Ch10 - Session

© 2021 McGraw-Hill Limited 10-1
Standard Costs 1
• Standards are benchmarks or “norms”
for measuring performance. Two types
of standards are commonly used:
• Quantity standards specify how much of an
input should be used to make a product or
provide a service.
• Cost (price) standards specify how much
should be paid for each unit
of the input.

Standard Costs 2
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
Labour Overhead
Type of Product Cost

Variance Analysis Cycle
Exhibit 10-1

Setting Standard Costs
• Setting price and quantity standards ideally combines the
expertise of everyone who is responsible for purchasing
and using the inputs; this includes accountants,
engineers, purchasing
agents, and production managers.
• Ideal Standards: Can only be attained under the best

circumstances. Requires employees to work at 100%
peak efficiency all the time.
• Practical standards: Tight but attainable. Requires

reasonable, although highly efficient, efforts by the
average employee.
Setting Direct Material Standards
Standard Price Standard Quantity

per Unit per Unit
The amount of
Final, delivered material required for each
cost of materials, unit, as well as an allowance
net of discounts including for unavoidable waste,
shipping, receiving, spoilage, and other normal
and other such costs. inefficiencies.

Setting Direct Labour Standards
Standard Rate Standard Hours

per Hour per Unit
Use time and

The labour rate that motion studies for
should be incurred per each labour operation to
hour of labour time, determine the amount of
including Employment labour time to complete one
Insurance, employee unit. Should include
benefits, and other allowance for normal
labour costs. inefficiencies.

Setting Variable Overhead
Standards
Price Quantity
Standards Standards
The rate is the The quantity is the

variable portion of the activity in the allocation
predetermined overhead base used to calculate the
rate. predetermined overhead.

Standard Cost Card – Variable
Production Cost
A standard cost card for one unit of
product might look like this:

Standards vs. Budgets
• Standards and budgets are very similar.

• A budget is set for total costs, whereas a
standard is a per unit cost.
• A standard can be viewed as the budgeted
cost for one unit of product.

Price and Quantity Standards
• Price and quantity standards are determined
separately for two reasons:
1. The purchasing manager is responsible for raw
material purchase prices and the production manager
is responsible for the quantity of raw material used.
2. 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.

Responsibility for Material Variances
1
• Production Manager is responsible for the Material
Quantity Variance.
• 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.
• If the purchasing manager purchases cheap
material, more of it may need to be used in
production causing unfavourable material quantity
variances.

Responsibility for Material Variances
2
• Purchasing Manager is responsible for the Material
Price Variance.
• Poor scheduling by the production manager may
require the purchasing manager to make rush
orders for material at a higher price, causing
unfavourable price variances.
• Therefore it is important to know who is

responsible for what.

A General Model for Variance Analysis 1
Variance Analysis
Price Variance Quantity Variance
Difference between Difference between

actual price and actual quantity and
standard price standard quantity

Variance Analysis
Materials quantity variance

Labour efficiency variance
VOH efficiency variance

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price
Spending Variance

Actual quantity is the amount of direct materials, direct labour, and

variable manufacturing overhead actually used.

× × ×
Spending Variance
Standard quantity is the standard quantity allowed for the

actual output of the period.

× × ×
Spending Variance
Actual price is the amount actually

paid for the input used.

× × ×
Spending Variance
Standard price is the amount that should

have been paid for the input used.

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

AQ = Actual Quantity SP = Standard Price
AP = Actual Price SQ = Standard Quantity
× × ×
Spending Variance
Material Variances Example
• Glacier Peak Outfitters has the following direct
material standard for the fibrefill in its
mountain parka.
• 0.1 kg. of fibrefill per parka(p) at $5.00 per kg.
• Last month 210 kgs of fibrefill were purchased
and used to make 2,000 parkas. The material
cost a total of $1,029.

