8-1

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Flexible Budgets, Standard
Costs, and Variance Analysis
Chapter 08
8-2
Variance Analysis Cycle
Conduct next
periods
operations
Identify
questions
Receive
explanations
Take
corrective
actions
Analyze
variances
Prepare standard
cost performance
report
Begin
8-2
8-3
Learning Objective 1
Prepare a flexible
budget.
8-4
Characteristics of Flexible Budgets
Planning budgets
are prepared for
a single, planned
level of activity.
Performance
evaluation is difficult
when actual activity
differs from the planned
level of activity.
Hmm! Comparing
static planning budgets
with actual costs
is like comparing
apples and oranges.
8-3
8-5
Improve performance evaluation.
May be prepared for any activity
level in the relevant range.
Show costs that should have been
incurred at the actual level of
activity, enabling apples to apples
cost comparisons.
Help managers control costs.
Lets look at Larrys Lawn Service.
Characteristics of Flexible Budgets
8-6
Larrys Lawn Service provides lawn care in a planned
community where all lawns are approximately the same size.
At the end of May, Larry prepared his June budget based on
mowing 500 lawns. Since all of the lawns are similar in size,
Larry felt that the number of lawns mowed in a month would
be the best way to measure overall activity for his business.
Larrys Budget
Deficiencies of the Static Planning Budget
8-4
8-7
Deficiencies of the Static Planning Budget
Larrys Planning Budget
8-8
Deficiencies of the Static Planning Budget
Larrys Actual Results
8-5
8-9
Deficiencies of the Static Planning Budget
Larrys Actual Results Compared with the Planning Budget
8-10
Deficiencies of the Static Planning Budget
Larrys Actual Results Compared with the Planning Budget
F = Favorable variance that occurs when
actual costs are less than budgeted costs.
U = Unfavorable variance that occurs when
actual costs are greater than budgeted costs.
F = Favorable variance that occurs when actual
revenue is greater than budgeted revenue.
8-6
8-11
Deficiencies of the Static Planning Budget
Larrys Actual Results Compared with the Planning Budget
Since these variances are favorable, has
Larry done a good job controlling costs?
Since these variances are unfavorable, has
Larry done a poor job controlling costs?
8-12
I dont think I
can answer the
questions using
a static budget.
Actual activity is above
planned activity.
So, shouldnt the variable
costs be higher if actual
activity is higher?
Deficiencies of the Static Planning Budget
8-7
8-13
The relevant question is . . .
How much of the cost variances are
due to higher activity and how much
are due to cost control?
To answer the question,
we must
the budget to the
actual level of activity.
Deficiencies of the Static Planning Budget
8-14
How a Flexible Budget Works
To a budget, we need to know that:
Total variable costs change
in direct proportion to
changes in activity.
Total fixed costs remain
unchanged within the
relevant range.
Fixed
8-8
8-15
Lets prepare a
budget
for Larrys Lawn
Service.
How a Flexible Budget Works
8-16
Preparing a Flexible Budget
Larrys Flexible Budget
8-9
8-17
Quick Check
What should the total wages and salaries cost
be in a flexible budget for 600 lawns?
a. $18,000.
b. $20,000.
c. $23,000.
d. $25,000.
8-18
Quick Check
What should be the total wages and salaries
cost in a flexible budget for 600 lawns?
a. $18,000
b. $20,000.
c. $23,000.
d. $25,000.
Total wages and salaries cost
= $5,000 + ($30 per lawn 600 lawns)
$5,000 + $18,000 = $23,000
What should the total wages and salaries cost
be in a flexible budget for 600 lawns?
a. $18,000.
b. $20,000.
c. $23,000.
d. $25,000.
8-10
8-19
Learning Objective 2
Prepare a report
showing revenue and
spending variances.
8-20
Revenue and Spending Variances
Flexible budget revenue Actual revenue
The difference is a revenue variance. The difference is a revenue variance.
Flexible budget cost Actual cost
The difference is a spending variance. The difference is a spending variance.
8-11
8-21
Now, lets use budgeting
concepts to compute revenue and
spending variances for Larrys Lawn
Service.
Revenue and Spending Variances
8-22
Revenue and Spending Variances
Larrys Flexible Budget Compared with the Actual Results
$1,750 favorable $1,750 favorable
revenue variance revenue variance
8-12
8-23
Larrys Flexible Budget Compared with the Actual Results
Revenue and Spending Variances
Spending
variances
8-24
Learning Objective 3
Prepare a flexible budget
with more than one cost
driver.
8-13
8-25
More than one cost
driver may be needed to
adequately explain all of
the costs in an organization.
The cost formulas used
to prepare a flexible
budget can be adjusted
to recognize multiple
cost drivers.
Flexible Budgets with Multiple Cost
Drivers
8-26
Because of the large unfavorable wages and salaries spending
variance, Larry decided to add an additional cost driver for
wages and salaries. The variance is due primarily to the number
