flexible budgeting and standard costing
TRANSCRIPT
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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Flexible Budgets, StandardCosts, and Variance AnalysisChapter 08
8-2
Variance Analysis Cycle
Conduct nextperiods
operations
Identifyquestions
Receiveexplanations
Takecorrective
actions
Analyzevariances
Prepare standardcost performance
report
Begin
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8-3
Learning Objective 1
Prepare a flexiblebudget.
8-4
Characteristics of Flexible Budgets
Planning budgetsare prepared fora single, plannedlevel of activity.
Performance
evaluation is difficultwhen actual activity
differs from the plannedlevel of activity.
Hmm! Comparingstatic planning budgets
with actual costsis like comparing
apples and oranges.
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Improve performance evaluation.
May be prepared for any activitylevel in the relevant range.
Show costs that should have beenincurred at the actual level ofactivity, enabling apples to applescost comparisons.
Help managers control costs.
Lets look at Larrys Lawn Service.
Characteristics of Flexible Budgets
8-6
Larrys Lawn Service provides lawn care in a plannedcommunity where all lawns are approximately the same size.At the end of May, Larry prepared his June budget based onmowing 500 lawns. Since all of the lawns are similar in size,Larry felt that the number of lawns mowed in a month wouldbe the best way to measure overall activity for his business.
Larrys Budget
Deficiencies of the Static Planning Budget
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Deficiencies of the Static Planning BudgetLarrys Planning Budget
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Deficiencies of the Static Planning BudgetLarrys Actual Results
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Deficiencies of the Static Planning Budget
Larrys Actual Results Compared with the Planning Budget
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Deficiencies of the Static Planning Budget
Larrys Actual Results Compared with the Planning Budget
F = Favorable variance that occurs whenactual costs are less than budgeted costs.
U = Unfavorable variance that occurs when
actual costs are greater than budgeted costs.
F = Favorable variance that occurs when actualrevenue is greater than budgeted revenue.
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Deficiencies of the Static Planning BudgetLarrys Actual Results Compared with the Planning Budget
Since these variances are favorable, hasLarry done a good job controlling costs?
Since these variances are unfavorable, hasLarry done a poor job controlling costs?
8-12
I dont think Ican answer thequestions usinga static budget.
Actual activity is aboveplanned activity.
So, shouldnt the variablecosts be higher if actual
activity is higher?
Deficiencies of the Static Planning Budget
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The relevant question is . . .
How much of the cost variances aredue to higher activity and how muchare due to cost control?
To answer the question,we must
the budget to theactual level of activity.
Deficiencies of the Static Planning Budget
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How a Flexible Budget Works
To a budget, we need to know that:
Total variable costs changein direct proportion tochanges in activity.
Total fixed costs remain
unchanged within therelevant range.
Fixed
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Lets prepare abudget
for Larrys LawnService.
How a Flexible Budget Works
8-16
Preparing a Flexible BudgetLarrys Flexible Budget
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Quick CheckWhat should the total wages and salaries costbe in a flexible budget for 600 lawns?
a. $18,000.
b. $20,000.
c. $23,000.
d. $25,000.
8-18
Quick CheckWhat should be the total wages and salariescost in a flexible budget for 600 lawns?
a. $18,000
b. $20,000.
c. $23,000.
d. $25,000.
Total wages and salaries cost
= $5,000 + ($30 per lawn 600 lawns)
$5,000 + $18,000 = $23,000
What should the total wages and salaries costbe in a flexible budget for 600 lawns?
a. $18,000.
b. $20,000.
c. $23,000.
d. $25,000.
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Learning Objective 2
Prepare a reportshowing revenue andspending variances.
8-20
Revenue and Spending Variances
Flexible budget revenue Actual revenue
The difference is a revenue variance.The difference is a revenue variance.
Flexible budget cost Actual cost
The difference is a spending variance.The difference is a spending variance.
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Now, lets use budgeting
concepts to compute revenue andspending variances for Larrys Lawn
Service.
