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Labor:
Price Standard – based on current wage rates and anticipated adjustments (e.g. C.O.L.A)
Quantity Standard – based on required production time plus an allowance for rest periods, clean-
up, machine setup, and machine downtime
Manufacturing Overhead:
A standard pre-determined overhead rate is used based on an expected standard activity index
such as standard direct labor hours or standard direct labor cost
VARIANCES
Static budget variance = actual results – static (master) budget amounts
Static budget refers to the budget that is set at the beginning of a budgeting period and that
is geared to only one level of activity – the budgeted level of activity.
Flexible budget variance = actual results – budgeted amounts for the actual level of activity
A flexible budget is geared to all levels of activity within the relevant range and is used to
plan and control spending. The flexible budget will show the cost formula for each variable
cost and total cost (possibly including fixed costs) at various levels of activity
Mix variance:
Total actual quantities at standard prices
Less: Total actual input at average standard input cost (TAI x ASIC
Mix variance
Yield variance:
Total actual input at average standard input cost (TAI x ASIC)
Less: Standard cost (AO x ASOC)
Yield variance
or
Actual output
Less: expected output from actual input
Yield difference
x Average standard output cost
Yield variance
b. The variable overhead efficiency variance is computed as follows when the variable
overhead rate is expressed in terms of direct labor-hours:
b. Volume Variance. The volume variance is the difference between the total budgeted fixed
overhead and the fixed overhead applied to production. Alternatively, it can be
expressed as the difference between the denominator level of activity and the standard
hours allowed for the output of the period, multiplied by the fixed portion of the
predetermined overhead rate.
Volume
Variance
=
Fixed portion of the
predetermined
overhead rate ( Denominator
hours
-
Standard hours
allowed for the
actual output )
The volume variance occurs because the denominator level of activity differs from the
standard hours allowed for production. Thus, an unfavorable variance means that the
company operated at an activity level below the denominator level of activity.
Conversely, a favorable variance means that the company operated at an activity level
greater than the denominator level of activity.
Under- and Overapplied overhead. The sum of the four manufacturing overhead variances-
variable overhead spending, variable overhead efficiency, fixed overhead budget, and
fixed overhead volume – equals the under- or overapplied overhead for the period.
Standard quantities, standard prices, and standard unit costs follow for direct materials and
direct manufacturing labor:
Standard Quantity Standard Price Standard Unit cost
Direct materials 12 pounds P10 per pound P120
Direct manufacturing labor 3.5 hours P50 per hour P175
During 2013, actual number of units produced and sold was 5,500. Actual cost of direct
materials used was P668,800, based on 70,400 pounds purchased at P9.50 per pound. Direct
manufacturing labor hours actually used were 18,500 at the rate of P51.50 per hour. As a result
actual direct manufacturing labor cost were P952,750. Actual fixed costs were P1,180,000.
There were no beginning or ending inventories.
Required:
1. Prepare a flexible budget for the given number of units of production.
2. Compute price and efficiency variances, as well as the flexible budget variance, for
direct materials and direct manufacturing labor.
2. Likmuan, Inc., is a privately hel furniture manufacturer. For august 2013, Likmuan had the
following standards for one of its product, a wicker chair:
The following data were compiled regarding actual performance: actual output units (chairs)
produced, 2,000; square yards of input purchased and used, 3,700; price per square yard,
P5.10; direct manufacturing labor costs, P8,820; actual hours of input, 900; labor price per hour,
P9.80
Required:
Show computations of price and efficiency variances for direct materials and direct
manufacturing labor
4. Rover Crunches, Inc. manufactures breakfast cereal, using the following proportion of
ingredients to produce 200 kgs. of output.
Quantity Price Cost
Wheat germ 25 kgs P2.05 P 50
Barley 100 1.00 100
Oats 125 0.80 100
Total 250 kgs P250
The materials price variance is recognized when the materials are purchased. Actual finished
production for the month was 70,000 kilos.