of hours required for the additional edging and trimming. So
Larry estimates the additional hours and builds those hours into
both his revenue and expense budget formulas.
Larrys New Budget
Flexible Budgets with Multiple Cost
Drivers
8-14
8-27
Flexible Budgets with Multiple Cost
Drivers
Larrys Budget Based on More than One Cost Driver
8-28
Standard Costs
Standards are benchmarks or norms for
measuring performance. In managerial accounting,
two types of standards are commonly used.
Quantity standards
specify how much of an
input should be used to
make a product or
provide a service.
Price standards
specify how much
should be paid for
each unit of the
input.
Examples: Firestone, Sears, McDonalds, hospitals,
construction, and manufacturing companies.
8-15
8-29
Setting Direct Materials Standards
Standard Price Standard Price
per Unit per Unit
Summarized in
a Bill of Materials.
Final, delivered
cost of materials,
net of discounts.
Standard Quantity Standard Quantity
per Unit per Unit
8-30
Setting Direct Labor Standards
Use time and
motion studies for
each labor operation.
Standard Hours
per Unit
Often a single
rate is used that reflects
the mix of wages earned.
Standard Rate
per Hour
8-16
8-31
Setting Variable Manufacturing Overhead
Standards
The rate is the
variable portion of the
predetermined overhead
rate.
Price
Standard
The quantity is
the activity in the
allocation base for
predetermined overhead.
Quantity Quantity
Standard Standard
8-32
The Standard Cost Card
A standard cost card for one unit of
product might look like this:
A A x B
Standard Standard Standard
Quantity Price Cost
Inputs or Hours or Rate per Unit
Direct materials 3.0 lbs. 4.00 $ per lb. 12.00 $
Direct labor 2.5 hours 14.00 per hour 35.00
Variable mfg. overhead 2.5 hours 3.00 per hour 7.50
Total standard unit cost 54.50 $
B
8-17
8-33
Using Standards in Flexible Budgets
Standard costs per unit for direct materials, direct
labor, and variable manufacturing overhead can be
used to compute activity and spending variances.
Spending variances become more Spending variances become more
useful by breaking them down into useful by breaking them down into
quantity and price variances. quantity and price variances.
8-34
A General Model for Variance Analysis
Variance Analysis
Price Variance
Difference between Difference between
actual price and actual price and
standard price standard price
Quantity Variance
Difference between Difference between
actual quantity and actual quantity and
standard quantity standard quantity
8-18
8-35
Quantity and Price Standards
Quantity and price standards are Quantity and price standards are
determined separately for two reasons: 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.
8-36
Variance Analysis
Materials price variance Materials price variance
Labor rate variance Labor rate variance
VOH rate variance VOH rate variance
Materials quantity variance Materials quantity variance
Labor efficiency variance Labor efficiency variance
VOH efficiency variance VOH efficiency variance
A General Model for Variance Analysis
Quantity Variance Price Variance
8-19
8-37
A General Model for Variance Analysis
Quantity Variance
(2) (1)
Price Variance
(3) (2)
(1)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)
(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)
Spending Variance
(3) (1)
8-38
A General Model for Variance Analysis
Actual quantity is the amount of direct materials, direct
labor, and variable manufacturing overhead actually used.
Quantity Variance
(2) (1)
Price Variance
(3) (2)
(1)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)
(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)
Spending Variance
(3) (1)
8-20
8-39
A General Model for Variance Analysis
Standard quantity is the standard quantity allowed
for the actual output of the period.
Quantity Variance
(2) (1)
Price Variance
(3) (2)
(1)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)
(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)
Spending Variance
(3) (1)
8-40
A General Model for Variance Analysis
Actual price is the amount actually
paid for the input used.
Quantity Variance
(2) (1)
Price Variance
(3) (2)
(1)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)
(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)
Spending Variance
(3) (1)
8-21
8-41
A General Model for Variance Analysis
Quantity Variance
(2) (1)
Price Variance
(3) (2)
(1)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)
(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)
Spending Variance
(3) (1)
Standard price is the amount that should
have been paid for the input used.
8-42
Learning Objective 4
Compute the direct
materials quantity and
price variances and
explain their
significance.
8-22
8-43
Glacier Peak Outfitters has the following direct
materials 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 materials cost a
total of $1,029.
Materials Variances An Example
8-44
200 kgs. 210 kgs. 210 kgs.