Revenue and Spending Variances
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Revenue and Spending VariancesLarrys Flexible Budget Compared with the Actual Results
$1,750 favorable$1,750 favorablerevenue variancerevenue variance
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Larrys Flexible Budget Compared with the Actual Results
Revenue and Spending Variances
Spendingvariances
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Learning Objective 3
Prepare a flexible budgetwith more than one cost
driver.
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More than one costdriver may be needed toadequately explain all of
the costs in an organization.
The cost formulas usedto prepare a flexible
budget can be adjustedto recognize multiple
cost drivers.
Flexible Budgets with Multiple Cost
Drivers
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Because of the large unfavorable wages and salaries spendingvariance, Larry decided to add an additional cost driver for
wages and salaries. The variance is due primarily to the numberof hours required for the additional edging and trimming. So
Larry estimates the additional hours and builds those hours intoboth his revenue and expense budget formulas.
Larrys New Budget
Flexible Budgets with Multiple CostDrivers
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Flexible Budgets with Multiple Cost
DriversLarrys Budget Based on More than One Cost Driver
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Standard Costs
Standards are benchmarks or norms formeasuring 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 for
each unit of theinput.
Examples: Firestone, Sears, McDonalds, hospitals,construction, and manufacturing companies.
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Setting Direct Materials Standards
Standard PriceStandard Priceper Unitper Unit
Summarized ina Bill of Materials.
Final, deliveredcost of materials,net of discounts.
Standard QuantityStandard Quantityper Unitper Unit
8-30
Setting Direct Labor Standards
Use time andmotion studies for
each labor operation.
Standard Hoursper Unit
Often a singlerate is used that reflectsthe mix of wages earned.
Standard Rateper Hour
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Setting Variable Manufacturing Overhead
Standards
The rate is thevariable portion of the
predetermined overheadrate.
PriceStandard
The quantity isthe activity in the
allocation base forpredetermined overhead.
QuantityQuantityStandardStandard
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The Standard Cost Card
A standard cost card for one unit ofproduct might look like this:
A A x B
Standard Standard Standard
Quantity Price Cost
Inputs or Hours or Rate per Unit
Direct materials 3.0 lbs. 4.00$ per lb. 12.00$
Direct labor 2.5 hours 14.00 per hour 35.00
Variable mfg. overhead 2.5 hours 3.00 per hour 7.50
Total standard unit cost 54.50$
B
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Using Standards in Flexible Budgets
Standard costs per unit for direct materials, directlabor, and variable manufacturing overhead can beused to compute activity and spending variances.
Spending variances become moreSpending variances become moreuseful by breaking them down intouseful by breaking them down into
quantity and price variances.quantity and price variances.
8-34
A General Model for Variance Analysis
Variance Analysis
Price Variance
Difference betweenDifference betweenactual price andactual price andstandard pricestandard price
Quantity Variance
Difference betweenDifference betweenactual quantity andactual quantity andstandard quantitystandard quantity
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Quantity and Price Standards
Quantity and price standards areQuantity and price standards aredetermined separately for two reasons:determined separately for two reasons:
The purchasing manager is responsible for rawmaterial purchase prices and the production manageris responsible for the quantity of raw material used.
The buying and using activities occur at different times.Raw material purchases may be held in inventory for aperiod of time before being used in production.
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Variance Analysis
Materials price varianceMaterials price varianceLabor rate varianceLabor rate varianceVOH rate varianceVOH rate variance
Materials quantity varianceMaterials quantity varianceLabor efficiency varianceLabor efficiency varianceVOH efficiency varianceVOH efficiency variance
A General Model for Variance Analysis
Quantity Variance Price Variance
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A General Model for Variance Analysis
Quantity Variance(2) (1)
Price Variance(3) (2)
(1)Standard Quantity
Allowed for Actual Output,at Standard Price
(SQ SP)
(2)Actual Quantity
of Input,at Standard Price
(AQ SP)
(3)Actual Quantity
of Input,at Actual Price
(AQ AP)
Spending Variance(3) (1)
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A General Model for Variance Analysis
Actual quantity is the amount of direct materials, directlabor, and variable manufacturing overhead actually used.
