Standard Costing and Analysis of
Variations
Standard Costs
Provide a benchmarkto evaluate performance.
Used for preparing operating budgets.Standard
Costs are
Management by Exception
DirectMaterial
Managers focus on quantities and coststhat differ from standards, a practice known as
management by exception.
Type of Product Cost
Am
ou
nt
DirectLabor
Standard
Accountants, engineers, personnel administrators, and Accountants, engineers, personnel administrators, and production managers combine efforts to set standards production managers combine efforts to set standards
based on experience and expectations.based on experience and expectations.
Participation in Setting Standards
Cost Variance Analysis
Standard Cost Variances
Quantity VariancePrice Variance
The difference betweenthe actual price and the
standard price
The difference betweenthe actual quantity andthe standard quantity
A General Model for Variance Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance Quantity Variance
Standard price is the amount that should have been paid for the resources acquired.
A General Model for Variance Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance Quantity Variance
Standard quantity is the quantity allowed for the actual good output.
A General Model for Variance Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance Quantity Variance
Materials price variance Materials quantity variance Labor rate variance Labor efficiency variance Variable overhead Variable overhead spending variance efficiency variance
AQ(AP - SP) SP(AQ - SQ)
AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity
Standard Costs
Let’s use the concepts
of the general model to
calculate standard cost
variances, starting with
direct material.
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.
Material Variances Zippy
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
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
Material Variances Summary
The price variance is computed on the entire
quantity purchased.
The quantity variance is computed only on the
quantity used.
Hanson purchased and used 1,700 pounds.
How are the variances computed if the amount purchased differs from
the amount used?
ZippyMaterial Variances
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.
Material Variances Zippy
Material Variances
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 differs from the earlier example because the quantity purchased is higher.
Zippy
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 from the
earlier example, because actual and standard
quantities are unchanged.
Material Variances Zippy
Isolation of Material Variances
I need the variances as soonas possible so that I canbetter identify problems
and control costs.
You accountants just don’tunderstand the problems
we production managers have.
Okay. I’ll start computingthe price variance when
material is purchased andthe quantity variance assoon as material is used.
Assume that Hanson Company maintains its inventory accounts at standard costs, i.e, all variances are removed from the inventory accounts as soon as they are measured. Raw materials are carried at standard acquisition costs. Work-in-process, finished goods and cost-of-sales accounts are carried at the standard costs of production. Show how the materials variances would be shown in the company’s ledger (T-) accounts.
Responsibility for Material Variances
I am not responsible for this unfavorable material
quantity variance.
You purchased cheapmaterial, so my peoplehad to use more of it.
You used too much material because of poorly trained
workers and poorly maintained equipment.
Also, your poor scheduling sometimes requires me to
rush order material at a higher price, causing
unfavorable price variances.
Standard Costs
Now let’s calculate standard cost variances for direct labor.
Hanson Inc. has the following direct labor standard to manufacture one Zippy:
1.5 standard hours per Zippy at $10.00 per direct labor hour
Last week 1,550 direct labor hours were worked at a total labor cost of $15,810 to
make 1,000 Zippies.
Labor Variances Zippy
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
Labor Variances Summary
Rate variance$310 unfavorable
Efficiency variance$500 unfavorable
1,550 hours 1,550 hours 1,500 hours × × ×$10.20 per hour $10.00 per hour $10.00 per hour
$15,810 $15,500 $15,000
Labor Rate Variance – A Closer Look
High skill,high rate
Low skill,low rate
Using highly paid skilled workers toperform unskilled tasks results in an
unfavorable rate variance.
Production managers who make work assignmentsare generally responsible for rate variances.
Labor Efficiency Variance –A Closer Look
UnfavorableEfficiencyVariance
Poorlytrainedworkers
Poorsupervisionof workers
Poorquality
materials
Poorlymaintainedequipment
Responsibility for Labor Variances
I am not responsible for the unfavorable labor
efficiency variance!
You purchased cheapmaterial, so it took more
time to process it.
You used too much time because of poorly
trained workers and poor supervision.
Cost Management Using Overhead Cost Variances
Let’s turn our attentionto the computation of
overhead cost variances. We will begin withvariable overhead.
Hanson prepared this budget for overhead:
Variable Overhead Variances – Example
Budgeted variable Total overhead cost per activity activity unit units
× + Budgeted fixedoverhead cost
Total budgetedoverhead cost =
Total budgetedoverhead cost =
$2.00 permachine
hour×
Totalmachine hours
+ $9,000
Spending Variance
EfficiencyVariance
AH × SVR
AH = Actual Hours of Activity SVR = Standard Variable Overhead RateSH = Standard Hours Allowed
SH × SVR
Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours
Variable Overhead Variances
Efficiency variance = SVR(AH - SH)
Spending Variance
EfficiencyVariance
Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours
AH × SVR
SH × SVR
Variable Overhead Variances
Hanson’s actual production for the period required 3,200 standard machine hours. Actual variable overhead incurred for the period was $6,740. Actual machine hours worked were
3,300.
Compute the variable overhead spending and efficiency variances.
Variable Overhead Variances – Example
3,300 hours 3,200 hours × × $2.00 per hour $2.00 per hour
Spending variance$140 unfavorable
Efficiency variance$200 unfavorable
Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours
$6,740 $6,600 $6,400
Variable Overhead Variances – Example
3,300 hours 3,200 hours × × $2.00 per hour $2.00 per hour
The $140 unfavorable spending variance and the $200 unfavorable efficiency variance result in a $340
unfavorable flexible budget variance.
Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours
$6,740 $6,600 $6,400
Variable Overhead Variances – Example
Fixed Overhead
Now let’s turn our attention to fixed overhead.
Budget Variance
VolumeVariance
PFOHR = Predetermined Fixed Overhead Rate SH = Standard Hours Allowed
SH × PFOHR
Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied
Fixed Overhead Variances
PFOHR =
Applied Fixed Overhead = PFOHR × Standard Hours
Budgeted Fixed Overhead
Planned Activity in Hours
Recall that fixed overhead costs are applied to products and services using a predetermined
fixed overhead rate (PFOHR):
Fixed Overhead
Hanson used the following predeterminedfixed overhead rate:
PFOHR =Budgeted Fixed Overhead
Planned Activity in Hours
=$9,000
3,000 machine hours
= $3.00 per machine hour
Fixed Overhead Variances – Example
Hanson’s actual production required 3,200 standard machine hours. Actual fixed overhead
was $8,450.
Compute the fixed overhead budget and volume variances.
Fixed Overhead Variances – Example
3,200 hours × $3.00 per hour
Fixed Overhead Variances – Example
Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied
$8,450 $9,000 $9,600
Budget variance$550 favorable
Volume variance$600 (neither favorable nor
unfavorable)
Fixed Overhead Variances –A Closer Look
Budget VarianceBudget Variance Volume VarianceVolume Variance
Results from paying moreor less than expected for
fixed overhead items.
Results from the inabilityto operate at the activity
level planned for the period.
Has no significance for cost control.
Fixed Overhead Variances
Let’s look at a graph showing fixed
overhead variances. We will use Hanson’s
numbers from the previous example.
Volume
Cost
$9,600 applied fixed OH
$9,000 budgeted fixed OH
3,200 machine hours × $3.00 fixed overhead rate
Fixed overhead
applied to products
Fixed Overhead Variances
{$600
Volume Variance
{$550Favorable
Budget Variance
$8,450 actual fixed OH
3,200 Standard
Hours
3,000 Hours PlannedActivity
Handout 11 (a):Direct Material Variances
Journal Entries
Monitor Company produces a single product with the following standard direct materials cost per unit of output:
Material pounds per unit: (SQ) 3lbs. Materials cost per pound: (SP) $20 Materials cost per unit: (SPxSQ) or (3 lbs. x $20) $60
During the past month, Monitor purchased 120,000 pounds of material at an average cost per pound of $25.00 and used 105,000 pounds in order to produce 34,000 units of output. The company had no beginning inventory. Inventories are valued at standard costs of production, and all variances are written-off (closed) to cost of goods sold at the end of the month. Required:
(1) Determine the total standard direct materials cost for the actual number of materials
pounds purchased during the month.
Monitor Company produces a single product with the following standard direct materials cost per unit of output:
Material pounds per unit: (SQ) 3lbs. Materials cost per pound: (SP) $20 Materials cost per unit: (SPxSQ) or (3 lbs. x $20) $60
During the past month, Monitor purchased 120,000 pounds of material at an average cost per pound of $25.00 and used 105,000 pounds in order to produce 34,000 units of output. The company had no beginning inventory. Inventories are valued at standard costs of production, and all variances are written-off (closed) to cost of goods sold at the end of the month. Required:
(1) Determine the total standard direct materials cost for the actual number of materials
pounds purchased during the month.
120,000 pounds @ $20 per pound = $2,400,000
Monitor Company produces a single product with the following standard direct materials cost per unit of output:
Material pounds per unit: (SQ) 3lbs. Materials cost per pound: (SP) $20 Materials cost per unit: (SPxSQ) or (3 lbs. x $20) $60
During the past month, Monitor purchased 120,000 pounds of material at an average cost per pound of $25.00 and used 105,000 pounds in order to produce 34,000 units of output. The company had no beginning inventory. Inventories are valued at standard costs of production, and all variances are written-off (closed) to cost of goods sold at the end of the month. Required:
(1) Determine the total standard direct materials cost for the actual number of materials
pounds purchased during the month.
120,000 pounds @ $20 per pound = $2,400,000
(2) Determine the total standard direct materials cost allowed for the actual number of units produced during the month.
34,000 units x 3 lbs. = 102,000 pounds
102,000 pounds @ $20 per pound = $2,040,000
(3) Determine the direct materials price and quantity (usage) variances for the month.
Price variance = ($25 - $20) (120,000 lbs.) = $ 600,000 unf.
Quantity variance = (105,000 lbs. – 102,000 lbs.) ($20)
= $ 60,000 unf
(4) Provide journal entries to record (a) the materials purchase and related price variance; (b)
the transfer of materials to work-in-process and the related quantity variance; and (c) the
closing of the materials variances to cost of goods sold.
Journal entries for materials Account Dr. Cr. Dr. Materials Inventory Dr, Material price variance Cr. Accounts Payable
$ 2,400,000 600,000
$ 3,000,000
Dr. Work in process Dr. Material quantity variance Cr. Materials Inventory
$ 2,040,000 60,000
$ 2,100,000
Dr. Cost of goods sold Cr. Materials price variance Cr. Materials quantity variance
$ 660,000 $ 600,000
60,000
(5) The firm is considering pro-ration of the materials variances among the cost of goods sold and
the ending inventory balances. Explain how the pro-ration would be determined. Would the same
approach be used for the price and the quantity variances?
