 10-42

Responsibility for Labor Variances

Production managers are Mix of skill levels
usually held accountable assigned to work tasks.
for labor variances
because they can
influence the: Level of employee
motivation.

Quality of production
supervision.

Quality of training
provided to employees.
Production Manager
 10-43

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
You purchased cheap maintained your
material, so it took more equipment.
time to process it.
 10-44

Quick Check ✓ Zippy

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.
 10-45

Quick Check ✓ Zippy

Hanson’s labor efficiency variance (LEV)

for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
 10-46

Quick Check ✓ Zippy

Hanson’s labor efficiency variance (LEV)

for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
LEV = SR(AH - SH)
LEV = $12.00(1,550 hrs - 1,500 hrs)
LEV = $600 unfavorable
 10-47

Quick Check ✓ Zippy

Hanson’s labor rate variance (LRV) for the

week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
 10-48

Quick Check ✓ Zippy

Hanson’s labor rate variance (LRV) for the

week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
LRV = AH(AR - SR)
LRV = 1,550 hrs($12.20 - $12.00)
d. $300 favorable.
LRV = $310 unfavorable
 10-49

Quick Check ✓ Zippy

Standard Hours Actual Hours Actual Hours

× × ×
Standard Rate Standard Rate Actual Rate
1,500 hours 1,550 hours 1,550 hours
× × ×
$12.00 per hour $12.00 per hour $12.20 per hour
= $18,000 = $18,600 = $18,910

Efficiency variance Rate variance

$600 unfavorable $310 unfavorable
 10-50

Learning Objective 3

Compute the variable

manufacturing overhead
efficiency and rate
variances and explain
their significance.
 10-51

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.
 10-52

Variable Manufacturing Overhead

Variances Summary
Standard Hours Actual Hours Actual Hours
× × ×
Standard Rate Standard Rate Actual Rate
2,400 hours 2,500 hours 2,500 hours
× × ×
$4.00 per hour $4.00 per hour $4.20 per hour
= $9,600 = $10,000 = $10,500

Efficiency variance Rate variance

$400 unfavorable $500 unfavorable
 10-53

Variable Manufacturing Overhead

Variances Summary
Standard Hours Actual Hours Actual Hours
× × ×
Standard Rate Standard Rate Actual Rate
2,400 hours 2,500 hours 2,500 hours
× 1.2 hours ×per parka × 2,000 ×
$4.00 per hour $4.00 per
parkas hour hours $4.20 per hour
= 2,400
= $9,600 = $10,000 = $10,500

Efficiency variance Rate variance

$400 unfavorable $500 unfavorable
 10-54

Variable Manufacturing Overhead

Variances Summary
Standard Hours Actual Hours Actual Hours
× × ×
Standard Rate Standard Rate Actual Rate
2,400 hours 2,500 hours 2,500 hours
× ×
$10,500 ÷ 2,500 hours ×
$4.00 per hour $4.00 per
= $4.20 per hour
hour $4.20 per hour
= $9,600 = $10,000 = $10,500

Efficiency variance Rate variance

$400 unfavorable $500 unfavorable
 10-55

Variable Manufacturing Overhead

Variances: Using Factored Equations
Variable manufacturing overhead efficiency variance
VMEV = (AH × SR) – (SH – SR)
= SR (AH – SH)
= $4.00 per hour (2,500 hours – 2,400 hours)
= $4.00 per hour (100 hours)
= $400 unfavorable
Variable manufacturing overhead rate variance
VMRV = (AH × AR) – (AH – SR)
= AH (AR – SR)
= 2,500 hours ($4.20 per hour – $4.00 per hour)
= 2,500 hours ($0.20 per hour)
= $500 unfavorable
 10-56

Quick Check ✓ Zippy

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.
 10-57

Quick Check ✓ Zippy

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.
 10-58

Quick Check ✓ Zippy

Hanson’s efficiency variance (VMEV) for

variable manufacturing overhead for the week
was:
a. $435 unfavorable.
b. $435 favorable.
1,000 units × 1.5 hrs per unit
c. $150 unfavorable.
d. $150 favorable.
VMEV = SR(AH - SH)
VMEV = $3.00(1,550 hrs - 1,500 hrs)
VMEV = $150 unfavorable
 10-59

Quick Check ✓ Zippy

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.
 10-60

Quick Check ✓ Zippy

Hanson’s rate variance (VMRV) for variable

manufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 favorable.
VMRV = AH(AR - SR)
c. $335 unfavorable.
VMRV = 1,550 hrs($3.30 - $3.00)
d. $300 favorable. VMRV = $465 unfavorable
 10-61

Quick Check ✓ Zippy

Standard Hours Actual Hours Actual Hours

× × ×
Standard Rate Standard Rate Actual Rate
1,500 hours 1,550 hours 1,550 hours
× × ×
$3.00 per hour $3.00 per hour $3.30 per hour
= $4,500 = $4,650 = $5,115

Efficiency variance Rate variance

$150 unfavorable $465 unfavorable
 10-62

Materials Variances―An Important

Subtlety

The quantity variance

is computed only on
the quantity used.
The price variance is
computed on the entire
quantity purchased.
 10-63

Materials Variances―An Important

Subtlety
Glacier Peak Outfitters has the following direct
materials 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 at a
cost of $1,029. Glacier used 200 kgs. to make
2,000 parkas.
 10-64

Materials Variances―An Important

Subtlety
Standard Quantity Actual Quantity
× ×
Standard Price Standard Price
200 kgs. 200 kgs.
× ×
$5.00 per kg. $5.00 per kg.
= $1,000 = $1,000

