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Standard Costs and OperatingStandard Costs and Operating Performance Measures
Chapter 11
© 2010 The McGraw-Hill Companies, Inc.
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Standard CostsStandard Costs
Standards are benchmarks or “norms” formeasuring performance. In managerial accounting,
two types of standards are commonly used.yp y
Quantity standards Price standardsQ yspecify how much of aninput should be used to
Price standardsspecify how muchshould be paid for
make a product orprovide a service.
each unit of theinput.
Examples: Firestone, Sears, McDonald’s, hospitals, i d f i i
McGraw‐Hill/Irwin Slide 2
construction and manufacturing companies.
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Standard CostsStandard CostsDeviations from standards deemed significantare brought to the attention of management, apractice known as management by exception.
Standard
Directmou
nt Standard
MaterialAm
DirectLabor
ManufacturingOverhead
T f P d t C t
McGraw‐Hill/Irwin Slide 3
Type of Product Cost
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Variance Analysis CycleVariance Analysis Cycle
Identifyquestions
Receive explanations
Takecorrective
actionsactions
Analyze Conduct next
period’svariances
period s operations
Prepare standard Prepare standard cost performance cost performance
reportreport
Begin
McGraw‐Hill/Irwin Slide 4
reportreport
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Setting Standard Costs
Accountants engineers purchasing
Setting Standard Costs
Accountants, engineers, purchasingagents, and production managers
bi ff t t t t d d th tcombine efforts to set standards that encourage efficient future operations.
McGraw‐Hill/Irwin Slide 5
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Setting Standard CostsSetting Standard CostsShould we use I recommend using practical
ideal standards that require employees towork at 100 percent
standards that are currently attainable with reasonable
and efficient effortwork at 100 percentpeak efficiency?
and efficient effort.
E i
McGraw‐Hill/Irwin Slide 6
Engineer Managerial Accountant
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Learning Objective 1Learning Objective 1
E l i h di i l E l i h di i l Explain how direct materials Explain how direct materials standards and direct laborstandards and direct labor
standards are set.standards are set.
McGraw‐Hill/Irwin Slide 7
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Setting Direct Material StandardsSetting Direct Material Standards
PriceStandards
QuantityStandards
Summarized in a Bill of Materials.
Final, deliveredcost of materials, a Bill of Materials.,net of discounts.
McGraw‐Hill/Irwin Slide 8
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Setting StandardsSetting Standards
Six Sigma advocates have sought toeliminate all defects and waste, rather than
continually build them into standards.
As a result allowances for waste andspoilage that are built into standards
should be reduced over time.
McGraw‐Hill/Irwin Slide 9
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Setting Direct Labor StandardsSetting Direct Labor Standards
RateStandards
TimeStandards
Often a singlerate is used that reflects
Use time and motion studies for
the mix of wages earned. each labor operation.
McGraw‐Hill/Irwin Slide 10
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Setting Variable Manufacturing Overhead StandardsStandards
RateStandards
QuantityStandards
The rate is the variable portion of the
The quantity is the activity in the
predetermined overheadrate.
allocation base for predetermined overhead.
McGraw‐Hill/Irwin Slide 11
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Standard Cost Card – Variable Production CostCost
f fA standard cost card for one unit of product might look like this:product might look like this:
A A x BBA A x BStandard Standard StandardQuantity Price Cost
B
Inputs or Hours or Rate per Unit
Direct materials 3.0 lbs. 4.00$ per lb. 12.00$ $ p $Direct labor 2.5 hours 14.00 per hour 35.00 Variable mfg. overhead 2.5 hours 3.00 per hour 7.50
Total standard unit cost 54 50$
McGraw‐Hill/Irwin Slide 12
Total standard unit cost 54.50$
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Price and Quantity StandardsPrice and Quantity Standards
P i d i d dPrice and quantity standards are determined separately for two reasons:
Th h i i ibl fThe purchasing manager is responsible for rawmaterial purchase prices and the production manageris responsible for the quantity of raw material usedis 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
McGraw‐Hill/Irwin Slide 13
period of time before being used in production.
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A General Model for Variance AnalysisA General Model for Variance Analysis
Variance Analysis
Price Variance Quantity Variance
Difference betweenDifference between Difference betweenDifference betweenDifference betweenDifference betweenactual price and actual price and standard pricestandard price
Difference betweenDifference betweenactual quantity andactual quantity andstandard quantitystandard quantity
McGraw‐Hill/Irwin Slide 14
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A General Model for Variance AnalysisA General Model for Variance Analysis
Variance Analysis
Price Variance Quantity Variance
Materials price variance Materials quantity varianceMaterials price varianceLabor rate varianceVOH rate variance
Materials quantity varianceLabor efficiency varianceVOH efficiency variance
McGraw‐Hill/Irwin Slide 15
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A General Model for Variance AnalysisA General Model for Variance Analysis
Actual Quantity Actual Quantity Standard Quantity× × ×
Actual Price Standard Price Standard Price
Price Variance Quantity Variance
McGraw‐Hill/Irwin Slide 16
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A General Model for Variance AnalysisA General Model for Variance Analysis
Actual Quantity Actual Quantity Standard Quantity× × ×
Actual Price Standard Price Standard Price
Price Variance Quantity Variance
Actual quantity is the amount of direct materials, direct labor, and variable
manufacturing overhead actually used.
