Week 11: Standard Costs and

Operating Performance Measures

Chapter 11 (Page 451-465)
FB2101 (2010/11 Sem B)

2010 The McGraw-Hill Companies, Inc.

 Standard Costs
Standards are benchmarks or norms for
measuring performance. In managerial accounting,
two types of standards are commonly used.

Quantity standards Price standards

specify how much of an specify how much
input should be used to should be paid for
make a product or each unit of the
provide a service. input.

Examples: Firestone, Sears, McDonalds, hospitals,

construction and manufacturing companies.
McGraw-Hill/Irwin Slide 2
 Standard Costs
Deviations from standards deemed significant
are brought to the attention of management, a
practice known as management by exception.

Standard
Amount

Direct
Material
Direct Manufacturing
Labor Overhead

Type of Product Cost

McGraw-Hill/Irwin Slide 3
 Variance Analysis Cycle

Take
Identify Receive corrective
questions explanations actions

Conduct next
Analyze periods
variances operations

Prepare standard
Begin
cost performance
report

McGraw-Hill/Irwin Slide 4
 Setting Standard Costs

Accountants, engineers, purchasing

agents, and production managers
combine efforts to set standards that encourage
efficient future operations.

McGraw-Hill/Irwin Slide 5
 Setting Standard Costs
Should we use
ideal standards that
require employees to
work at 100 percent
peak efficiency?
I recommend using practical
standards that are currently
attainable with reasonable
and efficient effort.

Engineer Managerial Accountant

McGraw-Hill/Irwin Slide 6
 Learning Objective 1

Explain how direct

materials standards
and direct labor
standards are set.

McGraw-Hill/Irwin Slide 7
 Setting Direct Material Standards

Price Quantity
Standards Standards

Final, delivered Summarized in

cost of materials, a Bill of Materials.
net of discounts.

McGraw-Hill/Irwin Slide 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.

McGraw-Hill/Irwin Slide 9
 Setting Direct Labor Standards

Rate Time
Standards Standards

Often a single Use time and

rate is used that reflects motion studies for
the mix of wages earned. each labor operation.

McGraw-Hill/Irwin Slide 10
 Setting Variable Manufacturing Overhead
Standards

Rate Quantity
Standards Standards

The rate is the The quantity is

variable portion of the the activity in the
predetermined overhead allocation base for
rate. predetermined overhead.

McGraw-Hill/Irwin Slide 11
 Standard Cost Card Variable Production
Cost

A standard cost card for one unit

of product might look like this:
A B AxB
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

McGraw-Hill/Irwin Slide 12
 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.
McGraw-Hill/Irwin Slide 13
 A General Model for Variance Analysis

Variance Analysis

Price Variance Quantity Variance

Difference between Difference between

actual price and actual quantity and
standard price standard quantity

McGraw-Hill/Irwin Slide 14
 A General Model for Variance Analysis

Variance Analysis

Price Variance Quantity Variance

Materials price variance Materials quantity variance

Labor rate variance Labor efficiency variance
VOH rate variance VOH efficiency variance

McGraw-Hill/Irwin Slide 15
 A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price

Price Variance Quantity Variance

McGraw-Hill/Irwin Slide 16
 A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Actual quantity is the amount of direct

materials, direct labor, and variable
manufacturing overhead actually used.

McGraw-Hill/Irwin Slide 17
 A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Standard quantity is the standard quantity

allowed for the actual output of the period.

McGraw-Hill/Irwin Slide 18
 A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Actual price is the amount actually

paid for the input used.

McGraw-Hill/Irwin Slide 19
 A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Standard price is the amount that should

have been paid for the input used.

McGraw-Hill/Irwin Slide 20
 A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price

Price Variance Quantity Variance

(AQ AP) (AQ SP) (AQ SP) (SQ SP)

AQ = Actual Quantity SP = Standard Price
AP = Actual Price SQ = Standard Quantity

McGraw-Hill/Irwin Slide 21
 Learning Objective 2

Compute the direct

materials price and
quantity variances and
explain their
significance.

McGraw-Hill/Irwin Slide 22
 Material Variances An 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.

