Transcript Garrison7eCH10

Standard Costs
Chapter Ten
© 2006 McGraw-Hill Ryerson Ltd.
Learning Objectives
After studying this chapter, you should be able to:
1. Explain how direct materials standards and direct
labour standards are set.
2. Compute the direct materials price and quantity
variances and explain their significance.
3. Compute mix and yield variances for materials
and explain their significance.
© 2006 McGraw-Hill Ryerson Ltd.
Learning Objectives
After studying this chapter, you should be able to:
4. Compute the direct labour rate and efficiency
variances and explain their significance.
5. Compute the variable manufacturing overhead
spending and efficiency variances.
6. (Appendix 10A) Prepare journal entries to record
standard costs and variances.
© 2006 McGraw-Hill Ryerson Ltd.
Standard Costs
Standards are benchmarks or “norms”
for measuring performance. 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.
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Cost (price)
standards specify
how much should be
paid for each unit
of the input.
Standard Costs
Amount
Deviations from standard deemed significant
are brought to the attention of management, a
practice known as management by exception.
Standard
Direct
Labour
Direct
Material
Manufacturing
Overhead
Type of Product Cost
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Variance Analysis Cycle
Identify
questions
Receive
explanations
Conduct next
period’s
operations
Analyze
variances
Prepare standard
cost performance
report
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Take
corrective
actions
Begin
Exh.
10-1
Setting Standard Costs
Accountants, engineers, purchasing
agents, and production managers
combine efforts to set standards that
encourage efficient future production.
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Setting Standard Costs
Should we use
ideal standards that
require employees to
work at 100 percent
peak efficiency?
Engineer
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I recommend using practical
standards that are currently
attainable with reasonable and
efficient effort.
Managerial
Accountant
Setting Direct Material Standards
Price
Standards
Quantity
Standards
Final, delivered
cost of materials,
net of discounts.
Summarized in
a Bill of Materials.
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Setting Standards
In recent years, TQM 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.
© 2006 McGraw-Hill Ryerson Ltd.
Setting Direct Labour Standards
Rate
Standards
Time
Standards
Often a single
rate is used that reflects
the mix of wages earned.
Use time and
motion studies for
each labour operation.
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Setting Variable Overhead Standards
Rate
Standards
Activity
Standards
The rate is the
variable portion of the
predetermined overhead
rate.
The activity is the
base used to calculate
the predetermined
overhead.
© 2006 McGraw-Hill Ryerson Ltd.
Standard Cost Card – Variable
Production Cost
A standard cost card for one unit of
product might look like this:
Inputs
Direct materials
Direct labour
Variable mfg. overhead
Total standard unit cost
© 2006 McGraw-Hill Ryerson Ltd.
A
B
AxB
Standard
Quantity
or Hours
Standard
Price
or Rate
Standard
Cost
per Unit
3.0 lbs.
2.5 hours
2.5 hours
$ 4.00 per lb.
$
14.00 per hour
3.00 per hour
$
12.00
35.00
7.50
54.50
Standards vs. Budgets
Are standards the
same as budgets?
A budget is set for
total costs.
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A standard is a per
unit cost.
Standards are often
used when
preparing budgets.
Price and Quantity Standards
Price and 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.
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A General Model for Variance Analysis
Variance Analysis
Price Variance
Quantity Variance
Difference between
actual price and
standard price
Difference between
actual quantity and
standard quantity
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A General Model for Variance Analysis
Variance Analysis
Price Variance
Quantity Variance
Materials price variance
Labour rate variance
VOH spending variance
Materials quantity variance
Labour efficiency variance
VOH efficiency variance
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A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
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Standard Quantity
×
Standard Price
Quantity Variance
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Actual quantity is the amount of direct
materials, direct labour, and variable
manufacturing overhead actually used.
© 2006 McGraw-Hill Ryerson Ltd.
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Standard quantity is the standard quantity
allowed for the actual output for the period.
© 2006 McGraw-Hill Ryerson Ltd.
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Actual price is the amount actually
paid for the for the input used.
© 2006 McGraw-Hill Ryerson Ltd.
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Standard price is the amount that should
have been paid for the input used.