Quantity Variance(2) (1)
Price Variance(3) (2)
(1)Standard Quantity
Allowed for Actual Output,at Standard Price
(SQ SP)
(2)Actual Quantity
of Input,at Standard Price
(AQ SP)
(3)Actual Quantity
of Input,at Actual Price
(AQ AP)
Spending Variance(3) (1)
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A General Model for Variance Analysis
Standard quantity is the standard quantity allowedfor the actual output of the period.
Quantity Variance(2) (1)
Price Variance(3) (2)
(1)Standard Quantity
Allowed for Actual Output,at Standard Price
(SQ SP)
(2)Actual Quantity
of Input,at Standard Price
(AQ SP)
(3)Actual Quantity
of Input,at Actual Price
(AQ AP)
Spending Variance(3) (1)
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A General Model for Variance Analysis
Actual price is the amount actuallypaid for the input used.
Quantity Variance(2) (1)
Price Variance(3) (2)
(1)Standard Quantity
Allowed for Actual Output,at Standard Price
(SQ SP)
(2)Actual Quantity
of Input,at Standard Price
(AQ SP)
(3)Actual Quantity
of Input,at Actual Price
(AQ AP)
Spending Variance(3) (1)
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Glacier Peak Outfitters has the following directmaterials 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 andused to make 2,000 parkas. The materials cost a
total of $1,029.
Materials Variances An Example
8-44
200 kgs. 210 kgs. 210 kgs.
$5.00 per kg. $5.00 per kg. $4.90 per kg.
= $1,000 = $1,050 = $1,029
Quantity variance$50 unfavorable
Price variance$21 favorable
Materials Variances Summary
Standard Quantity Actual Quantity Actual Quantity
Standard Price Standard Price Actual Price
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Materials Variances Summary
200 kgs. 210 kgs. 210 kgs.
$5.00 per kg. $5.00 per kg. $4.90 per kg.
= $1,000 = $1,050 = $1,029
Quantity variance$50 unfavorable
Price variance$21 favorable
Standard Quantity Actual Quantity Actual Quantity
Standard Price Standard Price Actual Price
0.1 kg per parka 2,000 parkas= 200 kgs
8-46
Materials Variances Summary
200 kgs. 210 kgs. 210 kgs.
$5.00 per kg. $5.00 per kg. $4.90 per kg.
= $1,000 = $1,050 = $1,029
Quantity variance$50 unfavorable
Price variance$21 favorable
Standard Quantity Actual Quantity Actual Quantity
Standard Price Standard Price Actual Price
$1,029 210 kgs= $4.90 per kg
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Materials Variances:
Using the Factored EquationsMaterials quantity variance
MQV = (AQ SP) (SQ SP)
= SP(AQ SQ)
= $5.00/kg (210 kgs (0.1 kg/parka 2,000 parkas))
= $5.00/kg (210 kgs 200 kgs)
= $5.00/kg (10 kgs) = $50 U
Materials price variance
MPV = (AQ AP) (AQ SP)
= AQ(AP SP)
= 210 kgs ($4.90/kg $5.00/kg)
= 210 kgs ( $0.10/kg) = $21 F
8-48
Materials Price VarianceMaterials Quantity Variance
Production Manager Purchasing Manager
The standard price is used to compute the quantity varianceso that the production manager is not held responsible for
the purchasing managers performance.
Responsibility for MaterialsVariances
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I am not responsible forthis unfavorable materials
quantity variance.
You purchased cheapmaterial, so my peoplehad to use more of it.
Your poor schedulingsometimes requires me torush order materials at a
higher price, causingunfavorable price variances.
Responsibility for Materials Variances
Production Manager Purchasing Manager
8-50
Hanson Inc. has the following direct materialsstandard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 1,700 pounds of materials were
purchased and used to make 1,000 Zippies. Thematerials cost a total of $6,630.
ZippyQuick Check
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ZippyQuick Check
How many pounds of materials should Hansonhave used to make 1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
c. 1,200 pounds.
d. 1,000 pounds.
8-52
ZippyQuick Check
How many pounds of materials should Hansonhave used to make 1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
c. 1,200 pounds.
d. 1,000 pounds. The standard quantity is:1,000 1.5 pounds per Zippy.