McGraw-Hill/Irwin Slide 23
 Material Variances Summary

Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price
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 Quantity variance

$21 favorable $50 unfavorable

McGraw-Hill/Irwin Slide 24
 Material Variances Summary

Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
kgs
$1,029 210
$4.90 per kg. $5.00per
= $4.90 perkg
kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Price variance Quantity variance

$21 favorable $50 unfavorable

McGraw-Hill/Irwin Slide 25
 Material Variances Summary

Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
0.1 kg per parka 2,000 parkas
$4.90 per kg. $5.00
= 200 per
kgs kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Price variance Quantity variance

$21 favorable $50 unfavorable

McGraw-Hill/Irwin Slide 26
 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

McGraw-Hill/Irwin Slide 27
 Isolation of Material Variances
I need the price variance
sooner so that I can better
identify purchasing problems.
You accountants just dont
understand the problems that
purchasing managers have.
McGraw-Hill/Irwin
Ill start computing
the price variance
when material is
purchased rather
than when its used.
Slide 28
 Material Variances

The price variance is

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

McGraw-Hill/Irwin Slide 29
 Responsibility for Material Variances

Materials Quantity Variance Materials Price 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 managers performance.

McGraw-Hill/Irwin Slide 30
 Responsibility for Material Variances

Your poor scheduling

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

McGraw-Hill/Irwin Slide 31
 Zippy
Quick Check

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.

McGraw-Hill/Irwin Slide 32
 Zippy
Quick Check

Hansons
Hansons material
material price
price variance
variance (MPV)
(MPV)
for
for the
the week
week was:
was:
a.
a. $170
$170 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
d.
d. $800
$800 favorable.
favorable.

McGraw-Hill/Irwin Slide 33
 Zippy
Quick Check

Hansons
Hansons material
material quantity
quantity variance
variance (MQV)
(MQV)
for
for the
the week
week was:
was:
a.
a. $170
$170 unfavorable.
unfavorable.
b.
b. $170
$170 favorable.
favorable.
c.
c. $800
$800 unfavorable.
unfavorable.
d.
d. $800
$800 favorable.
favorable.

McGraw-Hill/Irwin Slide 34
 Zippy
Quick Check

Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price
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 Quantity variance

$170 favorable $800 unfavorable
McGraw-Hill/Irwin Slide 35
 Zippy
Quick Check Continued

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.

McGraw-Hill/Irwin Slide 36
 Zippy
Quick Check Continued

Actual Quantity Actual Quantity

Purchased Purchased

2,800Price
Actual lbs. 2,800 lbs.
Standard Price

$3.90 per lb. $4.00 per lb.
= $10,920 = $11,200

Price variance increases

Price variance because quantity
$280 favorable purchased increases.
McGraw-Hill/Irwin Slide 37
 Zippy
Quick Check Continued

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 is
unchanged because
actual and standard Quantity variance
quantities are unchanged. $800 unfavorable
McGraw-Hill/Irwin Slide 38
 Learning Objective 3

Compute the direct

labor rate and
efficiency variances
and explain
their significance.

McGraw-Hill/Irwin Slide 39
 Labor Variances An Example

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.

McGraw-Hill/Irwin Slide 40
 Labor Variances Summary

Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours

$10.50 per hour $10.00 per hour. $10.00 per hour
= $26,250 = $25,000 = $24,000

Rate variance Efficiency variance

$1,250 unfavorable $1,000 unfavorable

McGraw-Hill/Irwin Slide 41
 Labor Variances Summary

Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
$26,250 2,500 hours
$10.50 per hour $10.00 per hour.
= $10.50 per hour $10.00 per hour
= $26,250 = $25,000 = $24,000

Rate variance Efficiency variance

$1,250 unfavorable $1,000 unfavorable

McGraw-Hill/Irwin Slide 42
 Labor Variances Summary

Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate 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.
= 2,400 hours $10.00 per hour
= $26,250 = $25,000 = $24,000

Rate variance Efficiency variance

$1,250 unfavorable $1,000 unfavorable

McGraw-Hill/Irwin Slide 43
 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)
= $1,000 unfavorable

McGraw-Hill/Irwin Slide 44
 Responsibility for Labor Variances

Production managers are Mix of skill levels

usually held accountable assigned to work tasks.
for labor variances
because they can
Level of employee
influence the:
motivation.

Quality of production
supervision.

Quality of training
provided to employees.
Production Manager

McGraw-Hill/Irwin Slide 45
 Responsibility for Labor Variances
I think it took more time
to process the
I am not responsible for materials because the
the unfavorable labor Maintenance
efficiency variance! Department has poorly
maintained your
You purchased cheap equipment.
material, so it took more
time to process it.