Material Variances Summary 1
× × ×
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 favourable $50 unfavourable
$29 unfavourable
× × ×
210 kgs. 210 kgs. 200 kgs.
× $1,029 ×
 210 kgs = ×
$4.90 per kg. $5.00
$4.90per
perkg.
kg $5.00 per kg.
= $1,029 = $1,050 = $1,000

$29 unfavourable
× × ×
210 kgs. 210 kgs. 200 kgs.
× ×  2,000 parkas =
0.1 kg per parka ×
$4.90 per kg. $5.00
200per
kgskg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

$29 unfavourable
Material Variances: Using the
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/p  2,000p))
= $5.00/kg (210 kgs – 200 kgs)
= $5.00/kg (10 kgs)
= $50 U
Isolation of Material Variances
• Variances should be isolated and brought

to the attention of management as quickly
as possible so that problems can be
identified and corrected on a timely basis.
• The most significant variances should be
viewed as red flags.

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.

Quick Check 
Hanson’s material price variance (MPV) for

the week was:
a. $170 unfavourable.
b. $170 favourable.
c. $800 unfavourable.
d. $800 favourable.

Quick Check 
Hanson’s material price variance (MPV)

for the week was:
Answer:
b. $170 favourable.

Quick Check 
Hanson’s material quantity variance (MQV)

for the week was:
b. $170 favourable.
d. $800 favourable.

Quick Check 
Hanson’s material quantity variance (MQV)

for the week was:
Answer:

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

$630 unfavourable
Material Variances
• Hanson purchased and used 1,700 pounds.
• How are the variances computed if the amount
purchased differs from the amount used?
1. The price variance is computed on the entire
quantity purchased.
2. The quantity variance is computed only on the
quantity used.

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.

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
$280 favourable
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
$800 unfavourable
Labour Variances Example 1
• Glacier Peak Outfitters has the following
direct labour 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 labour cost of $26,250
to make 2,000 parkas.
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 unfavourable $1,000 unfavourable
$2,250 unfavourable

× × ×
× ×  2,500 hours = ×
$26,250
$10.50 per hour $10.00 per hourper hour$10.00 per hour
$10.50
= $26,250 = $25,000 = $24,000

$2,250 unfavourable

× × ×
× × ×
= $26,250 = $25,000 = $24,000

$2,250 unfavourable
Labour Variances: Using the
Equations
Labour rate variance
LRV = AH (AR – SR)
= 2,500 hours ($10.50/hr – $10.00/hr)
= 2,500 hours ($0.50/hr)
= $1,250 unfavourable
Labour efficiency variance

LEV = SR (AH – SH)
= $10.00/hr (2,500 hours – 2,400 hours)
= $10.00/hr (100 hours)
= $1,000 unfavourable
Quick Check 
• Hanson Inc. has the following direct
labour standard to manufacture one Zippy:
• 1.5 standard hours per Zippy at $12.00
per direct labour hour
• Last week, 1,550 direct labour hours were
worked at a total labour cost of $18,910 to
make 1,000 Zippies.

Quick Check 
Hanson’s labour rate variance (LRV) for the

week was:
b. $310 favourable.
d. $300 favourable.

Quick Check 
Hanson’s labour rate variance (LRV) for the

week was:
Answer:
LRV = AH (AR – SR)
LRV = 1,550 hrs × ($12.20 – $12.00)
LRV = $310 unfavourable

Quick Check 
Hanson’s labour efficiency variance (LEV)

for the week was:
b. $590 favourable.
d. $600 favourable.