© 2006 McGraw-Hill Ryerson Ltd.
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
(AQ × AP) – (AQ × SP)
(AQ × SP) – (SQ × SP)
AQ = Actual Quantity
AP = Actual Price
SP = Standard Price
SQ = Standard Quantity
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Material Variances Example
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.
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Material Variances Summary
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
210 kgs.
×
$4.90 per kg.
210 kgs.
×
$5.00 per kg.
= $1,029
Price variance
$21 favorable
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= $1,050
Standard Quantity
×
Standard Price
200 kgs.
×
$5.00 per kg.
= $1,000
Quantity variance
$50 unfavorable
Material Variances Summary
Actual Quantity
×
Actual Price
210 kgs.
×
$4.90 per kg.
Actual Quantity
×
Standard Price
210 kgs.
$1,029  ×
210 kgs
$5.00per
perkg
kg.
= $4.90
= $1,029
Price variance
$21 favorable
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= $1,050
Standard Quantity
×
Standard Price
200 kgs.
×
$5.00 per kg.
= $1,000
Quantity variance
$50 unfavorable
Material Variances Summary
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Standard Quantity
×
Standard Price
210 kgs.
210 kgs.
200 kgs.
×
×
0.1 kg per parka× 2,000 parkas
$4.90 per kg.
$5.00
$5.00 per kg.
= 200 per
kgs kg.
= $1,029
Price variance
$21 favorable
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= $1,050
= $1,000
Quantity variance
$50 unfavorable
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
© 2006 McGraw-Hill Ryerson Ltd.
Responsibility for Material Variances
Materials Quantity Variance
Production Manager
Materials Price Variance
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.
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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.
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Your poor scheduling
sometimes requires me to
rush order material at a
higher price, causing
unfavorable price variances.
Quick Check 
Zippy
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.
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Hanson’s material price variance (MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
© 2006 McGraw-Hill Ryerson Ltd.
Zippy
Quick Check 
Zippy
Hanson’s material price variance (MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
MPV = AQ(AP - SP)
d. $800 favorable.MPV = 1,700 lbs. × ($3.90 - 4.00)
MPV = $170 Favorable
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Zippy
Hanson’s material quantity variance (MQV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Zippy
Hanson’s material 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
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Zippy
Standard Quantity
×
Standard Price
1,700 lbs.
×
$3.90 per lb.
1,700 lbs.
×
$4.00 per lb.
1,500 lbs.
×
$4.00 per lb.
= $6,630
= $ 6,800
= $6,000
Price variance
$170 favorable
© 2006 McGraw-Hill Ryerson Ltd.
Quantity variance
$800 unfavorable
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.
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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?
© 2006 McGraw-Hill Ryerson Ltd.
The price variance is
computed on the entire
quantity purchased.
The quantity variance
is computed only on
the quantity used.
Quick Check  Continued
Zippy
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.
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check  Continued
Actual Quantity
Purchased
×
Actual Price
Actual Quantity
Purchased
×
Standard Price
2,800 lbs.
×
$3.90 per lb.
2,800 lbs.
×
$4.00 per lb.
= $10,920
= $11,200
Price variance
$280 favorable
© 2006 McGraw-Hill Ryerson Ltd.
Zippy
Price variance increases
because quantity
purchased increases.
Quick Check  Continued
Actual Quantity
Used
×
Standard Price
Standard Quantity
×
Standard Price
1,700 lbs.
×
$4.00 per lb.
1,500 lbs.
×
$4.00 per lb.
= $6,800
= $6,000
Quantity variance is
unchanged because
actual and standard
quantities are unchanged.
© 2006 McGraw-Hill Ryerson Ltd.
Zippy
Quantity variance
$800 unfavorable
Further Analysis of Materials Variances: Mix
and Yield
When the production process requires the
input of more than one material, the material
quantity variance (MQV) can be further
broken down into mix variance and yield
variance.
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Mix and Yield Variances
Actual Quantity
×
Standard Price
Actual Quantity
@ Std. Mix (M)
×
Standard Price
Mix Variance
Standard Quantity
×
Standard Price
Yield Variance
Material Quantity Variance
SP(AQ - M)
AQ = Actual Quantity
SP = Standard Price
© 2006 McGraw-Hill Ryerson Ltd.