The variances would be pro-rated in proportion to the standard-cost dollar amounts of the
current period’s materials purchases included in the ending balances of the relevant inventory
and cost of sales accounts. The price variance would be prorated among the materials, work-
in-process, finished goods and cost of sales accounts. The quantity variance would be prorated
among the work-in-process, finished goods and cost of sales accounts.
Entry to record materials purchased
Entry to record materials used in production.
Entry to close variance accounts to cost of goods sold.
(4) Provide journal entries to record (a) the materials purchase and related price variance; (b)
the transfer of materials to work-in-process and the related quantity variance; and (c) the
closing of the materials variances to cost of goods sold.
Journal entries for materials Account Dr. Cr. Dr. Materials Inventory Dr, Material price variance Cr. Accounts Payable
$ 2,400,000 600,000
$ 3,000,000
Dr. Work in process Dr. Material quantity variance Cr. Materials Inventory
$ 2,040,000 60,000
$ 2,100,000
Dr. Cost of goods sold Cr. Materials price variance Cr. Materials quantity variance
$ 660,000 $ 600,000
60,000
(5) The firm is considering pro-ration of the materials variances among the cost of goods sold and
the ending inventory balances. Explain how the pro-ration would be determined. Would the same
approach be used for the price and the quantity variances?
The variances would be pro-rated in proportion to the standard-cost dollar amounts of the
current period’s materials purchases included in the ending balances of the relevant inventory
and cost of sales accounts. The price variance would be prorated among the materials, work-
in-process, finished goods and cost of sales accounts. The quantity variance would be prorated
among the work-in-process, finished goods and cost of sales accounts.
Entry to record materials purchased
Entry to record materials used in production.
Entry to close variance accounts to cost of goods sold.
(4) Provide journal entries to record (a) the materials purchase and related price variance; (b)
the transfer of materials to work-in-process and the related quantity variance; and (c) the
closing of the materials variances to cost of goods sold.
Journal entries for materials Account Dr. Cr. Dr. Materials Inventory Dr, Material price variance Cr. Accounts Payable
$ 2,400,000 600,000
$ 3,000,000
Dr. Work in process Dr. Material quantity variance Cr. Materials Inventory
$ 2,040,000 60,000
$ 2,100,000
Dr. Cost of goods sold Cr. Materials price variance Cr. Materials quantity variance
$ 660,000 $ 600,000
60,000
(5) The firm is considering pro-ration of the materials variances among the cost of goods sold and
the ending inventory balances. Explain how the pro-ration would be determined. Would the same
approach be used for the price and the quantity variances?
The variances would be pro-rated in proportion to the standard-cost dollar amounts of the
current period’s materials purchases included in the ending balances of the relevant inventory
and cost of sales accounts. The price variance would be prorated among the materials, work-
in-process, finished goods and cost of sales accounts. The quantity variance would be prorated
among the work-in-process, finished goods and cost of sales accounts.
Entry to record materials used in production.
Entry to close variance accounts to cost of goods sold.
(4) Provide journal entries to record (a) the materials purchase and related price variance; (b)
the transfer of materials to work-in-process and the related quantity variance; and (c) the
closing of the materials variances to cost of goods sold.
Journal entries for materials Account Dr. Cr. Dr. Materials Inventory Dr, Material price variance Cr. Accounts Payable
$ 2,400,000 600,000
$ 3,000,000
Dr. Work in process Dr. Material quantity variance Cr. Materials Inventory
$ 2,040,000 60,000
$ 2,100,000
Dr. Cost of goods sold Cr. Materials price variance Cr. Materials quantity variance
$ 660,000 $ 600,000
60,000
(5) The firm is considering pro-ration of the materials variances among the cost of goods sold and
the ending inventory balances. Explain how the pro-ration would be determined. Would the same
approach be used for the price and the quantity variances?
The variances would be pro-rated in proportion to the standard-cost dollar amounts of the
current period’s materials purchases included in the ending balances of the relevant inventory
and cost of sales accounts. The price variance would be prorated among the materials, work-
in-process, finished goods and cost of sales accounts. The quantity variance would be prorated
among the work-in-process, finished goods and cost of sales accounts.
Entry to close variance accounts to cost of goods sold.
(4) Provide journal entries to record (a) the materials purchase and related price variance; (b)
the transfer of materials to work-in-process and the related quantity variance; and (c) the
closing of the materials variances to cost of goods sold.
Journal entries for materials Account Dr. Cr. Dr. Materials Inventory Dr, Material price variance Cr. Accounts Payable
$ 2,400,000 600,000
$ 3,000,000
Dr. Work in process Dr. Material quantity variance Cr. Materials Inventory
$ 2,040,000 60,000
$ 2,100,000
Dr. Cost of goods sold Cr. Materials price variance Cr. Materials quantity variance
$ 660,000 $ 600,000
60,000
(5) The firm is considering pro-ration of the materials variances among the cost of goods sold and
the ending inventory balances. Explain how the pro-ration would be determined. Would the same
approach be used for the price and the quantity variances?
The variances would be pro-rated in proportion to the standard-cost dollar amounts of the
current period’s materials purchases included in the ending balances of the relevant inventory
and cost of sales accounts. The price variance would be prorated among the materials, work-
in-process, finished goods and cost of sales accounts. The quantity variance would be prorated
among the work-in-process, finished goods and cost of sales accounts.