McGraw‐Hill/Irwin Slide 17
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A General Model for Variance AnalysisA 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 standard quantity allowed for the actual output of the period.
McGraw‐Hill/Irwin Slide 18
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A General Model for Variance AnalysisA General Model for Variance Analysis
Actual Quantity Actual Quantity Standard Quantity× × ×
Actual Price Standard Price Standard Price
Price Variance Quantity Variance
Actual price is the amount actuallypaid for the input used.
McGraw‐Hill/Irwin Slide 19
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A General Model for Variance AnalysisA 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 input used.
McGraw‐Hill/Irwin Slide 20
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A General Model for Variance AnalysisA General Model for Variance Analysis
Actual Quantity Actual Quantity Standard Quantity× × ×
Actual Price Standard Price Standard Price
Price Variance Quantity Variance
(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)
AQ = Actual Quantity SP = Standard PriceAP = Actual Price SQ = Standard Quantity
McGraw‐Hill/Irwin Slide 21
AP Actual Price SQ Standard Quantity
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Learning Objective 2Learning Objective 2
C h di C h di Compute the direct Compute the direct materials price and quantity materials price and quantity p q yp q yvariances and explain their variances and explain their
significancesignificancesignificance.significance.
McGraw‐Hill/Irwin Slide 22
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Material Variances An ExampleMaterial Variances – An Example
Glacier Peak Outfitters has the following direct material standard for the fiberfill in its mountainmaterial standard for the fiberfill in its mountain
parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.
L t th 210 k f fib fill h d dLast month 210 kgs. of fiberfill were purchased and used to make 2,000 parkas. The material cost a
t t l f $1 029total of $1,029.
McGraw‐Hill/Irwin Slide 23
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Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity
Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity× × ×
Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.× × ×
$ $ $$4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000
Price variance$21 favorable
Quantity variance$50 unfavorable
McGraw‐Hill/Irwin Slide 24
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Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity
Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity× × ×
Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.× × ×
$ $ $$1,029 ÷ 210 kgs
$4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000
, g= $4.90 per kg
Price variance$21 favorable
Quantity variance$50 unfavorable
McGraw‐Hill/Irwin Slide 25
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Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity
Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity× × ×
Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.× × ×
$ $ $0.1 kg per parka × 2,000 parkas
$4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000
g p p , p= 200 kgs
Price variance$21 favorable
Quantity variance$50 unfavorable
McGraw‐Hill/Irwin Slide 26
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Material Variances:Using the Factored EquationsUsing the Factored Equations
M t i l i iMaterials price varianceMPV = AQ (AP - SP)
= 210 kgs ($4 90/kg $5 00/kg)= 210 kgs ($4.90/kg - $5.00/kg)= 210 kgs (-$0.10/kg)= $21 F= $21 F
Materials quantity varianceMQV = SP (AQ - SQ)MQV = 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 (210 kgs 200 kgs)= $5.00/kg (10 kgs) = $50 U
McGraw‐Hill/Irwin Slide 27
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Isolation of Material VariancesIsolation of Material VariancesI need the price variance I’ll start computing
sooner so that I can betteridentify purchasing problems.
Y t t j t d ’t
the price variancewhen material is
purchased ratherYou accountants just don’tunderstand the problems thatpurchasing managers have.
purchased rather than when it’s used.
p g g
McGraw‐Hill/Irwin Slide 28
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Material VariancesMaterial Variances
Hanson purchased and The price variance is computed on the entireused 1,700 pounds.
How are the variances computed if the amount
computed on the entire quantity purchased.
The quantity variancecomputed if the amount purchased differs from
the amount used?
The quantity variance is computed only on
the quantity used.
McGraw‐Hill/Irwin Slide 29
q y
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Responsibility for Material VariancesResponsibility for Material Variances
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
McGraw‐Hill/Irwin Slide 30
the purchasing manager s performance.
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Responsibility for Material Variances
Y h d li
Responsibility for Material Variances
I am not responsible forthis unfavorable material
Your poor scheduling sometimes requires me to
rush order material at a quantity variance.
You purchased cheaphigher price, causing
unfavorable price variances. material, so my peoplehad to use more of it.
McGraw‐Hill/Irwin Slide 31
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ZippyQuick CheckQuick Check
Hanson Inc. has the following direct material standard to manufacture one Zippy: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 Thepurchased and used to make 1,000 Zippies. The
material cost a total of $6,630.
McGraw‐Hill/Irwin Slide 32
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Quick CheckZippy
Quick Check
Hanson’s material price variance (MPV)for the week was:a. $170 unfavorable.b. $170 favorable.c $800 unfavorablec. $800 unfavorable.d. $800 favorable.
