Bab 4

© 2012 McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & Yuen
Standard Costs and Operating
Performance Measures
Chapter 12

McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 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.

Standard Costs
Direct
Material
Deviations from standards deemed significant
are brought to the attention of management, a
practice known as management by exception.
Type of Product Cost
Amount
Direct
Labor
Manufacturing
Overhead
Standard

Variance Analysis Cycle
Prepare standard
cost performance
report
Analyze
variances
Begin
Identify
questions
Receive
explanations
Take
corrective
actions
Conduct next
period’s
operations

Accountants, engineers, purchasing
agents, and production managers
combine efforts to set standards that encourage
efficient future operations.
Setting Standard Costs

Setting Standard Costs
Should we use
ideal standards that
require employees to
work at 100 percent
peak efficiency?
Engineer Managerial Accountant
I recommend using practical
standards that are currently
attainable with reasonable
and efficient effort.

Learning Objective 1
Explain how direct
materials standards and
direct labor
standards are set.

Setting Direct Material Standards
Price
Standards
Summarized in
a Bill of Materials.
Final, delivered
cost of materials,
net of discounts.
Quantity
Standards

Setting Standards
Six Sigma advocates have sought to
eliminate all defects and waste, rather than
continually build them into standards.
As a result allowances for waste and
spoilage that are built into standards
should be reduced over time.

Setting Direct Labor Standards
Rate
Standards
Often a single
rate is used that reflects
the mix of wages earned.
Time
Standards
Use time and
motion studies for
each labor operation.

Setting Variable Manufacturing Overhead
Standards
Rate
Standards
The rate is the
variable portion of the
predetermined overhead
rate.
Quantity
Standards
The quantity is
the activity in the
allocation base for
predetermined overhead.

Standard Cost Card – Variable Production
Cost
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

Price and Quantity Standards
Price and quantity standards are
determined separately for two reasons:
 The purchasing manager is responsible for raw
material purchase prices and the production manager
is responsible for the quantity of raw material used.
 The 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.

A General Model for Variance Analysis
Variance Analysis
Price Variance
Difference between
actual price and
standard price
Quantity Variance
Difference between
actual quantity and
standard quantity

Variance Analysis
Materials price variance
Labor rate variance
VOH rate variance
Materials quantity variance
Labor efficiency variance
VOH efficiency variance
Price Variance Quantity Variance

Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price

× × ×
Actual quantity is the amount of direct
materials, direct labor, and variable
manufacturing overhead actually used.

× × ×
Standard quantity is the standard quantity
allowed for the actual output of the period.

× × ×
Actual price is the amount actually
paid for the input used.

Standard price is the amount that should
have been paid for the input used.
× × ×

(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)
AQ = Actual Quantity SP = Standard Price
AP = Actual Price SQ = Standard Quantity
× × ×

Another Way to Look at the Problems
Actual Quantity x Actual Price = AQ x AP
Price variance
Actual Quantity x Standard Price = AQ x SP
Quantity variance
Standard Quantity x Standard Price = SQ x SP
Total Variance
SQ = (Aouput x standard quantity for production)
= standard quantity allowed for the actual output

Compute the direct
materials price and
quantity variances and
explain their significance.

Glacier Peak Outfitters has the following direct
material standard for the fiberfill in its mountain
parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.
Last month 210 kgs. of fiberfill were purchased and
used to make 2,000 parkas. The material cost a
total of $1,029.
Material Variances – An Example

Material Variances: The Line-by-line Method
AQ x AP = 210 x AP = 1,029
(21) F Price variance
AQ x SP = 210 x 5 = 1,050
50 U Quantity variance
SQ x SP = (2000 x 0.1) x 5 = 1,000
29 U Total Variance
Calculation of Actual Purchase Price (AP) per unit can be done but is
not necessary because AP will not be used in subsequent calculation
and the total actual purchase cost in total is sufficient for the variance
calculation.

