Standard Costs and Operating
Performance Measures
Chapter 11
© 2010 The McGraw-Hill Companies, Inc.
Standard Costs
Standards are benchmarks or “norms” for
measuring performance. In managerial accounting,
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.
Price standards
specify how much
should be paid for
each unit of the
input.
Examples: Firestone, Sears, McDonald’s, hospitals,
construction and manufacturing companies.
McGraw-Hill/Irwin
Slide 2
Standard Costs
Amount
Deviations from standards deemed significant
are brought to the attention of management, a
practice known as management by exception.
Standard
Direct
Labor
Direct
Material
Manufacturing
Overhead
Type of Product Cost
McGraw-Hill/Irwin
Slide 3
Variance Analysis Cycle
Identify
questions
Receive
explanations
Conduct next
period’s
operations
Analyze
variances
Prepare standard
cost performance
report
McGraw-Hill/Irwin
Take
corrective
actions
Begin
Slide 4
Setting Standard Costs
Accountants, engineers, purchasing
agents, and production managers
combine efforts to set standards that encourage
efficient future operations.
McGraw-Hill/Irwin
Slide 5
Setting Standard Costs
Should we use
ideal standards that
require employees to
work at 100 percent
peak efficiency?
Engineer
McGraw-Hill/Irwin
I recommend using practical
standards that are currently
attainable with reasonable
and efficient effort.
Managerial Accountant
Slide 6
Learning Objective 1
Explain how direct materials
standards and direct labor
standards are set.
McGraw-Hill/Irwin
Slide 7
Setting Direct Material Standards
Price
Standards
Quantity
Standards
Final, delivered
cost of materials,
net of discounts.
Summarized in
a Bill of Materials.
McGraw-Hill/Irwin
Slide 8
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.
McGraw-Hill/Irwin
Slide 9
Setting Direct Labor Standards
Rate
Standards
Time
Standards
Often a single
rate is used that reflects
the mix of wages earned.
Use time and
motion studies for
each labor operation.
McGraw-Hill/Irwin
Slide 10
Setting Variable Manufacturing Overhead
Standards
Rate
Standards
Quantity
Standards
The rate is the
variable portion of the
predetermined overhead
rate.
The quantity is
the activity in the
allocation base for
predetermined overhead.
McGraw-Hill/Irwin
Slide 11
Standard Cost Card – Variable Production
Cost
A standard cost card for one unit of
product might look like this:
Inputs
Direct materials
Direct labor
Variable mfg. overhead
Total standard unit cost
McGraw-Hill/Irwin
A
B
AxB
Standard
Quantity
or Hours
Standard
Price
or Rate
Standard
Cost
per Unit
3.0 lbs.
2.5 hours
2.5 hours
$
$ 4.00 per lb.
14.00 per hour
3.00 per hour
$
12.00
35.00
7.50
54.50
Slide 12
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.
McGraw-Hill/Irwin
Slide 13
A General Model for Variance Analysis
Variance Analysis
Price Variance
Quantity Variance
Difference between
actual price and
standard price
Difference between
actual quantity and
standard quantity
McGraw-Hill/Irwin
Slide 14
A General Model for Variance Analysis
Variance Analysis
Price Variance
Quantity Variance
Materials price variance
Labor rate variance
VOH rate variance
Materials quantity variance
Labor efficiency variance
VOH efficiency variance
McGraw-Hill/Irwin
Slide 15
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
McGraw-Hill/Irwin
Standard Quantity
×
Standard Price
Quantity Variance
Slide 16
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Actual quantity is the amount of direct
materials, direct labor, and variable
manufacturing overhead actually used.
McGraw-Hill/Irwin
Slide 17
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Standard quantity is the standard quantity
allowed for the actual output of the period.
McGraw-Hill/Irwin
Slide 18
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Actual price is the amount actually
paid for the input used.
McGraw-Hill/Irwin
Slide 19
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Standard price is the amount that should
have been paid for the input used.
McGraw-Hill/Irwin
Slide 20
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
(AQ × AP) – (AQ × SP)
(AQ × SP) – (SQ × SP)
AQ = Actual Quantity
AP = Actual Price
SP = Standard Price
SQ = Standard Quantity
McGraw-Hill/Irwin
Slide 21
Learning Objective 2
Compute the direct
materials price and quantity
variances and explain their
significance.
McGraw-Hill/Irwin
Slide 22
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.
McGraw-Hill/Irwin
Slide 23
Material Variances Summary
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
210 kgs.
