2016-17 Term 1

ACCT112 Management
Accounting
Week 6
Standards and Variances

2016-17-T1-Aug to Dec 2016

Seminar Outline
Understand how budgeting is used as a
planning and control tool
Prepare a flexible budget
Static and flexible budget
Compute and interpret the variances

2016-17-T1-Aug to Dec 2016

Use of Budget in Planning & Control

Budget
(Benchmark)
Prepared based
on Standards

Actual Results

Compare

Variances
Management by exception
Analyse, Investigate,
Take corrective action
2016-17-T1-Aug to Dec 2016

NF Ltd produces winter jackets. Its strategy is to keeps

costs low and price its jackets competitively. NF has been
successful in executing the strategy through lean
production. Its excellent relationship with suppliers and
ability to shorten production throughput time have
enabled it not to keep any inventories for
materials, WIP and FG.
Each jacket requires 1.2 DLH and 0.1kg DM.
NF has a capacity to produce up to 3,000 jackets
annually. However, when it prepared the budget at the
beginning of the year, it had planned to produce only
1,900 jackets for the year due to the weak market
outlook.
Fixed overheads comprise mainly production equipment
rental, forecasted to be $4,560 for the year. Variable
overheads comprise 2016-17-T1-Aug
electricity
and production supplies, 4
to Dec 2016

NF set the following standards to prepare the budget:

Qty Standard Price
Standard
Selling price per
jacket

Std per
jacket

$40

Direct materials

0.1kg per
jacket

$5/kg

Direct labour

1.2DLH per
jacket

Variable Overhead
VOHR = $9,120/
(1,900x1.2DLH) =
$4/DLH

1.2DLH per
jacket
(Qty refers to
the qty of the
cost allocation
base)

Fixed Overhead
FOHR = $4,560/
(1,900x1.2DLH)
= $2/DLH

1.2 DLH per

$2/DLH
$2.40
jacket
(Price refers
(Qty refers to
to the POR)
2016-17-T1-Aug to Dec 2016
the
qty of the

$10/DLH

$0.50
$12.00

$4/DLH
$4.80
(Price refers
to the POR)

Planning or Static Budget

At the Beginning the year, the company
prepared the planning or static budget using
the standards.
Formula for
Static Planning
Budget
Sales quantity
Production Quantity
Revenue
Less Cost of Goods
Sold
Direct materials
Direct labour
Var Overhead
Fixed Overhead
Gross Margin
a

S
Q
$40a x S

Budget
1,900 jackets
1,900 jackets
$76,000

$0.50a x Q
$12.00a x Q
$4.80a x Q
$4,560

$950
$22,800
$9,120
$4,560
$38,570

Standard per jacket (refer to previous slide)

2016-17-T1-Aug to Dec 2016

At the End of the year, NF was happy that actual

gross margin was $47,721 higher than its target set at
the beginning of the year.
Budget
Actual
(Target)
Sales quantity
2,000
1,900
Production qty
2,000
1,900
Revenue
$90,000
$76,000
Less COGS
Direct materials
$1,029
$950
Direct labour
$26,250
$22,800
Var Overhead
$10,500
$9,120
Fixed Overhead
$4,500
$4,560
Gross Margin
$47,721
$38,570
NF wanted to know the reasons for the better than
expected performance so that it can reward the
managers who have done well; and identify areas for
improvement.
2016-17-T1-Aug to Dec 2016

Static Budget vs Actual Results

At the end of the period, the
period are known.
Static Planning
Bgt
Sales quantity
1,900
Production qty
1,900
Revenue
$76,000
Less COGS
Direct
materials
$950
Direct labour
$22,800
Var Overhead
$9,120
Fixed
Overhead
$4,560
Gross Margin
$38,570

actual results for the

Actual
2,000
2,000
$90,000

Variances

$14,000 F

$1,029
$26,250
$10,500

$79 U
U=
$3,450 U
$1,380 U BAD?