McGraw‐Hill/Irwin Slide 33
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Quick CheckZippy
Quick Check
Hanson’s material price variance (MPV)for the week was:a. $170 unfavorable.b. $170 favorable.c $800 unfavorablec. $800 unfavorable.d. $800 favorable.MPV = AQ(AP - SP)
MPV = 1,700 lbs. × ($3.90 - 4.00), ( )MPV = $170 Favorable
McGraw‐Hill/Irwin Slide 34
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Quick CheckZippy
Quick Check
Hanson’s material quantity variance (MQV)Hanson s material quantity variance (MQV)for the week was:a $170 unfavorablea. $170 unfavorable.b. $170 favorable.c. $800 unfavorable.d. $800 favorable.
McGraw‐Hill/Irwin Slide 35
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Quick CheckZippy
Quick Check
Hanson’s material quantity variance (MQV)Hanson s material quantity variance (MQV)for the week was:a $170 unfavorablea. $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 nfa orable
McGraw‐Hill/Irwin Slide 36
MQV = $800 unfavorable
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ZippyQuick CheckQuick Check
Actual Quantity Actual Quantity Standard Quantity× × ×
1,700 lbs. 1,700 lbs. 1,500 lbs.
Actual Price Standard Price Standard Price
, , ,× × ×
$3.90 per lb. $4.00 per lb. $4.00 per lb.
= $6,630 = $ 6,800 = $6,000
Price variance$170 f bl
Quantity variance$800 f bl
McGraw‐Hill/Irwin Slide 37
$170 favorable $800 unfavorable
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ZippyQuick Check ContinuedQuick Check Continued
Hanson Inc. has the following material standard to man fact re one Zippmanufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound1.5 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.
McGraw‐Hill/Irwin Slide 38
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ZippyQuick Check Continued
A t l Q tit A t l Q tit
Quick Check Continued
Actual Quantity Actual QuantityPurchased Purchased
× ×A l P i S d d P iActual Price Standard Price
2,800 lbs. 2,800 lbs. , ,× ×
$3.90 per lb. $4.00 per lb.
= $10,920 = $11,200
Price variance$280 f bl
Price variance increases because quantity
McGraw‐Hill/Irwin Slide 39
$280 favorable purchased increases.
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ZippyQuick Check Continued
A t l Q tit
Quick Check Continued
Actual QuantityUsed Standard Quantity
× ×S d d P i S d d P iStandard Price Standard Price
1,700 lbs. 1,500 lbs., ,× ×
$4.00 per lb. $4.00 per lb.
= $6,800 = $6,000 Quantity variance is
Quantity variance$800 f bl
Qua y a a ce sunchanged because actual and standard
McGraw‐Hill/Irwin Slide 40
$800 unfavorablequantities are unchanged.
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Learning Objective 3Learning Objective 3
C h di l b C h di l b Compute the direct labor Compute the direct labor rate and efficiency variances rate and efficiency variances yy
and explainand explaintheir significance their significance their significance. their significance.
McGraw‐Hill/Irwin Slide 41
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Labor Variances An ExampleLabor Variances – An Example
Glacier Peak Outfitters has the following direct labor standard for its mountain parkastandard for its mountain parka.
1.2 standard hours per parka at $10.00 per hour
Last month, employees actually worked 2,500 hours t t t l l b t f $26 250 t k 2 000at a total labor cost of $26,250 to make 2,000
parkas.
McGraw‐Hill/Irwin Slide 42
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Labor Variances Summary
Actual Hours Actual Hours Standard Hours
Labor Variances Summary
Actual Hours Actual Hours Standard Hours× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours× × ×
$ $ $$10.50 per hour $10.00 per hour. $10.00 per hour
= $26,250 = $25,000 = $24,000
Rate variance$1,250 unfavorable
Efficiency variance$1,000 unfavorable
McGraw‐Hill/Irwin Slide 43
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Labor Variances SummaryLabor Variances Summary
Actual Hours Actual Hours Standard HoursActual Hours Actual Hours Standard Hours× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours× × ×
$ $ $$26,250 ÷ 2,500 hours
$10.50 per hour $10.00 per hour. $10.00 per hour
= $26,250 = $25,000 = $24,000
, ,= $10.50 per hour
Rate variance$1,250 unfavorable
Efficiency variance$1,000 unfavorable
McGraw‐Hill/Irwin Slide 44
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Labor Variances SummaryLabor Variances Summary
Actual Hours Actual Hours Standard HoursActual Hours Actual Hours Standard Hours× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours× × ×
$ $ $1.2 hours per parka × 2,000
$10.50 per hour $10.00 per hour. $10.00 per hour
= $26,250 = $25,000 = $24,000
p p ,parkas = 2,400 hours
Rate variance$1,250 unfavorable
Efficiency variance$1,000 unfavorable
McGraw‐Hill/Irwin Slide 45
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Labor Variances:Using the Factored EquationsUsing the Factored Equations
L b t iLabor rate varianceLRV = AH (AR - SR)
= 2 500 hours ($10 50 per hour $10 00 per hour)= 2,500 hours ($10.50 per hour – $10.00 per hour)= 2,500 hours ($0.50 per hour)= $1 250 unfavorable= $1,250 unfavorable
Labor efficiency varianceLEV = SR (AH - SH)LEV = SR (AH - SH)
= $10.00 per hour (2,500 hours – 2,400 hours)= $10.00 per hour (100 hours) $10.00 per hour (100 hours) = $1,000 unfavorable
McGraw‐Hill/Irwin Slide 46
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Responsibility for Labor VariancesResponsibility for Labor Variances
Production managers areusually held accountable
for labor variances
Mix of skill levelsassigned to work tasks.
for labor variancesbecause they can
influence the: Level of employee ti timotivation.