Quick Check 
Hanson’s labour efficiency variance (LEV)

for the week was:
Answer:
LEV = SR (AH – SH)
LEV = $12.00 × (1,550 hrs – 1,500 hrs)
LEV = $600 unfavourable
Quick Check 
× × ×
× × ×
= $18,910 = $18,600 = $18,000

$310 unfavourable $600 unfavourable
$910 unfavourable
Variable Manufacturing Overhead
Variances Example
• Glacier Peak Outfitters has the following
direct variable manufacturing overhead labour
standard for its mountain parka.
• 1.2 standard hours per parka at $4.00/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 1
× × ×
× × ×
= $10,500 = $10,000 = $9,600
Spending variance Efficiency variance

$900 unfavourable
Variances Summary 2
× × ×
× × ×
$10,500  2,500 hours =
$4.20 per hour
= $10,500 = $10,000 = $9,600

$900 unfavourable
Variances Summary 3
× × ×
× ×  2,000 parkas
1.2 hours per parka ×
$4.20 per hour $4.00 perhours
= 2,400 hour $4.00 per hour
= $10,500 = $10,000 = $9,600

$900 unfavourable
Variances: Using the Equations
Variable manufacturing overhead spending variance
VMSV = AH (AR – SR)
= 2,500 hours ($4.20/hour – $4.00/hour)
= 2,500 hours ($0.20/hour)
= $500 unfavourable
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 unfavourable
Interpreting the Spending Variance
• This variance can be informative when the actual

variable overhead costs vary in proportion with
the actual number of hours worked in a period.
• An overhead spending variance can occur if
either:
1. The actual purchase price of the variable overhead items
differs from the standards or
2. The actual quantity of variable overhead items used
differs from the standard.

Interpreting the Efficiency Variance
• This variance is useful only if the cost driver

for variable overhead really is the actual
hours worked.
• This variance is an estimate of the indirect
effect on variable overhead costs of efficiency
or inefficiency in the use of the activity base.

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 labour hour
• Last week, 1,550 hours were worked to
make 1,000 Zippies, and $5,115 was spent
for variable manufacturing overhead.

Quick Check 
Hanson’s spending variance (VOSV) for

variable manufacturing overhead for the week
was:
b. $400 favourable.
d. $300 favourable.
Quick Check 
Hanson’s spending variance (VOSV) for

was:
Answer:
VOSV = AH (AR – SR)
VOSV = 1,550 hrs × ($3.30 – $3.00)
VOSV = $465 unfavourable
Quick Check 
Hanson’s efficiency variance (VOEV) for

was:
b. $435 favourable.
d. $150 favourable.
Quick Check 
Hanson’s efficiency variance (VOEV) for

was:
1,000 units × 1.5 hrs per unit

Answer:

Quick Check 
× × ×
× × ×
= $5,115 = $4,650 = $4,500

$615 unfavourable
Standard Costs and Variance in the
Service Industry
• While standard costing has its roots in the
manufacturing industry, standard costing techniques
can also help firms in the service industry
understand and better manage their costs.
• The main differences between standard costing in
the manufacturing and service industries are the
terminology used and the manner in which the cost
of goods sold account is constructed.

Overhead Rates and Fixed Overhead
Analysis
• Recall that overhead costs are assigned to products
and services using a predetermined overhead rate
(POHR):
Assigned Overhead = POHR × Standard Activity
Overhead from the

flexible budget for the
denominator level of activity
POHR =
Denominator level of activity

Denominator Activity
• The Denominator Activity is the activity figure
used to compute the predetermined overhead rate.
• Recall that once an estimated activity level

(denominator activity) has been chosen, it remains
unchanged throughout the year, even if the actual
activity turns out to be different from the original
estimate.

Overhead Rates and Fixed Overhead
Analysis
• The predetermined overhead rate can be broken
down into fixed and variable components.
• The variable component is useful for preparing and
analyzing variable overhead variances.
• The fixed component is useful for preparing and
analyzing fixed overhead variances.