Handout 11 (b):Direct Labor Variances
Journal Entries
Merrimac Company produces a single product with the following standard direct labor cost per unit of output:
Direct labor hours per unit: 4 hrs. Direct labor cost per hour: $25 Direct labor cost per unit: (4 hours x $25) $100
During the month, the company incurred total payroll costs of $4,500,000. Of this amount,
$750,000 was paid for indirect labor, which is classified as factory overhead. The remaining payroll costs were paid for 130,000 direct labor hours used in the production of 34,000 units of output. The company had no beginning inventory. Inventories are valued at standard costs of production, and all variances are written-off (closed) to cost of goods sold at the end of the month.
Merrimac Company produces a single product with the following standard direct labor cost per unit of output:
Direct labor hours per unit: 4 hrs. Direct labor cost per hour: $25 Direct labor cost per unit: (4 hours x $25) $100
During the month, the company incurred total payroll costs of $4,500,000. Of this amount,
$750,000 was paid for indirect labor, which is classified as factory overhead. The remaining payroll costs were paid for 130,000 direct labor hours used in the production of 34,000 units of output. The company had no beginning inventory. Inventories are valued at standard costs of production, and all variances are written-off (closed) to cost of goods sold at the end of the month. Required:
(1) Determine the total standard direct labor cost for the actual number of direct labor hours worked during
the month.
130,000 dlh @ $25 per dlh = $3,250,000
(2) Determine the total standard direct labor cost allowed for the actual number of units produced during the
month.
34,000 units x 4dlh = 136,000 dlh
136,000 dlh @ $25 per dlh = $3,400,000
(3) Determine the direct labor rate and efficiency (usage) variances for the month.
(Note that the actual payroll cost for direct labor is $ 3,750,000)
Rate variance = $ 3,750,000 – ($25) (130,000 dlh) = $ 500,000 unf
Efficiency variance = (136,000 dlh – 130,000 dlh.) ($25)
= $ 150,000 fav
(1) Provide journal entries to record (a) the factory payroll and related rate variance; (b) the transfer of indirect labor
to the factory overhead account; (c) the transfer of direct labor cost to work-in-process and the related efficiency
variance; and (d) the closing of the direct labor variances to cost of goods sold.
Journal entries for direct labor Account Dr. Cr. Dr. Payroll suspense Cr. Wages payable, etc.
$ 4,500,000 $ 4,500,000
Dr. Overhead Dr. Labor rate variance Cr. Payroll suspense
$ 750,000 500,000
$ 1,250,000 Dr. Work in process Cr. Payroll suspense
$ 3,400,000 $ 3,400,000
Dr. Payroll suspense Cr. Labor efficiency variance
$ 150,000 $ 150,000
Dr. Cost of goods sold Dr. Labor efficiency variance Cr. Labor rate variance
$ 350,000 $ 150,000
500,000
(1) The firm is considering pro-ration of the direct labor variances among the cost of
goods sold and the ending inventory balances. Explain how the pro-ration would be
determined. Would the same approach be used for the rate and the efficiency
variances?
The variances would be pro-rated in proportion to the standard-cost dollar amounts
of current period’s direct labor in the ending balances of the work-in-process,
finished goods and cost of sales accounts. The labor rate and efficiency variances
would be pro-rated in the same proportions to these accounts.
To record the actual payroll cost.
To charge indirect labor to overhead, and to recognize the labor rate variance.
To charge WIP with the standard labor cost allowed.
To recognize the labor efficiency variance.
To close the labor variances to cost of goods sold.
(1) Provide journal entries to record (a) the factory payroll and related rate variance; (b) the transfer of indirect labor
to the factory overhead account; (c) the transfer of direct labor cost to work-in-process and the related efficiency
variance; and (d) the closing of the direct labor variances to cost of goods sold.
Journal entries for direct labor Account Dr. Cr. Dr. Payroll suspense Cr. Wages payable, etc.
$ 4,500,000 $ 4,500,000
Dr. Overhead Dr. Labor rate variance Cr. Payroll suspense
$ 750,000 500,000
$ 1,250,000 Dr. Work in process Cr. Payroll suspense
$ 3,400,000 $ 3,400,000
Dr. Payroll suspense Cr. Labor efficiency variance
$ 150,000 $ 150,000
Dr. Cost of goods sold Dr. Labor efficiency variance Cr. Labor rate variance
$ 350,000 $ 150,000
500,000
(1) The firm is considering pro-ration of the direct labor variances among the cost of goods sold
and the ending inventory balances. Explain how the pro-ration would be determined. Would
the same approach be used for the rate and the efficiency variances?
The variances would be pro-rated in proportion to the standard-cost dollar amounts of
current period’s direct labor in the ending balances of the work-in-process, finished
goods and cost of sales accounts. The labor rate and efficiency variances would be pro-
rated in the same proportions to these accounts.
To charge indirect labor to overhead, and to recognize the labor rate variance.
To charge WIP with the standard labor cost allowed.
To recognize the labor efficiency variance.
To close the labor variances to cost of goods sold.
(1) Provide journal entries to record (a) the factory payroll and related rate variance; (b) the transfer of indirect labor
to the factory overhead account; (c) the transfer of direct labor cost to work-in-process and the related efficiency
variance; and (d) the closing of the direct labor variances to cost of goods sold.
Journal entries for direct labor Account Dr. Cr. Dr. Payroll suspense Cr. Wages payable, etc.
