BACOSTMX Module 8 Lecture Standard Costing

STANDARD COSTING AND VARIANCE ANALYSIS
BACOSTMX MODULE 8
1. Discuss the rationale of standard costs.
2. Explain how direct materials standards and direct labor
standards are set.
3. Compute the direct materials price and quantity variances and
explain their significance.
4. Compute the direct labor rate and efficiency variances and
LEARNING explain their significance.
OUTCOMES 5. Compute the variable manufacturing overhead rate and
efficiency variances.
6. Compute and interpret the fixed overhead budget and volume
variances.
7. Calculate mix and yield variances for direct materials and direct
labor.
8. Prepare journal entries to record standard costs and variances.
COST ACCOUNTING AND CONTROL 2

 Discuss the rationale of standard
LEARNING
OUTCOME 1 costs.

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

KAIZEN Continuous improvement standards
STANDARDS
Reflect planned improvement and are

a type of currently attainable
standard
Focus on cost reduction

REASONS FOR
ADOPTING Cost management
STANDARD
COSTING SYSTEMS
Planning and control
Decision making and product costing

 Explain how direct materials
LEARNING
OUTCOME 2 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 DIRECT MATERIAL STANDARDS
 Standard Price per unit  Standard Quantity per unit
Purchase price, top grade $3.85 Material requirement as 2.7

pewter ingots, in 40-pound specified in the bill of materials
ingots for a pair of bookends, in pounds
Freight, by truck, from the $0.24
supplier’s warehouse Allowance for waste and 0.2
Less Purchase discount ($0.09) spoilage, in pounds
Standard price per pound $4.00 Allowance for rejects, in pounds 0.1
Standard quantity per pair of 3.0

bookends, in pounds
STANDARD BILL OF MATERIALS
 Identifies the quantity of direct materials that should be used to produce a predetermined
quantity of output
 Acts as a materials requisition form
 Product: Quarts of Deluxe Strawberry Frozen Yogurt
 Output: 30,000 Quarts
Direct Material Unit Standard Total Requirements

Yogurt 25 oz. 750,000 oz.
Strawberries 10 oz. 300,000 oz.
Milk 8 oz. 240,000 oz.
Cream 4 oz. 120,000 oz.
Gelatin 1 oz. 30,000 oz.
Container 1 container 30,000 containers
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 DIRECT LABOR STANDARDS
 Standard direct rate per hour  Standard direct hours per unit
Basic wage rate per hour $10.00 Basic labor time per unit, in hours 1.9
Employment taxes at 10% $1.00 Allowance for breaks and 0.1

of the basic rate personal needs
Fringe benefits at 30% of $3.00 Allowance for cleanup and 0.3
the basic rate machine downtime
Standard rate per direct $14.00 Allowance for rejects 0.2
labor hour Standard direct labor hours per 2.5
unit of product

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.
STANDARD COSTING SYSTEMS
 Standard costs are developed for direct materials, direct
labor, and overhead used in producing a product or
service
 Total of standard costs yields the standard cost per unit
 Standard cost sheet: Provides the detail underlying the
standard unit cost

STANDARD COST SHEET FOR DELUXE STRAWBERRY FROZEN
YOGURT
Description Standard Price Standard Usage Standard Cost Subtotal
Direct materials:
Yogurt $ 0.04 × 25 oz. = $1.00
Strawberries 0.02 × 10 oz. = 0.20
Milk 0.03 × 8 oz. = 0.24
Cream 0.05 × 4 oz. = 0.20
Gelatin 0.02 × 1 oz. = 0.02
Container 0.06 × 1 = 0.06
Total direct materials $1.72
Direct labor:
Machine operators 16.00 × 0.01 hr. = $0.16
Total direct labor 0.16
Overhead:
Variable overhead 12.00 × 0.01 hr. = $0.12
Fixed overhead 40.00 × 0.01 hr. = 0.40
Total overhead 0.52
Total
COST ACCOUNTING standard
AND CONTROL unit cost $2.40 22
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

Variance Analysis
Materials price variance Materials quantity variance

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

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price


× × ×
Actual quantity is the amount of direct

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


× × ×
Standard quantity is the standard quantity

allowed for the actual output of the period.