Quality of productionQuality of production supervision.
Production Manager
Quality of training provided to employees.
McGraw‐Hill/Irwin Slide 47
Production Manager p p y
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Responsibility for Labor Variances
I think it took more time
Responsibility for Labor Variances
I am not responsible forth f bl l b
I think it took more time to process the
materials because the M i tthe unfavorable labor
efficiency variance!You purchased cheap
Maintenance Department has poorly
maintained your You purchased cheapmaterial, so it took more
time to process it.
yequipment.
p
McGraw‐Hill/Irwin Slide 48
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ZippyQuick CheckQuick Check
Hanson Inc. has the following direct laborgstandard to manufacture one Zippy:
1 5 standard hours per Zippy at1.5 standard hours per Zippy at$12.00 per direct labor hour
Last week, 1,550 direct labor hours wereworked at a total labor cost of $18,910
to make 1,000 Zippies.
McGraw‐Hill/Irwin Slide 49
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Quick CheckZippy
Quick Check
Hanson’s labor rate variance (LRV) for theHanson s labor rate variance (LRV) for the week was:a $310 unfavorablea. $310 unfavorable.b. $310 favorable.
$c. $300 unfavorable.d. $300 favorable.
McGraw‐Hill/Irwin Slide 50
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Quick CheckZippy
Quick Check
Hanson’s labor rate variance (LRV) for theHanson s labor rate variance (LRV) for the week was:a $310 unfavorablea. $310 unfavorable.b. $310 favorable.
$c. $300 unfavorable.d. $300 favorable.
LRV = AH(AR - SR)LRV = 1,550 hrs($12.20 - $12.00)LRV = $310 unfavorableLRV = $310 unfavorable
McGraw‐Hill/Irwin Slide 51
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Quick CheckZippy
Quick Check
Hanson’s labor efficiency variance (LEV)for the week was:a. $590 unfavorable.b. $590 favorable.c $600 unfavorablec. $600 unfavorable.d. $600 favorable.
McGraw‐Hill/Irwin Slide 52
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Quick CheckZippy
Quick Check
Hanson’s labor efficiency variance (LEV)for the week was:a. $590 unfavorable.b. $590 favorable.c $600 unfavorablec. $600 unfavorable.d. $600 favorable.
LEV SR(AH SH)LEV = SR(AH - SH)LEV = $12.00(1,550 hrs - 1,500 hrs)LEV = $600 unfavorable
McGraw‐Hill/Irwin Slide 53
LEV $600 unfavorable
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ZippyQuick CheckQuick Check
Actual Hours Actual Hours Standard Hours× × ×
Actual Rate Standard Rate Standard Rate
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
Rate variance$310 f bl
Efficiency variance$600 f bl
McGraw‐Hill/Irwin Slide 54
$310 unfavorable $600 unfavorable
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Learning Objective 4Learning Objective 4
C h i bl C h i bl Compute the variable Compute the variable manufacturing overhead rate manufacturing overhead rate gg
and efficiency variances.and efficiency variances.
McGraw‐Hill/Irwin Slide 55
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Variable Manufacturing Overhead Variances An Example– An Example
Glacier Peak Outfitters has the following direct variable manufacturing overhead labor standard for its mountain g
parka.
1 2 standard hours per parka at $4 00 per hour1.2 standard hours per parka at $4.00 per hour
Last month, employees actually worked 2,500 hours to make 2 000 parkas Actual variable manufacturingmake 2,000 parkas. Actual variable manufacturing
overhead for the month was $10,500.