$4,500
$47,721

$60 F
$9,151 F

Favourable (F): Actual revenue > Bgt revenue; or Actual expense

< Bgt expense
Unfavourable (U): Actual revenue < Bgt revenue; or Actual
8
2016-17-T1-Aug to Dec 2016

Preparing a Flexible Budget

Prepared at
beginning of
year
Static

Prepared when
Actuals are
known
Flexible

Formula Planning
Actual
for Bgt Budget Budget Results
Sales Quantity
S
1,900
2,000
2,000
Production
Qty
Q
1,900
2,000
2,000
Revenue
$40a x S $76,000 $80,000 $90,000
Less COGS
Direct
$0.5a x
Materials
Q
$950
$1,000
$1,029
$12a x
Direct Labour
Q
$22,800 $24,000 $26,250
$4.80a x
Var Overhead
Q
$9,120
$9,600
$10,500
Fixed
a
Standard
Overhead
$4,560 $4,560 Comparison
$4,560
$4,500
more
2016-17-T1-Aug to Dec 2016
meaningful?
Gross Margin
$38,570 $40,840
$47,721

Variances when Actual Revenue Bgt

Revenue
Sales quantity
Production
Quantity
Revenue

Static
Planning
Budget
1,900

Actual
2,000

1,900
$76,000

2,000
$90,000

Variances

$14,000 F

Since Revenue = Sales Qty x Selling Price per unit,

Variance (i.e. Actual Revenue Bgt Revenue) is
due to:
1) Actual sales qty is different from Bgt sales qty
i.e. Activity Variance
2) Actual selling price is different from Bgt selling
price
i.e. Revenue Variance
2016-17-T1-Aug to Dec 2016

10

Variances when Actual Revenue Bgt

Revenue Revenu
Static
Planning Activity
Bgt
Variance
Sales
quantity

1,900

Flexibl
e
Budget
2,000

e
Varianc Actual
e
Results

Total
Var

2,000

$90,000
$76,000
$80,000
i.e.
i.e.
i.e.
2,000
1,900 Bgt
2,000
Actual
$10,000
$14,000
Revenue
Qty x $40 $4,000 F Actual Qty
Qty sold
F
F
std selling
sold x $40
x $45
price
std selling
Actual
price
selling
Rev
Bgt
Rev var
var =
= Flexible
Flexible
Bgt
Activity
price
Activity var
var =
= Static
Static Bgt
Bgt
Actual
Actual Results
Results
Flexible
Flexible Bgt
Bgt
Fav
Fav because
because higher
higher actual
actual
Fav
Fav because
because company
company sold
sold
selling
selling price
price $45
$45 is
is higher
higher than
than
100
100 jackets
jackets more
more than
than the
the
plan
plan $40
$40
plan
plan (i.e.
(i.e. 100
100 jackets
jackets xx $40
$40 =
=
(i.e.
(i.e. Each
Each piece
piece sold
sold earned
earned $5
$5
$4,000
$4,000 rev
rev more
more than
than bgt)
bgt)
more
more
than plan.
plan. 2,000
2,000 pc
pc sold
sold11
2016-17-T1-Aug to Dec
2016than
earned $10,000 rev more than

Cost Variances: When Actual Costs

Bgt Costs
INPUTS

Direct Material
Direct Labour
Variable
Overhead
Fixed Overhead

OUTPUT
Finished
Product

E.g. If Actual DM > Budgeted DM, what are the

possible
Actualreasons?
Q finished units
Bgt P finished units
produced
x Actual y kg of DM to
produce 1 finished unit
x Actual $r per 1 kg of DM
Actual DM = Q * y kg x
$r/kg

>

x Bgt z kg of DM to
produce 1 finished
unit
x Bgt $s per 1 kg of
DM

Bgt DM = P * z kg *
2016-17-T1-Aug to Dec 2016
12
$s/kg

Cost Variances: When Actual Costs >

Costs
Actual DM = (Q * Bgt
y
> Bgt DM = (P * z kg)
kg) x $r/kg
Total Standard Qty of
the DM (TSQ) to
produce Q finished
units

* $s/kg
Bgt Qty of the DM
(BQ) to produce P
finished units

How much of the cost variances is due to:

1) producing more finished units i.e.
output activity reasons (Q > P)
2) cost control
z)

inefficient use (qty) of input (y

paying too much ($) for the

input ($r $s)
2016-17-T1-Aug to Dec 2016

13

Cost Variances
Actual
Results

Activity
Level
Cost

Flexible
Budget

2,000 finished= 2,000 finished

units
units
Q
Q
(Q * y) * $r

(Q * z) * $s

(2) Spending
Variances
= Flexible
Actual
Due toBgt
cost control
Results
zy
$s $r

Static
Budget
1,900
finished units
P
(P * z) * $s

(1) Activity or Volume

Variances = Static Bgt
Flexible
Due to Bgt
output
PQ

Total Variances = Static Budget

Actual Results
2016-17-T1-Aug to Dec 2016

14

DM Variances
Refer to the earlier example. Budgeted output: 1,900
jackets. Quantity
Price
Standard
Standard

Standard

Cost per 1
unit of
Finished
Product
0.1 kg x $5 =
$0.5 per jacket

Direct
0.1 kg of
Final,
Materia fiberfill to make delivered
ls
1 jacket
cost of
Actual production quantity (Output): 2,000
materials,
Actual
DM
purchased
and
used
(Input): $1,029 i.e. 210 kg @
jackets
net of
$4.90/kg
discounts.
Static Bgt
Actual DM $
Flexible
Bgt
e.g. $5 per kg
$1,029 to
2,000
1,900 jackets
produce 2,000
jackets*0.1*$5 =
*0.1*$5 =$950
jackets
$1,000
Spending Var (z)
Activity or Volume Var (P
Q)
2016-17-T1-Aug to Dec 2016

15

(1) Activity or Volume Variances (Output

reasons)
Due to difference between Static Bgt output 1,900 units &
Actual 2,000 units

Activit
y
Varianc
e

Flexible
Budget
Sales quantity
2,000
Production Qty
2,000

Static
Budget
1,900
1,900

TSQ for 2000 jackets

Revenue = 2,000*0.1kg
$80,000
=
Less COGS 200kg
200kg*$5/k
g=

BQ for 1900 jackets

$76,000
= 1,900*0.1kg = 190F
kg
=190kg*$5
/kg

Direct
materials

$1,000

$4,000

$950

Direct labour
$24,000 $22,800
Var Overhead
$9,600 $9,120
Fixed Overhead $4,560
$4,560
2016-17-T1-Aug
to Dec 2016

$50 U
$1,200
U
$480 U
$0

Used more
DM because
(produced
100 jackets
more than
Plan) x (Std
cost $0.50
per jacket)
FOH activity
variance is
always zero
16

(2) Breaking down Spending Variances

(Input reasons)
Flexible
Budget

Actual

Var due to
Input
reasons

=
Production
Quantity
2,000
2,000
Direct materials
$1,000
$1,029
$29 U
Direct labour
$24,000
$26,250 $2,250 U
Variable
Overhead
$9,600
$10,500
$900 U
Fixed Overhead
$4,560
$4,500
$60 F
Spending variances are due to cost control; NOT
because of producing and selling more finished units
than plan.
Cost control e.g. if unfavourable:
(i) Used too much of the input to produce the output
(ii) Paid too much for the input
2016-17-T1-Aug to Dec 2016

17

Direct Materials Spending Variances

Step 1 Flex
Q: 2,000 jackets
P: 2,000 jackets
Bgt
Actual DM Costs
Flexible Budget
e.g. how much $DM should
Incurred
be budgeted to produce
2,000
AQ of DM x AP of
TSQ jackets?
of DM x SP of
Step 2:
DM
DM
Spending Variance =
find TSQ
Price Variance + Quantity
Variance
where

AQ = Actual quantity of input used (e.g. 210 kg of

DM used)
AP
price
of eachof
unit
of input
(e.g.
TSQ==Actual
Total Std
quantity
input
(e.g. used
DM) to
$4.90/kg)
produce the actual output (i.e. 2,000 jackets
actually produced)
SP = Std price of each
unit of input
2016-17-T1-Aug to Dec 2016
18

