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Standard Costs and Operating

Performance Measures
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, McDonald’s, hospitals,


construction and manufacturing companies.
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


Variance Analysis Cycle

Take
Identify Receive corrective
questions explanations actions

Conduct next
Analyze period’s
variances operations

Prepare standard
Begin
cost performance
report
Setting Standard Costs

Accountants, engineers, purchasing


agents, and production managers
combine efforts to set standards that encourage
efficient future operations.
Setting Standard Costs
Should we use I recommend using practical
ideal standards that standards that are currently
require employees to attainable with reasonable
work at 100 percent and efficient effort.
peak efficiency?

Engineer Managerial Accountant


Learning Objective 1

Explain how direct


materials standards
and direct labor
standards are set.
Setting Direct Material Standards

Price Quantity
Standards Standards

Final, delivered Summarized in


cost of materials, a Bill of Materials.
net of discounts.
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.
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.
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.
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
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.
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
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
A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity


× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance


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.
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.
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.
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.
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
Learning Objective 2

Compute the direct


materials price and
quantity variances and
explain their
significance.
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.
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
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
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
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
Isolation of Material Variances
I need the price variance I’ll start computing
sooner so that I can better the price variance
identify purchasing problems. when material is
You accountants just don’t purchased rather
understand the problems that than when it’s used.
purchasing managers have.
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.
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 manager’s performance.
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.
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.
Zippy
Quick Check 

Hanson’s
Hanson’s 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.
Zippy
Quick Check 

Hanson’s
Hanson’s 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. $800 favorable. MPV = AQ(AP - SP)
d. $800 favorable.MPV = 1,700 lbs. × ($3.90 - 4.00)
MPV = $170 Favorable
Zippy
Quick Check 

Hanson’s
Hanson’s 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.
Zippy
Quick Check 

Hanson’s
Hanson’s 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.
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 lbs - 1,500 lbs)
MQV = $800 unfavorable
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
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.
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.
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
Learning Objective 3

Compute the direct


labor rate and
efficiency variances
and explain
their significance.
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.
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
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
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
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
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
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.
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.
Zippy
Quick Check 

Hanson’s
Hanson’s 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.
Zippy
Quick Check 

Hanson’s
Hanson’s 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.LRV = AH(AR - SR)
unfavorable.
LRV = 1,550 hrs($12.20 - $12.00)
d.
d. $300
$300 favorable.
favorable.LRV = $310 unfavorable
Zippy
Quick Check 

Hanson’s
Hanson’s 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.
Zippy
Quick Check 

Hanson’s
Hanson’s 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.
LEV = SR(AH - SH)
LEV = $12.00(1,550 hrs - 1,500 hrs)
LEV = $600 unfavorable
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
Learning Objective 4

Compute the variable


manufacturing
overhead rate and
efficiency variances.
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.
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
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
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
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
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.
Zippy
Quick Check 

Hanson’s
Hanson’s 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.
Zippy
Quick Check 

Hanson’s
Hanson’s 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.
VMRV = AH(AR - SR)
c. $335 unfavorable.
c. $335 unfavorable. VMRV = 1,550 hrs($3.30 - $3.00)
d.
d. $300
$300 favorable.
favorable. VMRV = $465 unfavorable
Zippy
Quick Check 

Hanson’s
Hanson’s 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.
Zippy
Quick Check 

Hanson’s
Hanson’s efficiency
efficiency variance
variance (VMEV)
(VMEV) for for
variable
variable manufacturing
manufacturing overhead
overhead forfor the
the week
week
was:
was:
a.
a. $435
$435 unfavorable.
unfavorable.
b.
b. $435
$435 favorable.
favorable. 1,000 units × 1.5 hrs per unit
c.
c. $150
$150 unfavorable.
unfavorable.
d.
d. $150
$150 favorable.
favorable.
VMEV = SR(AH - SH)
VMEV = $3.00(1,550 hrs - 1,500 hrs)
VMEV = $150 unfavorable
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
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.
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
Advantages of Standard Costs