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Hansons materials quantity variance (MQV)for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
ZippyQuick Check
8-54
Hansons materials quantity variance (MQV)for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.MQV = SP(AQ - SQ)MQV = $4.00(1,700 lbs - 1,500 lbs)MQV = $800 unfavorable
ZippyQuick Check
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Hansons materials price variance (MPV)for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
ZippyQuick Check
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Hansons materials price variance (MPV)for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable. MPV = AQ(AP - SP)MPV = 1,700 lbs. ($3.90 -4.00)MPV = $170 Favorable
ZippyQuick Check
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1,500 lbs. 1,700 lbs. 1,700 lbs.
$4.00 per lb. $4.00 per lb. $3.90 per lb.
= $6,000 = $ 6,800 = $6,630
Quantity variance$800 unfavorable
Price variance$170 favorable
ZippyQuick Check
Standard Quantity Actual Quantity Actual Quantity
Standard Price Standard Price Actual Price
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1,500 lbs. 1,700 lbs. 1,700 lbs.
$4.00 per lb. $4.00 per lb. $3.90 per lb.
= $6,000 = $ 6,800 = $6,630
Quantity variance$800 unfavorable
Price variance$170 favorable
ZippyQuick Check
Standard Quantity Actual Quantity Actual Quantity
Standard Price Standard Price Actual Price
Recall that the standard quantity for 1,000 Zippiesis 1,000 1.5 pounds per Zippy = 1,500 pounds.
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Learning Objective 5
Compute the direct laborefficiency and rate
variances and explaintheir significance.
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Glacier Peak Outfitters has the following direct laborstandard for its mountain parka.
1.2 standard hours per parka at $10.00 per hour
Last month, employees actually worked 2,500 hoursat a total labor cost of $26,250 to make 2,000
parkas.
Labor Variances An Example
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Efficiency variance$1,000 unfavorable
Rate variance$1,250 unfavorable
Standard Hours Actual Hours Actual Hours
Standard Rate Standard Rate Actual Rate
Labor Variances Summary
2,400 hours 2,500 hours 2,500 hours
$10.00 per hour $10.00 per hour $10.50 per hour
= $24,000 = $25,000 = $26,250
8-62
Labor Variances Summary
Efficiency variance$1,000 unfavorable
Rate variance$1,250 unfavorable
Standard Hours Actual Hours Actual Hours
Standard Rate Standard Rate Actual Rate
2,400 hours 2,500 hours 2,500 hours
$10.00 per hour $10.00 per hour $10.50 per hour
= $24,000 = $25,000 = $26,250
1.2 hours per parka 2,000parkas = 2,400 hours
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Labor Variances Summary
Efficiency variance$1,000 unfavorable
Rate variance$1,250 unfavorable
Standard Hours Actual Hours Actual Hours
Standard Rate Standard Rate Actual Rate
2,400 hours 2,500 hours 2,500 hours
$10.00 per hour $10.00 per hour $10.50 per hour
= $24,000 = $25,000 = $26,250
$26,250 2,500 hours= $10.50 per hour
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Labor Variances: Using the FactoredEquationsLabor efficiency variance
LEV = (AH SR) (SH SR)
= SR (AH SH)
= $10.00 per hour (2,500 hours 2,400 hours)
= $10.00 per hour (100 hours)
= $1,000 unfavorable
Labor rate variance
LRV = (AH
AR) (AH
SR)= AH (AR SR)
= 2,500 hours ($10.50 per hour $10.00 per hour)
= 2,500 hours ($0.50 per hour)
= $1,250 unfavorable
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Responsibility for Labor Variances
Production Manager
Production managers areusually held accountable
for labor variancesbecause they can
influence the:
Mix of skill levelsassigned to work tasks.
Level of employeemotivation.
Quality of productionsupervision.
Quality of trainingprovided to employees.
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I am not responsible forthe unfavorable laborefficiency variance!
You purchased cheapmaterial, so it took more
time to process it.
I think it took more timeto process the
materials because theMaintenance
Department has poorlymaintained your
equipment.
Responsibility for Labor Variances
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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 wereworked at a total labor cost of $18,910
to make 1,000 Zippies.