Spending Var = Price + Quantity Var

Actual Costs
Flexible Budget
Incurred
2,000 jackets
2,000 jackets
TSQ of input x
AQ of input x AP
SP
Spending Variance =
Price Variance + Quantity
Variance

Flexible Bgt Var = Actual Costs Incurred Flexible

Bgt

- (AQ
x SP)
+ (AQ
= (AQ x AP)
(TSQ
x SP)
= (AQ x AP)
x SP)
(TSQ x SP) = AQ x (AP-SP) + SP (AQ TSQ)

Price or
Rate
Variance

Efficiency or
Quantity
Variance
2016-17-T1-Aug to Dec 2016

19

Price and Quantity Variances: DM

AQ = Actual quantity of input (i.e. DM) used
AQ= 210 kg purchased and used
AP = Actual price of each unit of input used
AP = $4.90 per kg
TSQ = Total Std quantity of input (e.g. DM)
to produce
actual output (i.e. must flex
bgt to match actual
2,000 jackets produced)
TSQ = (0.1 kg * 2,000 jackets)
= 200 kg to produce 2,000 jackets
SP = Std price of each unit of input
SP = $5 per kg
2016-17-T1-Aug to Dec 2016

20

Price and Quantity Variances: DM

Intermediate
step;
FLEXIBLE
2,000
2,000
2,000
ACTUAL
NOT
FLEXIBLE
BGT
jacketsActual Quantity of
jackets Quantity of
jackets
BGT
Actual
DM
DM
Total Standard Qty of DM

210 kgPrice
Actual
Standard
Price
(0.1 kg
x 2,000 jackets)

$4.90 per kg
$5.00 per kg.
Price variance
= $1,029
$21 favorable
= $1,000

210 kg Price
Standard

$5.00 per kg
Quantity
= $1,050 variance
$50 unfavorable

DM Spending variance = $1,029 - $1,000 = $29

unfavourable
2016-17-T1-Aug to Dec 2016

21

Summary of Variances: DM
2,000 jackets 2,000 jackets 2,000 jackets 1,900 jackets
Actual
Flexible
Static
Results
Budget
Budget
AQ of DM x AP

SP x AQ of DM TSQ of DM x SP BQ of DM x SP

(0.1 kg x
(0.1 kg x
1,900)
210 kg xPrice
$4.90 Var
x $5.00 =
Qty Var 2,000)
Activity or
= $1,029
$5.00
x
210
kg
x
$5.00
$950
$21F Spending$50U
Var
Volume Var
$29U
$50U

Total Variance = Actual Results - Static Budget = $1,029-$950 =

$79U due to:
(a) Activity var $50U. Actual produced is more than Planned
prod qty, thus higher DM cost (100 more jackets x
$0.50/jacket); and
(b) Quantity Var $50U i.e. used more DM than should be (210 kg
actually used vs standard of 200 kg)
but mitigated by
2016-17-T1-Aug to Dec 2016
22
(c) Price Var $21F i.e. bought cheaper DM (actual $4.90 vs $5

DM Var: Qty purchased NOT EQUAL to

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

2016-17-T1-Aug to Dec 2016

23

DM Var: Qty purchased not equal to

Qty used
Actual Quantity
Quantity
Purchased
Purchased

2,800 kg
kgActual Price
Price

Actual

Who is responsible
for Price Variance?

2,800
Standard

$3.90 per kg
per kg

Use Qty
Purchased

$4.00

= $10,920
Price variance
$11,200 $280 favorable

2016-17-T1-Aug to Dec 2016

24

DM Var: Qty purchased not equal to

Qty used

Who is
responsible for
Standard
Quantity
Qty
Variance?

