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PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cyn...
10-2
Standard Costs
Standards are benchmarks or “norms” for
measuring performance. In managerial accounting,
two types of ...
10-3
Setting Direct Materials Standards
Standard PriceStandard Price
per Unitper Unit
Summarized in
a Bill of Materials.
F...
10-4
Setting Direct Labor Standards
Use time and
motion studies for
each labor operation.
Standard HoursStandard Hours
per...
10-5
Setting Variable Manufacturing
Overhead Standards
The rate is the
variable portion of the
predetermined overhead
rate...
10-6
The Standard Cost Card
A standard cost card for one unit
of product might look like this:
A A x B
Standard Standard S...
10-7
Using Standards in Flexible Budgets
Standard costs per unit for direct materials, direct
labor, and variable manufact...
10-8
A General Model for Variance Analysis
Variance Analysis
Quantity Variance
Difference betweenDifference between
actual...
10-9
Price and Quantity Standards
Price and quantity standards arePrice and quantity standards are
determined separately f...
10-10
Variance Analysis
Materials quantity varianceMaterials quantity variance
Labor efficiency varianceLabor efficiency v...
10-11
A General Model for Variance Analysis
Price Variance
(2) – (1)
Quantity Variance
(3) – (2)
(3)
Standard Quantity
All...
10-12
A General Model for Variance Analysis
Actual quantity is the amount of direct materials, direct
labor, and variable ...
10-13
A General Model for Variance Analysis
Standard quantity is the standard quantity allowed
for the actual output of th...
10-14
A General Model for Variance Analysis
Actual price is the amount actually
paid for the input used.
Price Variance
(2...
10-15
A General Model for Variance Analysis
Standard price is the amount that should
have been paid for the input used.
Pr...
10-16
Learning Objective 1
Compute the direct
materials price and
quantity variances and
explain their
significance.
10-17
Glacier Peak Outfitters has the following direct
materials standard for the fiberfill in its mountain
parka.
0.1 kg....
10-18
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...
10-19
Materials Variances Summary
210 kgs. 210 kgs. 200 kgs.
× × ×
$4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1...
10-20
Materials Variances Summary
210 kgs. 210 kgs. 200 kgs.
× × ×
$4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1...
10-21
Materials Variances:
Using the Factored Equations
Materials price variance
MPV = (AQ × AP) – (AQ × SP)
= AQ(AP – SP)...
10-22
Materials Price Variance Materials Quantity Variance
Production ManagerPurchasing Manager
The standard price is used...
10-23
I am not responsible for
this unfavorable materials
quantity variance.
You purchased cheap
material, so my people
ha...
10-24
Hanson Inc. has the following direct materials
standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per ...
10-25
How many pounds of materials should
Hanson have used to make 1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
c. 1,2...
10-26
ZippyQuick Check 
How many pounds of materials should
Hanson have used to make 1,000 Zippies?
a. 1,700 pounds.
b. 1...
10-27
Hanson’s materials quantity variance (MQV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavor...
10-28
Hanson’s materials quantity variance (MQV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavor...
10-29
Hanson’s materials price variance (MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorabl...
10-30
Hanson’s materials price variance (MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorabl...
10-31
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 v...
10-32
ZippyQuick Check 
Recall that the standard quantity for 1,000 Zippies
is 1,000 × 1.5 pounds per Zippy = 1,500 pound...
10-33
Learning Objective 2
Compute the direct labor
rate and efficiency
variances and explain
their significance.
10-34
Glacier Peak Outfitters has the following direct
labor standard for its mountain parka.
1.2 standard hours per parka...
10-35
Rate variance
$1,250 unfavorable
Efficiency variance
$1,000 unfavorable
Actual Hours Actual Hours Standard Hours
× ×...
10-36
Labor Variances Summary
Rate variance
$1,250 unfavorable
Efficiency variance
$1,000 unfavorable
Actual Hours Actual ...
10-37
Labor Variances Summary
Rate variance
$1,250 unfavorable
Efficiency variance
$1,000 unfavorable
Actual Hours Actual ...
10-38
Labor Variances: Using the
Factored Equations
Labor rate variance
LRV = (AH × AR) – (AH × SR)
= AH (AR – SR)
= 2,500...