$5.00 per kg. $5.00 per kg. $4.90 per kg.
= $1,000 = $1,050 = $1,029
Quantity variance
$50 unfavorable
Price variance
$21 favorable
Materials Variances Summary
Standard Quantity Actual Quantity Actual Quantity

Standard Price Standard Price Actual Price
8-23
8-45
Materials Variances Summary
200 kgs. 210 kgs. 210 kgs.

$5.00 per kg. $5.00 per kg. $4.90 per kg.
= $1,000 = $1,050 = $1,029
Quantity variance
$50 unfavorable
Price variance
$21 favorable
Standard Quantity Actual Quantity Actual Quantity

Standard Price Standard Price Actual Price
0.1 kg per parka 2,000 parkas
= 200 kgs
8-46
Materials Variances Summary
200 kgs. 210 kgs. 210 kgs.

$5.00 per kg. $5.00 per kg. $4.90 per kg.
= $1,000 = $1,050 = $1,029
Quantity variance
$50 unfavorable
Price variance
$21 favorable
Standard Quantity Actual Quantity Actual Quantity

Standard Price Standard Price Actual Price
$1,029 210 kgs
= $4.90 per kg
8-24
8-47
Materials Variances:
Using the Factored Equations
Materials quantity variance
MQV = (AQ SP) (SQ SP)
= 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
Materials price variance
MPV = (AQ AP) (AQ SP)
= AQ(AP SP)
= 210 kgs ($4.90/kg $5.00/kg)
= 210 kgs ( $0.10/kg) = $21 F
8-48
Materials Price Variance Materials Quantity Variance
Production Manager Purchasing Manager
The standard price is used to compute the quantity variance
so that the production manager is not held responsible for
the purchasing managers performance.
Responsibility for Materials
Variances
8-25
8-49
I am not responsible for
this unfavorable materials
quantity variance.
You purchased cheap
material, so my people
had to use more of it.
Your poor scheduling
sometimes requires me to
rush order materials at a
higher price, causing
unfavorable price variances.
Responsibility for Materials Variances
Production Manager Purchasing Manager
8-50
Hanson Inc. has the following direct materials
standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 1,700 pounds of materials were
purchased and used to make 1,000 Zippies. The
materials cost a total of $6,630.
Zippy
Quick Check
8-26
8-51
Zippy
Quick Check
How many pounds of materials should Hanson
have used to make 1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
c. 1,200 pounds.
d. 1,000 pounds.
8-52
Zippy
Quick Check
How many pounds of materials should Hanson
have used to make 1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
c. 1,200 pounds.
d. 1,000 pounds.
The standard quantity is:
1,000 1.5 pounds per Zippy.
8-27
8-53
Hansons materials quantity variance (MQV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Zippy
Quick Check
8-54
Hansons materials 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
Zippy
Quick Check
8-28
8-55
Hansons materials price variance (MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Zippy
Quick Check
8-56
Hansons materials price variance (MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
MPV = AQ(AP - SP)
MPV = 1,700 lbs. ($3.90 -
4.00)
MPV = $170 Favorable
Zippy
Quick Check
8-29
8-57
1,500 lbs. 1,700 lbs. 1,700 lbs.

$4.00 per lb. $4.00 per lb. $3.90 per lb.
= $6,000 = $ 6,800 = $6,630
Quantity variance
$800 unfavorable
Price variance
$170 favorable
Zippy
Quick Check
Standard Quantity Actual Quantity Actual Quantity

Standard Price Standard Price Actual Price
8-58
1,500 lbs. 1,700 lbs. 1,700 lbs.