×
$4.90 per kg.
210 kgs.
×
$5.00 per kg.
= $1,029
Price variance
$21 favorable
McGraw-Hill/Irwin
= $1,050
Standard Quantity
×
Standard Price
200 kgs.
×
$5.00 per kg.
= $1,000
Quantity variance
$50 unfavorable
Slide 24
Material Variances Summary
Actual Quantity
×
Actual Price
210 kgs.
×
$4.90 per kg.
Actual Quantity
×
Standard Price
210 kgs.
$1,029  ×
210 kgs
$5.00per
perkg
kg.
= $4.90
= $1,029
Price variance
$21 favorable
McGraw-Hill/Irwin
= $1,050
Standard Quantity
×
Standard Price
200 kgs.
×
$5.00 per kg.
= $1,000
Quantity variance
$50 unfavorable
Slide 25
Material Variances Summary
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Standard Quantity
×
Standard Price
210 kgs.
210 kgs.
200 kgs.
×
×
0.1 kg per parka× 2,000 parkas
$4.90 per kg.
$5.00
$5.00 per kg.
= 200 per
kgs kg.
= $1,029
Price variance
$21 favorable
McGraw-Hill/Irwin
= $1,050
= $1,000
Quantity variance
$50 unfavorable
Slide 26
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
McGraw-Hill/Irwin
Slide 27
Isolation of Material Variances
I need the price variance
sooner so that I can better
identify purchasing problems.
You accountants just don’t
understand the problems that
purchasing managers have.
McGraw-Hill/Irwin
I’ll start computing
the price variance
when material is
purchased rather
than when it’s used.
Slide 28
Material Variances
Hanson purchased and
used 1,700 pounds.
How are the variances
computed if the amount
purchased differs from
the amount used?
McGraw-Hill/Irwin
The price variance is
computed on the entire
quantity purchased.
The quantity variance
is computed only on
the quantity used.
Slide 29
Responsibility for Material Variances
Materials Quantity Variance
Production Manager
Materials Price Variance
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.
McGraw-Hill/Irwin
Slide 30
Responsibility for Material Variances
I am not responsible for
this unfavorable material
quantity variance.
You purchased cheap
material, so my people
had to use more of it.
McGraw-Hill/Irwin
Your poor scheduling
sometimes requires me to
rush order material at a
higher price, causing
unfavorable price variances.
Slide 31
Quick Check 
Zippy
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.
McGraw-Hill/Irwin
Slide 32
Quick Check 
Zippy
Hanson’s material price variance (MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
McGraw-Hill/Irwin
Slide 33
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. MPV = AQ(AP - SP)
MPV = 1,700 lbs. × ($3.90 - 4.00)
MPV = $170 Favorable
McGraw-Hill/Irwin
Slide 34
Quick Check 
Zippy
Hanson’s material quantity variance (MQV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
McGraw-Hill/Irwin
Slide 35
Zippy
Quick Check 
Hanson’s material quantity variance (MQV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 lbs - 1,500 lbs)
MQV = $800 unfavorable
McGraw-Hill/Irwin
Slide 36
Zippy
Quick Check 
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Standard Quantity
×
Standard Price
1,700 lbs.
×
$3.90 per lb.
1,700 lbs.
×
$4.00 per lb.
1,500 lbs.
×
$4.00 per lb.
= $6,630
= $ 6,800
= $6,000
Price variance
$170 favorable
McGraw-Hill/Irwin
Quantity variance
$800 unfavorable
Slide 37
Quick Check  Continued
Zippy
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.
McGraw-Hill/Irwin
Slide 38
Zippy
Quick Check  Continued
Actual Quantity
Purchased
×
Actual Price
Actual Quantity
Purchased
×
Standard Price
2,800 lbs.
×
$3.90 per lb.
2,800 lbs.
×
$4.00 per lb.
= $10,920
= $11,200
Price variance
$280 favorable
McGraw-Hill/Irwin
Price variance increases
because quantity
purchased increases.
Slide 39
Zippy
Quick Check  Continued
Actual Quantity
Used
×
Standard Price
1,700 lbs.
×
$4.00 per lb.
1,500 lbs.
×
$4.00 per lb.
= $6,800
= $6,000
Quantity variance is
unchanged because
actual and standard
quantities are unchanged.
McGraw-Hill/Irwin
Standard Quantity
×
Standard Price
Quantity variance
$800 unfavorable
Slide 40
Learning Objective 3
Compute the direct labor
rate and efficiency variances
and explain
their significance.