Use Qty
Standard
1,500kg
UsedPrice

Actual Quantity
Used

Total

1,700 kg
Standard
Price

$4.00 per kg
$4.00 per kg
$6,000

= $6,800
Quantity
variance
$800 unfavorable
2016-17-T1-Aug to Dec 2016

25

DL Variances: Example
Refer to the earlier example. Budgeted output: 1,900
jackets. Quantity
Price
Standard
Standard

Standard

Cost per 1
unit of
Finished
Product

Direct
Labour

1.2 hours to
Often a single
1.2 hr x $10
produce 1 jacket rate is used
= $12 per
Use time and
that reflects
jacket
motion studies
mix of wages
for each labor
earned
Actual operation
production quantity
e.g.(Output):
$10 per hr2,000

jacketsDL (Input): Employees actually worked

Actual
2,500 hours at a total labor cost of $26,250
2016-17-T1-Aug to Dec 2016

26

DL Variances: Spending & Activity

Variances
2,000
jacketsDL $
Actual
$26,250 to
produce 2,000
jackets
Spending

2,000
jackets Bgt
Flexible
2,000
jackets*1.2*$10 =
$24,000

Var (z)

Activity

1,900
jackets
Static Bgt
1,900 jackets
*1.2*$10 =$22,800

or Volume Var (P

Q) $24,000 -

$22,800
= $1,200U

2016-17-T1-Aug to Dec 2016

27

DL: Spending Variances

2,000
jackets
Actual Hours
Total Std Hours

Actual Rate
(2,000 x 1.2)
hours
Standard
Rate

2,000
jackets

2,000
jackets
Flexible
Budget
Actual Hours

2,500 hours
Standard Rate

x
$10.00 per hour
$10.00 per hour
Rate variance
Efficiency variance
$26,250
(given)
$25,000
$1,250
unfavorable =$1,000
unfavorable
= $24,000
Spending variance $2,250 unfavorable
2016-17-T1-Aug to Dec 2016

28

Summary of Variances: DL
2,000 jackets
Actual Results
AQ of DLH x AP
2,500 hr x
$10.50
= $26,250

2,000 jackets

SP x AQ
2,500 hr
x $10.00 =
$25,000

2,000 jackets
Flexible
Budget
TSQ of DLH x SP
(1.2 hr x 2,000)
x $10.00 =
$24,000

Rate Var
Efficiency Var
$1,250 USpending
$1,000
VarU

1,900 jackets
Static Budget
BQ of DLH x SP
(1.2 hr x 1,900)
x $10.00 =
$22,800

Activity or Vol Var

$1,200 U

$2,250 U

Total Variance = Actual Results - Static Budget = $3,450 U due to:

(a) Activity var $1,200U. Actual produced is more than Planned
prod qty, thus higher DL cost (100 more jackets x $12/jacket);
and
(b) Efficiency Var $1,000 U i.e. used more DL than should be
(2,500 hr actually used vs standard of 2,400 hr); and
(c) Rate Var $1,250 U i.e.
used more expensive DL (actual
2016-17-T1-Aug to Dec 2016
$10.50/hr vs std $10/hr)

29

Variable Overhead: Example

Budgeted output: 1,900 jackets
Actual output: 2,000 jackets
Actual electricity and production supplies and other
actual variable overhead incurred = $10,500

2,000
jacketsVOH $
Actual

$10,500 to
produce 2,000
jackets

2,000
jackets Bgt
Flexible

1,900
jackets
Static Bgt

= Applied VOH
using Std
Costing

BQ * POR
= (1,900 jackets
*1.2hr)*$4
=$9,120

(TSQ * POR)
= (2,000
jackets*1.2hr) *$4
= $9,600
Activity or Volume Var (P
Spending
$10,500
Var- $9,600 =
Q) $9,600 - $9,120 =

$900U

$480U

2016-17-T1-Aug to Dec 2016

30

Variable OH Variances using Standard

Costing
Note: DLH is the cost allocation base. Thus AQ,
TSQ
2,000refer to DLH. 2,000
2,000
jackets
jackets
jackets
Flexible
Bgt =
Applied VOH
Actual VOH
Actual Hours
Total Std Hours

2,500 hours
POR
(1.2 x 2,000)POR
hours
$4.00/hr
$4.00/hr
Rate variance
= $10,500
=Efficiency
$10,000 variance
$500 unfavorable
$400 unfavorable
= $9,600
Spending Var (also the underapplied VOH) in Std
Costing system = $900U
2016-17-T1-Aug to Dec 2016