$4.00 per lb. $4.00 per lb. $3.90 per lb.
= $6,000 = $ 6,800 = $6,630
Quantity variance
$800 unfavorable
Price variance
$170 favorable
Zippy
Quick Check
Standard Quantity Actual Quantity Actual Quantity

Standard Price Standard Price Actual Price
Recall that the standard quantity for 1,000 Zippies
is 1,000 1.5 pounds per Zippy = 1,500 pounds.
8-30
8-59
Learning Objective 5
Compute the direct labor
efficiency and rate
variances and explain
their significance.
8-60
Glacier Peak Outfitters has the following direct labor
standard for its mountain parka.
1.2 standard hours per parka at $10.00 per hour
Last month, employees actually worked 2,500 hours
at a total labor cost of $26,250 to make 2,000
parkas.
Labor Variances An Example
8-31
8-61
Efficiency variance
$1,000 unfavorable
Rate variance
$1,250 unfavorable
Standard Hours Actual Hours Actual Hours

Standard Rate Standard Rate Actual Rate
Labor Variances Summary
2,400 hours 2,500 hours 2,500 hours

$10.00 per hour $10.00 per hour $10.50 per hour
= $24,000 = $25,000 = $26,250
8-62
Labor Variances Summary
Efficiency variance
$1,000 unfavorable
Rate variance
$1,250 unfavorable
Standard Hours Actual Hours Actual Hours

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

$10.00 per hour $10.00 per hour $10.50 per hour
= $24,000 = $25,000 = $26,250
1.2 hours per parka 2,000
parkas = 2,400 hours
8-32
8-63
Labor Variances Summary
Efficiency variance
$1,000 unfavorable
Rate variance
$1,250 unfavorable
Standard Hours Actual Hours Actual Hours

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

$10.00 per hour $10.00 per hour $10.50 per hour
= $24,000 = $25,000 = $26,250
$26,250 2,500 hours
= $10.50 per hour
8-64
Labor Variances: Using the Factored
Equations
Labor efficiency variance
LEV = (AH SR) (SH SR)
= SR (AH SH)
= $10.00 per hour (2,500 hours 2,400 hours)
= $10.00 per hour (100 hours)
= $1,000 unfavorable
Labor rate variance
LRV = (AH AR) (AH SR)
= AH (AR SR)
= 2,500 hours ($10.50 per hour $10.00 per hour)
= 2,500 hours ($0.50 per hour)
= $1,250 unfavorable
8-33
8-65
Responsibility for Labor Variances
Production Manager
Production managers are
usually held accountable
for labor variances
because they can
influence the:
Mix of skill levels
assigned to work tasks.
Level of employee
motivation.
Quality of production
supervision.
Quality of training
provided to employees.
8-66
I am not responsible for
the unfavorable labor
efficiency variance!
You purchased cheap
material, so it took more
time to process it.
I think it took more time
to process the
materials because the
Maintenance
Department has poorly
maintained your
equipment.
Responsibility for Labor Variances
8-34
8-67
Hanson Inc. has the following direct labor
standard to manufacture one Zippy:
1.5 standard hours per Zippy at
$12.00 per direct labor-hour
Last week, 1,550 direct labor-hours were
worked at a total labor cost of $18,910
to make 1,000 Zippies.
Zippy
Quick Check
8-68
Hansons labor efficiency variance (LEV)
for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
Zippy
Quick Check
8-35
8-69
Hansons labor 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
Zippy
Quick Check
8-70
Hansons labor rate variance (LRV) for the
week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Zippy
Quick Check
8-36
8-71
Hansons labor rate variance (LRV) for the
week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
LRV = AH(AR - SR)
LRV = 1,550 hrs($12.20 - $12.00)
LRV = $310 unfavorable
Zippy
Quick Check
8-72
Efficiency variance
$600 unfavorable
Rate variance
$310 unfavorable
1,500 hours 1,550 hours 1,550 hours

$12.00 per hour $12.00 per hour $12.20 per hour
= $18,000 = $18,600 = $18,910
Zippy
Quick Check
Standard Hours Actual Hours Actual Hours