McGraw-Hill/Irwin
Slide 41
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.
McGraw-Hill/Irwin
Slide 42
Labor Variances Summary
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
2,500 hours
×
$10.50 per hour
2,500 hours
×
$10.00 per hour.
= $26,250
= $25,000
Rate variance
$1,250 unfavorable
McGraw-Hill/Irwin
Standard Hours
×
Standard Rate
2,400 hours
×
$10.00 per hour
= $24,000
Efficiency variance
$1,000 unfavorable
Slide 43
Labor Variances Summary
Actual Hours
×
Actual Rate
2,500 hours
×
$10.50 per hour
= $26,250
Actual Hours
×
Standard Rate
2,500 hours
2,400 hours
×  2,500 hours
×
$26,250
$10.00
per hour.
= $10.50
per hour $10.00 per hour
= $25,000
Rate variance
$1,250 unfavorable
McGraw-Hill/Irwin
Standard Hours
×
Standard Rate
= $24,000
Efficiency variance
$1,000 unfavorable
Slide 44
Labor Variances Summary
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
Standard Hours
×
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.
$10.00 per hour
= 2,400
hours
= $26,250
= $25,000
Rate variance
$1,250 unfavorable
McGraw-Hill/Irwin
= $24,000
Efficiency variance
$1,000 unfavorable
Slide 45
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
McGraw-Hill/Irwin
Slide 46
Responsibility for Labor Variances
Production managers are
usually held accountable
for labor variances
because they can
influence the:
Mix of skill levels
assigned to work tasks.
Level of employee
motivation.
Quality of production
supervision.
Production Manager
McGraw-Hill/Irwin
Quality of training
provided to employees.
Slide 47
Responsibility for Labor Variances
I am not responsible for
the unfavorable labor
efficiency variance!
You purchased cheap
material, so it took more
time to process it.
McGraw-Hill/Irwin
I think it took more time
to process the
materials because the
Maintenance
Department has poorly
maintained your
equipment.
Slide 48
Quick Check 
Zippy
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.
McGraw-Hill/Irwin
Slide 49
Quick Check 
Zippy
Hanson’s labor rate variance (LRV) for the
week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
McGraw-Hill/Irwin
Slide 50
Quick Check 
Zippy
Hanson’s labor rate variance (LRV) for the
week was:
a. $310 unfavorable.
b. $310 favorable.
LRV = AH(AR - SR)
c. $300 unfavorable.
LRV = 1,550 hrs($12.20 - $12.00)
d. $300 favorable.LRV = $310 unfavorable
McGraw-Hill/Irwin
Slide 51
Quick Check 
Zippy
Hanson’s labor efficiency variance (LEV)
for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
McGraw-Hill/Irwin
Slide 52
Zippy
Quick Check 
Hanson’s labor efficiency variance (LEV)
for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
LEV = SR(AH - SH)
LEV = $12.00(1,550 hrs - 1,500 hrs)
LEV = $600 unfavorable
McGraw-Hill/Irwin
Slide 53
Zippy
Quick Check 
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
1,550 hours
×
$12.20 per hour
1,550 hours
×
$12.00 per hour
= $18,910
= $18,600
Rate variance
$310 unfavorable
McGraw-Hill/Irwin
Standard Hours
×
Standard Rate
1,500 hours
×
$12.00 per hour
= $18,000
Efficiency variance
$600 unfavorable
Slide 54
Learning Objective 4
Compute the variable
manufacturing overhead rate
and efficiency variances.
McGraw-Hill/Irwin
Slide 55
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.
McGraw-Hill/Irwin
Slide 56
Variable Manufacturing Overhead Variances
Summary
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
Standard Hours
×
Standard Rate
2,500 hours
×
$4.20 per hour
2,500 hours
×
$4.00 per hour
2,400 hours
×
$4.00 per hour
= $10,500
= $10,000
= $9,600
Rate variance
$500 unfavorable
McGraw-Hill/Irwin
Efficiency variance
$400 unfavorable
Slide 57
Variable Manufacturing Overhead Variances
Summary
Actual Hours
×
Actual Rate
2,500 hours
×
$4.20 per hour
= $10,500
Actual Hours
×
Standard Rate
2,500 hours
2,400 hours
×
$10,500×  2,500 hours
$4.00
per per
hourhour
$4.00 per hour
= $4.20
= $10,000
Rate variance
$500 unfavorable
McGraw-Hill/Irwin
Standard Hours
×
Standard Rate
= $9,600
Efficiency variance
$400 unfavorable
Slide 58
Variable Manufacturing Overhead Variances
Summary
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
2,500 hours
2,500 hours
×
1.2 hours per ×parka  2,000
$4.20 per hour parkas
$4.00
per hour
= 2,400
hours
= $10,500
= $10,000
Rate variance
$500 unfavorable
McGraw-Hill/Irwin
Standard Hours
×
Standard Rate
2,400 hours
×
$4.00 per hour
= $9,600
Efficiency variance
$400 unfavorable
Slide 59
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
McGraw-Hill/Irwin
Slide 60
Quick Check 
Zippy
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.
