Transcript Garrison9ce_Ch10

10-1
MANAGERIAL
ACCOUNTING
Ninth Canadian Edition
GARRISON, CHESLEY, CARROLL, WEBB, LIBBY
Standard Costs
and Overhead Analysis
Chapter 10
PowerPoint Author:
Robert G. Ducharme, MAcc, CA
University of Waterloo, School of Accounting and Finance
Copyright © 2012 McGraw-Hill Ryerson Limited
10-2
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
Cost (price)
standards specify
how much should be
paid for each unit
of the input.
LO 1
10-3
Standard Costs
Amount
Deviations from standards deemed significant
are brought to the attention of management, a
practice known as management by exception.
Standard
Direct
Material
Direct
Labour
Manufacturing
Overhead
Type of Product Cost
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
10-4
Exhibit
10-1
Variance Analysis Cycle
Identify
questions
Receive
explanations
Conduct next
period’s
operations
Analyze
variances
Prepare standard
cost performance
report
Copyright © 2012 McGraw-Hill Ryerson Limited
Take
corrective
actions
Begin
LO 1
10-5
Setting Standard Costs
Accountants, engineers, purchasing
agents, and production managers
combine efforts to set standards that encourage
efficient future production.
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LO 1
10-6
Setting Standard Costs
Should we use
ideal standards that
require employees to
work at 100%
peak efficiency?
Engineer
Copyright © 2012 McGraw-Hill Ryerson Limited
I recommend using practical
standards that are currently
attainable with reasonable and
efficient effort.
Managerial
Accountant
LO 1
10-7
Setting Direct Material Standards
Standard Price
per Unit
Standard Quantity
per Unit
Final, delivered
cost of materials,
net of discounts.
Summarized in
a Bill of Materials.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
10-8
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
10-9
Setting Direct Labour Standards
Standard Rate
per Hour
Standard Hours
per Unit
Often a single
rate is used that reflects
the mix of wages earned.
Use time and
motion studies for
each labour operation.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
10-10
Setting Variable Overhead Standards
Price
Standards
Quantity
Standards
The rate is the
variable portion of the
predetermined overhead
rate.
The quantity is the
activity in the allocation
base used to calculate the
predetermined overhead.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
10-11
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
Copyright © 2012 McGraw-Hill Ryerson Limited
A
B
A×B
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
LO 1
10-12
Standards vs. Budgets
Are standards the
same as budgets?
A budget is set for
total costs.
Copyright © 2012 McGraw-Hill Ryerson Limited
A standard is a per
unit cost.
Standards are often
used when
preparing budgets.
LO 1
10-13
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
10-14
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
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
10-15
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
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
10-16
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Spending Variance
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
10-17
A General Model for Variance Analysis
Actual quantity is the amount of direct materials, direct
labour, and variable manufacturing overhead actually used.
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Spending Variance
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
10-18
A General Model for Variance Analysis
Standard quantity is the standard quantity allowed
for the actual output of the period.
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Spending Variance
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
10-19
A General Model for Variance Analysis
Actual price is the amount actually
paid for the input used.
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Spending Variance
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
10-20
A General Model for Variance Analysis
Standard price is the amount that should
have been paid for the input used.
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Spending Variance
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
10-21
A General Model for Variance Analysis
(AQ × AP) – (AQ × SP)
(AQ × SP) – (SQ × SP)
AQ = Actual Quantity
AP = Actual Price
SP = Standard Price
SQ = Standard Quantity
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Spending Variance
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
10-22
Material Variances Example
Glacier Peak Outfitters has the following direct
material standard for the fibrefill in its mountain
parka.
0.1 kg. of fibrefill per parka at $5.00 per kg.
Last month 210 kgs of fibrefill were purchased
and used to make 2,000 parkas. The material
cost a total of $1,029.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
10-23
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
= $1,050
Price variance
$21 favourable
200 kgs.
×
$5.00 per kg.
= $1,000
Quantity variance
$50 unfavourable
$29 unfavourable
Copyright © 2012 McGraw-Hill Ryerson Limited
Standard Quantity
×
Standard Price
LO 2
10-24
Material Variances Summary
Actual Quantity
×
Actual Price
210 kgs.
×
$4.90 per kg.
= $1,029
Actual Quantity
×
Standard Price
210 kgs.
$1,029  ×
210 kgs
$5.00per
perkg
kg.