31

Methods of Product Costing

Recorded in WIP->FG>COGS
DM

DL

Overhead

Difference
between
Actual &
Recorded

Actual
Costing

Actual

Actual

Actual

Always 0

Normal
Costing

Actual

Actual

Applied OH =
POR x Actual
Qty of cost
allocation base

Over- or
underapplied
OH adjusted
in
WIP/FG/COGS

Standard
Costing

Standa Standar
rd
d

Method

Applied OH =
POR x Total Std
Qty of cost
2016-17-T1-Aug to Dec 2016
allocation base

DM, DL, OH
Variances
adjusted in
32
Materials/WIP/

Normal Costing
System

Manu
Overhead
Actual
Applied =
POR x Actual
DLH

Standard Costing
System

Manu
Overhead
Actual
Applied =
POR x TSQL
this is also
Flexible
Budget

Under-/Over-applied OH = Actual
Applied
= Spending Var

WIP

WIP
Actual DM
Actual DL
Applied =
POR x Actual
DLH

COGM

DM = TSQM x
SPM
DL = TSQL x
SPL
Applied =
POR x TSQL

2016-17-T1-Aug to Dec 2016

COGM

33

Variable OH Rate & Efficiency Variance

Var OH comprises electricity, manufacturing
supplies, etc.
Note:
allocation base. Thus
2,000
2,000 DLH is the cost
2,000AQ, TSQ
refer
to DLH.
Flexible
Bgt =
jackets
jackets
jackets
Applied VOH
Actual VOH
Actual Hours
Total Std Hours

Actual cost of
2,500
DLH
POR
electricity,
POR
2,400
DLHmanu
supplies, etc.
$4.00/DLH

$4.00/DLH Rate variance

Efficiency variance
= $10,500
=
$500 unfavorable = $10,000
$400 unfavorable
$9,600
Unfav rate var because
Is the unfav VOH
actual VOH is higher than
efficiency var due to
planned. What are
inefficient use of
possible reasons for
electricity, manu
higher actual VOH? 2016-17-T1-Aug to Decsupplies,
etc.?
2016
34

Summary of Variances: Var OH

2,000 jackets 2,000 jackets 2,000 jackets 1,900 jackets
Flexible
Actual
Budget =
Static
Results
Applied VOH
Budget
Actual VOH

SP x AQ

TSQ of DLH x SP BQ of DLH x SP

(1.2 hr x
(1.2 hr x
2,000)
1,900)
Rate Var
Vol=Var
$4.00 xEfficiency
2,500
xVar
$4.00Activity
=
x or
$4.00
$500U
$400UOH in$9,600
$10,500
hr = $10,000
Ubder-/Over-applied
Std $480U $9,120
Costing system
Total Variance = Actual Results - Static Budget = $1,380 U due
to:
(a) Activity var $480U. Actual produced is more than Planned
prod qty, thus higher VOH cost (100 more jackets x
$4.80/jacket); and
(b) Efficiency Var $400 U i.e. used more DL (cost allocation base)
than should be (2,500 hr actually used vs standard of 2,400
35
hr); and
2016-17-T1-Aug to Dec 2016

Fixed OH Variances in a Std Costing

System
Bgt output: 1,900 jackets;
Bgt FOH = $4,560;
Bgt DLH per jacket = 1.2 DLH; Relevant range: 0 to 3,000
jackets
Quantity Standard
Price Standard
i.e. cost allocation
i.e. POR
base
Fixed
Overhe
ad

Cost allocation base =

POR
Bgt DLH to produce
= $4,560/
1,900 jackets
(1.2x1,900)
= 1,900 jackets x 1.2
= $4,560/2,280 DLH
Actual production quantity (Output): 2,000
DLH
= $2/DLH
jackets
Actual fixed
manufacturing
overhead (production
= 2,280
DLH
equipment rental) was $4,500
In a Standard Costing System
Applied FOH = POR x TSQ
= $2 x (2,000 x
1.2) DLH
= $2 x 2,400 DLH
= $4,800
to Dec 2016
36
Overapplied FOH 2016-17-T1-Aug
= $4,800
$4,500 =