Overhead Application in a Standard
Costing System
• To understand fixed overhead variances, it is
necessary to first understand how overhead is applied
to WIP in a standard costing system.
• In a normal cost system, overhead is applied to work
in process based on the actual number
of hours worked in the period.
• In a standard cost system, overhead is applied to
work in process based on the standard hours allowed
for the actual output of the period.
Normal versus Standard Cost
Systems
Exhibit 10-10
Normal Costing System Standard Costing System

Manufacturing Overhead Manufacturing Overhead
Applied
Applied
overhead costs:
Actual overhead Actual
Standard hours
overhead costs: Actual overhead
allowed for
costs hours × costs
actual output ×
incurred. Predetermined incurred.
Predetermined
overhead rate.
overhead rate.
Under- or overapplied Under- or overapplied

overhead overhead
Fixed Overhead Variances 1
Actual Fixed Fixed Fixed

Overhead Overhead Overhead
Incurred Budget
DH × FR Applied
SH × FR
Budget Volume
Variance Variance
FR = Standard Fixed Overhead Rate

SH = Standard Hours Allowed
DH = Denominator Hours
• Budget Variance
The budget variance is a measure of the difference
between the actual fixed overhead costs incurred
during the period and the budgeted fixed overhead
costs as contained in the flexible budget.
Budget variance = Actual fixed overhead cost –

flexible budget fixed overhead cost

• Volume Variance
The volume variance is a measure of utilization of
plant facilities.
Fixed portion of denominator

Volume the hours – standard
= x
Variance predetermined hours allowed
overhead rate

Overhead Rates and Overhead
Analysis – Example Part 1
ColaCo prepared this flexible budget for overhead:
Total Variable Total Fixed

Machine Variable Overhead Fixed Overhead
Hours Overhead Rate Overhead Rate
3,000 $ 6,000 ? $ 9,000 ?
4,000 8,000 ? 9,000 ?
Let’s calculate overhead rates.
ColaCo applies overhead based

on machine-hour activity.
This rate is constant at all levels of activity.

Rate = Total Fixed Overhead ÷ Machine Hours
This rate decreases when activity increases.

The total POHR is the sum of

the fixed and variable rates
for a given activity level.
Fixed Overhead Variances –
Example Part 1
• ColaCo’s actual production required 3,200

standard machine hours.
• Actual fixed overhead was $8,450.
• The predetermined overhead rate is based on
3,000 machine hours.

Example Part 2
Incurred Budget Applied
$8,450 $9,000
The budget variance results

Budget variance from spending more or
$550 favourable less than expected for fixed
overhead items.

Example Part 3
SH × FR
3,200 hours
×
$8,450 $9,000 $3.00 per hour
$9,600
Budget variance
$550 favourable Volume variance
$600 favourable
$1,150 favourable
Volume Variance – A Closer Look 1
Volume
Variance
Results when standard hours

allowed for actual output differs
from the denominator activity.
Unfavourable Favourable
when standard hours when standard hours
< denominator hours > denominator hours
Volume Variance – A Closer Look 2
Volume
Variance
Does not measure over- or under spending
It results from treating fixed overhead

as if
it were a variable cost.
Quick Check 
Yoder Enterprises’ actual production for the period required
2,100 standard direct labour hours. Actual fixed overhead
for the period was $14,800. The budgeted fixed overhead
was $14,450. The predetermined fixed overhead rate was
$7 per direct labour hour. What was the budget variance?
a. $350 U
b. $350 F
c. $100 F
d. $100 U

Quick Check 
Yoder Enterprises’ actual production for the period
required 2,100 standard direct labour hours. Actual fixed
Budget variance
overhead for the period was $14,800. The budgeted fixed
= Actual
overhead wasfixed overhead
$14,450. – Budgeted
The fixed overhead
predetermined fixed overhead
rate was $7 per– $14,450
= $14,800 direct labour hour. What was the budget
variance?
= $350 U
Answer:
a. $350 U

Quick Check 
required 2,100 standard direct labour hours. Actual fixed
overhead for the period was $14,800. The budgeted fixed
overhead was $14,450. The predetermined fixed overhead
rate was $7 per direct labour hour. What was the volume
variance?
a. $250 U
b. $250 F
c. $100 F
d. $100 U
Quick Check 
required 2,100
Volume standard direct labour hours. Actual fixed
variance
overhead=for the period
Budgeted fixedwas $14,800.
overhead – (SHThe budgeted fixed
 FR)
overhead=was $14,450.
$14,450 The
– (2,100 predetermined
hours  $7 per hour)fixed overhead
rate was $7 per direct
= $14,450 labour hour. What was the volume
– $14,700
variance?= $250 F
Answer:
b. $250 F