McGraw‐Hill/Irwin Slide 56
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Variable Manufacturing Overhead Variances Summary
Actual Hours Actual Hours Standard Hours
Summary
Actual Hours Actual Hours Standard Hours× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours× × ×
$ $ $$4.20 per hour $4.00 per hour $4.00 per hour
= $10,500 = $10,000 = $9,600
Rate variance$500 unfavorable
Efficiency variance$400 unfavorable
McGraw‐Hill/Irwin Slide 57
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Variable Manufacturing Overhead Variances Summary
Actual Hours Actual Hours Standard Hours
Summary
Actual Hours Actual Hours Standard Hours× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours× × ×
$ $ $$10,500 ÷ 2,500 hours
$4.20 per hour $4.00 per hour $4.00 per hour
= $10,500 = $10,000 = $9,600
, ,= $4.20 per hour
Rate variance$500 unfavorable
Efficiency variance$400 unfavorable
McGraw‐Hill/Irwin Slide 58
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Variable Manufacturing Overhead Variances Summary
Actual Hours Actual Hours Standard Hours
Summary
Actual Hours Actual Hours Standard Hours× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours× × ×
$ $ $1.2 hours per parka × 2,000
$4.20 per hour $4.00 per hour $4.00 per hour
= $10,500 = $10,000 = $9,600
parkas = 2,400 hours
Rate variance$500 unfavorable
Efficiency variance$400 unfavorable
McGraw‐Hill/Irwin Slide 59
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Variable Manufacturing Overhead Variances: Using Factored EquationsUsing Factored Equations
V i bl f t i h d t iVariable manufacturing overhead rate varianceVMRV = AH (AR - SR)
= 2 500 hours ($4 20 per hour $4 00 per hour)= 2,500 hours ($4.20 per hour – $4.00 per hour)= 2,500 hours ($0.20 per hour)= $500 unfavorable= $500 unfavorable
Variable manufacturing overhead efficiency varianceVMEV = SR (AH - SH)VMEV = SR (AH - SH)
= $4.00 per hour (2,500 hours – 2,400 hours)= $4.00 per hour (100 hours) $4.00 per hour (100 hours) = $400 unfavorable
McGraw‐Hill/Irwin Slide 60
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ZippyQuick CheckQuick Check
Hanson Inc. has the following variablemanufacturing overhead standard tomanufacturing overhead standard to
manufacture one Zippy:
1 d d h Zi1.5 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, pp , $ , p
variable manufacturing overhead.
McGraw‐Hill/Irwin Slide 61
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Quick CheckZippy
Quick Check
Hanson’s rate variance (VMRV) for variable f t i h d f th kmanufacturing overhead for the week was:
a. $465 unfavorable.b. $400 favorable.c $335 unfavorablec. $335 unfavorable.d. $300 favorable.
McGraw‐Hill/Irwin Slide 62
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Quick CheckZippy
Quick Check
Hanson’s rate variance (VMRV) for variable f t i h d f th kmanufacturing overhead for the week was:
a. $465 unfavorable.b. $400 favorable.c $335 unfavorableVMRV = AH(AR - SR)c. $335 unfavorable.d. $300 favorable.
VMRV = 1,550 hrs($3.30 - $3.00)VMRV = $465 unfavorable
McGraw‐Hill/Irwin Slide 63
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Quick CheckZippy
Quick Check
Hanson’s efficiency variance (VMEV) for i bl f t i h d f th kvariable manufacturing overhead for the week
was:a. $435 unfavorable.b. $435 favorable.c. $150 unfavorable.d $150 favorabled. $150 favorable.
McGraw‐Hill/Irwin Slide 64
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Quick CheckZippy
Quick Check
Hanson’s efficiency variance (VMEV) for i bl f t i h d f th kvariable manufacturing overhead for the week
was:a. $435 unfavorable.b. $435 favorable. 1 000 units × 1 5 hrs per unitc. $150 unfavorable.d $150 favorable
1,000 units × 1.5 hrs per unit
d. $150 favorable.VMEV = SR(AH - SH)VMEV = $3.00(1,550 hrs - 1,500 hrs)
McGraw‐Hill/Irwin Slide 65
( )VMEV = $150 unfavorable
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ZippyQuick CheckQuick Check
Actual Hours Actual Hours Standard Hours× × ×
1,550 hours 1,550 hours 1,500 hours
Actual Rate Standard Rate Standard Rate
, , ,× × ×
$3.30 per hour $3.00 per hour $3.00 per hour
= $5,115 = $4,650 = $4,500
Rate variance$465 f bl
Efficiency variance$150 f bl
McGraw‐Hill/Irwin Slide 66
$465 unfavorable $150 unfavorable
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Variance Analysis and Management by ExceptionException
How do I knowLarger variances, in dollar amount or as
which variances to investigate?
a percentage of the standard, are
investigated first
McGraw‐Hill/Irwin Slide 67
investigated first.
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A Statistical Control ChartA Statistical Control Chart
W i i l f i ti ti
•Warning signals for investigation
Favorable Limit
• • • • ••Desired Value
Unfavorable Limit
• • •Desired Value
Unfavorable Limit
•1 2 3 4 5 6 7 8 9
Variance Measurements
McGraw‐Hill/Irwin Slide 68
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Advantages of Standard CostsAdvantages of Standard Costs
Management byexception
Promotes economyand efficiency
Ad tAdvantagesEnhances
Simplifiedbookkeeping
responsibilityaccounting
McGraw‐Hill/Irwin Slide 69
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Potential Problems with Standard Costs
Emphasizing standards Favorable
Potential Problems with Standard Costs
Potential
Emphasizing standardsmay exclude other
important objectives.
Favorablevariances may
be misinterpreted.PotentialProblems
Emphasis onnegative may
impact morale.
Standard costreports may
not be timely. impact morale.
Continuous
not be timely.
Invalid assumptions Continuousimprovement maybe more important
th ti t d d
Invalid assumptionsabout the relationship
between labort d t t
McGraw‐Hill/Irwin Slide 70
than meeting standards.cost and output.