McGraw-Hill/Irwin
Slide 61
Quick Check 
Zippy
Hanson’s rate variance (VMRV) for variable
manufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.
McGraw-Hill/Irwin
Slide 62
Quick Check 
Zippy
Hanson’s rate variance (VMRV) for variable
manufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 favorable.
VMRV = AH(AR - SR)
c. $335 unfavorable.
VMRV = 1,550 hrs($3.30 - $3.00)
d. $300 favorable. VMRV = $465 unfavorable
McGraw-Hill/Irwin
Slide 63
Quick Check 
Zippy
Hanson’s efficiency variance (VMEV) for
variable manufacturing overhead for the week
was:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.
d. $150 favorable.
McGraw-Hill/Irwin
Slide 64
Quick Check 
Zippy
Hanson’s efficiency variance (VMEV) for
variable manufacturing overhead for the week
was:
a. $435 unfavorable.
b. $435 favorable.
1,000 units × 1.5 hrs per unit
c. $150 unfavorable.
d. $150 favorable.
VMEV = SR(AH - SH)
VMEV = $3.00(1,550 hrs - 1,500 hrs)
VMEV = $150 unfavorable
McGraw-Hill/Irwin
Slide 65
Zippy
Quick Check 
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
Standard Hours
×
Standard Rate
1,550 hours
×
$3.30 per hour
1,550 hours
×
$3.00 per hour
1,500 hours
×
$3.00 per hour
= $5,115
= $4,650
Rate variance
$465 unfavorable
McGraw-Hill/Irwin
= $4,500
Efficiency variance
$150 unfavorable
Slide 66
Variance Analysis and Management by
Exception
How do I know
which variances to
investigate?
McGraw-Hill/Irwin
Larger variances, in
dollar amount or as
a percentage of the
standard, are
investigated first.
Slide 67
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
McGraw-Hill/Irwin
Slide 68
Advantages of Standard Costs
Management by
exception
Promotes economy
and efficiency
Advantages
Simplified
bookkeeping
McGraw-Hill/Irwin
Enhances
responsibility
accounting
Slide 69
Potential Problems with Standard Costs
Emphasizing standards
may exclude other
important objectives.
Standard cost
reports may
not be timely.
Invalid assumptions
about the relationship
between labor
cost and output.
McGraw-Hill/Irwin
Potential
Problems
Favorable
variances may
be misinterpreted.
Emphasis on
negative may
impact morale.
Continuous
improvement may
be more important
than meeting standards.
Slide 70
Learning Objective 5
Compute delivery cycle time,
throughput time, and
manufacturing cycle
efficiency (MCE).
McGraw-Hill/Irwin
Slide 71
Delivery Performance Measures
Order
Received
Wait Time
Production
Started
Goods
Shipped
Process Time + Inspection Time
+ Move Time + Queue Time
Throughput Time
Delivery Cycle Time
Process time is the only value-added time.
McGraw-Hill/Irwin
Slide 72
Delivery Performance Measures
Order
Received
Wait Time
Production
Started
Goods
Shipped
Process Time + Inspection Time
+ Move Time + Queue Time
Throughput Time
Delivery Cycle Time
Manufacturing
Cycle
=
Efficiency
McGraw-Hill/Irwin
Value-added time
Manufacturing cycle time
Slide 73
Quick Check 
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days
Move 0.5 days
Queue 9.3 days
What is the throughput time?
a. 10.4 days.
b. 0.2 days.
c. 4.1 days.
d. 13.4 days.
McGraw-Hill/Irwin
Slide 74
Quick Check 
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days
Move 0.5 days
Queue 9.3 days
What is the throughput time?
a. 10.4 days.
b. 0.2 days.