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
× × ×
Material Variances Summary

210 kgs. 210 kgs. 200 kgs.
× × ×
= $1,029 = $1,050 = $1,000
Price variance
$21 favorable
Quantity variance
$50 unfavorable
× × ×
$1,029  210 kgs
= $4.90 per kg

210 kgs. 210 kgs. 200 kgs.
× × ×
= $1,029 = $1,050 = $1,000
Price variance
$21 favorable
Quantity variance
$50 unfavorable
× × ×
0.1 kg per parka  2,000 parkas
= 200 kgs

Material Variances:
Using the Factored Equations
Materials price variance
MPV = AQ (AP - SP)
= 210 kgs ($4.90/kg - $5.00/kg)
= 210 kgs (-$0.10/kg)
= $21 F
Materials quantity variance
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 (10 kgs)
= $50 U

Isolation of Material Variances
I need the price variance
sooner so that I can better
identify purchasing problems.
You accountants just don’t
understand the problems that
purchasing managers have.
I’ll start computing
the price variance
when material is
purchased rather
than when it’s used.

Material Variances
Hanson purchased and
used 1,700 pounds.
How are the variances
computed if the amount
purchased differs from
the amount used?
The price variance is
computed on the entire
quantity purchased.
The quantity variance
is computed only on
the quantity used.

Materials Price VarianceMaterials Quantity Variance
Production Manager Purchasing 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.
Responsibility for Material Variances

I am not responsible for
this unfavorable material
quantity variance.
You purchased cheap
material, so my people
had to use more of it.
Your poor scheduling
sometimes requires me to
rush order material at a
higher price, causing
unfavorable price variances.
Responsibility for Material Variances

Hanson Inc. has the following direct material
standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 1,700 pounds of material were
purchased and used to make 1,000 Zippies. The
material cost a total of $6,630.
Zippy
Quick Check 

Quick Check 
AQ x AP = 1,700 x AP = 6,630
AQ x SP = 1,700 x 4 = 6,800
SQ x SP = (1000 x 1.5) x 4 = 6,000
630 U Total Variance
Zippy

Quick Check 
Zippy
Hanson’s material price variance (MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.

Hanson’s material price variance (MPV)
for the week was:
b. $170 favorable.
d. $800 favorable.
MPV = AQ(AP - SP)
MPV = 1,700 lbs. × ($3.90 - 4.00)
MPV = $170 Favorable
Quick Check 
Zippy
AQ x AP = 1,700 x AP = 6,630
AQ x SP = 1,700 x 4 = 6,800

Quick Check 
Hanson’s material quantity variance (MQV)
for the week was:
b. $170 favorable.
d. $800 favorable.
Zippy

Hanson’s material quantity variance (MQV)
for the week was:
b. $170 favorable.
d. $800 favorable.
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 lbs - 1,500 lbs)
MQV = $800 unfavorable
Quick Check 
Zippy
AQ x SP = 1,700 x 4 = 6,800
SQ x SP = (1000 x 1.5) x 4 = 6,000

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
× × ×
Zippy
Quick Check 

Hanson Inc. has the following material standard to
manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 2,800 pounds of material were
purchased at a total cost of $10,920, and 1,700
pounds were used to make 1,000 Zippies.
Zippy
Quick Check  Continued

AQp x AP = 2,800 x AP = 10,920
AQp x SP = 2,800 x 4 = 11,200
4,400 U Inventory @ Std cost
AQu x SP = 1,700 x 4 = 6,800
800 U Usage variance
SQ x SP = (1000 x 1.5) x 4 = 6,000 (Quantity variance)
4,920 U Total Variance
AQp = Actual Quantity Purchased
AQu = Actual Quantity used
SQ = (Aouput x standard quantity for production use)
Zippy

Actual Quantity Actual Quantity
Purchased Purchased
× ×
Actual Price Standard Price
2,800 lbs. 2,800 lbs.
× ×
$3.90 per lb. $4.00 per lb.
= $10,920 = $11,200
Price variance
$280 favorable
Price variance increases
because quantity
purchased increases.
Zippy

Actual Quantity
Used Standard Quantity
× ×
Standard Price Standard Price
1,700 lbs. 1,500 lbs.
× ×
$4.00 per lb. $4.00 per lb.
= $6,800 = $6,000
Quantity variance
$800 unfavorable
Quantity variance is
unchanged because
actual and standard
quantities are unchanged.
Zippy

Compute the direct labor
rate and efficiency
variances and explain
their significance.