= $4.90
= $1,050
Price variance
$21 favourable
200 kgs.
×
$5.00 per kg.
= $1,000
Quantity variance
$50 unfavourable
$29 unfavourable
Copyright © 2012 McGraw-Hill Ryerson Limited
Standard Quantity
×
Standard Price
LO 2
10-25
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
= $1,050
Price variance
$21 favourable
Quantity variance
$50 unfavourable
$29 unfavourable
Copyright © 2012 McGraw-Hill Ryerson Limited
= $1,000
LO 2
Material Variances:
Using the Factored Equations
10-26
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
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
10-27
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
10-28
Responsibility for Material Variances
I am not responsible for
this unfavourable material
quantity variance.
You purchased cheap
material, so my people
had to use more of it.
Copyright © 2012 McGraw-Hill Ryerson Limited
Your poor scheduling
sometimes requires me to
rush order material at a
higher price, causing
unfavourable price variances.
LO 2
10-29
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
10-30
Quick Check 
Zippy
Hanson’s material price variance (MPV)
for the week was:
a. $170 unfavourable.
b. $170 favourable.
c. $800 unfavourable.
d. $800 favourable.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
10-31
Quick Check 
Zippy
Hanson’s material price variance (MPV)
for the week was:
a. $170 unfavourable.
b. $170 favourable.
c. $800 unfavourable.
MPV = AQ (AP – SP)
d. $800 favourable.
MPV = 1,700 lbs. × ($3.90 – 4.00)
MPV = $170 favourable
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
10-32
Quick Check 
Zippy
Hanson’s material quantity variance (MQV)
for the week was:
a. $170 unfavourable.
b. $170 favourable.
c. $800 unfavourable.
d. $800 favourable.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
10-33
Quick Check 
Zippy
Hanson’s material quantity variance (MQV)
for the week was:
a. $170 unfavourable.
b. $170 favourable.
c. $800 unfavourable.
d. $800 favourable.
MQV = SP (AQ – SQ)
MQV = $4.00 × (1,700 lbs – 1,500 lbs)
MQV = $800 unfavourable
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
10-34
Quick Check 
Actual Quantity
×
Actual Price
Zippy
Actual Quantity
×
Standard Price
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 favourable
Copyright © 2012 McGraw-Hill Ryerson Limited
Quantity variance
$800 unfavourable
$630 unfavourable
LO 2
10-35
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
I’ll start computing
the price variance
when material is
purchased rather than
when it’s used.
LO 2
10-36
Material Variances
Hanson purchased and
used 1,700 pounds.
How are the variances
computed if the amount
purchased differs from
the amount used?
Copyright © 2012 McGraw-Hill Ryerson Limited
The price variance is
computed on the entire
quantity purchased.
The quantity variance
is computed only on
the quantity used.
LO 2
10-37
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
10-38
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 favourable
Copyright © 2012 McGraw-Hill Ryerson Limited
Zippy
Price variance increases
because quantity
purchased increases.
LO 2
10-39
Quick Check  Continued
Zippy
Actual Quantity
Used
×
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
Standard Quantity
×
Standard Price
Quantity variance
$800 unfavourable
LO 2
10-40
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
10-41
Labour Variances Summary
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
Standard Hours
×
Standard Rate
2,500 hours
×
$10.50 per hour
2,500 hours
×
$10.00 per hour
2,400 hours
×
$10.00 per hour
= $26,250
= $25,000
= $24,000
Rate variance
$1,250 unfavourable
Efficiency variance
$1,000 unfavourable
$2,250 unfavourable
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
10-42
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 unfavourable
= $24,000
Efficiency variance
$1,000 unfavourable
$2,250 unfavourable
Copyright © 2012 McGraw-Hill Ryerson Limited
Standard Hours
×
Standard Rate
LO 3
10-43
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 unfavourable
Efficiency variance
$1,000 unfavourable
$2,250 unfavourable
Copyright © 2012 McGraw-Hill Ryerson Limited
= $24,000
LO 3
Labour Variances:
Using the Factored Equations
10-44
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 unfavourable
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 unfavourable
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
10-45
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
Copyright © 2012 McGraw-Hill Ryerson Limited
Quality of training
provided to employees.
LO 3
10-46
Responsibility for Labour Variances
I am not responsible for
the unfavourable labour
efficiency variance!
You purchased cheap
material, so it took more
time to process it.