SP(M - SQ)
M = AQ @ Std. Mix
SQ = Standard Quantity
Example of Mix and Yield Variances
• One unit of finished goods requires the following input
mix:
 2 kgs of A with a standard price of $1.50/kg
 3 kgs of B with a standard price of $2.50/kg
• The standard mix is thus 2A:3B
• During the period, 150 units of finished goods were
produced using 350 kgs of A and 450 kgs of B.
© 2006 McGraw-Hill Ryerson Ltd.
35
2
5
Mix and Yield Variances
• Mix Variance: SP(AQ - M)
Material A: $1.50 x [350 – 2/5 (350 + 450)] = $45 U
Material B: $2.50 x [450 – 3/5 (350 + 450)] = $75 F
• Yield Variance: SP(M - SQ)
Material A: $1.50 x [2/5 (350 + 450) – 150(2)] = $30 U
Material B: $2.50 x [3/5 (350 + 450) – 150 (3)] = $75 U
• Material Quantity Variance: SP(AQ - SQ)
Material A: $1.50 x [350 – 150(2)] = $75 U
Material B: $2.50 x [450 – 150 (3)] = $-0- U
© 2006 McGraw-Hill Ryerson Ltd.
Material Mix and Yield Variances
80
60
40
20
Mix
Yield
Quantity
0
-20
-40
-60
-80
A
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B
Labour Variances Example
Glacier Peak Outfitters has the following direct
labour 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 labour cost of $26,250 to make
2,000 parkas.
© 2006 McGraw-Hill Ryerson Ltd.
Labour Variances Summary
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
2,500 hours
×
$10.50 per hour
2,500 hours
×
$10.00 per hour.
= $26,250
= $25,000
Rate variance
$1,250 unfavorable
© 2006 McGraw-Hill Ryerson Ltd.
Standard Hours
×
Standard Rate
2,400 hours
×
$10.00 per hour
= $24,000
Efficiency variance
$1,000 unfavorable
Labour Variances Summary
Actual Hours
×
Actual Rate
2,500 hours
×
$10.50 per hour
= $26,250
Actual Hours
×
Standard Rate
2,500 hours
2,400 hours
×  2,500 hours
×
$26,250
$10.00
per hour.
= $10.50
per hour $10.00 per hour
= $25,000
Rate variance
$1,250 unfavorable
© 2006 McGraw-Hill Ryerson Ltd.
Standard Hours
×
Standard Rate
= $24,000
Efficiency variance
$1,000 unfavorable
Labour Variances Summary
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
Standard Hours
×
Standard Rate
2,500 hours
2,500 hours
2,400 hours
×
×
1.2 hours per ×parka  2,000
$10.50 per hour parkas
$10.00
per hour.
$10.00 per hour
= 2,400
hours
= $26,250
= $25,000
Rate variance
$1,250 unfavorable
© 2006 McGraw-Hill Ryerson Ltd.
= $24,000
Efficiency variance
$1,000 unfavorable
Labour Variances:
Using the Factored Equations
Labour 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
Labour efficiency variance
LEV = SR (AH - SH)
= $10.00 per hour (2,500 hours – 2,400 hours)
= $10.00 per hour (100 hours)
= $1,000 unfavorable
© 2006 McGraw-Hill Ryerson Ltd.
Responsibility for Labour Variances
Production managers are
usually held accountable
for labour variances
because they can
influence the:
Mix of skill levels
assigned to work tasks.
Level of employee
motivation.
Quality of production
supervision.
Production Manager
© 2006 McGraw-Hill Ryerson Ltd.
Quality of training
provided to employees.
Responsibility for
Labour Variances
I am not responsible for
the unfavorable labour
efficiency variance!
You purchased cheap
material, so it took more
time to process it.
© 2006 McGraw-Hill Ryerson Ltd.
I think it took more time
to process the
materials because the
Maintenance
Department has poorly
maintained your
equipment.