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

Labor Variances
AH x AR = 2,500 x AR = 26,250
1,250 U Rate variance
AH x SR = 2,500 x 10 = 25,000
1,000 U Efficiency variance
SH x SR = (2000 x 1.2) x 10 = 24,000
2,250 U Total Variance
AH = Actual hour paid (and worked in this case)
AR = Actual rate per hour
SR = Standard rate per hour
SH = (Aouput x standard hours for the production)
= standard hours allowed for the actual output

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

× × ×
= $26,250 = $25,000 = $24,000
× × ×
$26,250  2,500 hours
= $10.50 per hour
Rate variance
$1,250 unfavorable
Efficiency variance
$1,000 unfavorable

× × ×
= $26,250 = $25,000 = $24,000
× × ×
1.2 hours per parka  2,000
parkas = 2,400 hours
Rate variance
$1,250 unfavorable
Efficiency variance
$1,000 unfavorable

Labor Variances:
Using the Factored Equations
Labor rate variance
LRV = AH (AR - SR)
= 2,500 hours ($10.50 per hour – $10.00 per hour)
= 2,500 hours ($0.50 per hour)
= $1,250 unfavorable
Labor efficiency variance
LEV = SR (AH - SH)
= $10.00 per hour (2,500 hours – 2,400 hours)
= $10.00 per hour (100 hours)

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.

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

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.
Zippy
Quick Check 

Quick Check 
AH x AR = 1,550 x AR = 18,910
310 U Rate variance
AH x SR = 1,550 x 12 = 18,600
600 U Efficiency variance
SH x SR = (1000 x 1.5) x 12 = 18,000

Hanson’s labor rate variance (LRV) for the
week was:
b. $310 favorable.
d. $300 favorable.
Quick Check 
Zippy

Hanson’s labor rate variance (LRV) for the
week was:
b. $310 favorable.
d. $300 favorable.
Quick Check 
LRV = AH(AR - SR)
LRV = 1,550 hrs($12.20 - $12.00)
LRV = $310 unfavorable
Zippy
AH x AR = 1,550 x AR = 18,910
310 U Rate variance
AH x SR = 1,550 x 12 = 18,600

Hanson’s labor efficiency variance (LEV)
for the week was:
b. $590 favorable.
d. $600 favorable.
Quick Check 
Zippy

Hanson’s labor efficiency variance (LEV)
for the week was:
b. $590 favorable.
d. $600 favorable.
Quick Check 
LEV = SR(AH - SH)
LEV = $12.00(1,550 hrs - 1,500 hrs)
LEV = $600 unfavorable
Zippy
AH x SR = 1,550 x 12 = 18,600
SH x SR = (1000 x 1.5) x 12 = 18,000

× × ×
Rate variance
$310 unfavorable
Efficiency variance
$600 unfavorable
× × ×
$12.20 per hour $12.00 per hour $12.00 per hour
= $18,910 = $18,600 = $18,000
Zippy
Quick Check 

Compute the variable
manufacturing overhead
rate and efficiency
variances.

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

AH x AR = 2,500 x AR = 10,500
500 U Rate variance
AH x SR = 2,500 x 4 = 10,000
SH x SR = (2000 x 1.2) x 4 = 9,600

× × ×
= $10,500 = $10,000 = $9,600
Rate variance
$500 unfavorable
Efficiency variance
$400 unfavorable
× × ×
Summary

× × ×
× × ×
= $10,500 = $10,000 = $9,600
Rate variance
$500 unfavorable
Efficiency variance
$400 unfavorable
$10,500  2,500 hours
= $4.20 per hour
Summary

× × ×
× × ×
= $10,500 = $10,000 = $9,600
Rate variance
$500 unfavorable
Efficiency variance
$400 unfavorable
1.2 hours per parka  2,000
parkas = 2,400 hours
Summary

Variable Manufacturing Overhead Variances:
Using Factored Equations
Variable manufacturing overhead rate variance
VMRV = 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 = SR (AH - SH)
= $4.00 per hour (2,500 hours – 2,400 hours)
= $4.00 per hour (100 hours)
= $400 unfavorable

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.
Zippy
Quick Check 

Quick Check 
AH x AR = 1,550 x AR = 5,115
465 U Rate variance
AH x SR = 1,550 x 3 = 4,650
SH x SR = (1000 x 1.5) x 3 = 4,500