ZippyQuick Check
8-68
Hansons labor efficiency variance (LEV)for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
ZippyQuick Check
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Hansons labor efficiency variance (LEV)for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
LEV = SR(AH - SH)LEV = $12.00(1,550 hrs - 1,500 hrs)LEV = $600 unfavorable
ZippyQuick Check
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Hansons labor rate variance (LRV) for theweek was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
ZippyQuick Check
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Hansons labor rate variance (LRV) for theweek was:
a. $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 unfavorable
ZippyQuick Check
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Efficiency variance$600 unfavorable
Rate variance$310 unfavorable
1,500 hours 1,550 hours 1,550 hours
$12.00 per hour $12.00 per hour $12.20 per hour
= $18,000 = $18,600 = $18,910
ZippyQuick Check
Standard Hours Actual Hours Actual Hours
Standard Rate Standard Rate Actual Rate
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Learning Objective 6
Compute the variablemanufacturing overhead
efficiency and ratevariances and explain
their significance.
8-74
Glacier Peak Outfitters has the following directvariable manufacturing overhead labor standard for
its mountain parka.
1.2 standard hours per parka at $4.00 per hour
Last month, employees actually worked 2,500 hours
to make 2,000 parkas. Actual variablemanufacturing overhead for the month was$10,500.
Variable Manufacturing OverheadVariances An Example
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2,400 hours 2,500 hours 2,500 hours
$4.00 per hour $4.00 per hour $4.20 per hour
= $9,600 = $10,000 = $10,500
Efficiency variance$400 unfavorable
Rate variance$500 unfavorable
Variable Manufacturing Overhead
Variances SummaryStandard Hours Actual Hours Actual Hours
Standard Rate Standard Rate Actual Rate
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Variable Manufacturing OverheadVariances Summary
2,400 hours 2,500 hours 2,500 hours
$4.00 per hour $4.00 per hour $4.20 per hour
= $9,600 = $10,000 = $10,500
Efficiency variance$400 unfavorable
Rate variance$500 unfavorable
Standard Hours Actual Hours Actual Hours
Standard Rate Standard Rate Actual Rate
1.2 hours per parka 2,000parkas = 2,400 hours
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Variable Manufacturing Overhead
Variances Summary
2,400 hours 2,500 hours 2,500 hours
$4.00 per hour $4.00 per hour $4.20 per hour
= $9,600 = $10,000 = $10,500
Efficiency variance$400 unfavorable
Rate variance$500 unfavorable
Standard Hours Actual Hours Actual Hours
Standard Rate Standard Rate Actual Rate
$10,500 2,500 hours= $4.20 per hour
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Variable Manufacturing OverheadVariances: Using Factored EquationsVariable manufacturing overhead efficiency variance
VMEV = (AH SR) (SH SR)
= SR (AH SH)
= $4.00 per hour (2,500 hours 2,400 hours)
= $4.00 per hour (100 hours)
= $400 unfavorable
Variable manufacturing overhead rate variance
VMRV = (AH AR) (AH SR)= AH (AR SR)
= 2,500 hours ($4.20 per hour $4.00 per hour)
= 2,500 hours ($0.20 per hour)
= $500 unfavorable
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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 make
1,000 Zippies, and $5,115 was spent forvariable manufacturing overhead.
ZippyQuick Check
8-80
Hansons efficiency variance (VMEV) forvariable manufacturing overhead for the weekwas:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.d. $150 favorable.
ZippyQuick Check
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Hansons efficiency variance (VMEV) forvariable manufacturing overhead for the weekwas:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.
d. $150 favorable.VMEV = SR(AH - SH)VMEV = $3.00(1,550 hrs - 1,500 hrs)VMEV = $150 unfavorable
1,000 units 1.5 hrs per unit
ZippyQuick Check
8-82
Hansons rate variance (VMRV) for variablemanufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.
ZippyQuick Check
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Hansons rate variance (VMRV) for variablemanufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.