McGraw-Hill/Irwin Slide 46
 Zippy
Quick Check

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.

McGraw-Hill/Irwin Slide 47
 Zippy
Quick Check

Hansons
Hansons labor
labor rate
rate variance
variance (LRV)
(LRV) for
for the
the
week
week was:
was:
a.
a. $310
$310 unfavorable.
unfavorable.
b.
b. $310
$310 favorable.
favorable.
c.
c. $300
$300 unfavorable.
unfavorable.
d.
d. $300
$300 favorable.
favorable.

McGraw-Hill/Irwin Slide 48
 Zippy
Quick Check

Hansons
Hansons labor
labor efficiency
efficiency variance
variance (LEV)
(LEV)
for
for the
the week
week was:
was:
a.
a. $590
$590 unfavorable.
unfavorable.
b.
b. $590
$590 favorable.
favorable.
c.
c. $600
$600 unfavorable.
unfavorable.
d.
d. $600
$600 favorable.
favorable.

McGraw-Hill/Irwin Slide 49
 Zippy
Quick Check

Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate
1,550 hours 1,550 hours 1,500 hours

$12.20 per hour $12.00 per hour $12.00 per hour
= $18,910 = $18,600 = $18,000

Rate variance Efficiency variance

$310 unfavorable $600 unfavorable
McGraw-Hill/Irwin Slide 50
 Week 12:
Variable OH Variance & Fixed OH Variance

Chapter 11 (Page 465-501)

FB2101 (2010/11 Sem B)

2010 The McGraw-Hill Companies, Inc.

 Learning Objective 4

Compute the variable

manufacturing
overhead rate and
efficiency variances.

McGraw-Hill/Irwin Slide 52
 Variable Manufacturing Overhead Variances
An Example

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.

McGraw-Hill/Irwin Slide 53
 Variable Manufacturing Overhead Variances
Summary
Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours

$4.20 per hour $4.00 per hour $4.00 per hour
= $10,500 = $10,000 = $9,600

Rate variance Efficiency variance

$500 unfavorable $400 unfavorable

McGraw-Hill/Irwin Slide 54
 Variable Manufacturing Overhead Variances
Summary
Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
$10,500 2,500 hours
$4.20 per hour $4.00 per per
= $4.20 hourhour $4.00 per hour
= $10,500 = $10,000 = $9,600

Rate variance Efficiency variance

$500 unfavorable $400 unfavorable

McGraw-Hill/Irwin Slide 55
 Variable Manufacturing Overhead Variances
Summary
Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours

1.2 hours per parka 2,000
$4.20 per hour parkas$4.00 per hour
= 2,400 hours $4.00 per hour
= $10,500 = $10,000 = $9,600

Rate variance Efficiency variance

$500 unfavorable $400 unfavorable

McGraw-Hill/Irwin Slide 56
 Zippy
Quick Check

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.

McGraw-Hill/Irwin Slide 57
 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

McGraw-Hill/Irwin Slide 58
 Zippy
Quick Check

Hansons
Hansons rate
rate variance
variance (VMRV)
(VMRV) for for variable
variable
manufacturing
manufacturing overhead
overhead for
for the
the week
week was:
was:
a.
a. $465
$465 unfavorable.
unfavorable.
b.
b. $400
$400 favorable.
favorable.
c.
c. $335
$335 unfavorable.
unfavorable.
d.
d. $300
$300 favorable.
favorable.

McGraw-Hill/Irwin Slide 59
 Zippy
Quick Check

Hansons
Hansons efficiency
efficiency variance
variance (VMEV)
(VMEV) forfor
variable
variable manufacturing
manufacturing overhead
overhead for
for the
the week
week
was:
was:
a.
a. $435
$435 unfavorable.
unfavorable.
b.
b. $435
$435 favorable.
favorable.
c.
c. $150
$150 unfavorable.
unfavorable.
d.
d. $150
$150 favorable.
favorable.

