Responsibility for Labor Variances Responsibility for Labor Variances

I am not responsible for Maybe I can attribute the labor

the unfavorable labor and materials variances to personnel
efficiency variance! You used too much
time because of poorly for hiring the wrong people
You bought poor quality trained workers and and training them poorly.
materials, so my people took poor supervision.
more time to process them.

16-1 16-2

Standard Costing: Factory Overhead Standard Costs for Factory Overhead

Variable Fixed
Overhead Overhead

lEnergy costs lFactory managers’

lIndirect materials salaries
lIndirect
labor lPlant and equipment
lEquipment repair depreciation
and maintenance lPlant security guards
lInsurance and property
taxes for factory
building and equipment

1
 A General Model for Variable FB at standard
Standard Costs for Factory Overhead activity allowed for
Overhead Variance Analysis actual output

FB at actual Standard
Actual costs costs
activities
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual OH Rate Standard OH Rate Standard OH Rate

We will use a
general model Spending Efficiency
similar to labor Variance Variance
and material to
calculate overhead
variances.
The total variance is the flexible budget variance.

A General Model for Variable A General Model for Variable

Overhead Variance Analysis Overhead Variance Analysis

Actual Quantity Actual Quantity Standard Quantity Actual Quantity Actual Quantity Standard Quantity
× × × × × ×
Actual OH Rate Standard OH Rate Standard OH Rate Actual OH Rate Standard OH Rate Standard OH Rate

Spending Efficiency Spending Efficiency

Variance Variance Variance Variance
Standard Overhead rate is the amount that Standard quantity is the standard activities
should have been paid for the resources allowed for the actual output.
acquired.

2
 A General Model for Variable Determining a Standard Variable Factory
Overhead Variance Analysis Overhead Rate

Actual Quantity Actual Quantity Standard Quantity

× × × Œ Decide the level of operation.
Actual OH Rate Standard OH Rate Standard OH Rate
 Determine total variable factory
overhead for the operation.
Ž Select an activity base for variable
Spending Efficiency
factory overhead and determine the
Variance Variance
amount for the operation.
Materials price variance
AQ(AR - SR) MaterialsSR(AQ
quantity-variance
SQ)
Labor rate variance Labor efficiency variance  Divide the amount in 2 by the amount
AQ = Actual Quantity
Variable overhead SRVariable
= Standard Rate
overhead in 3 to arrive at the standard variable
AR = Actual Ratevariance
spending SQ =efficiency
Standard Quantity
variance overhead rate.

Variable Factory Overhead Variable Factory Overhead

Variances Example Variances Example

Hanson Inc. applies variable factory overhead

on the basis of direct labor hours. Hanson
has the following variable factory overhead
standard to manufacture one tent:

Let’s visit Hanson
for factory overhead
analysis.
1.5 standard hours of labor per tent at a variable
overhead rate of $3.00 per direct labor hour.
Last month 1,550 hours were worked to make
1,000 tent, and $5,115 was spent for variable
factory overhead.

3
Variable Factory Overhead Variable Factory Overhead
Variances Question 1 Variances Question 2

What was Hanson’s actual rate (AR) Hanson’s spending variance (SV)
for variable factory overhead rate for variable factory overhead for
for the month? the month was:

a. $3.00 per hour. a. $465 unfavorable.

b. $3.19 per hour. b. $400 favorable.
c. $3.30 per hour. c. $335 unfavorable.
d. $4.50 per hour. d. $300 favorable.

Variable Factory Overhead Variable Factory Overhead FB at standard

activity allowed for

Variances Question 3 Variances – Summary actual output

FB at actual Standard
Actual costs
activities costs
Actual Hours Actual Hours Standard Hours
Hanson’s efficiency variance (EV) × × ×
for variable factory overhead for Actual Rate Standard Rate Standard Rate
the month was:

a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable. Spending variance Efficiency variance
d. $150 favorable. $........ …..favorable $........ ……favorable

4
Interpretation and Implications of
Variable Factory Overhead
Variances
Spending Variance
Results from paying more
or less than expected for
overhead items such as
supplies and utilities.
Fixed Overhead Variances
Efficiency Variance
A function of the
selected activity
measure.
It does not reflect
overhead control.
Now let’s turn
our attention
to fixed
overhead.