Copyright © 2012 McGraw-Hill Ryerson Limited
I think it took more time
to process the
materials because the
Maintenance
Department has poorly
maintained your
equipment.
LO 3
10-47
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
10-48
Quick Check 
Zippy
Hanson’s labour rate variance (LRV) for the
week was:
a. $310 unfavourable.
b. $310 favourable.
c. $300 unfavourable.
d. $300 favourable.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
10-49
Quick Check 
Zippy
Hanson’s labour rate variance (LRV) for the
week was:
a. $310 unfavourable.
b. $310 favourable.
LRV = AH (AR – SR)
c. $300 unfavourable.
LRV = 1,550 hrs × ($12.20 – $12.00)
LRV = $310 unfavourable
d. $300 favourable.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
10-50
Quick Check 
Zippy
Hanson’s labour efficiency variance (LEV)
for the week was:
a. $590 unfavourable.
b. $590 favourable.
c. $600 unfavourable.
d. $600 favourable.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
10-51
Quick Check 
Zippy
Hanson’s labour efficiency variance (LEV)
for the week was:
a. $590 unfavourable.
b. $590 favourable.
c. $600 unfavourable.
d. $600 favourable.
LEV = SR (AH – SH)
LEV = $12.00 × (1,550 hrs – 1,500 hrs)
LEV = $600 unfavourable
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
10-52
Quick Check 
Zippy
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 unfavourable
Copyright © 2012 McGraw-Hill Ryerson Limited
Standard Hours
×
Standard Rate
1,500 hours
×
$12.00 per hour
= $18,000
Efficiency variance
$600 unfavourable
$910 unfavourable
LO 3
Variable Manufacturing Overhead Variances
Example
10-53
Glacier Peak Outfitters has the following direct
variable manufacturing overhead labour
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 4
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 unfavourable
Copyright © 2012 McGraw-Hill Ryerson Limited
10-54
Efficiency variance
$400 unfavourable
$900 unfavourable
LO 4
Variable Manufacturing Overhead Variances
Summary
Actual Hours
×
Actual Rate
2,500 hours
×
$4.20 per hour
= $10,500
Actual Hours
×
Standard Rate
Standard 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 unfavourable
Copyright © 2012 McGraw-Hill Ryerson Limited
10-55
= $9,600
Efficiency variance
$400 unfavourable
$900 unfavourable
LO 4
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 unfavourable
Copyright © 2012 McGraw-Hill Ryerson Limited
10-56
Standard Hours
×
Standard Rate
2,400 hours
×
$4.00 per hour
= $9,600
Efficiency variance
$400 unfavourable
$900 unfavourable
LO 4
Variable Manufacturing Overhead Variances:
Using Factored Equations
10-57
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 unfavourable
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 unfavourable
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 4
10-58
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 4
10-59
Quick Check 
Zippy
Hanson’s spending variance (VOSV) for
variable manufacturing overhead for
the week was:
a. $465 unfavourable.
b. $400 favourable.
c. $335 unfavourable.
d. $300 favourable.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 4
10-60
Quick Check 
Zippy
Hanson’s spending variance (VOSV) for
variable manufacturing overhead for
the week was:
a. $465 unfavourable.
b. $400 favourable.
VOSV = AH (AR – SR)
c. $335 unfavourable.
VOSV = 1,550 hrs × ($3.30 – $3.00)
VOSV = $465 unfavourable
d. $300 favourable.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 4
10-61
Quick Check 
Zippy
Hanson’s efficiency variance (VOEV) for
variable manufacturing overhead for the
week was:
a. $435 unfavourable.
b. $435 favourable.
c. $150 unfavourable.
d. $150 favourable.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 4
10-62
Quick Check 
Zippy
Hanson’s efficiency variance (VOEV) for
variable manufacturing overhead for the
week was:
a. $435 unfavourable.
b. $435 favourable. 1,000 units × 1.5 hrs per unit
c. $150 unfavourable.
d. $150 favourable.
VOEV = SR (AH – SH)
VOEV = $3.00 × (1,550 hrs – 1,500 hrs)
VOEV = $150 unfavourable
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 4
10-63
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 unfavourable
Copyright © 2012 McGraw-Hill Ryerson Limited
= $4,500
Efficiency variance
$150 unfavourable
$615 unfavourable
LO 4
10-64
Overhead Rates and Overhead Analysis
Recall that overhead costs are assigned to
products and services using a
predetermined overhead rate (POHR):
Assigned Overhead = POHR × Standard Activity
POHR
Copyright © 2012 McGraw-Hill Ryerson Limited
=
Overhead from the
flexible budget for the
denominator level of activity
Denominator level of activity
LO 5
10-65
Overhead Rates and Overhead Analysis
The predetermined overhead rate
can be broken down into fixed
and variable components.