VMRV = AH(AR - SR)VMRV = 1,550 hrs($3.30 - $3.00)VMRV = $465 unfavorable
ZippyQuick Check
8-84
Efficiency variance$150 unfavorable
Rate variance$465 unfavorable
1,500 hours 1,550 hours 1,550 hours
$3.00 per hour $3.00 per hour $3.30 per hour
= $4,500 = $4,650 = $5,115
ZippyQuick Check
Standard Hours Actual Hours Actual Hours
Standard Rate Standard Rate Actual Rate
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Materials VariancesAn Important
Subtlety
The quantity varianceis computed only on
the quantity used.
The price variance iscomputed on the entire
quantity purchased.
8-86
Glacier Peak Outfitters has the following directmaterials standard for the fiberfill in its mountain
parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.
Last month 210 kgs. of fiberfill were purchased at a
cost of $1,029. Glacier used 200 kgs. to make2,000 parkas.
Materials VariancesAn ImportantSubtlety
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200 kgs. 200 kgs.
$5.00 per kg. $5.00 per kg.
= $1,000 = $1,000
Quantity variance$0
Standard Quantity Actual Quantity
Standard Price Standard Price
Materials VariancesAn Important
Subtlety
8-88
210 kgs. 210 kgs.
$5.00 per kg. $4.90 per kg.
= $1,050 = $1,029
Price variance$21 favorable
Actual Quantity Actual Quantity
Standard Price Actual Price
Materials VariancesAn ImportantSubtlety
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Variance Analysis and Management by
Exception
How do I know
which variances toinvestigate?
Larger variances, indollar amount or as
a percentage of thestandard, are
investigated first.
8-90
Advantages of Standard Costs
Management byexception
Advantages
Promotes economyand efficiency
Simplifiedbookkeeping
Enhancesresponsibility
accounting
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PotentialProblems
Emphasis onnegative may
impact morale.
Emphasizing standardsmay exclude other
important objectives.
Favorablevariances may
be misinterpreted.
Continuousimprovement 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
PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
PREDETERMINED OVERHEADRATES AND OVERHEAD
ANALYSIS IN A STANDARDCOSTING SYSTEM
Appendix 8A
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Learning Objective 7
(Appendix 8A)
Compute and interpretthe fixed overheadvolume and budget
variances.
8-94
Volumevariance
Fixed Overhead Volume VarianceFixed
OverheadApplied
ActualFixed
Overhead
BudgetedFixed
Overhead
Volumevariance
Fixedoverheadapplied to
work in process
Budgetedfixed
overhead=
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8-95
FPOHR = Fixed portion of the predetermined overhead rateDH = Denominator hoursSH = Standard hours allowed for actual output
SH FR DH FR
Fixed Overhead Volume Variance
Volume variance FPOHR (DH SH)=
FixedOverheadApplied
ActualFixed
Overhead
BudgetedFixed
Overhead
Volumevariance
8-96
Budgetvariance
Fixed Overhead Budget Variance
Budgetvariance
Budgetedfixed
overhead
Actualfixed
overhead=
FixedOverheadApplied
ActualFixed
Overhead
BudgetedFixed
Overhead
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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 Data
ColaCo
8-98
Computing Fixed Overhead Variances
Budgeted variable manufacturing overhead 90,000$
Budgeted fixed manufacturing overhead 270,000Total budgeted manufacturing overhead 360,000$
Actual variable manufacturing overhead 100,000$
Actual fixed manufacturing overhead 280,000Total actual manufacturing overhead 380,000$
ColaCo
Cost Data
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Predetermined Overhead Rates
Predeterminedoverhead rate
Estimated total manufacturing overhead costEstimated total amount of the allocation base
=
Predeterminedoverhead rate
$360,00090,000 Machine-hours
=
Predetermined
overhead rate
= $4.00 per machine-hour
8-100
Predetermined Overhead Rates
Variable component of thepredetermined overhead rate
$90,00090,000 Machine-hours
=
Variable component of thepredetermined overhead rate
= $1.00 per machine-hour
Fixed component of the
predetermined overhead rate
$270,000
90,000 Machine-hours=
Fixed component of thepredetermined overhead rate
= $3.00 per machine-hour
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Applying Manufacturing Overhead
Overheadapplied
Predeterminedoverhead rate
Standard hours allowedfor the actual output
=
Overheadapplied
$4.00 permachine-hour
84,000 machine-hours=
Overheadapplied
$336,000=