10-39
Responsibility for Labor Variances
Production Manager
Production managers are
usually held accountable
for labor var...
10-40
I am not responsible for
the unfavorable labor
efficiency variance!
You purchased cheap
material, so it took more
ti...
10-41
Hanson Inc. has the following direct labor
standard to manufacture one Zippy:
1.5 standard hours per Zippy at
$12.00...
10-42
Hanson’s labor rate variance (LRV) for the
week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d....
10-43
Hanson’s labor rate variance (LRV) for the
week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d....
10-44
Hanson’s labor efficiency variance (LEV)
for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorab...
10-45
Hanson’s labor efficiency variance (LEV)
for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorab...
10-46
Rate variance
$310 unfavorable
Efficiency variance
$600 unfavorable
1,550 hours 1,550 hours 1,500 hours
× × ×
$12.20...
10-47
Learning Objective 3
Compute the variable
manufacturing overhead
rate and efficiency
variances and explain
their sig...
10-48
Glacier Peak Outfitters has the following direct
variable manufacturing overhead labor standard
for its mountain par...
10-49
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
...
10-50
Variable Manufacturing Overhead
Variances Summary
2,500 hours 2,500 hours 2,400 hours
× × ×
$4.20 per hour $4.00 per...
10-51
Variable Manufacturing Overhead
Variances Summary
2,500 hours 2,500 hours 2,400 hours
× × ×
$4.20 per hour $4.00 per...
10-52
Variable Manufacturing Overhead
Variances: Using Factored Equations
Variable manufacturing overhead rate variance
VM...
10-53
Hanson Inc. has the following variable
manufacturing overhead standard to
manufacture one Zippy:
1.5 standard hours ...
10-54
Hanson’s rate variance (VMRV) for variable
manufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 fav...
10-55
Hanson’s rate variance (VMRV) for variable
manufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 fav...
10-56
Hanson’s efficiency variance (VMEV) for
variable manufacturing overhead for the week
was:
a. $435 unfavorable.
b. $4...
10-57
Hanson’s efficiency variance (VMEV) for
variable manufacturing overhead for the week
was:
a. $435 unfavorable.
b. $4...
10-58
Rate variance
$465 unfavorable
Efficiency variance
$150 unfavorable
1,550 hours 1,550 hours 1,500 hours
× × ×
$3.30 ...
10-59
Materials Variances―An Important Subtlety
The quantity variance
is computed only on
the quantity used.
The price var...
10-60
Glacier Peak Outfitters has the following direct
materials standard for the fiberfill in its mountain
parka.
0.1 kg....
10-61
210 kgs. 210 kgs. 200 kgs. 200 kgs.
× × × ×
$4.90 per kg. $5.00 per kg. . $5.00 per kg. $5.00 per
kg.
= $1,029 = $1,...
10-62
Advantages of Standard Costs
Standard costs are
a key element of
the management by
exception approach.
Advantages
St...
10-63
Potential
Problems
If variances are misused
as a club to negatively
reinforce employees,
morale may suffer and
emplo...
10-64
Excessive emphasis on meeting the standards may overshadow other
important objectives such as maintaining and improv...
10-65
End of Chapter 10
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Managerial Accounting ed 15 Chapter 10

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Managerial Accounting ed 15 Chapter 10

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Managerial Accounting ed 15 Chapter 10

  1. 1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Standard Costs and Variances Chapter 10
  2. 2. 10-2 Standard Costs Standards are benchmarks or “norms” for measuring performance. In managerial accounting, two types of standards are commonly used. Quantity standards specify how much of an input should be used to make a product or provide a service. Price standards specify how much should be paid for each unit of the input. Examples: Firestone, Sears, McDonald’s, hospitals, construction, and manufacturing companies.