The variable
component is useful
for preparing and analyzing
variable overhead
variances.
Copyright © 2012 McGraw-Hill Ryerson Limited
The fixed
component is useful
for preparing and analyzing
fixed overhead
variances.
LO 5
10-66
Normal versus Standard Cost Systems
In a normal cost
system, overhead is
applied to work in
process based on
the actual number
of hours worked
in the period.
Copyright © 2012 McGraw-Hill Ryerson Limited
In a standard cost
system, overhead is
applied to work in
process based on
the standard hours
allowed for the actual
output of the period.
LO 6
10-67
Fixed Overhead Variances
Actual Fixed
Overhead
Incurred
Budget
Variance
Fixed
Overhead
Budget
DH × FR
Fixed
Overhead
Applied
SH × FR
Volume
Variance
FR = Standard Fixed Overhead Rate
SH = Standard Hours Allowed
DH = Denominator Hours
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
10-68
Overhead Rates and Overhead
Analysis – Example
ColaCo prepared this
Machine
Hours
3,000
Total
Variable
Overhead
$
4,000
budget for overhead:
Variable
Overhead
Rate
6,000
?
8,000
?
Total
Fixed
Overhead
$
Fixed
Overhead
Rate
9,000
?
9,000
?
Let’s calculate overhead rates.
ColaCo applies overhead based
on machine-hour activity.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
10-69
Overhead Rates and Overhead
Analysis – Example
ColaCo prepared this
Machine
Hours
3,000
budget for overhead:
Total
Variable
Overhead
Variable
Overhead
Rate
Total
Fixed
Overhead
$
$
$
4,000
6,000
8,000
2.00
2.00
Fixed
Overhead
Rate
9,000
?
9,000
?
Rate = Total Variable Overhead ÷ Machine Hours
This rate is constant at all levels of activity.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
10-70
Overhead Rates and Overhead
Analysis – Example
ColaCo prepared this
Machine
Hours
3,000
budget for overhead:
Total
Variable
Overhead
Variable
Overhead
Rate
Total
Fixed
Overhead
Fixed
Overhead
Rate
$
$
$
$
4,000
6,000
8,000
2.00
2.00
9,000
9,000
3.00
2.25
Rate = Total Fixed Overhead ÷ Machine Hours
This rate decreases when activity increases.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
10-71
Overhead Rates and Overhead
Analysis – Example
ColaCo prepared this
Machine
Hours
3,000
budget for overhead:
Total
Variable
Overhead
Variable
Overhead
Rate
Total
Fixed
Overhead
Fixed
Overhead
Rate
$
$
$
$
4,000
6,000
8,000
2.00
2.00
9,000
9,000
3.00
2.25
The total POHR is the sum of
the fixed and variable rates
for a given activity level.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
10-72
Fixed Overhead Variances – Example
ColaCo’s actual production required 3,200
standard machine hours. Actual fixed overhead was
$8,450. The predetermined overhead rate is based
on 3,000 machine hours.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
10-73
Overhead Variances
Now let’s turn
our attention
to calculating
fixed overhead
variances.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
10-74
Fixed Overhead Variances – Example
Actual Fixed
Overhead
Incurred
Fixed
Overhead
Budget
$8,450
$9,000
Fixed
Overhead
Applied
Budget variance
$550 favourable
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
10-75
Fixed Overhead Variances –
A Closer Look
Budget Variance
Results from spending
more or less than
expected for fixed
overhead items.
Copyright © 2012 McGraw-Hill Ryerson Limited
Now, let’s use the
standard hours allowed
to compute the fixed
overhead volume
variance.
LO 6
10-76
Fixed Overhead Variances – Example
Actual Fixed
Overhead
Incurred
Fixed
Overhead
Budget
Fixed
Overhead
Applied
SH × FR
3,200 hours
×
$3.00 per hour
$8,450
$9,000
$9,600
Budget variance
$550 favourable
Copyright © 2012 McGraw-Hill Ryerson Limited
Volume variance
$600 favourable
$1,150 favourable
LO 6
10-77
Volume Variance – A Closer Look
Volume
Variance
Results when standard hours
allowed for actual output differs
from the denominator activity.