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Learning Objective 5Learning Objective 5
C d li l i C d li l i Compute delivery cycle time, Compute delivery cycle time, throughput time, and throughput time, and g pg pmanufacturing cycle manufacturing cycle
efficiency (MCE)efficiency (MCE)efficiency (MCE).efficiency (MCE).
McGraw‐Hill/Irwin Slide 71
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Delivery Performance MeasuresDelivery Performance Measures
Order P d ti GoodsOrder Received
ProductionStarted
Goods Shipped
Wait TimeProcess Time + Inspection Time
+ Move Time + Queue Time+ Move Time + Queue Time
Throughput Time
Delivery Cycle Time
Throughput Time
Process time is the only value added time
McGraw‐Hill/Irwin Slide 72
Process time is the only value-added time.
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Delivery Performance Measures
Order P d ti Goods
Delivery Performance Measures
Order Received
ProductionStarted
Goods Shipped
Wait TimeProcess Time + Inspection Time
+ Move Time + Queue Time+ Move Time + Queue Time
Throughput Time
Delivery Cycle Time
Throughput Time
ManufacturingCycle
Value-added timeM f i l i=
McGraw‐Hill/Irwin Slide 73
Cyc eEfficiency Manufacturing cycle time
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Quick CheckQuick Check
A TQM team at Narton Corp has recorded theA TQM team at Narton Corp has recorded the following average times for production:
Wait 3.0 days Move 0.5 daysInspection 0.4 days Queue 9.3 daysProcess 0.2 days
What is the throughput time?What is the throughput time? a. 10.4 days.b 0 2 daysb. 0.2 days.c. 4.1 days.d 13 4 days
McGraw‐Hill/Irwin Slide 74
d. 13.4 days.
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Quick Check
A TQM team at Narton Corp has recorded the
Quick Check
A TQM team at Narton Corp has recorded the following average times for production:
Wait 3.0 days Move 0.5 daysInspection 0.4 days Queue 9.3 daysProcess 0.2 days
What is the throughput time?What is the throughput time? a. 10.4 days.b 0 2 daysb. 0.2 days.c. 4.1 days.d 13 4 days
Throughput time = Process + Inspection + Move + Queue= 0.2 days + 0.4 days + 0.5 days + 9.3 days= 10 4 days
McGraw‐Hill/Irwin Slide 75
d. 13.4 days. = 10.4 days
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Quick CheckQuick Check
A TQM team at Narton Corp has recorded theA TQM team at Narton Corp has recorded the following average times for production:
Wait 3.0 days Move 0.5 daysInspection 0.4 days Queue 9.3 daysProcess 0.2 days
What is the Manufacturing Cycle Efficiency (MCE)?What is the Manufacturing Cycle Efficiency (MCE)? a. 50.0%.b 1 9%b. 1.9%.c. 52.0%.d 5 1%
McGraw‐Hill/Irwin Slide 76
d. 5.1%.
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Quick Check
A TQM team at Narton Corp has recorded the
Quick Check
A TQM team at Narton Corp has recorded the following average times for production:
Wait 3.0 days Move 0.5 daysInspection 0.4 days Queue 9.3 daysProcess 0.2 days
What is the Manufacturing Cycle Efficiency (MCE)?What is the Manufacturing Cycle Efficiency (MCE)? a. 50.0%.b 1 9% MCE = Value-added time ÷ Throughput timeb. 1.9%.c. 52.0%.d 5 1%
= Process time ÷ Throughput time= 0.2 days ÷ 10.4 days
McGraw‐Hill/Irwin Slide 77
d. 5.1%. = 1.9%
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Quick CheckQuick Check
A TQM team at Narton Corp has recorded theA TQM team at Narton Corp has recorded the following average times for production:
W it 3 0 d M 0 5 dWait 3.0 days Move 0.5 daysInspection 0.4 days Queue 9.3 daysProcess 0.2 days
What is the delivery cycle time (DCT)? y y ( )a. 0.5 days.b. 0.7 days.b. 0.7 days.c. 13.4 days.d 10 4 days
McGraw‐Hill/Irwin Slide 78
d. 10.4 days.
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Quick Check
A TQM team at Narton Corp has recorded the
Quick Check
A TQM team at Narton Corp has recorded the following average times for production:
W it 3 0 d M 0 5 dWait 3.0 days Move 0.5 daysInspection 0.4 days Queue 9.3 daysProcess 0.2 days
What is the delivery cycle time (DCT)? y y ( )a. 0.5 days.b. 0.7 days.b. 0.7 days.c. 13.4 days.d 10 4 days
DCT = Wait time + Throughput time= 3.0 days + 10.4 days= 13 4 days
McGraw‐Hill/Irwin Slide 79
d. 10.4 days. = 13.4 days
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Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System
Appendix 11A
© 2010 The McGraw-Hill Companies, Inc.
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Learning Objective 6Learning Objective 6
(A di 11A)(A di 11A)(Appendix 11A)(Appendix 11A)
Compute and interpret the Compute and interpret the fixed overhead budget and
volume variances.