  3. 3. 10-3 Setting Direct Materials Standards Standard PriceStandard Price per Unitper Unit Summarized in a Bill of Materials. Final, delivered cost of materials, net of discounts. Standard QuantityStandard Quantity per Unitper Unit
  4. 4. 10-4 Setting Direct Labor Standards Use time and motion studies for each labor operation. Standard HoursStandard Hours per Unitper Unit Often a single rate is used that reflects the mix of wages earned. Standard RateStandard Rate per Hourper Hour
  5. 5. 10-5 Setting Variable Manufacturing Overhead Standards The rate is the variable portion of the predetermined overhead rate. Price Standard The quantity is the activity in the allocation base for predetermined overhead. QuantityQuantity StandardStandard
  6. 6. 10-6 The Standard Cost Card A standard cost card for one unit of product 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
  7. 7. 10-7 Using Standards in Flexible Budgets Standard costs per unit for direct materials, direct labor, and variable manufacturing overhead can be used to compute activity and spending variances. Spending variances become moreSpending variances become more useful by breaking them down intouseful by breaking them down into price and quantity variances.price and quantity variances.
  8. 8. 10-8 A General Model for Variance Analysis Variance Analysis Quantity Variance Difference betweenDifference between actual quantity andactual quantity and standard quantitystandard quantity Price Variance Difference betweenDifference between actual price andactual price and standard pricestandard price
  9. 9. 10-9 Price and Quantity Standards Price and quantity standards arePrice and quantity standards are determined separately for two reasons:determined separately for two reasons:  The purchasing manager is responsible for raw material purchase prices and the production manager is responsible for the quantity of raw material used.  The purchasing manager is responsible for raw material purchase prices and the production manager is responsible for the quantity of raw material used.  The buying and using activities occur at different times. Raw material purchases may be held in inventory for a period of time before being used in production.  The buying and using activities occur at different times. Raw material purchases may be held in inventory for a period of time before being used in production.
  10. 10. 10-10 Variance Analysis Materials quantity varianceMaterials quantity variance Labor efficiency varianceLabor efficiency variance VOH efficiency varianceVOH efficiency variance A General Model for Variance Analysis Price Variance Quantity Variance Materials price varianceMaterials price variance Labor rate varianceLabor rate variance VOH rate varianceVOH rate variance
  11. 11. 10-11 A General Model for Variance Analysis Price Variance (2) – (1) Quantity Variance (3) – (2) (3) Standard Quantity Allowed for Actual Output, at Standard Price (SQ × SP) (2) Actual Quantity of Input, at Standard Price (AQ × SP) (1) Actual Quantity of Input, at Actual Price (AQ × AP) Spending Variance (3) – (1)
  12. 12. 10-12 A General Model for Variance Analysis Actual quantity is the amount of direct materials, direct labor, and variable manufacturing overhead actually used. Price Variance (2) – (1) Quantity Variance (3) – (2) (3) Standard Quantity Allowed for Actual Output, at Standard Price (SQ × SP) (2) Actual Quantity of Input, at Standard Price (AQ × SP) (1) Actual Quantity of Input, at Actual Price (AQ × AP) Spending Variance (3) – (1)
  13. 13. 10-13 A General Model for Variance Analysis Standard quantity is the standard quantity allowed for the actual output of the period. Price Variance (2) – (1) Quantity Variance (3) – (2) (3) Standard Quantity Allowed for Actual Output, at Standard Price (SQ × SP) (2) Actual Quantity of Input, at Standard Price (AQ × SP) (1) Actual Quantity of Input, at Actual Price (AQ × AP) Spending Variance (3) – (1)
  14. 14. 10-14 A General Model for Variance Analysis Actual price is the amount actually paid for the input used. Price Variance (2) – (1) Quantity Variance (3) – (2) (3) Standard Quantity Allowed for Actual Output, at Standard Price (SQ × SP) (2) Actual Quantity of Input, at Standard Price (AQ × SP) (1) Actual Quantity of Input, at Actual Price (AQ × AP) Spending Variance (3) – (1)
  15. 15. 10-15 A General Model for Variance Analysis Standard price is the amount that should have been paid for the input used. Price Variance (2) – (1) Quantity Variance (3) – (2) (3) Standard Quantity Allowed for Actual Output, at Standard Price (SQ × SP) (2) Actual Quantity of Input, at Standard Price (AQ × SP) (1) Actual Quantity of Input, at Actual Price (AQ × AP) Spending Variance (3) – (1)
  16. 16. 10-16 Learning Objective 1 Compute the direct materials price and quantity variances and explain their significance.