× × ×
Actual price is the amount actually

paid for the input used.


× × ×
Standard price is the amount that should

have been paid for the input used.


× × ×
(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)

AQ = Actual Quantity SP = Standard Price
AP = Actual Price SQ = Standard Quantity
 Compute the direct materials
LEARNING
OUTCOME 3 price and quantity variances and

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
× × ×
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

× × ×
210 kgs. 210 kgs. 200 kgs.
× $1,029  ×
210 kgs ×
$4.90 per kg. $5.00per
= $4.90 perkg
kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000


× × ×
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


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

Zippy
QUICK CHECK ✓
Hanson’s material price variance (MPV)
for the week was:
b. $170 favorable.
c. $800 unfavorable.MPV = AQ(AP - SP)
MPV = 1,700 lbs. × ($3.90 - 4.00)
d. $800 favorable. MPV = $170 Favorable

Zippy
QUICK CHECK ✓
Hanson’s material quantity variance (MQV)
for the week was:
b. $170 favorable.
d. $800 favorable.

Zippy
QUICK CHECK ✓
Hanson’s material quantity variance (MQV)
for the week was:
b. $170 favorable.
d. $800 favorable.
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 lbs - 1,500 lbs)
MQV = $800 unfavorable
Zippy
QUICK CHECK ✓
× × ×
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

Zippy
QUICK CHECK ✓ CONTINUED

Hanson Inc. has the following material standard to
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

Actual Quantity Actual Quantity
Purchased Purchased
× ×
Actual Price Standard Price
2,800 lbs. 2,800 lbs.
× ×
$3.90 per lb. $4.00 per lb.
= $10,920 = $11,200
Price variance increases

Price variance because quantity
$280 favorable purchased increases.
Zippy

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
 Compute the direct labor rate
LEARNING
OUTCOME 4 and efficiency variances and

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

× × ×
× $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


× × ×
× 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


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)
COST ACCOUNTING AND CONTROL
= $1,000 unfavorable 55
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 labor rate variance (LRV) for the
week was:
b. $310 favorable.
d. $300 favorable.

Zippy
QUICK CHECK ✓
Hanson’s labor rate variance (LRV) for the
week was:
b. $310 favorable.
LRV = AH(AR - SR)
LRV = 1,550 hrs($12.20 - $12.00)
d. $300 favorable.LRV = $310 unfavorable

Zippy
QUICK CHECK ✓
Hanson’s labor efficiency variance (LEV)
for the week was:
b. $590 favorable.
d. $600 favorable.

Zippy
QUICK CHECK ✓
Hanson’s labor efficiency variance (LEV)
for the week was:
b. $590 favorable.
d. $600 favorable.
LEV = SR(AH - SH)
LEV = $12.00(1,550 hrs - 1,500 hrs)
LEV = $600 unfavorable
Zippy
QUICK CHECK ✓
× × ×
× × ×
$12.20 per hour $12.00 per hour $12.00 per hour
= $18,910 = $18,600 = $18,000

$310 unfavorable $600 unfavorable
 Compute the variable
LEARNING
OUTCOME 5 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.

VARIANCES SUMMARY
× × ×
× × ×
= $10,500 = $10,000 = $9,600


VARIANCES SUMMARY
× × ×
× $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


VARIANCES SUMMARY
× × ×
× 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


VARIANCES: USING FACTORED
Variable manufacturing overhead rate variance
EQUATIONS
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
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 rate variance (VMRV) for variable
manufacturing overhead for the week was:
b. $400 favorable.
d. $300 favorable.

Zippy
QUICK CHECK ✓
Hanson’s rate variance (VMRV) for variable
manufacturing overhead for the week was:
b. $400 favorable.
VMRV = AH(AR - SR)
VMRV = 1,550 hrs($3.30 - $3.00)
d. $300 favorable. VMRV = $465 unfavorable

Zippy
QUICK CHECK ✓
Hanson’s efficiency variance (VMEV) for
variable manufacturing overhead for the week
was:
b. $435 favorable.
d. $150 favorable.