McGraw‐Hill/Irwin Slide 81
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Fixed Overhead Budget VarianceFixed Overhead Budget VarianceActual FixedBudgetedFixed
OverheadOverheadApplied
FixedOverhead
Budget ivariance
Budgetvariance
Budgetedfixed
overhead
Actualfixed
overhead= –
McGraw‐Hill/Irwin Slide 82
overheadoverhead
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Fixed Overhead Volume VarianceFixed Overhead Volume VarianceActual FixedBudgetedFixed
OverheadOverheadApplied
FixedOverhead
Volumeivariance
FixedVolumevariance
Fixedoverheadapplied to
Budgetedfixed
overhead= –
McGraw‐Hill/Irwin Slide 83
ppwork in processoverhead
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Fixed Overhead Volume VarianceFixed Overhead Volume VarianceActual FixedBudgetedFixed
OverheadOverheadApplied
FixedOverhead
SH × FRDH × FR
Volumei
Volume variance FPOHR × (DH – SH)=
variance
FPOHR = Fixed portion of the predetermined overhead rateDH = Denominator hours
McGraw‐Hill/Irwin Slide 84
DH = Denominator hoursSH = Standard hours allowed for actual output
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Computing Fixed Overhead VariancesComputing Fixed Overhead Variances
Budgeted production 30 000 unitsProduction and Machine-Hour Data
ColaCo
Budgeted production 30,000 units Standard machine-hours per unit 3 hours Budgeted machine-hours 90,000 hours
Actual production 28 000 units Actual production 28,000 units Standard machine-hours allowed for the actual production 84,000 hours Actual machine-hours 88,000 hours
McGraw‐Hill/Irwin Slide 85
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Computing Fixed Overhead VariancesComputing Fixed Overhead Variances
ColaCoCost Data
Budgeted variable manufacturing overhead 90,000$ Budgeted fixed manufacturing overhead 270,000 Total budgeted manufacturing overhead 360,000$ g g ,$
Actual variable manufacturing overhead 100,000$ A t l fi d f t i h d 280 000 Actual fixed manufacturing overhead 280,000
Total actual manufacturing overhead 380,000$
McGraw‐Hill/Irwin Slide 86
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Predetermined Overhead RatesPredetermined Overhead Rates
Predetermined overhead rate
Estimated total manufacturing overhead costEstimated total amount of the allocation base=
P d t i d $360 000Predetermined overhead rate
$360,00090,000 Machine-hours=
Predetermined overhead rate = $4.00 per machine-houroverhead rate p
McGraw‐Hill/Irwin Slide 87
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Predetermined Overhead RatesPredetermined Overhead Rates
Variable component of the $90 000Variable component of thepredetermined overhead rate
$90,00090,000 Machine-hours=
V i bl f hVariable component of thepredetermined overhead rate = $1.00 per machine-hour
Fixed component of the $270 000Fixed component of thepredetermined overhead rate
$270,00090,000 Machine-hours=
Fixed component of thepredetermined overhead rate = $3.00 per machine-hour
McGraw‐Hill/Irwin Slide 88
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Applying Manufacturing OverheadApplying Manufacturing Overhead
Overheadapplied
Predetermined overhead rate
Standard hours allowedfor the actual output= ×applied overhead rate for the actual output
Overhead $4 00 perOverheadapplied
$4.00 permachine-hour 84,000 machine-hours= ×
Overheadapplied $336,000=
McGraw‐Hill/Irwin Slide 89
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Computing the Budget VarianceComputing the Budget Variance
Budgetvariance
Budgetedfixed
Actualfixed= –variance overheadoverhead
Budgetvariance = $280,000 – $270,000
BudgetBudgetvariance = $10,000 Unfavorable
McGraw‐Hill/Irwin Slide 90
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Computing the Volume VarianceComputing the Volume VarianceFixed
h dBudgetedVolumevariance
overheadapplied to
work in process
Budgetedfixed
overhead= –
work in process
Volumevariance = $270,000 – $3.00 per
machine-hour( × $84,000machine-hours)variance machine-hour( machine-hours)
Volumevariance = $18,000 Unfavorable
McGraw‐Hill/Irwin Slide 91
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Computing the Volume VarianceComputing the Volume Variance
Volume variance FPOHR × (DH – SH)=
FPOHR = Fixed portion of the predetermined overhead rateDH = Denominator hours
Volume variance O ( S )
DH = Denominator hoursSH = Standard hours allowed for actual output
V l $3 00 per ( 90 000 84 000 )Volumevariance
= $3.00 permachine-hour (× 90,000
mach-hours – 84,000mach-hours)
Volumevariance
= 18,000 Unfavorable
McGraw‐Hill/Irwin Slide 92
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A Pictorial View of the VariancesA Pictorial View of the Variances
A t l Fi d O h dB d t dActualFixed
Overhead
Fixed OverheadApplied to
Work in Process
BudgetedFixed
OverheadOverhead Work in Process Overhead252,000270,000280,000
Budget variance,$10,000 unfavorable
Volume variance,$18,000 unfavorable
Total variance, $28,000 unfavorable
McGraw‐Hill/Irwin Slide 93
Total variance, $28,000 unfavorable
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Fixed Overhead Variances –A Graphic ApproachA Graphic Approach
Let’s look at a graph showing fixed overhead
variances. We will use ColaCo’s
numbers from the previous example.
