Standard Costs & Operating
Performance Measures
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-2
Standard Costs
Standards are “benchmarks” or “norms”
for measuring performance. Two types
of standards are commonly used.
Price standards
Specify how much should
be paid for each unit
of the input.
McGraw-Hill/Irwin
Quantity standards
specify how much of an
input should be used to
make a product.
Copyright © 2008, The McGraw-Hill Companies, Inc.
Standard Cost Card – Variable
Production Cost
11-3
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
Standard
Price
or Rate
$ 4.00 per lb.
14.00 per hour
3.00 per hour
Standard Standard
Quantity
Cost
or Hours per Unit
3.0 lbs.
2.5 hours
2.5 hours
$
$
12.00
35.00
7.50
54.50
* Fixed cost will be discussed later.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-4
Setting Standard Costs
Accountants, engineers, purchasing
agents, and production managers
combine efforts to set standards that encourage
efficient production.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-5
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
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-6
Standard Costs
Amount
Significant deviations from standards
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
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-7
Variance Analysis Cycle
Identify & ask
questions
Receive
explanations
Exhibit
10-1
Take
corrective
actions
Conduct next
period’s
operations
Analyze
variances
Prepare standard
cost performance
report
Begin
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-8
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
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-9
A General Model for Variance Analysis
Variance Analysis
Price Variance
Quantity Variance
Materials price variance
Labor rate variance
VOH spending variance
Materials quantity variance
Labor efficiency variance
VOH efficiency variance
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-10
A General Model for Variance Analysis
Variance = Actual Cost (AC) – Standard Cost (SC)
We have favorable (F) or unfavorable (U)
variance as follows:
Total Variance is F (U) if AC < (>) SC.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-11
A General Model for Variance Analysis
Variance = Actual cost (AC) – Standard Cost (SC)
Actual cost = AQ × AP
AQ = Actual Quantity
AP = Actual Price
Standard cost = SP x SQ
SP = Standard Price
SQ = Standard Quantity
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-12
A General Model for Variance Analysis
Variance = Actual cost (AC) – Standard Cost (SC)
= AQ × AP – SP x SQ
= AQ x AP – AQ x SP + AQ x SP – SP x SQ
= AQ(AP – SP) + (AQ – SQ)SP
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-13
A General Model for Variance Analysis
Variance = Actual cost (AC) – Standard Cost (SC)
= AQ (AP – SP) + (AQ – SQ) SP
In sum, we have a favorable (F) or unfavorable (U)
variance as follows:
Total Variance is F (U) if AC < (>) SC;
Price (Rate, Spending) Variance is F (U) if AP < (>) SP;
Quantity (Efficiency) Variance is F (U) if AQ < (>) SQ.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-14
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
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-15
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
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-16
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
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-17
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
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-18
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
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-19
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
AQ × (AP – SP)
AQ = Actual Quantity
AP = Actual Price
McGraw-Hill/Irwin
Standard Quantity
×
Standard Price
Quantity Variance
(AQ – SQ) × SP)
SP = Standard Price
SQ = Standard Quantity
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-20
Learning Objective 2
Compute the direct
materials price and
quantity variances and
explain their significance.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-21
Material Variances Example
Glacier Peak Outfitters has the following direct material
standard for the fiberfill for 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
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-22
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
McGraw-Hill/Irwin
= $1,050
Standard Quantity
×
Standard Price
200 kgs.
×
$5.00 per kg.
= $1,000
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-23
Material Variances Summary
Actual Quantity
×
Actual Price
210 kgs.
×
$4.90 per kg.
= $1,029
McGraw-Hill/Irwin
Actual Quantity
×
Standard Price
210 kgs.
× kgs
$1,029  210
$5.00per
perkg
kg.
= $4.90
= $1,050
Standard Quantity
×
Standard Price
200 kgs.
×
$5.00 per kg.
= $1,000
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-24
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
McGraw-Hill/Irwin
= $1,050
= $1,000
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-25
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
Copyright © 2008, The McGraw-Hill Companies, Inc.
Material Variances:
Using the Factored Equations
11-26
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
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-27
Responsibility for Material Variances
Materials Price Variance
Purchasing Manager
Materials Quantity Variance
Production 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
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-28
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.
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-29
Material Variances
How are the material
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.
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-30
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
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-31
Quick Check 
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Zippy
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
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-32
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
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-33
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
Zippy
Price variance increases
because quantity
purchased increases.