  17. 17. 10-17 Glacier Peak Outfitters has the following direct materials standard for the fiberfill in its mountain parka. 0.1 kg. of fiberfill per parka at $5.00 per kg. Last month 210 kgs. of fiberfill were purchased and used to make 2,000 parkas. The materials cost a total of $1,029. Materials Variances – An Example
  18. 18. 10-18 210 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 Materials Variances Summary Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
  19. 19. 10-19 Materials Variances Summary 210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg. = $1,029 = $1,050 = $1,000 Price variance $21 favorable Quantity variance $50 unfavorable Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 0.1 kg per parka × 2,000 parkas = 200 kgs
  20. 20. 10-20 Materials Variances Summary 210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg. = $1,029 = $1,050 = $1,000 Price variance $21 favorable Quantity variance $50 unfavorable Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price $1,029 ÷ 210 kgs = $4.90 per kg
  21. 21. 10-21 Materials Variances: Using the Factored Equations 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 Materials quantity variance MQV = (AQ × SP) – (SQ × SP) = SP(AQ – SQ) = $5.00/kg (210 kgs – (0.1 kg/parka × 2,000 parkas)) = $5.00/kg (210 kgs – 200 kgs) = $5.00/kg (10 kgs) = $50 U
  22. 22. 10-22 Materials Price Variance Materials Quantity Variance Production ManagerPurchasing Manager The standard price is used to compute the quantity variance so that the production manager is not held responsible for the purchasing manager’s performance. The standard price is used to compute the quantity variance so that the production manager is not held responsible for the purchasing manager’s performance. Responsibility for Materials Variances
  23. 23. 10-23 I am not responsible for this unfavorable materials quantity variance. You purchased cheap material, so my people had to use more of it. Your poor scheduling sometimes requires me to rush order materials at a higher price, causing unfavorable price variances. Responsibility for Materials Variances Production Manager Purchasing Manager
  24. 24. 10-24 Hanson Inc. has the following direct materials standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound Last week, 1,700 pounds of materials were purchased and used to make 1,000 Zippies. The materials cost a total of $6,630. ZippyQuick Check 
  25. 25. 10-25 How many pounds of materials should Hanson have used to make 1,000 Zippies? a. 1,700 pounds. b. 1,500 pounds. c. 1,200 pounds. d. 1,000 pounds. ZippyQuick Check 
  26. 26. 10-26 ZippyQuick Check  How many pounds of materials should Hanson have used to make 1,000 Zippies? a. 1,700 pounds. b. 1,500 pounds. c. 1,200 pounds. d. 1,000 pounds. The standard quantity is: 1,000 × 1.5 pounds per Zippy.
  27. 27. 10-27 Hanson’s materials quantity variance (MQV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. ZippyQuick Check 
  28. 28. 10-28 Hanson’s materials quantity variance (MQV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800 unfavorable ZippyQuick Check 
  29. 29. 10-29 Hanson’s materials price variance (MPV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. ZippyQuick Check 
  30. 30. 10-30 Hanson’s materials price variance (MPV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.MPV = AQ(AP - SP) MPV = 1,700 lbs. × ($3.90 - 4.00) MPV = $170 Favorable ZippyQuick Check 
  31. 31. 10-31 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 ZippyQuick Check  Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
  32. 32. 10-32 ZippyQuick Check  Recall that the standard quantity for 1,000 Zippies is 1,000 × 1.5 pounds per Zippy = 1,500 pounds. 1,700 lbs. 1,700 lbs. 1,500 lbs. × × × $3.90 per lb. $4.00 per lb. $4.00 per lb. = $6,630 = $ 6,800 = $6,000 Price variance $170 favorable Quantity variance $800 unfavorable Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
  33. 33. 10-33 Learning Objective 2 Compute the direct labor rate and efficiency variances and explain their significance.