$ 4,500,000 $ 4,500,000
Dr. Overhead Dr. Labor rate variance Cr. Payroll suspense
$ 750,000 500,000
$ 1,250,000 Dr. Work in process Cr. Payroll suspense
$ 3,400,000 $ 3,400,000
Dr. Payroll suspense Cr. Labor efficiency variance
$ 150,000 $ 150,000
Dr. Cost of goods sold Dr. Labor efficiency variance Cr. Labor rate variance
$ 350,000 $ 150,000
500,000
(1) The firm is considering pro-ration of the direct labor variances among the cost of goods sold
and the ending inventory balances. Explain how the pro-ration would be determined. Would
the same approach be used for the rate and the efficiency variances?
The variances would be pro-rated in proportion to the standard-cost dollar amounts of
current period’s direct labor in the ending balances of the work-in-process, finished
goods and cost of sales accounts. The labor rate and efficiency variances would be pro-
rated in the same proportions to these accounts.
To charge WIP with the standard labor cost allowed.
To recognize the labor efficiency variance.
To close the labor variances to cost of goods sold.
(1) Provide journal entries to record (a) the factory payroll and related rate variance; (b) the transfer of indirect labor
to the factory overhead account; (c) the transfer of direct labor cost to work-in-process and the related efficiency
variance; and (d) the closing of the direct labor variances to cost of goods sold.
Journal entries for direct labor Account Dr. Cr. Dr. Payroll suspense Cr. Wages payable, etc.
$ 4,500,000 $ 4,500,000
Dr. Overhead Dr. Labor rate variance Cr. Payroll suspense
$ 750,000 500,000
$ 1,250,000 Dr. Work in process Cr. Payroll suspense
$ 3,400,000 $ 3,400,000
Dr. Payroll suspense Cr. Labor efficiency variance
$ 150,000 $ 150,000
Dr. Cost of goods sold Dr. Labor efficiency variance Cr. Labor rate variance
$ 350,000 $ 150,000
500,000
(1) The firm is considering pro-ration of the direct labor variances among the cost of goods sold
and the ending inventory balances. Explain how the pro-ration would be determined. Would
the same approach be used for the rate and the efficiency variances?
The variances would be pro-rated in proportion to the standard-cost dollar amounts of
current period’s direct labor in the ending balances of the work-in-process, finished
goods and cost of sales accounts. The labor rate and efficiency variances would be pro-
rated in the same proportions to these accounts.
To recognize the labor efficiency variance.
To close the labor variances to cost of goods sold.
(1) Provide journal entries to record (a) the factory payroll and related rate variance; (b) the transfer of indirect labor
to the factory overhead account; (c) the transfer of direct labor cost to work-in-process and the related efficiency
variance; and (d) the closing of the direct labor variances to cost of goods sold.
Journal entries for direct labor Account Dr. Cr. Dr. Payroll suspense Cr. Wages payable, etc.
$ 4,500,000 $ 4,500,000
Dr. Overhead Dr. Labor rate variance Cr. Payroll suspense
$ 750,000 500,000
$ 1,250,000 Dr. Work in process Cr. Payroll suspense
$ 3,400,000 $ 3,400,000
Dr. Payroll suspense Cr. Labor efficiency variance
$ 150,000 $ 150,000
Dr. Cost of goods sold Dr. Labor efficiency variance Cr. Labor rate variance
$ 350,000 $ 150,000
500,000
(1) The firm is considering pro-ration of the direct labor variances among the cost of goods sold
and the ending inventory balances. Explain how the pro-ration would be determined. Would
the same approach be used for the rate and the efficiency variances?
The variances would be pro-rated in proportion to the standard-cost dollar amounts of
current period’s direct labor in the ending balances of the work-in-process, finished
goods and cost of sales accounts. The labor rate and efficiency variances would be pro-
rated in the same proportions to these accounts.
To close the labor variances to cost of goods sold.
(1) Provide journal entries to record (a) the factory payroll and related rate variance; (b) the transfer of indirect labor
to the factory overhead account; (c) the transfer of direct labor cost to work-in-process and the related efficiency
variance; and (d) the closing of the direct labor variances to cost of goods sold.
Journal entries for direct labor Account Dr. Cr. Dr. Payroll suspense Cr. Wages payable, etc.
$ 4,500,000 $ 4,500,000
Dr. Overhead Dr. Labor rate variance Cr. Payroll suspense
$ 750,000 500,000
$ 1,250,000 Dr. Work in process Cr. Payroll suspense
$ 3,400,000 $ 3,400,000
Dr. Payroll suspense Cr. Labor efficiency variance
$ 150,000 $ 150,000
Dr. Cost of goods sold Dr. Labor efficiency variance Cr. Labor rate variance
$ 350,000 $ 150,000
500,000
(1) The firm is considering pro-ration of the direct labor variances among the cost of goods sold
and the ending inventory balances. Explain how the pro-ration would be determined. Would
the same approach be used for the rate and the efficiency variances?
The variances would be pro-rated in proportion to the standard-cost dollar amounts of
current period’s direct labor in the ending balances of the work-in-process, finished
goods and cost of sales accounts. The labor rate and efficiency variances would be pro-
rated in the same proportions to these accounts.