Quick Check 
Zippy
Hanson Inc. has the following direct labour
standard to manufacture one Zippy:
1.5 standard hours per Zippy at $12.00 per
direct labour hour
Last week 1,550 direct labour hours were
worked at a total labour cost of $18,910
to make 1,000 Zippies.
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Hanson’s labour rate variance (LRV) for
the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
© 2006 McGraw-Hill Ryerson Ltd.
Zippy
Quick Check 
Zippy
Hanson’s labour rate variance (LRV) for
the week was:
a. $310 unfavorable.
b. $310 favorable.
LRV = AH(AR - SR)
c. $300 unfavorable.
LRV = 1,550 hrs($12.20 - $12.00)
d. $300 favorable.
LRV = $310 unfavorable
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Zippy
Hanson’s labour efficiency variance (LEV)
for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Zippy
Hanson’s labour 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
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
1,550 hours
×
$12.20 per hour
1,550 hours
×
$12.00 per hour
= $18,910
= $18,600
Rate variance
$310 unfavorable
© 2006 McGraw-Hill Ryerson Ltd.
Zippy
Standard Hours
×
Standard Rate
1,500 hours
×
$12.00 per hour
= $18,000
Efficiency variance
$600 unfavorable
Variable Manufacturing Overhead
Variances Example
Glacier Peak Outfitters has the following
variable manufacturing overhead 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.
© 2006 McGraw-Hill Ryerson Ltd.
Variable Manufacturing Overhead
Variances Summary
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
Standard Hours
×
Standard Rate
2,500 hours
×
$4.20 per hour
2,500 hours
×
$4.00 per hour
2,400 hours
×
$4.00 per hour
= $10,500
= $10,000
= $9,600
Spending variance
$500 unfavorable
© 2006 McGraw-Hill Ryerson Ltd.
Efficiency variance
$400 unfavorable
Variable Manufacturing Overhead
Variances Summary
Actual Hours
×
Actual Rate
2,500 hours
×
$4.20 per hour
= $10,500
Actual Hours
×
Standard Rate
2,500 hours
2,400 hours
×
$10,500×  2,500 hours
$4.00
per per
hourhour
$4.00 per hour
= $4.20
= $10,000
Spending variance
$500 unfavorable
© 2006 McGraw-Hill Ryerson Ltd.
Standard Hours
×
Standard Rate
= $9,600
Efficiency variance
$400 unfavorable
Variable Manufacturing Overhead
Variances Summary
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
2,500 hours
2,500 hours
×
1.2 hours per ×parka  2,000
$4.20 per hour parkas
$4.00
per hour
= 2,400
hours
= $10,500
= $10,000
Spending variance
$500 unfavorable
© 2006 McGraw-Hill Ryerson Ltd.
Standard Hours
×
Standard Rate
2,400 hours
×
$4.00 per hour
= $9,600
Efficiency variance
$400 unfavorable
Variable Manufacturing Overhead
Variances: Using Factored Equations
Variable manufacturing overhead spending variance
VMSV = 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
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Zippy
Hanson Inc. has the following variable
manufacturing overhead standard to
manufacture one Zippy:
1.5 standard hours per Zippy at $3.00 per
direct labour hour
Last week 1,550 hours were worked to make
1,000 Zippies, and $5,115 was spent for
variable manufacturing overhead.
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Hanson’s spending variance (VOSV) for
variable manufacturing overhead for
the week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.
© 2006 McGraw-Hill Ryerson Ltd.
Zippy
Quick Check 
Zippy
Hanson’s spending variance (VOSV) for
variable manufacturing overhead for
the week was:
a. $465 unfavorable.
b. $400 favorable.
VOSV = AH(AR - SR)
c. $335 unfavorable.
VOSV = 1,550 hrs($3.30 - $3.00)
d. $300 favorable. VOSV = $465 unfavorable
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Hanson’s efficiency variance (VOEV) for
variable manufacturing overhead for the
week was:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.
d. $150 favorable.
© 2006 McGraw-Hill Ryerson Ltd.
Zippy
Quick Check 
Zippy
Hanson’s efficiency variance (VOEV) for
variable manufacturing overhead for the
week was:
a. $435 unfavorable.
b. $435 favorable. 1,000 units × 1.5 hrs per unit
c. $150 unfavorable.
d. $150 favorable.