Standard Rate Standard Rate Actual Rate
8-37
8-73
Learning Objective 6
Compute the variable
manufacturing overhead
efficiency and rate
variances and explain
their significance.
8-74
Glacier Peak Outfitters has the following direct
variable manufacturing overhead labor standard for
its mountain parka.
1.2 standard hours per parka at $4.00 per hour
Last month, employees actually worked 2,500 hours
to make 2,000 parkas. Actual variable
manufacturing overhead for the month was
$10,500.
Variable Manufacturing Overhead
Variances An Example
8-38
8-75
2,400 hours 2,500 hours 2,500 hours

$4.00 per hour $4.00 per hour $4.20 per hour
= $9,600 = $10,000 = $10,500
Efficiency variance
$400 unfavorable
Rate variance
$500 unfavorable
Variable Manufacturing Overhead
Variances Summary
Standard Hours Actual Hours Actual Hours

Standard Rate Standard Rate Actual Rate
8-76
Variable Manufacturing Overhead
Variances Summary
2,400 hours 2,500 hours 2,500 hours

$4.00 per hour $4.00 per hour $4.20 per hour
= $9,600 = $10,000 = $10,500
Efficiency variance
$400 unfavorable
Rate variance
$500 unfavorable
Standard Hours Actual Hours Actual Hours

Standard Rate Standard Rate Actual Rate
1.2 hours per parka 2,000
parkas = 2,400 hours
8-39
8-77
Variable Manufacturing Overhead
Variances Summary
2,400 hours 2,500 hours 2,500 hours

$4.00 per hour $4.00 per hour $4.20 per hour
= $9,600 = $10,000 = $10,500
Efficiency variance
$400 unfavorable
Rate variance
$500 unfavorable
Standard Hours Actual Hours Actual Hours

Standard Rate Standard Rate Actual Rate
$10,500 2,500 hours
= $4.20 per hour
8-78
Variable Manufacturing Overhead
Variances: Using Factored Equations
Variable manufacturing overhead efficiency variance
VMEV = (AH SR) (SH SR)
= SR (AH SH)
= $4.00 per hour (2,500 hours 2,400 hours)
= $4.00 per hour (100 hours)
= $400 unfavorable
Variable manufacturing overhead rate variance
VMRV = (AH AR) (AH SR)
= AH (AR SR)
= 2,500 hours ($4.20 per hour $4.00 per hour)
= 2,500 hours ($0.20 per hour)
= $500 unfavorable
8-40
8-79
Hanson Inc. has the following variable
manufacturing overhead standard to
manufacture one Zippy:
1.5 standard hours per Zippy at
$3.00 per direct labor-hour
Last week, 1,550 hours were worked to make
1,000 Zippies, and $5,115 was spent for
variable manufacturing overhead.
Zippy Quick Check
8-80
Hansons efficiency variance (VMEV) for
variable manufacturing overhead for the week
was:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.
d. $150 favorable.
Zippy Quick Check
8-41
8-81
Hansons efficiency variance (VMEV) for
variable manufacturing overhead for the week
was:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.
d. $150 favorable.
VMEV = SR(AH - SH)
VMEV = $3.00(1,550 hrs - 1,500 hrs)
VMEV = $150 unfavorable
1,000 units 1.5 hrs per unit
Zippy Quick Check
8-82
Hansons rate variance (VMRV) for variable
manufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.
Zippy Quick Check
8-42
8-83
Hansons rate variance (VMRV) for variable
manufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.
VMRV = AH(AR - SR)
VMRV = 1,550 hrs($3.30 - $3.00)
VMRV = $465 unfavorable
Zippy Quick Check
8-84
Efficiency variance
$150 unfavorable
Rate variance
$465 unfavorable
1,500 hours 1,550 hours 1,550 hours

$3.00 per hour $3.00 per hour $3.30 per hour
= $4,500 = $4,650 = $5,115
Zippy Quick Check
Standard Hours Actual Hours Actual Hours

Standard Rate Standard Rate Actual Rate
8-43
8-85
Materials VariancesAn Important
Subtlety
The quantity variance
is computed only on
the quantity used.
The price variance is
computed on the entire
quantity purchased.
8-86
Glacier Peak Outfitters has the following direct
materials 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 at a
cost of $1,029. Glacier used 200 kgs. to make
2,000 parkas.
Materials VariancesAn Important
Subtlety
8-44
8-87
200 kgs. 200 kgs.