Throughput time = Process + Inspection + Move + Queue
c. 4.1 days. = 0.2 days + 0.4 days + 0.5 days + 9.3 days
d. 13.4 days. = 10.4 days
McGraw-Hill/Irwin
Slide 75
Quick Check 
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days
Move 0.5 days
Queue 9.3 days
What is the Manufacturing Cycle Efficiency (MCE)?
a. 50.0%.
b. 1.9%.
c. 52.0%.
d. 5.1%.
McGraw-Hill/Irwin
Slide 76
Quick Check 
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days
Move 0.5 days
Queue 9.3 days
What is the Manufacturing Cycle Efficiency (MCE)?
a. 50.0%.
MCE = Value-added time ÷ Throughput time
b. 1.9%.
= Process time ÷ Throughput time
c. 52.0%.
= 0.2 days ÷ 10.4 days
d. 5.1%.
= 1.9%
McGraw-Hill/Irwin
Slide 77
Quick Check 
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days
Move 0.5 days
Queue 9.3 days
What is the delivery cycle time (DCT)?
a. 0.5 days.
b. 0.7 days.
c. 13.4 days.
d. 10.4 days.
McGraw-Hill/Irwin
Slide 78
Quick Check 
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days
Move 0.5 days
Queue 9.3 days
What is the delivery cycle time (DCT)?
a. 0.5 days.
b. 0.7 days.
DCT = Wait time + Throughput time
c. 13.4 days.
= 3.0 days + 10.4 days
d. 10.4 days.
= 13.4 days
McGraw-Hill/Irwin
Slide 79
Predetermined Overhead Rates and Overhead
Analysis in a Standard Costing System
Appendix 11A
© 2010 The McGraw-Hill Companies, Inc.
Learning Objective 6
(Appendix 11A)
Compute and interpret the
fixed overhead budget and
volume variances.
McGraw-Hill/Irwin
Slide 81
Fixed Overhead Budget Variance
Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
Fixed
Overhead
Applied
Budget
variance
Budget
variance
McGraw-Hill/Irwin
=
Actual
fixed
overhead
–
Budgeted
fixed
overhead
Slide 82
Fixed Overhead Volume Variance
Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
Fixed
Overhead
Applied
Volume
variance
Volume
variance
McGraw-Hill/Irwin
=
Budgeted
fixed
overhead
–
Fixed
overhead
applied to
work in process
Slide 83
Fixed Overhead Volume Variance
Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
DH × FR
Fixed
Overhead
Applied
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
McGraw-Hill/Irwin
Slide 84
Computing Fixed Overhead Variances
ColaCo
Production and Machine-Hour Data
Budgeted production
Standard machine-hours per unit
Budgeted machine-hours
Actual production
Standard machine-hours allowed for the actual production
Actual machine-hours
McGraw-Hill/Irwin
30,000
3
90,000
28,000
84,000
88,000
units
hours
hours
units
hours
hours
Slide 85
Computing Fixed Overhead Variances
ColaCo
Cost Data
Budgeted variable manufacturing overhead
Budgeted fixed manufacturing overhead
Total budgeted manufacturing overhead
$
Actual variable manufacturing overhead
Actual fixed manufacturing overhead
Total actual manufacturing overhead
$
McGraw-Hill/Irwin
$
$
90,000
270,000
360,000
100,000
280,000
380,000
Slide 86
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
McGraw-Hill/Irwin
Slide 87
Predetermined Overhead Rates
Variable component of the
predetermined overhead rate
$90,000
=
90,000 Machine-hours
Variable component of the
predetermined overhead rate
= $1.00 per machine-hour
Fixed component of the
predetermined overhead rate
$270,000
=
90,000 Machine-hours
Fixed component of the
predetermined overhead rate
= $3.00 per machine-hour
McGraw-Hill/Irwin
Slide 88
Applying Manufacturing Overhead
Overhead
applied
=
Predetermined
overhead rate
×
Standard hours allowed
for the actual output
Overhead
applied
=
$4.00 per
machine-hour
×
84,000 machine-hours
Overhead
applied
=
$336,000
McGraw-Hill/Irwin
Slide 89
Computing the Budget Variance
McGraw-Hill/Irwin
Actual
fixed
overhead
Budgeted
fixed
overhead
Budget
variance
=
Budget
variance
=
$280,000 – $270,000
Budget
variance
=
$10,000 Unfavorable
–
Slide 90
Computing the Volume Variance
Volume
variance
=
Budgeted
fixed
overhead
–
(
Fixed
overhead
applied to
work in process
= $270,000 –
Volume
variance
= $18,000 Unfavorable
McGraw-Hill/Irwin
)
$3.00 per
$84,000
×
machine-hour
machine-hours
Volume
variance
Slide 91
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
Volume
variance
= 18,000 Unfavorable
McGraw-Hill/Irwin
)
90,000
84,000
–
mach-hours
mach-hours
Slide 92
A Pictorial View of the Variances
Actual
Fixed
Overhead
280,000
Budgeted
Fixed
Overhead
270,000
Budget variance,
$10,000 unfavorable
Fixed Overhead
Applied to
Work in Process
252,000
Volume variance,
$18,000 unfavorable
Total variance, $28,000 unfavorable
McGraw-Hill/Irwin
Slide 93
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.