Unfavourable
when standard hours
< denominator hours
Copyright © 2012 McGraw-Hill Ryerson Limited
Favourable
when standard hours
> denominator hours
LO 6
10-78
Volume Variance – A Closer Look
Volume
Variance
Does not
measure overor under spending
Results when standard hours
actualtreating
output differs
Itallowed
resultsforfrom
fixed
from the denominator activity.
overhead as if it were a
variable cost.
Unfavourable
when standard hours
< denominator hours
Copyright © 2012 McGraw-Hill Ryerson Limited
Favourable
when standard hours
> denominator hours
LO 6
10-79
Quick Check 
Yoder Enterprises’ actual production for the
period required 2,100 standard direct labour
hours. Actual fixed overhead for the period was
$14,800. The budgeted fixed overhead was
$14,450. The predetermined fixed overhead rate
was $7 per direct labour hour. What was the
budget variance?
a. $350 U
b. $350 F
c. $100 F
d. $100 U
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
10-80
Quick Check 
Budget
variance
Yoder Enterprises’
actual production for the
period
required
standard
directfixed
labour
= Actual
fixed 2,100
overhead
– Budgeted
overhead
hours. Actual fixed overhead for the period was
= $14,800
$14,450 fixed overhead was
$14,800.
The–budgeted
$14,450.
= $350The
U predetermined fixed overhead rate
was $7 per direct labour hour. What was the
budget variance?
a. $350 U
b. $350 F
c. $100 F
d. $100 U
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
10-81
Quick Check 
Yoder Enterprises’ actual production for the
period required 2,100 standard direct labour
hours. Actual fixed overhead for the period was
$14,800. The budgeted fixed overhead was
$14,450. The predetermined fixed overhead rate
was $7 per direct labour hour. What was the
volume variance?
a. $250 U
b. $250 F
c. $100 F
d. $100 U
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
10-82
Quick Check 
Volume
variance actual production for the
Yoder
Enterprises’
Budgeted
fixedstandard
overheaddirect
– (SH labour
 FR)
period =required
2,100
$14,450
– (2,100
hoursfor
 $7
hour)was
hours. =Actual
fixed
overhead
theper
period
$14,800.
The budgeted
fixed overhead was
= $14,450
– $14,700
$14,450.
The Fpredetermined fixed overhead rate
= $250
was $7 per direct labour hour. What was the
volume variance?
a. $250 U
b. $250 F
c. $100 F
d. $100 U
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
10-83
Quick Check Summary
Actual Fixed
Overhead
Incurred
$14,800
Fixed
Overhead
Budget
$14,450
Budget variance
$350 unfavourable
Copyright © 2012 McGraw-Hill Ryerson Limited
Fixed
Overhead
Applied
SH × FR
2,100 hours
×
$7.00 per hour
$14,700
Volume variance
$250 favourable
$1,150 favourable
LO 6
Fixed Overhead Variances –
A Graphic Approach
10-84
Let’s look at a
graph showing
fixed overhead
variances. We will
use ColaCo’s
numbers from the
previous example.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
10-85
Fixed Overhead Variances –
A Graphic Approach
Cost
$9,000 budgeted fixed OH
Activity
3,000 Hours
Expected
Activity
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
10-86
Fixed Overhead Variances –
A Graphic Approach
Cost
$9,000 budgeted fixed OH
{
$8,450 actual fixed OH
$550
Favourable
Budget
Variance
Activity
3,000 Hours
Expected
Activity
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
Fixed Overhead Variances –
A Graphic Approach
Cost
$600
Favourable
Volume
Variance
{
$550 {
Favourable
10-87
3,200 machine hours × $3.00 fixed overhead rate
$9,600 applied fixed OH
$9,000 budgeted fixed OH
$8,450 actual fixed OH
Budget
Variance
3,000 Hours
Expected
Activity
Copyright © 2012 McGraw-Hill Ryerson Limited
Activity
3,200
Standard
Hours LO 6
Overhead Variances and Under- or Overapplied
Overhead Cost
10-88
In a standard
cost system:
Unfavourable
variances are equivalent
to underapplied overhead.
Favourable
variances are equivalent
to overapplied overhead.