$5.00 per kg. $5.00 per kg.
= $1,000 = $1,000
Quantity variance
$0
Standard Quantity Actual Quantity

Standard Price Standard Price
Materials VariancesAn Important
Subtlety
8-88
210 kgs. 210 kgs.

$5.00 per kg. $4.90 per kg.
= $1,050 = $1,029
Price variance
$21 favorable
Actual Quantity Actual Quantity

Standard Price Actual Price
Materials VariancesAn Important
Subtlety
8-45
8-89
Variance Analysis and Management by
Exception
How do I know
which variances to
investigate?
Larger variances, in
dollar amount or as
a percentage of the
standard, are
investigated first.
8-90
Advantages of Standard Costs
Management by
exception
Advantages
Promotes economy
and efficiency
Simplified
bookkeeping
Enhances
responsibility
accounting
8-46
8-91
Potential
Problems
Emphasis on
negative may
impact morale.
Emphasizing standards
may exclude other
important objectives.
Favorable
variances may
be misinterpreted.
Continuous
improvement may
be more important
than meeting standards.
Standard cost
reports may
not be timely.
Invalid assumptions
about the relationship
between labor
cost and output.
Potential Problems with Standard Costs
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
PREDETERMINED OVERHEAD
RATES AND OVERHEAD
ANALYSIS IN A STANDARD
COSTING SYSTEM
Appendix 8A
8-47
8-93
Learning Objective 7
(Appendix 8A)
Compute and interpret
the fixed overhead
volume and budget
variances.
8-94
Volume
variance
Fixed Overhead Volume Variance
Fixed
Overhead
Applied
Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
Volume
variance
Fixed
overhead
applied to
work in process
Budgeted
fixed
overhead
=
8-48
8-95
FPOHR = Fixed portion of the predetermined overhead rate
DH = Denominator hours
SH = Standard hours allowed for actual output
SH FR
DH FR
Fixed Overhead Volume Variance
Volume variance FPOHR (DH SH) =
Fixed
Overhead
Applied
Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
Volume
variance
8-96
Budget
variance
Fixed Overhead Budget Variance
Budget
variance
Budgeted
fixed
overhead
Actual
fixed
overhead
=
Fixed
Overhead
Applied
Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
8-49
8-97
Computing Fixed Overhead Variances
Budgeted production 30,000 units
Standard machine-hours per unit 3 hours
Budgeted machine-hours 90,000 hours
Actual production 28,000 units
Standard machine-hours allowed for the actual production 84,000 hours
Actual machine-hours 88,000 hours
Production and Machine-Hour Data
ColaCo
8-98
Computing Fixed Overhead Variances
Budgeted variable manufacturing overhead 90,000 $
Budgeted fixed manufacturing overhead 270,000
Total budgeted manufacturing overhead 360,000 $
Actual variable manufacturing overhead 100,000 $
Actual fixed manufacturing overhead 280,000
Total actual manufacturing overhead 380,000 $
ColaCo
Cost Data
8-50
8-99
Predetermined Overhead Rates
Predetermined
overhead rate
Estimated total manufacturing overhead cost
Estimated total amount of the allocation base
=
Predetermined
overhead rate
$360,000
90,000 Machine-hours
=
Predetermined
overhead rate
= $4.00 per machine-hour
8-100
Predetermined Overhead Rates
Variable component of the
predetermined overhead rate
$90,000
90,000 Machine-hours
=
Variable component of the
predetermined overhead rate
= $1.00 per machine-hour
Fixed component of the
predetermined overhead rate
$270,000
90,000 Machine-hours
=
Fixed component of the
predetermined overhead rate
= $3.00 per machine-hour
8-51
8-101
Applying Manufacturing Overhead
Overhead
applied
Predetermined
overhead rate
Standard hours allowed
for the actual output
=
Overhead
applied
$4.00 per
machine-hour
84,000 machine-hours =
Overhead
applied
$336,000 =
8-102
Computing the Volume Variance
Volume
variance
Fixed
overhead
applied to
work in process
Budgeted
fixed
overhead
=
Volume
variance
= $18,000 Unfavorable
Volume
variance
= $270,000
$3.00 per
machine-hour
(

$84,000
machine-hours
)
8-52
8-103
Computing the Volume Variance
FPOHR = Fixed portion of the predetermined overhead rate
DH = Denominator hours
SH = Standard hours allowed for actual output
Volume variance FPOHR (DH SH) =
Volume
variance
=
$3.00 per
machine-hour
(