Quick Check Summary
SH × FR
2,100 hours
×
$7.00 per hour
$14,800 $14,450 $14,700
Budget variance Volume variance

$350 unfavourable $250 favourable
$1,150 favourable
Graphic Analysis of Fixed Overhead
Variances 1
Cost We will continue to use ColaCo’s numbers
from the previous example.
$9,000 budgeted fixed OH
e ad
e rh cts
ov d u
ed p r o
Fi x t o
l i ed
p p
a Activity
3,000 Hours
Expected Activity
Variances 2
Cost
$9,000 budgeted fixed OH

$550 {
Favourable
$8,450
$8,450 actual
actual fixed
fixedOH
OH
Budget
Variance e ad
e rh cts
ov d u
ed p r o
Fi x t o
l i ed
p p
a Activity
3,000 Hours
Expected Activity
Variances 3
Cost 3,200 machine hours × $3.00 fixed overhead rate
$600
Favourable $9,600 applied fixed OH
Volume
Variance { $9,000 budgeted fixed OH
$550 { $8,450
$8,450 actual
actual fixed
fixedOH
OH
Favourable
Budget
Variance e ad
e rh cts
ov d u
ed p r o
Fi x t o
l i ed
p p
a Activity
3,000 Hours 3,200
Expected Activity Standard
© 2021 McGraw-Hill Limited
Hours10-87
Overhead Variances and Under- or
Overapplied Overhead Cost
In a standard
cost system:

Overhead Reporting and Variance
Investigation
• A performance report builds on the analysis of variable
and fixed overhead.
• After preparing the performance report, management
still has to decide whether the variances that have been
calculated require further action.
• Not all variances are worth investigating.
• Management should consider the dollar amount of the
variance and the size of the variance relative to the
amount of spending involved.
• Another approach is to plot variance data on a statistical
control chart.

A Statistical Control Chart
Exhibit 10-15

Capacity Analysis: Theoretical vs.
Practical
• Theoretical capacity is the volume of capacity if
all available production time is used and no waste
occurs. (i.e. operations conducted 24 hours per day,
7 days per week, 365 days per year, with no
downtime)
• Practical capacity represents what could be

produced with operations at theoretical capacity
less unavoidable downtime.

Advantages of Standard Costs
1. Management by exception
2. Promotes economy and efficiency
3. Simplified bookkeeping
4. Enhances responsibility accounting

Potential Problems with Standard
Costs
1. Standard cost reports may not be timely.
2. Invalid assumptions about the relationship between
labour cost and output.
3. Favourable variances may be misinterpreted.
4. Emphasizing standards may exclude other important
objectives.
5. Continuous improvement may be more important
than meeting standards.

End of Chapter Summary Part 1
• A standard is a benchmark or norm for measuring
performance.
• Standards are set for both the cost and the quantity of
inputs needed to manufacture goods or to provide
services.
• Standards are normally practical in nature, meaning
that they can be attained by reasonable, although highly
efficient, efforts.
• The difference between actual cost and standard cost is
referred to as a variance.

• The denominator activity is the figure used to
calculate the predetermined overhead rate for variable
and fixed overhead.
• The overhead rate is used to determine the total
standard cost per unit of a product by multiplying the
rate by the quantity of the activity required to produce
each unit.
• There are two variances for fixed overhead; the
budget variance and the volume variance.

• An overhead performance report provides details on
each item that makes up total variable and fixed
overhead. Both actual and budget figures are included
in the report.
• Only unusual or particularly significant variances
should be investigated.
• Capacity analysis is a useful strategic tool that allows
managers to evaluate the financial impact of operating
at less than full productive capacity.

Appendix 10A
Further Analysis of Materials
Variances

Variances: Mix and Yield 1
• When the production process requires the input of
more than one material, the material quantity
variance (MQV) can be further broken down into
mix variance and yield variance.