McGraw-Hill/Irwin Slide 60
 Zippy
Quick Check

Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate
1,550 hours 1,550 hours 1,500 hours

$3.30 per hour $3.00 per hour $3.00 per hour
= $5,115 = $4,650 = $4,500

Rate variance Efficiency variance

$465 unfavorable $150 unfavorable
McGraw-Hill/Irwin Slide 61
 Variance Analysis and Management by
Exception

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

McGraw-Hill/Irwin Slide 62
 A Statistical Control Chart

Warning signals for investigation

Favorable Limit


Desired Value

Unfavorable Limit

1 2 3 4 5 6 7 8 9
Variance Measurements

McGraw-Hill/Irwin Slide 63
 Advantages of Standard Costs

Management by Promotes economy

exception and efficiency

Advantages
Enhances
Simplified responsibility
bookkeeping accounting

McGraw-Hill/Irwin Slide 64
 Potential Problems with Standard Costs
Emphasizing standards Favorable
may exclude other variances may
important objectives. be misinterpreted.
Potential
Problems
Standard cost Emphasis on
reports may negative may
not be timely. impact morale.

Invalid assumptions Continuous

about the relationship improvement may
between labor be more important
cost and output. than meeting standards.
McGraw-Hill/Irwin Slide 65
 Learning Objective 5

Compute delivery cycle

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

McGraw-Hill/Irwin Slide 66
 Delivery Performance Measures

Order Production Goods

Received Started Shipped

Process Time + Inspection Time

Wait Time + Move Time + Queue Time

Throughput Time

Delivery Cycle Time

Process time is the only value-added time.

McGraw-Hill/Irwin Slide 67
 Delivery Performance Measures

Order Production Goods

Received Started Shipped

Process Time + Inspection Time

Wait Time + Move Time + Queue Time

Throughput Time

Delivery Cycle Time

Manufacturing Value-added time
Cycle = Manufacturing cycle time
Efficiency
McGraw-Hill/Irwin Slide 68
 Quick Check

AA TQM
TQM team
team at
at Narton
Narton Corp
Corp has
has recorded
recorded the
the
following
following average
average times
times for
for production:
production:
Wait
Wait 3.0
3.0 days
days Move
Move 0.5
0.5 days
days
Inspection
Inspection 0.4
0.4 days
days Queue
Queue 9.3
9.3 days
days
Process
Process 0.20.2 days
days
What
What is
is the
the throughput
throughput time?
time?
a.
a. 10.4
10.4 days.
days.
b.
b. 0.2
0.2 days.
days.
c.
c. 4.1
4.1 days.
days.
d.
d. 13.4
13.4 days.
days.
McGraw-Hill/Irwin Slide 69
 Quick Check

AA TQM
TQM team
team at
at Narton
Narton Corp
Corp has
has recorded
recorded the
the
following
following average
average times
times for
for production:
production:
Wait
Wait 3.0
3.0 days
days Move
Move 0.5
0.5 days
days
Inspection
Inspection 0.4
0.4 days
days Queue
Queue 9.3
9.3 days
days
Process
Process 0.20.2 days
days
What
What is
is the
the Manufacturing
Manufacturing Cycle
Cycle Efficiency
Efficiency (MCE)?
(MCE)?
a.
a. 50.0%.
50.0%.
b.
b. 1.9%.
1.9%.
c.
c. 52.0%.
52.0%.
d.
d. 5.1%.
5.1%.
McGraw-Hill/Irwin Slide 70
 Quick Check

AA TQM
TQM team
team at
at Narton
Narton Corp
Corp has
has recorded
recorded the
the
following
following average
average times
times for
for production:
production:
Wait
Wait 3.0
3.0 days
days Move
Move 0.5
0.5 days
days
Inspection
Inspection 0.4
0.4 days
days Queue
Queue 9.3
9.3 days
days
Process
Process 0.20.2 days
days
What
What is
is the
the delivery
delivery cycle
cycle time
time (DCT)?
(DCT)?
a.
a. 0.5
0.5 days.
days.
b.
b. 0.7
0.7 days.
days.
c.
c. 13.4
13.4 days.
days.
d.
d. 10.4
10.4 days.
days.
McGraw-Hill/Irwin Slide 71
Predetermined Overhead Rates and Overhead
Analysis in a Standard Costing System

Appendix 11A

2010 The McGraw-Hill Companies, Inc.

 Learning Objective 6

(Appendix 11A)
Compute and interpret
the fixed overhead
budget and volume
variances.