The sum of the overhead variances
equals the under- or overapplied
overhead cost for a period.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
10-89
Theoretical vs. Practical Capacity
Theoretical capacity
is the volume of
capacity if all available
production time is
used and no waste
occurs.
(i.e. operations conducted
24 hours per day, 7 days
per week, 365 days per
year, with no downtime)
Copyright © 2012 McGraw-Hill Ryerson Limited
Practical capacity
represents what
could be produced
with operations at
theoretical capacity
less unavoidable
downtime.
LO 7
10-90
Variance Analysis and
Management by Exception
How do I know
which variances to
investigate?
Copyright © 2012 McGraw-Hill Ryerson Limited
Larger variances, in
dollar amount or as
a percentage of the
standard, are
investigated first.
LO 7
10-91
Exhibit
10-9
A Statistical Control Chart
Warning signals for investigation
Favourable Limit
•
Desired Value
•
•
•
•
•
•
Unfavourable Limit
1
2
3
4
5
6
7
•
8
•
9
Variance Measurements
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 7
10-92
Advantages of Standard Costs
Management by
exception
Promotes economy
and efficiency
Advantages
Simplified
bookkeeping
Copyright © 2012 McGraw-Hill Ryerson Limited
Enhances
responsibility
accounting
LO 7
10-93
Potential Problems with Standard Costs
Emphasizing standards
may exclude other
important objectives.
Potential
Problems
Standard cost
reports may
not be timely.
Invalid assumptions
about the relationship
between labour
cost and output.
Copyright © 2012 McGraw-Hill Ryerson Limited
Favourable
variances may
be misinterpreted.
Emphasis on
negative may
impact morale.
Continuous
improvement may
be more important
than meeting standards.
LO 7
10-94
Further Analysis of
Materials Variances
Appendix 10A
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 8
Appendix 10A – Further Analysis of Materials
Variances: Mix and Yield
10-95
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 8
10-96
Appendix 10A – 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
Copyright © 2012 McGraw-Hill Ryerson Limited
SP (M – SQ)
M = AQ @ Std. Mix
SQ = Standard Quantity
LO 8
10-97
Appendix 10A – 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.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 8
10-98
Appendix 10A – Mix and Yield Variances

Mix Variance: SP(AQ – M)
Material A: $1.50 × [350 – 2/5 (350 + 450)] = $45 U
Material B: $2.50 × [450 – 3/5 (350 + 450)] = $75 F

Yield Variance: SP(M – SQ)
Material A: $1.50 × [2/5 (350 + 450) – 150 (2)] = $30 U
Material B: $2.50 × [3/5 (350 + 450) – 150 (3)] = $75 U

Material Quantity Variance: SP(AQ – SQ)
Material A: $1.50 × [350 – 150 (2)] = $75 U
Material B: $2.50 × [450 – 150 (3)] = $-0- U
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 8
10-99
Appendix 10A – Material Mix and Yield Variances
80
60
40
20
Mix
Yield
Quantity
0
-20
-40
-60
-80
A
Copyright © 2012 McGraw-Hill Ryerson Limited
B
LO 8
10-100
General Ledger Entries
to Record Variances
Appendix 10B
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 9
10-101
Appendix 10B
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
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.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 9
10-102
Appendix 10B
Recording Material 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
1,000
50
1,050
To record the use of material
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 9
10-103
Appendix 10B
Recording Labour Variances
GENERAL JOURNAL
Date
Description
Post.
Ref.
Work in Process
Page 4
Debit
24,000
Labour Rate Variance
1,250
Labour Efficiency Variance
1,000
Wages Payable
Credit
26,250
To record incurrence of direct labour cost
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 9
Appendix 10B – Recording Variable
Manufacturing Overhead Variances
10-104
Variable manufacturing
overhead variances are usually not
recorded in the accounts separately,
but are determined as part of the
general analysis of overhead.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 9
Appendix 10B
Cost Flows in a Standard Cost System


Inventories are recorded at standard cost.
Variances are recorded as follows:



10-105
Favourable variances are credits, representing
savings in production costs.
Unfavourable variances are debits, representing
excess production costs.
Standard cost variances are usually closed to cost
of goods sold.


Unfavourable variances increase cost of goods sold.
Favourable variances decrease cost of goods sold.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 9
10-106
End of Chapter 10
Copyright © 2012 McGraw-Hill Ryerson Limited