  34. 34. 10-34 Glacier Peak Outfitters has the following direct labor standard for its mountain parka. 1.2 standard hours per parka at $10.00 per hour Last month, employees actually worked 2,500 hours at a total labor cost of $26,250 to make 2,000 parkas. Labor Variances – An Example
  35. 35. 10-35 Rate variance $1,250 unfavorable Efficiency variance $1,000 unfavorable Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate Labor Variances Summary 2,500 hours 2,500 hours 2,400 hours × × × $10.50 per hour $10.00 per hour $10.00 per hour = $26,250 = $25,000 = $24,000
  36. 36. 10-36 Labor Variances Summary Rate variance $1,250 unfavorable Efficiency variance $1,000 unfavorable Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 2,500 hours 2,500 hours 2,400 hours × × × $10.50 per hour $10.00 per hour $10.00 per hour = $26,250 = $25,000 = $24,000 1.2 hours per parka × 2,000 parkas = 2,400 hours
  37. 37. 10-37 Labor Variances Summary Rate variance $1,250 unfavorable Efficiency variance $1,000 unfavorable Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 2,500 hours 2,500 hours 2,400 hours × × × $10.50 per hour $10.00 per hour $10.00 per hour = $26,250 = $25,000 = $24,000 $26,250 ÷ 2,500 hours = $10.50 per hour
  38. 38. 10-38 Labor Variances: Using the Factored Equations 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 Labor efficiency variance LEV = (AH × SR) – (SH × SR) = SR (AH – SH) = $10.00 per hour (2,500 hours – 2,400 hours) = $10.00 per hour (100 hours) = $1,000 unfavorable
  39. 39. 10-39 Responsibility for Labor Variances Production Manager Production managers are usually held accountable for labor variances because they can influence the: Mix of skill levels assigned to work tasks. Level of employee motivation. Quality of production supervision. Quality of training provided to employees.
  40. 40. 10-40 I am not responsible for the unfavorable labor efficiency variance! You purchased cheap material, so it took more time to process it. I think it took more time to process the materials because the Maintenance Department has poorly maintained your equipment. Responsibility for Labor Variances
  41. 41. 10-41 Hanson Inc. has the following direct labor standard to manufacture one Zippy: 1.5 standard hours per Zippy at $12.00 per direct labor hour Last week, 1,550 direct labor hours were worked at a total labor cost of $18,910 to make 1,000 Zippies. ZippyQuick Check 
  42. 42. 10-42 Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable. ZippyQuick Check 
  43. 43. 10-43 Hanson’s labor rate variance (LRV) for the week 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 
  44. 44. 10-44 Hanson’s labor efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable. ZippyQuick Check 
  45. 45. 10-45 Hanson’s labor efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable. LEV = SR(AH - SH) LEV = $12.00(1,550 hrs - 1,500 hrs) LEV = $600 unfavorable ZippyQuick Check 
  46. 46. 10-46 Rate variance $310 unfavorable Efficiency variance $600 unfavorable 1,550 hours 1,550 hours 1,500 hours × × × $12.20 per hour $12.00 per hour $12.00 per hour = $18,910 = $18,600 = $18,000 ZippyQuick Check  Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
  47. 47. 10-47 Learning Objective 3 Compute the variable manufacturing overhead rate and efficiency variances and explain their significance.
