Chapter 9 Standard Costs PowerPoint Authors: Jon A. Booker, Ph.D., CPA, CIA Charles W. Caldwell,...
-
Upload
katherine-quinn -
Category
Documents
-
view
239 -
download
5
Transcript of 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) = $4,000 unfavorable
9-92
Computing the Sum of All Variances
Variable overhead rate variance 12,000$ 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
9-93
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.
9-95
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.
9-96
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
9-97
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
9-98
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.
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.
9-99
End of Chapter 9
9-100