Hanson’s rate variance (VMRV) for variable
manufacturing overhead for the week was:
b. $400 favorable.
d. $300 favorable.
Quick Check 
Zippy

Hanson’s rate variance (VMRV) for variable
manufacturing overhead for the week was:
b. $400 favorable.
d. $300 favorable.
Quick Check 
VMRV = AH(AR - SR)
VMRV = 1,550 hrs($3.30 - $3.00)
VMRV = $465 unfavorable
Zippy
AH x AR = 1,550 x AR = 5,115
465 U Rate variance
AH x SR = 1,550 x 3 = 4,650

Hanson’s efficiency variance (VMEV) for
variable manufacturing overhead for the week
was:
b. $435 favorable.
d. $150 favorable.
Quick Check 
Zippy

Hanson’s efficiency variance (VMEV) for
variable manufacturing overhead for the week
was:
b. $435 favorable.
d. $150 favorable.
Quick Check 
VMEV = SR(AH - SH)
VMEV = $3.00(1,550 hrs - 1,500 hrs)
VMEV = $150 unfavorable
1,000 units × 1.5 hrs per unit
Zippy
AH x SR = 1,550 x 3 = 4,650
SH x SR = (1000 x 1.5) x 3 = 4,500

Rate variance
$465 unfavorable
Efficiency variance
$150 unfavorable
× × ×
= $5,115 = $4,650 = $4,500
× × ×
Zippy
Quick Check 

Variance Analysis and Management by
Exception
How do I know
which variances to
investigate?
Larger variances, in
dollar amount or as
a percentage of the
standard, are
investigated first.

A Statistical Control Chart
1 2 3 4 5 6 7 8 9
Variance Measurements
Favorable Limit
Unfavorable Limit
•
•
•
• •
•
•
•
•
Warning signals for investigation
Desired Value

Advantages of Standard Costs
Management by
exception
Advantages
Promotes economy
and efficiency
Simplified
bookkeeping
Enhances
responsibility
accounting

Potential
Problems
Emphasis on
negative may
impact morale.
Emphasizing standards
may exclude other
important objectives.
Favorable
variances may
be misinterpreted.
Continuous
improvement may
be more important
than meeting standards.
Standard cost
reports may
not be timely.
Invalid assumptions
about the relationship
between labor
cost and output.
Potential Problems with Standard Costs

Compute delivery cycle
time, throughput time, and
manufacturing cycle
efficiency (MCE).

Process time is the only value-added time.
Delivery Performance Measures
Wait Time
Process Time + Inspection Time
+ Move Time + Queue Time
Delivery Cycle Time
Order
Received
Production
Started
Goods
Shipped
Throughput Time

Manufacturing
Cycle
Efficiency
Value-added time
Manufacturing cycle time
=
Wait Time
Process Time + Inspection Time
+ Move Time + Queue Time
Delivery Cycle Time
Order
Received
Production
Started
Goods
Shipped
Throughput Time
Delivery Performance Measures

Quick Check 
A TQM team at Narton Corp has recorded the
following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the throughput time?
a. 10.4 days.
b. 0.2 days.
c. 4.1 days.
d. 13.4 days.

Process 0.2 days
What is the throughput time?
a. 10.4 days.
b. 0.2 days.
c. 4.1 days.
d. 13.4 days.
Quick Check 
Throughput time = Process + Inspection + Move + Queue
= 0.2 days + 0.4 days + 0.5 days + 9.3 days
= 10.4 days

Quick Check 
Process 0.2 days
What is the Manufacturing Cycle Efficiency (MCE)?
a. 50.0%.
b. 1.9%.
c. 52.0%.
d. 5.1%.

Process 0.2 days
What is the Manufacturing Cycle Efficiency (MCE)?
a. 50.0%.
b. 1.9%.
c. 52.0%.
d. 5.1%.
Quick Check 
MCE = Value-added time ÷ Throughput time
= Process time ÷ Throughput time
= 0.2 days ÷ 10.4 days
= 1.9%

Quick Check 
Process 0.2 days
What is the delivery cycle time (DCT)?
a. 0.5 days.
b. 0.7 days.
c. 13.4 days.
d. 10.4 days.