  48. 48. 10-48 Glacier Peak Outfitters has the following direct variable manufacturing overhead labor standard for its mountain parka. 1.2 standard hours per parka at $4.00 per hour Last month, employees actually worked 2,500 hours to make 2,000 parkas. Actual variable manufacturing overhead for the month was $10,500. Variable Manufacturing Overhead Variances – An Example
  49. 49. 10-49 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 Variable Manufacturing Overhead Variances Summary Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
  50. 50. 10-50 Variable Manufacturing Overhead Variances Summary 2,500 hours 2,500 hours 2,400 hours × × × $4.20 per hour $4.00 per hour $4.00 per hour = $10,500 = $10,000 = $9,600 Rate variance $500 unfavorable Efficiency variance $400 unfavorable Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 1.2 hours per parka × 2,000 parkas = 2,400 hours
  51. 51. 10-51 Variable Manufacturing Overhead Variances Summary 2,500 hours 2,500 hours 2,400 hours × × × $4.20 per hour $4.00 per hour $4.00 per hour = $10,500 = $10,000 = $9,600 Rate variance $500 unfavorable Efficiency variance $400 unfavorable Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate $10,500 ÷ 2,500 hours = $4.20 per hour
  52. 52. 10-52 Variable Manufacturing Overhead Variances: Using Factored Equations 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 Variable manufacturing overhead efficiency variance VMEV = (AH × SR) – (SH – SR) = SR (AH – SH) = $4.00 per hour (2,500 hours – 2,400 hours) = $4.00 per hour (100 hours) = $400 unfavorable
  53. 53. 10-53 Hanson Inc. has the following variable manufacturing overhead standard to manufacture one Zippy: 1.5 standard hours per Zippy at $3.00 per direct labor hour Last week, 1,550 hours were worked to make 1,000 Zippies, and $5,115 was spent for variable manufacturing overhead. ZippyQuick Check 
  54. 54. 10-54 Hanson’s rate variance (VMRV) for variable manufacturing overhead for the week was: a. $465 unfavorable. b. $400 favorable. c. $335 unfavorable. d. $300 favorable. ZippyQuick Check 
  55. 55. 10-55 Hanson’s rate variance (VMRV) for variable manufacturing overhead for the week was: a. $465 unfavorable. b. $400 favorable. c. $335 unfavorable. d. $300 favorable. VMRV = AH(AR - SR) VMRV = 1,550 hrs($3.30 - $3.00) VMRV = $465 unfavorable ZippyQuick Check 
  56. 56. 10-56 Hanson’s efficiency variance (VMEV) for variable manufacturing overhead for the week was: a. $435 unfavorable. b. $435 favorable. c. $150 unfavorable. d. $150 favorable. ZippyQuick Check 
  57. 57. 10-57 Hanson’s efficiency variance (VMEV) for variable manufacturing overhead for the week was: a. $435 unfavorable. b. $435 favorable. c. $150 unfavorable. d. $150 favorable. 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 
  58. 58. 10-58 Rate variance $465 unfavorable Efficiency variance $150 unfavorable 1,550 hours 1,550 hours 1,500 hours × × × $3.30 per hour $3.00 per hour $3.00 per hour = $5,115 = $4,650 = $4,500 ZippyQuick Check  Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
  59. 59. 10-59 Materials Variances―An Important Subtlety The quantity variance is computed only on the quantity used. The price variance is computed on the entire quantity purchased.
  60. 60. 10-60 Glacier Peak Outfitters has the following direct materials standard for the fiberfill in its mountain parka. 0.1 kg. of fiberfill per parka at $5.00 per kg. Last month 210 kgs. of fiberfill were purchased at a cost of $1,029. Glacier used 200 kgs. to make 2,000 parkas. Materials Variances―An Important Subtlety
  61. 61. 10-61 210 kgs. 210 kgs. 200 kgs. 200 kgs. × × × × $4.90 per kg. $5.00 per kg. . $5.00 per kg. $5.00 per kg. = $1,029 = $1,050 = $1,000 = $1,000 Price variance $21 favorable Actual Quantity Actual Quantity Actual Quantity Purchased Purchased Used Standard Quantity × × × × Actual Price Standard Price Standard Price Standard Price Materials Variances―An Important Subtlety Quantity variance $0
  62. 62. 10-62 Advantages of Standard Costs Standard costs are a key element of the management by exception approach. Advantages Standards can provide benchmarks that promote economy and efficiency. Standards can greatly simplify bookkeeping. Standards can support responsibility accounting systems.
  63. 63. 10-63 Potential Problems If variances are misused as a club to negatively reinforce employees, morale may suffer and employees may make dysfunctional decisions. Standard cost variance reports are usually prepared on a monthly basis and may contain information that is outdated. Potential Problems with Standard Costs Labor variances assume that the production process is labor-paced and that labor is a variable cost. These assumptions are often invalid in today’s automated manufacturing environment where employees are essentially a fixed cost.
  64. 64. 10-64 Excessive emphasis on meeting the standards may overshadow other important objectives such as maintaining and improving quality, on-time delivery, and customer satisfaction. In some cases, a “favorable” variance can be as bad or worse than an unfavorable variance. Just meeting standards may not be sufficient; continuous improvement may be necessary to survive in a competitive environment. Potential Problems with Standard Costs Potential Problems
  65. 65. 10-65 End of Chapter 10

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