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Standard
Amount
Direct
Material
Direct Manufacturing
Labor Overhead
Take
Identify Receive corrective
questions explanations actions
Conduct next
Analyze period’s
variances operations
Prepare standard
Begin
cost performance
report
Engineer Managerial
Accountant
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Setting Direct Material Standards
Price Quantity
Standards Standards
Rate Time
Standards Standards
Rate Activity
Standards Standards
Variance Analysis
Variance Analysis
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
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Labor Variances Example
Quality of production
supervision.
Quality of training
provided to employees.
Production Manager
Both spending
Only a spending
and efficiency
variance can be
variances can be
computed.
computed.
Spending Variance
= $140 unfavorable
Spending Variance
Results from paying more
or less than expected for
overhead items and from Now, let’s use the
excessive usage of standard hours allowed,
overhead items. along with the actual
hours, to compute the
efficiency variance.
Spending Efficiency
Variance Variance
Spending variance = AH(AR - SR)
Efficiency variance = SR(AH - SH)
Efficiency Variance
Controlled by
managing the
overhead cost driver.
Spending variance = AH
Yoder Enterprises’ (AR -production
actual SR) for the
period=required 2,100overhead
Actual variable standard (AH ´ SR)
direct–labor
incurred
hours. Actual variable overhead for the period
= $10,950 – (2,050 hours ´ $5 per hour)
was $10,950. Actual direct labor hours worked
were 2,050. The
= $10,950 predetermined variable
– $10,250
overhead rate is $5 per direct labor hour. What
= $700 U
was the spending variance?
a. $450 U
b. $450 F
c. $700 F
d. $700 U
Activity-based costing
can be used when multiple
activity bases drive
variable overhead costs.
Budget Volume
Variance Variance
$8,450 $9,000
Budget variance
$550 favorable
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Fixed Overhead Variances –
A Closer Look
Budget Variance
Volume
Variance
Unfavorable Favorable
when standard hours when standard hours
< denominator hours > denominator hours
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Volume Variance – A Closer Look
Volume
Variance
Does not measure over-
or under spending
Results when standard hours
Itallowed
resultsforfrom treating
actual fixed
output differs
from the denominator
overhead activity.
as if it were a
variable cost.
Unfavorable Favorable
when standard hours when standard hours
< denominator hours > denominator hours
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Quick Check ü
Budget
Yoder variance
Enterprises’ actual production for the
period required
= Actual 2,100 standard
fixed overhead – Budgeteddirect labor
fixed overhead
hours. Actual– $14,450
= $14,800 fixed overhead for the period
was $14,800. The budgeted fixed overhead
was= $14,450.
$350 U The predetermined fixed
overhead rate was $7 per direct labor hour.
What was the budget variance?
a. $350 U
b. $350 F
c. $100 F
d. $100 U
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Quick Check ü
Volume variance
Yoder Enterprises’ actual production for the
= Budgeted fixed overhead – (SH ´ FR)
period required 2,100 standard direct labor
hours. =Actual
$14,450 – (2,100
fixed hours ´ $7
overhead forper
thehour)
period
= $14,450The
was $14,800. – $14,700
budgeted fixed overhead
was $14,450.
= $250 F The predetermined fixed
overhead rate was $7 per direct labor hour.
What was the volume variance?
a. $250 U
b. $250 F
c. $100 F
d. $100 U
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Quick Check Summary
Let’s look at a
graph showing
fixed overhead
variances. We will
use ColaCo’s
numbers from the
previous example.
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Fixed Overhead Variances
Cost
Activity
3,000 Hours
Expected
Activity
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Fixed Overhead Variances
Cost
Activity
3,000 Hours
Expected
Activity
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Fixed Overhead Variances
Activity
3,000 Hours 3,200
Expected Standard
Activity Hours
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Overhead Variances and Under- or
Overapplied Overhead Cost
In a standard
cost system:
Unfavorable Favorable
variances are equivalent variances are equivalent
to underapplied overhead. to overapplied overhead.
Larger variances, in
How do I know dollar amount or as
which variances to a percentage of the
investigate? standard, are
investigated first.
Favorable Limit
• •
• • •
Desired Value
• •
Unfavorable Limit •
•
1 2 3 4 5 6 7 8 9
Variance Measurements
Advantages
Enhances
Simplified responsibility
bookkeeping accounting
Continuous
Invalid assumptions improvement may
about the relationship be more important
between labor than meeting standards.
cost and output.
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Cost Flows in a Standard Cost System