McGraw-Hill/Irwin
Slide 94
Graphic Analysis of Fixed
Overhead Variances
Budget
$270,000
Denominator
hours
0
0
McGraw-Hill/Irwin
Machine-hours (000)
90
Slide 95
Graphic Analysis of Fixed
Overhead Variances
Actual
$280,000
Budget
$270,000
{
Budget Variance 10,000 U
Denominator
hours
0
0
McGraw-Hill/Irwin
Machine-hours (000)
90
Slide 96
Graphic Analysis of Fixed
Overhead Variances
Actual
$280,000
Budget
$270,000
Applied
$252,000
{
{
Budget Variance 10,000 U
Volume Variance 18,000 U
Standard
hours
Denominator
hours
0
0
McGraw-Hill/Irwin
Machine-hours (000)
84
90
Slide 97
Reconciling Overhead Variances and
Underapplied or Overapplied Overhead
In a standard
cost system:
Unfavorable
variances are equivalent
to underapplied overhead.
Favorable
variances are equivalent
to overapplied overhead.
The sum of the overhead variances
equals the under- or overapplied
overhead cost for the period.
McGraw-Hill/Irwin
Slide 98
Reconciling Overhead Variances and
Underapplied or Overapplied Overhead
ColaCo
Computation of Underapplied Overhead
Predetermined overhead rate (a)
Standard hours allowed for the actual output (b)
Manufacturing overhead applied (a) × (b)
Actual manufacturing overhead
Manufacturing overhead underapplied or
overapplied
McGraw-Hill/Irwin
$
$
$
$
4.00 per machine-hour
84,000 machine hours
336,000
380,000
44,000 underapplied
Slide 99
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
McGraw-Hill/Irwin
Slide 100
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
McGraw-Hill/Irwin
Slide 101
Computing the Sum of All Variances
ColaCo
Computing the Sum of All variances
Variable overhead rate variance
Variable overhead efficiency variance
Fixed overhead budget variance
Fixed overhead volume variance
Total of the overhead variances
McGraw-Hill/Irwin
$
$
12,000
4,000
10,000
18,000
44,000
U
U
U
U
U
Slide 102
Journal Entries
to Record Variances
Appendix 11B
© 2010 The McGraw-Hill Companies, Inc.
Learning Objective 7
(Appendix 11B)
Prepare journal entries
to record standard
costs and variances.
McGraw-Hill/Irwin
Slide 104
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
AQ × AP = $1,029
AQ × SP = $1,050
SQ × SP = $1,000
MPV = $21 F
MQV = $50 U
Labor
AH × AR = $26,250
AH × SR = $25,000
SH × SR = $24,000
LRV = $1,250 U
LEV = $1,000 U
Now, let’s prepare the entries to record
the labor and material variances.
McGraw-Hill/Irwin
Slide 105
Appendix 11B
Recording Material Variances
GENERAL JOURNAL
Date
Description
Raw Materials
Post.
Ref.
Page 4
Debit
Credit
1,050
Materials Price Variance
21
Accounts Payable
1,029
To record the purchase of material
Work in Process
Materials Quantity Variance
Raw Materials
1,000
50
1,050
To record the use of material
McGraw-Hill/Irwin
Slide 106
Appendix 11B
Recording Labor Variances
GENERAL JOURNAL
Date
Description
Work in Process
Post.
Ref.
Page 4
Debit
24,000
Labor Rate Variance
1,250
Labor Efficiency Variance
1,000
Wages Payable
Credit
26,250
To record direct labor
McGraw-Hill/Irwin
Slide 107
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.
McGraw-Hill/Irwin
Slide 108
End of Chapter 11
McGraw-Hill/Irwin
Slide 109