Handout 11 (c):Variable and Fixed Overhead Variances
Journal Entries
Titanic Company produces a single product with the following standard direct labor cost per unit of output:
Direct labor hours per unit: 4 hrs. Direct labor cost per hour: $25 Direct labor cost per unit: (4 hours x $25) $100
The company assigns overhead costs to production using a predetermined rate based on budgeted direct labor hours. The company has estimated the following flexible overhead budget equation:
TOH = Fixed overhead + variable overhead rate x direct labor hours = $ 4,000,000 + $60 x direct labor hours At the start of last month the company had budgeted monthly output of 40,000 units. During the month, Titanic incurred total overhead costs of $14,500,000. Of this amount, $4,500,000 was incurred for fixed overhead, and $10,000,000 was incurred for variable overhead. The company used 130,000 direct labor hours in order to produce 34,000 units of output. The company had no beginning inventory. Inventories are valued at standard costs of production, and all variances are written-off (closed) to cost of goods sold at the end of the month.
Titanic Company produces a single product with the following standard direct labor cost per unit of output:
Direct labor hours per unit: 4 hrs. Direct labor cost per hour: $25 Direct labor cost per unit: (4 hours x $25) $100
The company assigns overhead costs to production using a predetermined rate based on budgeted direct labor hours. The company has estimated the following flexible overhead budget equation:
TOH = Fixed overhead + variable overhead rate x direct labor hours = $ 4,000,000 + $60 x direct labor hours At the start of last month the company had budgeted monthly output of 40,000 units. During the month, Titanic incurred total overhead costs of $14,500,000. Of this amount, $4,500,000 was incurred for fixed overhead, and $10,000,000 was incurred for variable overhead. The company used 130,000 direct labor hours in order to produce 34,000 units of output. The company had no beginning inventory. Inventories are valued at standard costs of production, and all variances are written-off (closed) to cost of goods sold at the end of the month.
(1) Determine the total flexible budget allowance for overhead costs for the actual number of direct labor hours worked during the
month.
Budgeted TOH = $ 4,000,000 + ($ 60) (130,000 dlh) = $ 11,800,000
(2) Determine the total flexible budget allowance for overhead costs for the allowed number of direct labor hours during the month.
(Note: allowed labor hours are the total standard hours allowed for the actual number of units produced).
Budgeted TOH = $ 4,000,000 + ($ 60) (136,000 dlh) = $ 12,160,000
(3) Determine the company’s predetermined overhead rates for fixed and variable overhead, and the combined (fixed plus variable)
overhead rate.
PFOHR = $ 4,000,000 / 160,000 dlh = $ 25 per dlh
PVOHR = $ 60 per dlh (slope of the flexible budget equation)
PTOHR = $ 85 per dlh ($ 25 + $60)
(1) Determine the total amounts of fixed and variable overheads applied to
production during the month, and the amounts of over- or under-applied fixed
and variable overhead.
Actual fixed overhead $ 4,500,000
Applied fixed overhead $ 3,400,000 ($ 25 x 136,000 dlh)
Under-applied $ 1,100,000
Actual variable overhead $ 10,000,000
Applied variable overhead $ 8,160,000 ( $60 x 136,000 dlh)
Under-applied $ 1,840,000
(1) Determine the variable overhead spending and efficiency variances for the month.
Actual variable overhead $ 10,000,000
Flexible VOH budget at actual dlh $ 7,800,000 ($ 60 x 130,000 dlh)
VOH Spending variance $ 2,200,000 unf
Flexible VOH budget at actual dlh $ 7,800,000 ($ 60 x 130,000 dlh)
Flexible VOH budget at allowed dlh $ 8,160,000 ($ 60 x 136,000 dlh)
VOH Efficiency variance $ 360,000 fav
(2) Determine the fixed overhead spending and volume variances for the month.
Actual fixed overhead $ 4,500,000
Budgeted fixed overhead $ 4,000,000
FOH Spending variance $ 500,000 unf
Budgeted fixed overhead $ 4,000,000
Applied fixed overhead $ 3,400,000 ($ 25 x 136,000 dlh)
FOH Volume variance $ 600,000 under-applied
(1) Assume that the company maintains separate control accounts for fixed and variable overheads, and
provide journal entries to record (a) the actual amounts of overhead incurred; (b) the application of fixed
and variable overheads to work-in-process; (c) the closing of the over-/under-applied overheads to
variance accounts; and (d) the closing of the overhead variances to cost of goods sold.
Journal entries for overhead Account Dr. Cr. Dr. Fixed overhead Dr. Variable overhead Cr. Sundry accounts
$ 4,500,000 $ 10,000,000
$ 14,500,000 Dr. Work in process Cr. Fixed overhead Cr. Variable overhead
$ 11,560,000
$ 3,400,000 $ 8,160,000
Dr. FOH Spending variance Dr. FOH Volume variance Cr. Fixed overhead
$ 500,000 $ 600,000
$ 1,100,000 Dr. VOH Spending variance Cr. VOH efficiency variance Cr. Variable overhead
$ 2,200,000 $ 360,000 $ 1,840,000
Dr. Cost of goods sold Dr. VOH efficiency variance Cr. VOH spending variance Cr. FOH spending variance Cr. FOH volume variance
$ 2,940,000 $ 360,000
$ 2,200,000 $ 500,000 $ 600,000
Record actual amounts of FOH and VOH.
Charge WIP with allowed FOH and VOH.
Record FOH volume and spending variances.
Record VOH spending and efficiency variances
Close all overhead variances to cost of goods sold.