McGraw-Hill/Irwin Slide 73
 Fixed Overhead Budget Variance
Actual Budgeted Fixed
Fixed Fixed Overhead
Overhead Overhead Applied

Budget
variance

Actual Budgeted
Budget
= fixed fixed
variance
overhead overhead

McGraw-Hill/Irwin Slide 74
 Fixed Overhead Volume Variance
Actual Budgeted Fixed
Fixed Fixed Overhead
Overhead Overhead Applied

Volume
variance
Fixed
Budgeted
Volume overhead
= fixed
variance applied to
overhead
work in process
McGraw-Hill/Irwin Slide 75
 Fixed Overhead Volume Variance
Actual Budgeted Fixed
Fixed Fixed Overhead
Overhead Overhead Applied
DH FR SH FR

Volume
variance
Volume variance = FPOHR (DH SH)

FPOHR = Fixed portion of the predetermined overhead rate

DH = Denominator hours
SH = Standard hours allowed for actual output
McGraw-Hill/Irwin Slide 76
 Computing Fixed Overhead Variances

McGraw-Hill/Irwin Slide 77
 Computing Fixed Overhead Variances

McGraw-Hill/Irwin Slide 78
 Predetermined Overhead Rates

Predetermined Estimated total manufacturing overhead cost

=
overhead rate Estimated total amount of the allocation base

Predetermined $360,000
=
overhead rate 90,000 Machine-hours

Predetermined
= $4.00 per machine-hour
overhead rate

McGraw-Hill/Irwin Slide 79
 Predetermined Overhead Rates
Variable component of the $90,000
=
predetermined overhead rate 90,000 Machine-hours

Variable component of the

= $1.00 per machine-hour
predetermined overhead rate

Fixed component of the $270,000

=
predetermined overhead rate 90,000 Machine-hours

Fixed component of the

= $3.00 per machine-hour
predetermined overhead rate

McGraw-Hill/Irwin Slide 80
 Applying Manufacturing Overhead

Overhead Predetermined Standard hours allowed

=
applied overhead rate for the actual output

Overhead $4.00 per

= 84,000 machine-hours
applied machine-hour

Overhead
= $336,000
applied

McGraw-Hill/Irwin Slide 81
 Computing the Budget Variance

Actual Budgeted
Budget
= fixed fixed
variance
overhead overhead

Budget
= $280,000 $270,000
variance

Budget
= $10,000 Unfavorable
variance

McGraw-Hill/Irwin Slide 82
 Computing the Volume Variance
Fixed
Budgeted
Volume overhead
= fixed
variance applied to
overhead
work in process

Volume
variance
= $270,000 ( $3.00 per
machine-hour

$84,000
machine-hours )
Volume
= $18,000 Unfavorable
variance

McGraw-Hill/Irwin Slide 83
 Computing the Volume Variance
Volume variance = FPOHR (DH SH)

FPOHR = Fixed portion of the predetermined overhead rate

DH = Denominator hours
SH = Standard hours allowed for actual output

Volume
variance
=
$3.00 per
machine-hour
( 90,000
mach-hours

84,000
mach-hours )
Volume = 18,000 Unfavorable
variance

McGraw-Hill/Irwin Slide 84
 A Pictorial View of the Variances

Actual Budgeted Fixed Overhead

Fixed Fixed Applied to
Overhead Overhead Work in Process
280,000 270,000 252,000

Budget variance, Volume variance,

$10,000 unfavorable $18,000 unfavorable

Total variance, $28,000 unfavorable

McGraw-Hill/Irwin Slide 85
 Reconciling Overhead Variances and
Underapplied or Overapplied Overhead

In a standard
cost system:

Unfavorable Favorable
variances are equivalent variances are equivalent
to underapplied overhead. to overapplied overhead.

The sum of the overhead variances

equals the under- or overapplied
overhead cost for the period.
McGraw-Hill/Irwin Slide 86
 Reconciling Overhead Variances and
Underapplied or Overapplied Overhead

McGraw-Hill/Irwin Slide 87
 Computing the Variable Overhead Variances

Variable manufacturing overhead rate variance

VMRV = (AH AR) (AH SR)
= $100,000 (88,000 hours $1.00 per hour)

= $12,000 unfavorable

McGraw-Hill/Irwin Slide 88
 Computing the Variable Overhead Variances

Variable manufacturing overhead efficiency variance

VMEV = (AH SR) (SH SR)
= $88,000 (84,000 hours $1.00 per hour)
= $4,000 unfavorable

McGraw-Hill/Irwin Slide 89
 Computing the Sum of All Variances

McGraw-Hill/Irwin Slide 90
 End of Chapter 11

McGraw-Hill/Irwin Slide 91