Quantity variance
$0
 10-65

Materials Variances―An Important

Subtlety
Actual Quantity Actual Quantity
× ×
Standard Price Actual Price
210 kgs. 210 kgs.
× ×
$5.00 per kg. $4.90 per kg.
= $1,050 = $1,029

Price variance
$21 favorable
 10-66

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.
 10-67

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
 10-68

Advantages of Standard Costs

Management by Promotes economy

exception and efficiency

Advantages
Enhances
Simplified responsibility
bookkeeping accounting
 10-69

Potential Problems with Standard

Costs
Emphasizing standards Favorable
may exclude other variances may
important objectives. Potential be misinterpreted.
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.
Predetermined Overhead Rates
and Overhead Analysis in a
Standard Costing System
Appendix 10A

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
 10-71

Learning Objective 4

(Appendix 10A)
Compute and interpret
the fixed overhead
volume and budget
variances.
 10-72

Fixed Overhead Volume Variance

Fixed Budgeted Actual
Overhead Fixed Fixed
Applied Overhead Overhead

Volume
variance
Fixed
Budgeted
Volume overhead
= fixed –
variance applied to
overhead
work in process
 10-73

Fixed Overhead Volume Variance

Fixed Budgeted Actual
Overhead Fixed Fixed
Applied Overhead Overhead
SH × FR DH × 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
 10-74

Fixed Overhead Budget Variance

Fixed Budgeted Actual
Overhead Fixed Fixed
Applied Overhead Overhead

Budget
variance

Actual Budgeted
Budget
= fixed – fixed
variance
overhead overhead
 10-75

Computing Fixed Overhead Variances

 10-76

Computing Fixed Overhead Variances

 10-77

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-hours

Predetermined
= $4.00 per machine-hour
overhead rate
 10-78

Predetermined Overhead Rates

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

Variable component of the

= $1.00 per machine-hour
predetermined overhead rate

Fixed component of the $270,000

=
predetermined overhead rate 90,000 Machine-hours

Fixed component of the

= $3.00 per machine-hour
predetermined overhead rate
 10-79

Applying Manufacturing Overhead

Overhead Predetermined Standard hours allowed

= ×
applied overhead rate for the actual output

Overhead $4.00 per

= × 84,000 machine-hours
applied machine-hour

Overhead
= $336,000
applied
 10-80

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-hours )
Volume
= $18,000 Unfavorable
variance
 10-81

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
mach-hours
–
84,000
mach-hours )
Volume = 18,000 Unfavorable
variance
 10-82

Computing the Budget Variance

Actual Budgeted
Budget
= fixed – fixed
variance
overhead overhead

Budget
= $280,000 – $270,000
variance

Budget
= $10,000 Unfavorable
variance
 10-83

A Pictorial View of the Variances

Fixed Overhead Budgeted Actual
Applied to Fixed Fixed
Work in Process Overhead Overhead
252,000 270,000 280,000

Volume variance, Budget variance,

$18,000 unfavorable $10,000 unfavorable

Total variance, $28,000 unfavorable

 10-84

Fixed Overhead Variances –

A Graphic Approach

Let’s look at a
graph showing
fixed overhead
variances. We will
use ColaCo’s
numbers from the
previous example.
 10-85

Graphic Analysis of Fixed

Overhead Variances

Budget
$270,000

at
d
p lie r
a p o u
d h
e a a rd
erh n d
o v s ta
e d e r
Fix .00 p Denominator
$3 hours
0
0 Machine-hours (000) 90
 10-86

Graphic Analysis of Fixed

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

at
d
p lie r
a p o u
d h
e a a rd
erh n d
o v s ta
e d e r
Fix .00 p Denominator
$3 hours
0
0 Machine-hours (000) 90
 10-87

Graphic Analysis of Fixed

Overhead Variances
Actual
$280,000
Budget { Budget Variance 10,000 U
$270,000
Applied { Volume Variance 18,000 U
$252,000
at
d
p lie r
a p o u
d h
e a a rd
erh n d
o v s ta
e d e r
Fix .00 p Standard Denominator
$3 hours hours
0
0 Machine-hours (000) 84 90
 10-88

Reconciling Overhead Variances and

Underapplied or Overapplied
In a
Overhead
standard
cost
system:
Favorable
variances are equivalent
to overapplied overhead.

The sum of the overhead variances

equals the under- or overapplied
overhead cost for the period.
 10-89

Reconciling Overhead Variances and

Underapplied or Overapplied Overhead
 10-90

Computing the Variable Overhead

Variances

Variable manufacturing overhead efficiency variance

VMEV = (AH × SR) – (SH × SR)
= $88,000 – (84,000 hours × $1.00 per hour)
= $4,000 unfavorable
 10-91

Computing the Variable Overhead

Variances

Variable manufacturing overhead rate variance

VMRV = (AH × AR) – (AH × SR)
= $100,000 – (88,000 hours × $1.00 per hour)
= $12,000 unfavorable
 10-92

Computing the Sum of All Variances

General Ledger
Journal EntriesEntries
to Record
to
Variances
Record Variances
Appendix 10B

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
 10-94

Learning Objective 5

(Appendix 10B)
Prepare journal entries
to record standard
costs and variances.
 10-95

Glacier Peak Outfitters ― Revisited

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, let’s prepare the entries to record

the labor and material variances.
 10-96

Recording Materials Variances

 10-97

Recording Labor Variances

 10-98

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.
 10-99

End of Chapter 10