(1) Assume that the company maintains separate control accounts for fixed and variable overheads, and
provide journal entries to record (a) the actual amounts of overhead incurred; (b) the application of fixed
and variable overheads to work-in-process; (c) the closing of the over-/under-applied overheads to
variance accounts; and (d) the closing of the overhead variances to cost of goods sold.
Journal entries for overhead Account Dr. Cr. Dr. Fixed overhead Dr. Variable overhead Cr. Sundry accounts
$ 4,500,000 $ 10,000,000
$ 14,500,000 Dr. Work in process Cr. Fixed overhead Cr. Variable overhead
$ 11,560,000
$ 3,400,000 $ 8,160,000
Dr. FOH Spending variance Dr. FOH Volume variance Cr. Fixed overhead
$ 500,000 $ 600,000
$ 1,100,000 Dr. VOH Spending variance Cr. VOH efficiency variance Cr. Variable overhead
$ 2,200,000 $ 360,000 $ 1,840,000
Dr. Cost of goods sold Dr. VOH efficiency variance Cr. VOH spending variance Cr. FOH spending variance Cr. FOH volume variance
$ 2,940,000 $ 360,000
$ 2,200,000 $ 500,000 $ 600,000
Charge WIP with allowed FOH and VOH.
Record FOH volume and spending variances.
Record VOH spending and efficiency variances
Close all overhead variances to cost of goods sold.
(1) Assume that the company maintains separate control accounts for fixed and variable overheads, and
provide journal entries to record (a) the actual amounts of overhead incurred; (b) the application of fixed
and variable overheads to work-in-process; (c) the closing of the over-/under-applied overheads to
variance accounts; and (d) the closing of the overhead variances to cost of goods sold.
Journal entries for overhead Account Dr. Cr. Dr. Fixed overhead Dr. Variable overhead Cr. Sundry accounts
$ 4,500,000 $ 10,000,000
$ 14,500,000 Dr. Work in process Cr. Fixed overhead Cr. Variable overhead
$ 11,560,000
$ 3,400,000 $ 8,160,000
Dr. FOH Spending variance Dr. FOH Volume variance Cr. Fixed overhead
$ 500,000 $ 600,000
$ 1,100,000 Dr. VOH Spending variance Cr. VOH efficiency variance Cr. Variable overhead
$ 2,200,000 $ 360,000 $ 1,840,000
Dr. Cost of goods sold Dr. VOH efficiency variance Cr. VOH spending variance Cr. FOH spending variance Cr. FOH volume variance
$ 2,940,000 $ 360,000
$ 2,200,000 $ 500,000 $ 600,000
Record FOH volume and spending variances.
Record VOH spending and efficiency variances
Close all overhead variances to cost of goods sold.
(1) Assume that the company maintains separate control accounts for fixed and variable overheads, and
provide journal entries to record (a) the actual amounts of overhead incurred; (b) the application of fixed
and variable overheads to work-in-process; (c) the closing of the over-/under-applied overheads to
variance accounts; and (d) the closing of the overhead variances to cost of goods sold.
Journal entries for overhead Account Dr. Cr. Dr. Fixed overhead Dr. Variable overhead Cr. Sundry accounts
$ 4,500,000 $ 10,000,000
$ 14,500,000 Dr. Work in process Cr. Fixed overhead Cr. Variable overhead
$ 11,560,000
$ 3,400,000 $ 8,160,000
Dr. FOH Spending variance Dr. FOH Volume variance Cr. Fixed overhead
$ 500,000 $ 600,000
$ 1,100,000 Dr. VOH Spending variance Cr. VOH efficiency variance Cr. Variable overhead
$ 2,200,000 $ 360,000 $ 1,840,000
Dr. Cost of goods sold Dr. VOH efficiency variance Cr. VOH spending variance Cr. FOH spending variance Cr. FOH volume variance
$ 2,940,000 $ 360,000
$ 2,200,000 $ 500,000 $ 600,000
Record VOH spending and efficiency variances
Close all overhead variances to cost of goods sold.
(1) Assume that the company maintains separate control accounts for fixed and variable overheads, and
provide journal entries to record (a) the actual amounts of overhead incurred; (b) the application of fixed
and variable overheads to work-in-process; (c) the closing of the over-/under-applied overheads to
variance accounts; and (d) the closing of the overhead variances to cost of goods sold.
Journal entries for overhead Account Dr. Cr. Dr. Fixed overhead Dr. Variable overhead Cr. Sundry accounts
$ 4,500,000 $ 10,000,000
$ 14,500,000 Dr. Work in process Cr. Fixed overhead Cr. Variable overhead
$ 11,560,000
$ 3,400,000 $ 8,160,000
Dr. FOH Spending variance Dr. FOH Volume variance Cr. Fixed overhead
$ 500,000 $ 600,000
$ 1,100,000 Dr. VOH Spending variance Cr. VOH efficiency variance Cr. Variable overhead
$ 2,200,000 $ 360,000 $ 1,840,000
Dr. Cost of goods sold Dr. VOH efficiency variance Cr. VOH spending variance Cr. FOH spending variance Cr. FOH volume variance
$ 2,940,000 $ 360,000
$ 2,200,000 $ 500,000 $ 600,000
Close all overhead variances to cost of goods sold.
(1) Assume that the company maintains separate control accounts for fixed and variable overheads, and
provide journal entries to record (a) the actual amounts of overhead incurred; (b) the application of fixed
and variable overheads to work-in-process; (c) the closing of the over-/under-applied overheads to
variance accounts; and (d) the closing of the overhead variances to cost of goods sold.