Zippy
QUICK CHECK ✓
Hanson’s efficiency variance (VMEV) for
variable manufacturing overhead for the week
was:
b. $435 favorable. 1,000 units × 1.5 hrs per unit
d. $150 favorable.
VMEV = SR(AH - SH)
VMEV = $3.00(1,550 hrs - 1,500 hrs)
VMEV = $150 unfavorable
Zippy
QUICK CHECK ✓
× × ×
× × ×
= $5,115 = $4,650 = $4,500

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. Potential be misinterpreted.
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.
 Compute and interpret the fixed
LEARNING
OUTCOME 6 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
Volume
variance
Fixed
Budgeted
Volume overhead
= fixed –
variance applied to
overhead
work in process
FIXED OVERHEAD VOLUME VARIANCE
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
ColaCo
Production and Machine-Hour Data
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

COMPUTING FIXED OVERHEAD
VARIANCES
ColaCo
Cost Data
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

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

predetermined overhead rate
Fixed component of the $270,000

=
predetermined overhead rate 90,000 Machine-hours
Fixed component of the

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,

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
Denominator
hours
0
0 Machine-hours (000) 90
Actual
$280,000
Budget { Budget Variance 10,000 U
$270,000
Denominator
hours
0
0 Machine-hours (000) 90
Actual
$280,000
Budget { Budget Variance 10,000 U
$270,000
Applied { Volume Variance 18,000 U
$252,000
Standard Denominator
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
ColaCo
Computation of Underapplied Overhead
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

COMPUTING THE VARIABLE OVERHEAD
VARIANCES
Variable manufacturing overhead rate variance

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

COMPUTING THE VARIABLE OVERHEAD
VARIANCES
Variable manufacturing overhead efficiency variance

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

COMPUTING THE SUM OF ALL VARIANCES
ColaCo
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

INTERPRETING  Variable overhead spending variance
VARIABLE
 Affected by price changes and how efficiently an
OVERHEAD overhead is used
VARIANCES
 Variable overhead items are affected by several
responsibility centers
 Assigning the cost to a specific area of
responsibility requires that cost be traced to the
area
 Variable overhead efficiency variance
 If variable overhead is driven by direct labor hours,
the variance is caused by efficient or inefficient use
of direct labor

 Fixed overhead spending variance
INTERPRETING
 Budget variance is usually small
FIXED OVERHEAD
VARIANCES  Many fixed overhead costs are affected primarily
by long-run decisions and not by changes in
production levels
 Fixed overhead volume variance
 Measure of planned utilization of capacity if the
budgeted volume is the amount that management
believed could be produced and sold
 Volume variance is a direct measure of capacity
utilization if practical capacity is used as the
budgeted volume

RECORDING OVERHEAD VARIANCES
 Applying overhead to production

 Work in Process is accumulated on the debit side
 Variance and fixed overhead control accounts are accumulated on
the credit side
 Recognizing the incurrence of actual overhead
 Variable and fixed overhead control accounts are debited
 Value of various accounts is credited

 Overhead variance reports are prepared periodically

 Closing the variances to cost of goods sold
 Fixed overhead volume variance account is debited and cost of
goods sold is credited
 Another entry is made to debit cost of goods sold and credit
variable overhead spending and efficiency variance accounts
and fixed overhead spending variance account

 Recognizing variances
 Fixed overhead control account, fixed overhead spending
variance account, and variable overhead spending and
efficiency variance accounts are debited
 Variable overhead control account and fixed overhead volume
variance account are credited

THREE VARIANCE ANALYSIS
Actual Variable Overhead VOHSR x Actual Hours VOHSR x Std. Hours VOHSR x Std. Hours
+ Actual Fixed Overhead + Budgeted FOH + Budgeted FOH + FOHSR x Std. Hours
=Total Actual Overhead = Budget OH at AH =Budget OH at SH = Applied Overhead
Spending Variance Efficiency Variance Volume Variance
Budget Variance Volume Variance
TWO VARIANCE ANALYSIS