Variances: Mix and Yield 2
• Mix Variance: The dollar effect on total materials cost
of a difference between the actual mix of materials
inputs and the standard mix of materials.
• Yield Variance: The dollar effect on total materials

costs of the total quantity of inputs actually used
generating a different output from what would have
been achieved using standard quantities of inputs at
the standard mix.

Extended Model for Variance
Analysis – Materials
Exhibit 10A-1

Mix and Yield Variances – Example
Part 1
• One unit of finished goods requires the following input
mix:
• 2 kgs of A with a standard price of $1.50/kg
• 3 kgs of B with a standard price of $2.50/kg
• The standard mix is therefore 2A:3B

• During the period, 150 units of finished goods were
produced using 350 kgs of A and 450 kgs of B.

Mix and Yield Variances – Example
Part 2
Mix Variance: SP(AQ – M)
Material A: $1.50 × [350 – 2/5 (350 + 450)] = $45 U
Material B: $2.50 × [450 – 3/5 (350 + 450)] = $75 F
Yield Variance: SP(M – SQ)

Material A: $1.50 × [2/5 (350 + 450) – 150 (2)] = $30 U
Material B: $2.50 × [3/5 (350 + 450) – 150 (3)] = $75 U
Material Quantity Variance: SP(AQ – SQ)

Material A: $1.50 × [350 – 150 (2)] = $75 U
Material B: $2.50 × [450 – 150 (3)] = $-0- U

Appendix 10B
General Ledger Entries

to Record Variances

Recording Direct Materials
Variances

Recording Direct Labour Variances

Recording Manufacturing Overhead
Variances 1
• Variable manufacturing overhead variances

are usually not recorded in the accounts
separately, but are determined as part of the
general analysis of overhead.

Variances 2
GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Overhead costs xxx
Various credits such as accounts payable xxx
To record actual variable and fixed overhead

Variances 3
GENERAL JOURNAL
Post.
Work in Progress xxx
Overhead Costs xxx
To record the application of variable overhead and fixed overhead

Variances 4
GENERAL JOURNAL
Post.
Variable overhead spending variance xxx
Variable overhead efficiency variance xxx
Fixed overhead budget variance xxx
Fixed overhead volume variance xxx
Overhead costs xxx
To record the overhead variances and the
disposition of underapplied overhead

Cost Flows in a Standard Cost
System
• Inventories are recorded at standard cost.
• Variances are recorded as follows:
• Favourable variances are credits, representing savings in
production costs.
• Unfavourable variances are debits, representing excess
production costs.
• Standard cost variances are usually closed to COGS.
• Unfavourable variances increase cost of goods sold.
• Favourable variances decrease cost of goods sold.

Appendix 10C
Sales Variance Analysis

Sales Variance Analysis 1
• The interaction of price and quantity represents
important information for businesses to analyze to
determine why the strategic goals and specific budgeted
targets were not achieved.
• Managers want to know the effects of market volume
changes, market penetration or share changes, sales mix
changes, and price changes.
• Each of these elements can be isolated and a variance
calculated. The formulas are on the next two slides.

Sales Price Variance =
[ ]
Actual sales
price
- Budgeted
sales price
Actual
x sales
volume
Market Volume Variance =
{ }Actual
market
volume
-
Budget
market
volume
Anticipated
x market share x
%
Budgeted
CM per
unit
Market Share Variance =
[ {Actual sales
quantity
-
Actual Anticipated
market x market share
volume %
© 2021 McGraw-Hill Limited
}] Budgeted
x CM per
unit
10-113
Sales Mix Variance =
{ Actual sales
quantity
- Actual sales quantity at
anticipated sales mix
} Budgeted
x CM per
unit
Sales Quantity Variance =
{[ Actual sales quantity at

anticipated sales mix ] Anticipated
- sales quantity
} x Budgeted
CM per unit

Consider the following example:
Budget Actual
Sales in units
Deluxe cards 14,000 17,000
Standard cards 6,000 5,000
Price per unit
Deluxe cards $18 $16
Standard cards $ 9 $10
Market volume
Deluxe cards 75,000 85,000
Standard cards 95,000 90,000
Variable cost per unit
Deluxe cards $ 8 $ 8
Standard cards $ 3 $ 3