Process 0.2 days
What is the delivery cycle time (DCT)?
a. 0.5 days.
b. 0.7 days.
c. 13.4 days.
d. 10.4 days.
Quick Check 
DCT = Wait time + Throughput time
= 3.0 days + 10.4 days
= 13.4 days

Generalized Model of the Row by Row Approach
and Its Preparation of the Performance Report
(Reconcile Actual Results to the Budgeted Figures)
Supplementary Note

Generalized Model of the Row by Row Approach and Its
Preparation of the Performance Report
(Reconcile Actual Results to the Budgeted Figures)
Actual Quantity x Actual Price = AQ x AP
Price variance
Actual Quantity x Standard Price = AQ x SP
Quantity variance
Standard Quantity x Standard Price = SQ x SP
Total Flexible Variance
Activity Variance
Budgeted Quantity x Standard Price = BQ x SP
Static variance
BQ = Budgeted quantity

Performance Report for Variance Analysis:
Recall Example from Chapter 11

Predetermined Overhead Rates and Overhead
Analysis in a Standard Costing System
Appendix 12A

(Appendix 12A)
Compute and interpret the
fixed overhead budget and
volume variances.

Fixed Manufacturing Overhead Variances:
The Line-by-line method
Actual Fixed Overhead
Budget variance
Budgeted Fixed Overhead = BH x SR (Spending variance)
Volume variance
Applied Fixed Overhead = SH x SR
Total Variance
BH = Budgeted hours (a.k.a. Denominator hours)

Budget
variance
Fixed Overhead Budget Variance
Actual
Fixed
Overhead
Fixed
Overhead
Applied
Budgeted
Fixed
Overhead
Budget
variance
Budgeted
fixed
overhead
Actual
fixed
overhead
= –

Volume
variance
Fixed Overhead Volume Variance
Actual
Fixed
Overhead
Fixed
Overhead
Applied
Budgeted
Fixed
Overhead
Volume
variance
Fixed
overhead
applied to
work in process
Budgeted
fixed
overhead
= –

FPOHR = Fixed portion of the predetermined overhead rate
DH = Denominator hours
SH = Standard hours allowed for actual output
SH × FRDH × FR
Fixed Overhead Volume Variance
Actual
Fixed
Overhead
Fixed
Overhead
Applied
Budgeted
Fixed
Overhead
Volume variance FPOHR × (DH – SH)=
Volume
variance

Computing Fixed Overhead Variances
Budgeted production 30,000 units
Standard machine-hour per unit 3 hours
Budgeted machine-hour 90,000 hours
Actual production 28,000 units
Standard machine-hour allowed for the actual production 84,000 hours
Actual machine-hour 88,000 hours
Production and Machine-Hour Data
ColaCo

Computing Fixed Overhead Variances
Budgeted variable manufacturing overhead 90,000$
Budgeted fixed manufacturing overhead 270,000
Total budgeted manufacturing overhead 360,000$
Actual variable manufacturing overhead 100,000$
Actual fixed manufacturing overhead 280,000
Total actual manufacturing overhead 380,000$
ColaCo
Cost Data

Predetermined Overhead Rates
Predetermined
overhead rate
Estimated total manufacturing overhead cost
Estimated total amount of the allocation base
=
Predetermined
overhead rate
$360,000
90,000 Machine-hour
=
Predetermined
overhead rate
= $4.00 per machine-hour

Predetermined Overhead Rates
Variable component of the
predetermined overhead rate
$90,000
90,000 Machine-hour
=
Variable component of the
Fixed component of the
$270,000
90,000 Machine-hour
=
Fixed component of the

Applying Manufacturing Overhead
Overhead
applied
Predetermined
overhead rate
Standard hours allowed
for the actual output
= ×
Overhead
applied
$4.00 per
machine-hour
84,000 machine-hour= ×
Overhead
applied
$336,000=

Fixed Manufacturing Overhead Variances
Actual = = 280,000
10,000 U Budget variance
Budgeted = = 270,000
18,000 U Volume variance
SH x SR = (28000 x 3) x 3 = 252,000
28,000 U Total Underapplied overhead