FOUR VARIANCE ANALYSIS
VOH Spending Variance VOH Efficiency Variance
Actual Variable Overhead VOHSR x Actual Hours VOHSR x Std. Hours VOHSR x Std. Hours
+ Actual Fixed Overhead + Budgeted FOH + Budgeted FOH + FOHSR x Std. Hours
=Total Actual Overhead = Budget OH at AH =Budget OH at SH = Applied Overhead
Volume Variance
FOH Budget Variance
ONE VARIANCE ANALYSIS

COST ACCOUNTING AND CONTROL Total Overhead Variance 108
 Calculate mix and yield variances
LEARNING for direct materials and direct
OUTCOME 7 labor

MIX AND YIELD VARIANCES
 Each possible combination of materials or labor is called a mix.

 Process yield is the output quantity that results from a specified input.
 Mix standards are used to calculate mix and yield variances for material
and labor.
 An underlying assumption in product mix situations is that the potential
for substitution among the material and labor components exists.

MIX AND YIELD
VARIANCES:
MATERIALS AND Mix variance: Created whenever
LABOR the actual mix of inputs differs
from the standard mix
Yield variance: Occurs

whenever the actual yield (output)
differs from the standard yield

MATERIAL PRICE, MIX AND YIELD VARIANCES
Actual Mix Actual Mix Standard Mix Standard Mix

x Actual Quantity x Actual Quantity x Actual Quantity x Standard Quantity
x Actual Price x Standard Price x Standard Price x Actual Price
Material Price Variance Material Mix Variance Material Yield Variance
Material Quantity Variance

DIRECT MATERIALS MIX VARIANCE
 SM - Quantity of each input that should have been used given the total actual
input quantity
 SM = Standard mix proportion × Total actual input quantity
 If relatively more of a more expensive input is used, the mix variance will be
unfavorable and vice versa
Mix variance =  (AQi − SMi)SPi

DIRECT MATERIALS YIELD VARIANCE
 Yield variance = (Standard yield – Actual yield)SPy

 Standard yield = Yield ratio × Total actual inputs
 Yield ratio = Total output ÷ Total input
 SPy = Standard cost of the yield (equal to total cost of a standard batch
divided by the amount of the yield)
LABOR RATE, MIX AND YIELD VARIANCES
Actual Mix Actual Mix Standard Mix Standard Mix

x Actual Hours x Actual Hours x Actual Hours x Standard Hours
x Actual Rate x Standard Rate x Standard Rate x Actual Rate
Labor Rate Variance Labor Mix Variance Labor Yield Variance
Labor efficiency variance

DIRECT LABOR MIX AND YIELD VARIANCES
Direct Labor Type Mix Mix Proportion SP Standard Cost
Shelling 3 hrs. 0.60 $ 8.00 $24
Mixing 2 0.40 15.00 30
Total 5 hrs. $54
Yield 120 lbs.
 Yield ratio: 24 = (120/5), or 2,400%

 Standard cost of the yield (SPy): $0.45 per pound ($54/120 pounds of yield)
 Suppose that Malcom processes 1,600 pounds of nuts and produces the following actual
results:
Direct Labor Type Actual Mix Percentages*
Shelling 20 hrs. 40.0%

Mixing 30 60.0
Total 50 hrs. 100.0%
Yield 1,300 lbs. 2,600.0%
DIRECT LABOR MIX AND YIELD VARIANCES
 Direct labor mix variance

 SM (shelling) = 0.60 × 50 = 30 hours
 SM (mixing labor) = 0.40 × 50 = 20 hours
Direct Labor Type AH SM AH-SM SP (AH-SM)SP

Shelling 20 30 (10) $8.00 $(80)
Mixing 30 20 10 15.00 150
Direct labor mix variance $(70) U
• Direct labor yield variance

 =(Standard yield − Actual yield)SPy
 =[(24 × 50) − 1,300]$0.45 = (1,200 − 1,300)$0.45
 =$45 F
 Prepare journal entries to
LEARNING
OUTCOME 8 record standard costs and
variances.