McGraw‐Hill/Irwin Slide 94
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Graphic Analysis of FixedOverhead VariancesOverhead Variances
Budget$270,000
Denominator
90
Denominatorhours
00
McGraw‐Hill/Irwin Slide 95
Machine-hours (000) 900
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Graphic Analysis of FixedOverhead VariancesOverhead Variances
Actual$280 000 {$280,000Budget
$270,000Budget Variance 10,000 U{
Denominator
90
Denominatorhours
00
McGraw‐Hill/Irwin Slide 96
Machine-hours (000) 900
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Graphic Analysis of FixedOverhead Variances
Actual$280 000
Overhead Variances
{$280,000
A li d
Budget$270,000
Budget Variance 10,000 U
Volume Variance 18,000 U
{{Applied
$252,000
Volume Variance 18,000 U{
Standard Denominator
908400
hoursDenominator
hours
McGraw‐Hill/Irwin Slide 97
Machine-hours (000) 90840
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Reconciling Overhead Variances and Underapplied or Overapplied OverheadU de app ed o O e app ed O e ead
In a standardcost system:y
Unfavorable FavorableUnfavorablevariances are equivalent
to underapplied overhead.
Favorablevariances are equivalentto overapplied overhead.
The sum of the overhead variancesequals the under- or overapplied
McGraw‐Hill/Irwin Slide 98
overhead cost for the period.
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Reconciling Overhead Variances and Underapplied or Overapplied OverheadUnderapplied or Overapplied Overhead
Predetermined overhead rate (a) 4.00$ per machine-hourComputation of Underapplied Overhead
ColaCo
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$ g , Manufacturing overhead underapplied or overapplied 44,000$ underapplied
McGraw‐Hill/Irwin Slide 99
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Computing the Variable Overhead VariancesComputing 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
McGraw‐Hill/Irwin Slide 100
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Computing the Variable Overhead VariancesComputing the Variable Overhead Variances
Variable manufacturing overhead efficiency varianceVMEV = (AH × SR) – (SH × SR)
= $88,000 – (84,000 hours × $1.00 per hour)= $4,000 unfavorable
McGraw‐Hill/Irwin Slide 101
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Computing the Sum of All VariancesComputing the Sum of All Variances
ColaCo
Variable overhead rate variance 12 000$ UComputing the Sum of All variances
ColaCo
Variable overhead rate variance 12,000$ U Variable overhead efficiency variance 4,000 U
Fixed overhead budget variance 10 000 U Fixed overhead budget variance 10,000 U Fixed overhead volume variance 18,000 U Total of the overhead variances 44,000$ U,
McGraw‐Hill/Irwin Slide 102
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Journal EntriesJournal Entriesto Record Variances
Appendix 11B
© 2010 The McGraw-Hill Companies, Inc.
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Learning Objective 7Learning Objective 7
(A di 11B)(A di 11B)(Appendix 11B)(Appendix 11B)
Prepare journal entriesPrepare journal entriesPrepare journal entriesPrepare journal entriesto record standardto record standardcosts and variances. costs and variances.
McGraw‐Hill/Irwin Slide 104
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Appendix 11BJournal Entries to Record VariancesJournal Entries to Record Variances
We will use information from the Glacier Peak Outfitterse use o at o o t e G ac e ea Out tte sexample presented earlier in the chapter to illustrate journal
entries for standard cost variances. Recall the following:
Material Labor
AQ × AP = $1,029AQ × SP = $1,050SQ × SP $1 000
AH × AR = $26,250AH × SR = $25,000SH × SR $24 000SQ × SP = $1,000
MPV = $21 FMQV = $50 U
SH × SR = $24,000LRV = $1,250 ULEV = $1,000 UMQV $50 U LEV $1,000 U
Now, let’s prepare the entries to record
McGraw‐Hill/Irwin Slide 105
the labor and material variances.
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Appendix 11BRecording Material VariancesRecording Material Variances
GENERAL JOURNAL Page 4Post.
Date Description Ref. Debit CreditRaw Materials 1,050
Materials Price Variance 21Materials Price Variance 21 Accounts Payable 1,029
To record the purchase of materialp
Work in Process 1,000 Materials Quantity Variance 50 Raw Materials 1,050
McGraw‐Hill/Irwin Slide 106
To record the use of material
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Appendix 11BRecording Labor VariancesRecording Labor Variances
GENERAL JOURNAL Page 4GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Work in Process 24,000 Labor Rate Variance 1,250 L b Effi i V i 1 000Labor Efficiency Variance 1,000
Wages Payable 26,250 To record direct laborTo record direct labor
McGraw‐Hill/Irwin Slide 107
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Cost Flows in a Standard Cost SystemCost 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.g
Unfavorable variances increase cost of goods sold.Favorable variances decrease cost of goods sold.
McGraw‐Hill/Irwin Slide 108
g
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End of Chapter 11End of Chapter 11
McGraw‐Hill/Irwin Slide 109