Computing the Budget Variance
Budget
variance
Budgeted
fixed
overhead
Actual
fixed
overhead
= –
Budget
variance
= $280,000 – $270,000
Budget
variance
= $10,000 Unfavorable

Computing the Volume Variance
Volume
variance
Fixed
overhead
applied to
work in process
Budgeted
fixed
overhead
= –
Volume
variance
= $18,000 Unfavorable
Volume
variance
= $270,000 –
$3.00 per
machine-hour( ×
$84,000
machine-hour )

Computing the Volume Variance
FPOHR = Fixed portion of the predetermined overhead rate
DH = Denominator hours
SH = Standard hours allowed for actual output
Volume variance FPOHR × (DH – SH)=
Volume
variance
=
$3.00 per
machine-hour (× 90,000
machine-hour
– 84,000
machine-hour)
Volume
variance
= 18,000 Unfavorable

A Pictorial View of the Variances
Actual
Fixed
Overhead
Fixed Overhead
Applied to
Work in Process
Budgeted
Fixed
Overhead
252,000270,000280,000
Total variance, $28,000 unfavorable
Budget variance,
$10,000 unfavorable
Volume variance,
$18,000 unfavorable

Fixed Overhead Variances –
A Graphic Approach
Let’s look at a
graph showing
fixed overhead
variances. We will
use ColaCo’s
numbers from the
previous example.

Graphic Analysis of Fixed
Overhead Variances
Machine-hours (000)
Budget
$270,000
90
Denominator
hours
0
0

Overhead Variances
Actual
$280,000
Machine-hours (000)
Budget
$270,000
90
Denominator
hours
0
0
Budget Variance 10,000 U{

Actual
$280,000
Applied
$252,000
Machine-hours (000)
Budget
$270,000
Overhead Variances
90840
0
Standard
hours
Denominator
hours
Budget Variance 10,000 U
Volume Variance 18,000 U
{
{

Reconciling Overhead Variances and
Underapplied or Overapplied Overhead
In a standard
cost system:
Unfavorable
variances are equivalent
to underapplied overhead.
Favorable
variances are equivalent
to overapplied overhead.
The sum of the overhead variances
equals the under- or overapplied
overhead cost for the period.

Reconciling Overhead Variances and
Underapplied or Overapplied Overhead
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

Variable Overhead Variances
AH x AR = = 100,000
12,000 U Rate variance
AH x SR = 88,000 x 1 = 88,000
4,000 U Efficiency variance
SH x SR = 84,000 x 1 = 84,000
(= 28,000 x 3) 16,000 U Total Variance
SR = Standard rate per hour = Total underapplied
SH = (Aouput x standard hours for the production) variable overhead

Computing the Variable Overhead Variances
Variable manufacturing overhead rate variance
VMRV = (AH × AR) – (AH × SR)
= $100,000 – (88,000 hours × $1.00 per hour)

Computing the Variable Overhead Variances
Variable manufacturing overhead efficiency variance
VMEV = (AH × SR) – (SH × SR)
= $88,000 – (84,000 hours × $1.00 per hour)

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

Journal Entries to Record
Variances
Appendix 12B

(Appendix 12B)
Prepare journal entries
to record standard
costs and variances.

Appendix 12B
Journal Entries to Record Variances
We will use information from the Glacier Peak Outfitters
example presented earlier in the chapter to illustrate journal
entries for standard cost variances. Recall the following:
Material
AQ × AP = $1,029
AQ × SP = $1,050
SQ × SP = $1,000
MPV = $21 F
MQV = $50 U
Labor
AH × AR = $26,250
AH × SR = $25,000
SH × SR = $24,000
LRV = $1,250 U
LEV = $1,000 U
Now, let’s prepare the entries to record
the labor and material variances.

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
Appendix 12B
Recording Material Variances

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
Appendix 12B
Recording Labor Variances

Cost Flows in a Standard Cost System
Inventories are recorded at standard cost.
Variances are recorded as follows:
 Favorable variances are credits, representing
savings in production costs.
 Unfavorable variances are debits, representing
excess production costs.
Standard cost variances are usually closed out
to cost of goods sold.
 Unfavorable variances increase cost of goods sold.
 Favorable variances decrease cost of goods sold.

End of Chapter 12

Bab 4

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