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 Labor
AQ × AP = $1,029 AH × AR = $26,250
AQ × SP = $1,050 AH × SR = $25,000
SQ × SP = $1,000 SH × SR = $24,000
MPV = $21 F LRV = $1,250 U
MQV = $50 U LEV = $1,000 U
Now, let’s prepare the entries to record

the labor and material variances.
RECORDING MATERIAL VARIANCES
 Journal entry associated with the purchase of direct materials

 Assumptions
 Unfavorable MPV
 AQ is defined as direct materials purchased
Debit Credit
Raw Materials (SP × AQ)
Materials Price Variance (AP – SP)AQ
Accounts Payable (AP × AQ)

 Journal entry to record the issuance and usage of direct materials

 Assumption - Unfavorable MUV
Debit Credit
Work in Process (SP × SQ)
Materials Quantity / Usage Variance (AQ – SQ)SP
Raw Materials (SP × AQ)

GENERAL JOURNAL Page 4
Post.
Date Description 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 LABOR VARIANCES
 Assumptions
 Favorable direct labor rate variance
 Unfavorable direct labor efficiency variance
Debit Credit
Work in Process (SH × SR)
Labor Efficiency Variance (AH – SH)SR
Labor Rate Variance (AR − SR)AH
Wages Payable AH × AR

RECORDING LABOR VARIANCES
GENERAL JOURNAL Page 4

Post.
Date Description 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

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.

REFERENCES:  Garrison, Noreen and Brewer, Managerial Accounting
(2008), 12th edition, Mc-Graw Hill International Edition.
 Kinney & Raiborn, 8th edition (2011), Cost Accounting:
Foundations and Evolutions. Cengage Learning
 Hansen, Don R. and Mowen, Maryanne M. (2018), Cost
Accounting and Control. Cengage Learning: Boston, USA.

THANK YOU

BACOSTMX Module 8 Lecture Standard Costing

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STANDARD COSTING AND VARIANCE ANALYSIS

COST ACCOUNTING AND CONTROL 2

COST ACCOUNTING AND CONTROL 3

Quantity standards Price standards

Examples: Firestone, Sears, McDonald’s, hospitals,

Type of Product Cost

COST ACCOUNTING AND CONTROL 6

COST ACCOUNTING AND CONTROL 7

Engineer Managerial Accountant

Reflect planned improvement and are

Focus on cost reduction

COST ACCOUNTING AND CONTROL 9

Planning and control

Decision making and product costing

COST ACCOUNTING AND CONTROL 10

COST ACCOUNTING AND CONTROL 11

Final, delivered Summarized in

COST ACCOUNTING AND CONTROL 12

 Standard Price per unit  Standard Quantity per unit

Purchase price, top grade $3.85 Material requirement as 2.7

Standard quantity per pair of 3.0

Direct Material Unit Standard Total Requirements

As a result allowances for waste and

COST ACCOUNTING AND CONTROL 15

Often a single Use time and

COST ACCOUNTING AND CONTROL 16

Employment taxes at 10% $1.00 Allowance for breaks and 0.1

COST ACCOUNTING AND CONTROL 17

The rate is the The quantity is

COST ACCOUNTING AND CONTROL 18

COST ACCOUNTING AND CONTROL 19

Price and quantity standards are

 The purchasing manager is responsible for raw

 The buying and using activities occur at different times.

COST ACCOUNTING AND CONTROL 21

Price Variance Quantity Variance

Difference between Difference between

COST ACCOUNTING AND CONTROL 23

Price Variance Quantity Variance

Materials price variance Materials quantity variance

COST ACCOUNTING AND CONTROL 24

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

COST ACCOUNTING AND CONTROL 25

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Actual quantity is the amount of direct

COST ACCOUNTING AND CONTROL 26

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Standard quantity is the standard quantity

COST ACCOUNTING AND CONTROL 27

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Actual price is the amount actually

COST ACCOUNTING AND CONTROL 28

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Standard price is the amount that should

COST ACCOUNTING AND CONTROL 29

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)

COST ACCOUNTING AND CONTROL 31