Management by Promotes economy


exception and efficiency

Advantages
Enhances
Simplified responsibility
bookkeeping accounting
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.
Learning Objective 5

Compute delivery cycle


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


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
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.
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.
Throughput days.
time = Process + Inspection + Move + Queue
c.
c. 4.1
4.1 days.
days. = 0.2 days + 0.4 days + 0.5 days + 9.3 days
d.
d. 13.4 days. = 10.4 days
13.4 days.
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%.
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%. MCE = Value-added time ÷ Throughput time
b.
b. 1.9%.
1.9%. = Process time ÷ Throughput time
c.
c. 52.0%.
52.0%. = 0.2 days ÷ 10.4 days
d.
d. 5.1%.
5.1%. = 1.9%
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.
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. DCT = Wait time + Throughput time
c.
c. 13.4
13.4 days.
days. = 3.0 days + 10.4 days
d.
d. 10.4
10.4 days.
days. = 13.4 days
Predetermined Overhead Rates and Overhead
Analysis in a Standard Costing System

Appendix 11A
Learning Objective 6

(Appendix 11A)
Compute and interpret
the fixed overhead
budget and volume
variances.
Fixed Overhead Budget Variance
Actual Budgeted Fixed
Fixed Fixed Overhead
Overhead Overhead Applied

Budget
variance

Actual Budgeted
Budget
= fixed – fixed
variance
overhead overhead
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
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
Computing Fixed Overhead Variances
Computing Fixed Overhead Variances
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
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
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
Computing the Budget Variance

Actual Budgeted
Budget
= fixed – fixed
variance
overhead overhead

Budget
= $280,000 – $270,000
variance

Budget
= $10,000 Unfavorable
variance
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
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
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


Fixed Overhead Variances –
A Graphic Approach

Let’s look at a
graph showing
fixed overhead
variances. We will
use ColaCo’s
numbers from the
previous example.
Graphic Analysis of Fixed
Overhead Variances

Budget
$270,000

at
li ed
p p u r
d a ho
e a a r d
e rh n d
o v s ta
e d e r
Fix 0 p Denominator
3 .0 hours
$
0
0 Machine-hours (000) 90
Graphic Analysis of Fixed
Overhead Variances
Actual
$280,000
Budget { Budget Variance 10,000 U
$270,000

at
li ed
p p u r
d a ho
e a a r d
e rh n d
o v s ta
e d e r
Fix 0 p Denominator
3 .0 hours
$
0
0 Machine-hours (000) 90
Graphic Analysis of Fixed
Overhead Variances
Actual
$280,000
Budget { Budget Variance 10,000 U
$270,000
Applied { Volume Variance 18,000 U
$252,000
at
li ed
p p u r
d a ho
e a a r d
e rh n d
o v s ta
e d e r
Fix 0 p Standard Denominator
3 .0 hours hours
$
0
0 Machine-hours (000) 84 90
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.
Reconciling Overhead Variances and
Underapplied or Overapplied Overhead
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
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
Computing the Sum of All Variances
Journal Entries to Record
Variances
Appendix 11B
Learning Objective 7

(Appendix 11B)
Prepare journal entries
to record standard
costs and variances.
Appendix 11B
Journal Entries to Record Variances
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
Material Labor
Labor
AQ
AQ ××AP
AP == $1,029
$1,029 AH
AH ××AR
AR == $26,250
$26,250
AQ
AQ ×× SP
SP == $1,050
$1,050 AH
AH ×× SR
SR == $25,000
$25,000
SQ
SQ ×× SP
SP == $1,000
$1,000 SH
SH ×× SR
SR == $24,000
$24,000
MPV
MPV == $21
$21 FF LRV
LRV == $1,250
$1,250 UU
MQV
MQV == $50
$50 UU LEV
LEV == $1,000
$1,000 UU

Now, let’s prepare the entries to record


the labor and material variances.
Appendix 11B
Recording Material Variances
Appendix 11B
Recording Labor Variances
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.