90,000
mach-hours

84,000
mach-hours
)
Volume
variance
= 18,000 Unfavorable
8-104
Computing the Budget Variance
Budget
variance
Budgeted
fixed
overhead
Actual
fixed
overhead
=
Budget
variance
= $280,000 $270,000
Budget
variance
= $10,000 Unfavorable
8-53
8-105
A Pictorial View of the Variances
Fixed Overhead
Applied to
Work in Process
Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
280,000
270,000 252,000
Total variance, $28,000 unfavorable
Budget variance,
$10,000 unfavorable
Volume variance,
$18,000 unfavorable
8-106
Fixed Overhead Variances
A Graphic Approach
Lets look at a
graph showing
fixed overhead
variances. We will
use ColaCos
numbers from the
previous example.
8-54
8-107
Graphic Analysis of Fixed
Overhead Variances
Machine-hours (000)
Budget
$270,000
90
Denominator
hours
0
0
8-108
Graphic Analysis of Fixed
Overhead Variances
Actual
$280,000
Machine-hours (000)
Budget
$270,000
90
Denominator
hours
0
0
Budget Variance 10,000 U
{
8-55
8-109
Applied
$252,000
Machine-hours (000)
Budget
$270,000
Graphic Analysis of Fixed
Overhead Variances
90 84 0
0
Standard
hours
Denominator
hours
Budget Variance 10,000 U
Volume Variance 18,000 U
{
{
Actual
$280,000
8-110
Reconciling Overhead Variances and
Underapplied or Overapplied Overhead
In a standard In a standard
cost system: cost system:
Unfavorable
variances are equivalent
to underapplied overhead.
Favorable
variances are equivalent
to overapplied overhead.
The sum of the overhead variances
equals the under- or overapplied
overhead cost for the period.
8-56
8-111
Predetermined overhead rate (a) 4.00 $ per machine-hour
Standard hours allowed for the actual output (b) 84,000 machine-hours
Manufacturing overhead applied (a) (b) 336,000 $
Actual manufacturing overhead 380,000 $
Manufacturing overhead underapplied or
overapplied 44,000 $ underapplied
Computation of Underapplied Overhead
ColaCo
Reconciling Overhead Variances and
Underapplied or Overapplied Overhead
8-112
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
8-57
8-113
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
8-114
Computing the Sum of All Variances
Variable overhead rate variance 12,000 $ U
Variable overhead efficiency variance 4,000 U
Fixed overhead budget variance 10,000 U
Fixed overhead volume variance 18,000 U
Total of the overhead variances 44,000 $ U
Computing the Sum of All variances
ColaCo
8-58
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
GENERAL LEDGER ENTRIES TO
RECORD VARIANCES
Appendix 8B
8-116
Learning Objective 8
(Appendix 8B)
Prepare journal entries
to record standard
costs and variances.
8-59
8-117
Glacier Peak Outfitters Revisited
We will use information from the Glacier Peak Outfitters
example presented earlier in the chapter to illustrate journal
entries for standard cost variances. Recall the following:
Material
AQ AP = $1,029
AQ SP = $1,050
SQ SP = $1,000
MPV = $21 F
MQV = $50 U
Labor
AH AR = $26,250
AH SR = $25,000
SH SR = $24,000
LRV = $1,250 U
LEV = $1,000 U
Now, lets prepare the entries to record
the labor and material variances.
8-118
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Raw Materials 1,050
Materials Price Variance 21
Accounts Payable 1,029
To record the purchase of material
Work in Process 1,000
Materials Quantity Variance 50
Raw Materials 1,050
To record the use of material
Recording Materials Variances
8-60
8-119
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Work in Process 24,000
Labor Rate Variance 1,250
Labor Efficiency Variance 1,000
Wages Payable 26,250
To record direct labor
Recording Labor Variances
8-120
Cost Flows in a Standard Cost System
Inventories are recorded at standard cost.
Variances are recorded as follows:
Favorable variances are credits, representing
savings in production costs.
Unfavorable variances are debits, representing
excess production costs.
Standard cost variances are usually closed out
to cost of goods sold.
Unfavorable variances increase cost of goods sold.
Favorable variances decrease cost of goods sold.
8-61
8-121
End of Chapter 08