Determining a Standard Variable Factory

Overhead Rate
Fixed Overhead Variances

ΠDetermine the total budgeted fixed factory overhead Fixed factory overhead costs are assigned to products and
for level of operation. services using a standard fixed overhead rate (FR):
 Select an activity measure or measures for applying
fixed factory overhead.
Ž Calculate the denominator quantity for the selected Assigned Overhead = FR × Standard Quantity
activity measure at the planned level of operations.
 Divide the amount in Step 1 by the amount in Step 3
to determine the standard fixed factory overhead
rate. Budgeted total fixed overhead costs
FR =
Denominator quantity for activity measure

5
FOH Variances FB at actual
Fixed Overhead Variances – Example
activities
FB at standard Standard
Actual costs activity allowed for
costs
actual output
Hanson Inc.’s budgeted fixed overhead is $9,000 for the
Actual Fixed Fixed Fixed month. The budgeted activity measure for the month is
Overhead Overhead Overhead 937.5 units
Incurred Flex Budget Applied
Actual production is 1,000 units and actual fixed overhead
SH × FR is $8,450 for the month.
Compute the fixed overhead spending and
volume variances.
Spending Volume First, calculate the fixed overhead rate.
Variance Variance

FR = Standard Fixed Overhead Rate $............. budgeted fixed overhead = $.......per hr

FR =
SH = Standard Hours Allowed (……………….) budgeted hours

FOH Variances FB at standard Interpretation of Fixed Factory Overhead

activity allowed for
– Example actual output
Variances
FB at actual Standard
Actual costs costs
activities
Actual Fixed Fixed Fixed Spending Variance Volume Variance
Overhead Overhead Overhead
Incurred Budget Applied Results from paying more Results from the inability
or less than expected for to operate at the activity
overhead items. budgeted for the period.

6
 Interpretation of Fixed Factory Overhead
Fixed Factory Overhead Variances
Volume Variance

A measure of
facility use

Let’s look at a graph Volume

showing fixed Variance
overhead variances.
We will use Results when standard quantity
Hanson’s numbers differ from budgeted quantity
from the previous
example. Unfavorable when standard Favorable when standard
quantity < budgeted quantity quantity > budgeted quantity

Interpretation of Fixed Factory Overhead Factors Contributing to a Fixed

Volume Variance Overhead Spending Variance

A measure of
facility use
ýIneffective budget
Has no significance procedures
for Volume
cost control ýInadequate
Variance control of costs
Explainable by and
controllable only through
Results when standard quantity ýMisclassification
differ fromactivity
budgeted quantity of cost items
Unfavorable when standard Favorable when standard
quantity < budgeted quantity quantity > budgeted quantity

7
Factors Contributing to a Fixed Three-Way Analysis of Factory Overhead
Overhead Volume Variance Variances
FB at actual FB at
standard Standard
Actual costs activities costs
activity
ŒManagement
decisions Variable OH Fixed OH Variable OH Fixed OH
Unexpected Spending Spending Efficiency Volume
Variance Variance Variance Variance
changes in
market demand
ŽUnforeseen
problems in Total OH Variable OH Fixed OH
manufacturing Spending Efficiency Volume
operations Variance Variance Variance

Three-Way Analysis of Factory Overhead

Fixed Factory Overhead Variances
Variances
FB at actual FB at
standard Standard
Actual costs activities costs
activity

Variable OH Fixed OH Variable OH Fixed OH

Spending Spending Efficiency Volume
Variance Variance Variance Variance
Let’s return to
Hanson Inc to
observe three-way
analysis of factory
overhead variances.
Total OH Variable OH Fixed OH
Spending Efficiency Volume
Variance Variance Variance
$........... $.......... $..........

8
 Two-Way Analysis of Factory Overhead
Fixed Factory Overhead Variances
Variances
FB at actual FB at
standard Standard
Actual costs activities costs
activity

Variable OH Fixed OH Variable OH Fixed OH

Spending Spending Efficiency Volume
Now, let’s use the Variance Variance Variance Variance
same numbers from
Hanson Inc to
illustrate two-way
analysis of factory Total OH Fixed OH
overhead variances. Controllable Volume
Variance Variance

Two-Way Analysis of Factory Overhead

Variances
FB at actual FB at
standard Standard
Actual costs activities costs
activity

Variable OH Fixed OH Variable OH Fixed OH

Spending Spending Efficiency Volume
Variance Variance Variance Variance
$465 U $550 F $150 U $600 F

Total OH Fixed OH
Controlling Volume
Variance Variance
$........... $...........