Sales Price Variance =
Deluxe = (16-18) * 17,000 = 34,000U
Standard = (10-9) * 5,000 = 5,000F
Total Sales Price Variance 29,000U
Market Volume Variance =

Deluxe=(85,000-75,000) x (14,000/75,000) x (18-8) = 18,667 F
Standard=(90,000-95,000) x (6,000/95,000) x (9-3) = 1,895 U
Total Market Volume Variance 16,772 F
Market Share Variance =

Deluxe=[17,000-(85,000 x 14,000/75,000)] x (18-8) = 11,333 F
Standard=[5,000-(90,000 x 6,000/95,000)] x (9-3) = 4,105 U
Total Market Share Variance 7,228 F
Sales Mix Variance

Deluxe=[17,000-(22,000 x14/20)] x (18-8)= 16,000 F
Standard=[(5,000-22,000 x 6/20)] x (9-3) = 9,600 U
Total Sales Mix Variance 6,400 F
Sales Quantity Variance

Deluxe=[(22,000 x 14/20)-14,000] x (18-8)= 14,000 F
Standard=[(22,000 x 6/20)-6,000] x (9-3) = 3,600 F
Total Sales Quantity Variance 17,600 F

Appendix 10D
Prediction of Labour Time –

Learning Curve

Cumulative Average Time Learning
Curve 1
• Most workers become more proficient at their
tasks the more they do them.
• Learning often takes place when employees are
first gaining experience with a new task.
• This means break-even analysis has multiple
break-even points when learning occurs.
• Studies of the rate at which individuals learn result
in a pattern like the one on the next slide.

Curve 2
Exhibit 10D-1

Curve 3
The functional form of the pattern on the previous slide is
as follows:
b
y = aQ
y = Average time required to produce one unit.

a = Time required to produce the first unit.
Q = Cumulative production in units.
b = Learning rate calculated as follows: [log (percentage
learning rate)]/log 2.
Incremental Unit Time Learning
Curve
The incremental unit time learning curve represents the fact
that the time required to produce the last unit decreases by a
constant percentage as the cumulative quantity of units
produced doubles. The functional form is as follows:
b
y = aQ
y = Time required to produce the last single unit.

a = Time required to produce the first unit.
Q = Cumulative production in units.
b = Learning rate calculated as follows: [log (percentage
learning rate)]/log 2.

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© 2021 McGraw-Hill Limited 10-1

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Type of Product Cost

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• Ideal Standards: Can only be attained under the best

• Practical standards: Tight but attainable. Requires

Standard Price Standard Quantity

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Standard Rate Standard Hours

Use time and

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The rate is the The quantity is the

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• Standards and budgets are very similar.

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• Therefore it is important to know who is

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Price Variance Quantity Variance

Difference between Difference between

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Price Variance Quantity Variance

Materials quantity variance

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Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

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Actual quantity is the amount of direct materials, direct labour, and

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Standard quantity is the standard quantity allowed for the

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Actual price is the amount actually

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

Standard price is the amount that should

Actual Quantity Actual Quantity Standard Quantity

Price Variance Quantity Variance

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

Price Variance Quantity Variance

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Price variance Quantity variance

Price variance Quantity variance

Price variance Quantity variance

• Variances should be isolated and brought

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• Hanson Inc. has the following direct material

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Hanson’s material price variance (MPV) for

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Hanson’s material price variance (MPV)

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Hanson’s material quantity variance (MQV)

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Hanson’s material quantity variance (MQV)

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Actual Quantity Actual Quantity Standard Quantity

Price variance Quantity variance

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Actual Quantity Actual Quantity