VOEV = SR(AH - SH)
VOEV = $3.00(1,550 hrs - 1,500 hrs)
VOEV = $150 unfavorable
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Zippy
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
Standard Hours
×
Standard Rate
1,550 hours
×
$3.30 per hour
1,550 hours
×
$3.00 per hour
1,500 hours
×
$3.00 per hour
= $5,115
= $4,650
Spending variance
$465 unfavorable
© 2006 McGraw-Hill Ryerson Ltd.
= $4,500
Efficiency variance
$150 unfavorable
Variance Analysis and
Management by Exception
How do I know
which variances to
investigate?
© 2006 McGraw-Hill Ryerson Ltd.
Larger variances, in
dollar amount or as
a percentage of the
standard, are
investigated first.
Exh.
10-9
A Statistical Control Chart
Warning signals for investigation
Favorable Limit
•
Desired Value
•
•
•
•
•
•
Unfavorable Limit
1
2
3
4
5
6
7
Variance Measurements
© 2006 McGraw-Hill Ryerson Ltd.
•
8
•
9
Advantages of Standard Costs
Promotes economy
and efficiency
Management by
exception
Advantages
Simplified
bookkeeping
© 2006 McGraw-Hill Ryerson Ltd.
Enhances
responsibility
accounting
Potential Problems with Standard Costs
Emphasizing standards
may exclude other
important objectives.
Standard cost
reports may
not be timely.
Invalid assumptions
about the relationship
between labour
cost and output.
© 2006 McGraw-Hill Ryerson Ltd.
Potential
Problems
Favorable
variances may
be misinterpreted.
Emphasis on
negative may
impact morale.
Continuous
improvement may
be more important
than meeting standards.
Review Problem
Standard Costs
© 2006 McGraw-Hill Ryerson Ltd.
Review Problem
Xavier Company produces a single product. Variable
manufacturing overhead is applied to products on the
basis of direct labour-hours. The standard costs for
one unit of product are as follows:



Direct material: 6 grams at $0.50 per gram
Direct labour: 1.8 hours at $10 per hour
Variable manufacturing overhead:
1.8 hours at $5 per hour
Total standard variable cost per unit
© 2006 McGraw-Hill Ryerson Ltd.
$ 3
18
9
$30
Review Problem
During June, 2,000 units were produced. The costs
associated with June’s operations were as follows:
 Materials purchased: 18,000 grams at $0.60
$10,800
 Materials used in production: 14,000 grams
—
 Direct labour: 4,000 hours at $9.75 per hour
39,000
 Variable manufacturing overhead costs incurred 20,800
Compute the materials, labour, and variable
manufacturing overhead variances.
© 2006 McGraw-Hill Ryerson Ltd.
Appendix 10A
Journal Entries to Record Variances
We will use information form the Glacier Peak Outfitters
example 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
Labour
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 labour and material variances.
© 2006 McGraw-Hill Ryerson Ltd.
Appendix 10A
Journal Entries to Record Variances
GENERAL JOURNAL
Date
Description
Raw Materials
Post.
Ref.
Page 4
Debit
Credit
1,050
Materials Price Variance
21
Accounts Payable
1,029
To record the purchase of material
Work in Process
Materials Quantity Variance
Raw materials
To record the use of material
© 2006 McGraw-Hill Ryerson Ltd.
1,000
50
1,050
Appendix 10A
Journal Entries to Record Variances
GENERAL JOURNAL
Date
Description
Work in Process
Post.
Ref.
Page 4
Debit
24,000
Labour Rate Variance
1,250
Labour Efficiency variance
1,000
Wages Payable
Credit
26,250
To record direct labour
Variable manufacturing overhead variances are usually not
recorded in the accounts separately, but are determined as part of
the general analysis of overhead that is covered in the next chapter.
© 2006 McGraw-Hill Ryerson Ltd.
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 to
cost of goods sold.
 Favorable variances decrease cost of goods sold.
 Unfavorable variances increase cost of goods sold.
© 2006 McGraw-Hill Ryerson Ltd.
End of Chapter 10
© 2006 McGraw-Hill Ryerson Ltd.