Journal entries for overhead Account Dr. Cr. Dr. Fixed overhead Dr. Variable overhead Cr. Sundry accounts
$ 4,500,000 $ 10,000,000
$ 14,500,000 Dr. Work in process Cr. Fixed overhead Cr. Variable overhead
$ 11,560,000
$ 3,400,000 $ 8,160,000
Dr. FOH Spending variance Dr. FOH Volume variance Cr. Fixed overhead
$ 500,000 $ 600,000
$ 1,100,000 Dr. VOH Spending variance Cr. VOH efficiency variance Cr. Variable overhead
$ 2,200,000 $ 360,000 $ 1,840,000
Dr. Cost of goods sold Dr. VOH efficiency variance Cr. VOH spending variance Cr. FOH spending variance Cr. FOH volume variance
$ 2,940,000 $ 360,000
$ 2,200,000 $ 500,000 $ 600,000
(1) The firm is considering pro-ration of the overhead
variances among the cost of goods sold and the
ending inventory balances. Explain how the pro-
ration would be determined. Would the same
approach be used for all four of the overhead
variances?
The variances would be pro-rated in proportion to the standard-cost dollar amounts of the current period’s applied overhead in the ending balances of the work-in-process, finished goods and cost of sales accounts. All four of the overhead variances would be pro-rated in the same proportions to these accounts.
Handout 11 (e):Standard Cost Variances
Multiple choice items
1. Lion Company's direct labor costs for the month of January were as follows:
What was Lion's direct labor efficiency variance? A. $6,450 favorable B. $6,150 favorable C. $6,300 favorable D. $6,000 favorable
1. Lion Company's direct labor costs for the month of January were as follows:
What was Lion's direct labor efficiency variance? A. $6,450 favorable B. $6,150 favorable C. $6,300 favorable D. $6,000 favorable
Total standard cost for 20,000 DLHs is $123,000 or $6.15 per hour. The efficiency variance is 1,000 DLH x $6.15 or $6,150.
2. Information on Rex Co.'s direct material costs for May follows:
For the month of May, what was Rex's direct materials price variance? A. $6,000 favorable B. $2,800 favorable C. $2,800 unfavorable D. $6,000 unfavorable
2. Information on Rex Co.'s direct material costs for May follows:
For the month of May, what was Rex's direct materials price variance? A. $6,000 favorable B. $2,800 favorable C. $2,800 unfavorable D. $6,000 unfavorable
1,000 lbs. were used efficiently,implying a standard cost of $3.00 per lb. The 30,000 lbs. used had a total standard cost of $90,000. This is $6,000 less than the actual cost of $84,000.
3. The standards for direct materials in making a certain product are 20 pounds at $0.75 per pound. During the past period, 56,000 units of product were made and the material quantity variance was $30,000 U. The number of pounds of direct material used during the period amounted to: A. 1,200,000 B. 784,000 C. 1,080,000 D. 1,160,000
3. The standards for direct materials in making a certain product are 20 pounds at $0.75 per pound. During the past period, 56,000 units of product were made and the material quantity variance was $30,000 U. The number of pounds of direct material used during the period amounted to: A. 1,200,000 B. 784,000 C. 1,080,000 D. 1,160,000
The quantity variance implies that 40,000 lbs. were used inefficiently. Production allows a total of 1,120,000 lbs (20 x 56,000). Actual usage is 1,160,000 (1,120,000 + 40,000).
4. Elliott Company makes and sells a single product. Last period the company's labor rate variance was $14,400 U. During the period, the company worked 36,000 actual direct labor-hours at an actual cost of $338,400. The standard labor rate for the product in dollars per hour is: A. $9.00 B. $8.50 C. $8.10 D. $9.40
4. Elliott Company makes and sells a single product. Last period the company's labor rate variance was $14,400 U. During the period, the company worked 36,000 actual direct labor-hours at an actual cost of $338,400. The standard labor rate for the product in dollars per hour is: A. $9.00 B. $8.50 C. $8.10 D. $9.40
The total standard cost for 36,000 DLH is $324,000 ($338,400 - $14,400), or $9 per DLH ($324,000 / 36,000DLH).
5. The following standards for variable manufacturing overhead have been established for a company that makes only one product:
What is the variable overhead spending variance for the month? A. $24,860 U B. $1,200 U C. $1,750 F D. $23,660 U
5. The following standards for variable manufacturing overhead have been established for a company that makes only one product:
What is the variable overhead spending variance for the month? A. $24,860 U B. $1,200 U C. $1,750 F D. $23,660 U
The allowed overhead at 7,000 DLH is $ 80,850 (7,000 x $11.55). This is $ $1,750 above the actual overhead of $79,100.
6. Alapai Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company has provided the following data for the most recent month:
What was the total of the variable overhead spending and fixed overhead budget variances for the month? A. $1,880 unfavorable B. $1,840 favorable C. $2,280 unfavorable D. $3,720 favorable
6. Alapai Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company has provided the following data for the most recent month:
What was the total of the variable overhead spending and fixed overhead budget variances for the month? A. $1,880 unfavorable B. $1,840 favorable C. $2,280 unfavorable D. $3,720 favorable
Variable: Actual is $66,960 and allowed is$67,680 (7,200 x $9.40), so the variance is $720 favorable.Fixed: Actual is $37,000 and budget is $40,000 so the variance is $3,000 favorable.