Fixed Overhead: Static Bgt = Flexible Bgt

(Activity Var = 0)
Total Fixed
Overhead $

$4,560

When
What is the Bgt
activity is
FOH for 2,000
within
jackets or 2,400
relevant
DLH?
range
FOH Static
Bgt
Static Fixed =
Ovhd FOH Flexible
= Flexible Bgt
Bgt

BQ = 2,280 DLH
i.e. 1,900 jackets x
1.2DLH

TSQ = 2,400 DLH

i.e. 2,000 jackets x
1.2 DLH

Std Qty of DLH

2016-17-T1-Aug to Dec 2016

37

Fixed Overhead: No Efficiency

Variance

When activity is within relevant

range, Bgt FOH remains at $4,560
Total
Fixed Overhead $ regardless of the efficiency in using
DL (i.e. the cost allocation base).
E.g. is the rental cost of the prodn
equip affected by the use of labour?
Thus there is NO efficiency
Fixed
variance forBgt
FOH
$4,560
Overhead

BQ = 2,280 DLH
i.e. 1,900 jackets x
1.2DLH

TSQ = 2,400 DLH

i.e. 2,000 jackets x
1.2 DLH

Std Qty of DLH

2016-17-T1-Aug to Dec 2016

38

Graphic Analysis of Fixed Overhead

Variance
FOH $
Applied FOH represented
by upward sloping
straight line behaves
x like
a variable cost

Applied
$4,800
Static/Flex
Bgt $4,560

at
d
r
e
i
e
l
p
p
ap .00
d
a
$2
e
rh ) =
e
ov 280 LH
, D
d
e
2
/
Fix 560
4
($
0

BQ = 2,280
DLH
DLH
i.e. 1,900
jackets x
2016-17-T1-Aug to Dec 2016
1.2DLH

TSQ = 2,400
DLH
i.e. 2,000
jackets x 39
1.2
DLH

Graphic Analysis of Fixed Overhead

Variance
FOH $
But Bgt FOH is a fixed cost as
long as the activity is within
the relevant range. x

Applied
$4,800
Static/Flex
Bgt $4,560

at
d
r
e
i
e
l
p
p
ap .00
d
a
$2
e
rh ) =
e
ov 280 LH
, D
d
e
2
/
Fix 560
4
($
0

BQ = 2,280
DLH
DLH
i.e. 1,900
jackets x
2016-17-T1-Aug to Dec 2016
1.2DLH

TSQ = 2,400
DLH
i.e. 2,000
jackets x 40
1.2
DLH

Graphic Analysis of Fixed Overhead

Variance
Thus should produce as much as
FOH $
possible to better utilize capacity.
Applied
$4,800
Static/Flex
Bgt $4,560

{
at
d
r
e
i
e
l
p
p
ap .00
d
a
$2
e
rh ) =
e
ov 280 LH
, D
d
e
2
/
Fix 560
4
($
0

BQ = 2,280
DLH
DLH
i.e. 1,900
jackets x
2016-17-T1-Aug to Dec 2016
1.2DLH

FOH
Prodn
Vol
Var
$240F

Produced
more
jackets
with
same
amt of
Bgt FOH:
better
utilizatio
n of
TSQ
= 2,400
capacity
DLH
i.e. 2,000
jackets x 41
1.2
DLH

Graphic Analysis of Fixed Overhead

Actual Variance
FOH may be different from Bgt FOH
FOH $
Applied
$4,800
Static/Flex
Bgt $4,560
Actual
$4,500

{
{

e.g. Supplier gave a discount on the rental

of the prod eqpt
FOH Production Vol Var $240F
Budget Variance $60F

d
e
i
l
p
ap H
d
L
a
e
D
r
rh
e
e
ov 00 p
d
.
e
2
x
$
Fi
0

at

BQ = 2,280
DLH
DLH
i.e. 1,900
jackets x
2016-17-T1-Aug to Dec 2016
1.2DLH

Overappl
ied FOH
Produced
more
jackets
with
same
amt of
Bgt FOH:
better
utilizatio
n of
TSQ
= 2,400
capacity
DLH
i.e. 2,000
jackets x 42
1.2
DLH