8-102
Computing the Volume Variance
Volumevariance
Fixedoverheadapplied to
work in process
Budgetedfixed
overhead=
Volumevariance
= $18,000 Unfavorable
Volume
variance
= $270,000$3.00 per
machine-hour
( $84,000machine-hours
)
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Computing the Volume Variance
FPOHR = Fixed portion of the predetermined overhead rateDH = Denominator hoursSH = Standard hours allowed for actual output
Volume variance FPOHR (DH SH)=
Volumevariance
=$3.00 per
machine-hour (90,000
mach-hours
84,000mach-hours)
Volumevariance
= 18,000 Unfavorable
8-104
Computing the Budget Variance
Budgetvariance
Budgetedfixed
overhead
Actualfixed
overhead=
Budgetvariance
= $280,000 $270,000
Budgetvariance
= $10,000 Unfavorable
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A Pictorial View of the Variances
Fixed OverheadApplied to
Work in Process
ActualFixed
Overhead
BudgetedFixed
Overhead
280,000270,000252,000
Total variance, $28,000 unfavorable
Budget variance,$10,000 unfavorable
Volume variance,$18,000 unfavorable
8-106
Fixed Overhead Variances A Graphic Approach
Lets look at agraph showingfixed overhead
variances. We willuse ColaCos
numbers from theprevious example.
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Graphic Analysis of Fixed
Overhead Variances
Machine-hours (000)
Budget$270,000
90
Denominatorhours
00
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Graphic Analysis of FixedOverhead VariancesActual
$280,000
Machine-hours (000)
Budget$270,000
90
Denominatorhours
00
Budget Variance 10,000 U{
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Applied$252,000
Machine-hours (000)
Budget$270,000
Graphic Analysis of Fixed
Overhead Variances
908400
Standardhours
Denominatorhours
Budget Variance 10,000 U
Volume Variance 18,000 U
{{
Actual$280,000
8-110
Reconciling Overhead Variances andUnderapplied or Overapplied Overhead
In a standardIn a standardcost system:cost system:
Unfavorablevariances are equivalent
to underapplied overhead.
Favorablevariances are equivalentto overapplied overhead.
The sum of the overhead variancesequals the under- or overapplied
overhead cost for the period.
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Predetermined overhead rate (a) 4.00$ 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 Overhead
ColaCo
Reconciling Overhead Variances and
Underapplied or Overapplied Overhead
8-112
Computing the Variable OverheadVariances
Variable manufacturing overhead efficiency varianceVMEV = (AH SR) (SH SR)
= $88,000 (84,000 hours $1.00 per hour)= $4,000 unfavorable
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Computing the Variable Overhead
Variances
Variable manufacturing overhead rate varianceVMRV = (AH AR) (AH SR)
= $100,000 (88,000 hours $1.00 per hour)= $12,000 unfavorable
8-114
Computing the Sum of All Variances
Variable overhead rate variance 12,000$ 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 variances
ColaCo
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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
GENERAL LEDGER ENTRIES TORECORD VARIANCES
Appendix 8B
8-116
Learning Objective 8
(Appendix 8B)
Prepare journal entriesto record standard
costs and variances.
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Glacier Peak Outfitters RevisitedWe will use information from the Glacier Peak Outfitters
example presented earlier in the chapter to illustrate journalentries for standard cost variances. Recall the following:
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
Now, lets prepare the entries to recordthe labor and material variances.
8-118
GENERAL JOURNAL Page 4
Date Description
Post.
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 Materials Variances
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GENERAL JOURNAL Page 4
Date Description
Post.
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 Labor Variances
8-120
Cost Flows in a Standard Cost System
Inventories are recorded at standard cost.
Variances are recorded as follows:
Favorable variances are credits, representingsavings in production costs.
Unfavorable variances are debits, representingexcess production costs.
Standard cost variances are usually closed outto cost of goods sold.
Unfavorable variances increase cost of goods sold.
Favorable variances decrease cost of goods sold.
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End of Chapter 08