Fixed OH Variances in Std Costing

System
2,000
2,000
2,000
1,900
2,000
jackets
Actual
Results
Actual FOH

jackets
Intermediate
Step

jackets
jackets
Flexible
Bgt
Static Bgt

Always = Static
Static Budget
Budget

BQ x POR

jackets
Applied
FOH
TSQ x POR

(1.2x2,000)
Activity
Producti
Budget
Efficiency
x $2
Var Always
on$4,800
Var $4,560Var $4,560
$4,500
$4,560
=
= $0
Volume
$60F
Always =
Var
Total Var (diff betw Actual
& Static Bgt)
$0
$240F
= $60F
Overapplied FOH = $4,800 - $4,500 =
$300
Variance (diff betw Actual Results & Static Budget) = $60F due to:
Budget Var $60F i.e. actual FOH cost less than planned.
Overapplied FOH due to Budget Var $60F & Prod Vol Var $240F
(better utilisation of capacity).
2016-17-T1-Aug to Dec 2016

43

Fixed Overhead Production Volume

Variance Applied FOH
FOH
Static Budget =
Flexible Budget

using Std Costing

POR x TSQ

Production
Volume var
$4,560
$4,800
$240 F
i.e.
100 x 1.2DLH
Bgt Prodn = 1,900
x $2 due to Actual Prodn = 2,000
jackets
jackets
over
Bgt FOH
Std Applied FOH
production
= $2 * (1,900*1.2)
= $2 * (2,000 *
of
100
jackets
DLH
1.2DLH)
= $2 * 2,280 DLH

Overutilization of
facilities; or
2016-17-T1-Aug to Dec 2016
Wrong

= $2 * 2,400 DLH
44

Reconciling Static Bgt Profit and

Actual Profit
+
+
+
+

Budgeted Gross
$38,57
Margin
0 NF wanted to know the
Sales Vol or Activity
reasons for the better
Var (F)
4,000 than expected
Sales Price Var (F)
10,000
performance so that it
DM Vol or Activity Var
can reward the
(U)
50
DM Price Var (F)
21 managers who have
DM Qty Var (U)
50 done well; and identify
areas for improvement.
DL Vol or Activity Var
(U)
1,200 Are you able to
DL Rate Var (U)
1,250 advise NF?
DL Efficiency Var (U)
1,000
VOH Vol or Activity
Var (U)
480
VOH Rate Var (U)
500
VOH Efficiency Var (U)
400
FOH Budget Var (F) 2016-17-T1-Aug 60
to Dec 2016
45
Actual Gross
$47,72

Note:
Fixed overhead volume variance in the
textbook is really the Fixed overhead
production volume variance.
Volume or activity variance is caused by
producing more or less finished units than
plan.
Thus FOH volume variance is always = 0
Production volume variance is due to
capacity utilisation. FOH production
volume variance can be fav or unfav.
2016-17-T1-Aug to Dec 2016

46

When to Investigate Variances?

a. Size of variances
b. Recurring variances
c. Trends
d. Controllability
e. Favourable variances
f.

Costs and benefits of investigation

2016-17-T1-Aug to Dec 2016

47

Potential Problems with Std Costs (pg

598)
Timeliness of variance analysis
Misuse variances
Non-unit-level cost drivers (modern
manufacturing is automated)
Favourable variance can be worse than
unfavourable variance
Meeting standards vs continually
improvement; other important objectives like
meeting quality, on-time delivery and
customer satisfaction
2016-17-T1-Aug to Dec 2016

48

Some Qn that you can answer now

Standards

Flexible
Budgets
Variances

Why is there a need for

standards? What really are
standards?
Why do you need to change your
plans? Isnt that cheating?
Do variance analysis provide
solutions to variances identified?

2016-17-T1-Aug to Dec 2016

49