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-34
Quick Check  Continued
Actual Quantity
Used
×
Standard Price
Standard Quantity
×
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
Zippy
Quantity variance
$800 unfavorable
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-35
Learning Objective 3
Compute the direct labor
rate and efficiency
variances and explain
their significance.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-36
Labor Variances 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
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-37
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
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-38
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
×
$26,250× 2,500 hours
$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
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-39
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
Copyright © 2008, The McGraw-Hill Companies, Inc.
Labor Variances:
Using the Factored Equations
11-40
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
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-41
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.
Copyright © 2008, The McGraw-Hill Companies, Inc.
Responsibility for
Labor Variances
11-42
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.
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-43
Learning Objective 4
Compute the variable
manufacturing overhead
spending and efficiency
variances.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-44
Variable Manufacturing Overhead
Variances Example
Glacier Peak Outfitters has the following variable
manufacturing overhead 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
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-45
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
Spending variance
$500 unfavorable
McGraw-Hill/Irwin
Efficiency variance
$400 unfavorable
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-46
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
Spending variance
$500 unfavorable
McGraw-Hill/Irwin
Standard Hours
×
Standard Rate
= $9,600
Efficiency variance
$400 unfavorable
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-47
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
Spending variance
$500 unfavorable
McGraw-Hill/Irwin
Standard Hours
×
Standard Rate
2,400 hours
×
$4.00 per hour
= $9,600
Efficiency variance
$400 unfavorable
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-48
Variable Manufacturing Overhead
Variances: Using Factored Equations
Variable manufacturing overhead spending variance
VMOSV = 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
VMOEV = SR (AH - SH)
= $4.00 per hour (2,500 hours – 2,400 hours)
= $4.00 per hour (100 hours)
= $400 unfavorable
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-49
Learning Objective 5
Compute the
predetermined overhead
rate and apply overhead
to products in a standard
cost system.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-50
Overhead Rates and Overhead Analysis
Recall that overhead costs are applied to
products using a predetermined overhead rate:
Applied Overhead = POHR × Activity Level
Flexible budget overhead for the
denominator level of activity
POHR
McGraw-Hill/Irwin
=
Denominator level of activity
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-51
Normal versus Standard Cost Systems
In a normal cost
system, overhead is
applied to work in
process based on
the actual number
of hours worked
in the period.
McGraw-Hill/Irwin
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.
Copyright © 2008, The McGraw-Hill Companies, Inc.
Overhead Rates and Overhead
Analysis – Example
11-52
ColaCo prepared this
Machine
Hours
3,000
4,000
Total
Variable
Overhead
$
budget for overhead:
Variable
Overhead
Rate
6,000
?
8,000
?
Total
Fixed
Overhead
$
Fixed
Overhead
Rate
9,000
?
9,000
?
Let’s calculate overhead rates.
ColaCo applies overhead based
on machine-hour activity.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
Overhead Rates and Overhead
Analysis – Example
11-53
ColaCo prepared this
Machine
Hours
3,000
4,000
budget for overhead:
Total
Variable
Overhead
Variable
Overhead
Rate
Total
Fixed
Overhead
$
$
$
6,000
8,000
2.00
2.00
Fixed
Overhead
Rate
9,000
?
9,000
?
Rate = Total Variable Overhead ÷ Machine Hours
This rate is constant at all levels of activity.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
Overhead Rates and Overhead
Analysis – Example
11-54
ColaCo prepared this
Machine
Hours
3,000
4,000
budget for overhead:
Total
Variable
Overhead
Variable
Overhead
Rate
Total
Fixed
Overhead
Fixed
Overhead
Rate
$
$
$
$
6,000
8,000
2.00
2.00
9,000
9,000
3.00
2.25
Rate = Total Fixed Overhead ÷ Machine Hours
This rate decreases when activity increases.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
Overhead Rates and Overhead
Analysis – Example
11-55
ColaCo prepared this
Machine
Hours
3,000
4,000
budget for overhead:
Total
Variable
Overhead
Variable
Overhead
Rate
Total
Fixed
Overhead
Fixed
Overhead
Rate
$
$
$
$
6,000
8,000
2.00
2.00
9,000
9,000
3.00
2.25
The total POHR is the sum of
the fixed and variable rates
for a given activity level.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-56
Fixed Overhead Analysis
Regarding FOH in standard costing, we need to consider three things:
1) Actual FOH
2) FOH Budget (the same for all activity levels)
= FOH rate x Denominator activity level
3) FOH Applied = Standard Costs
= FOH rate x the standard hours allowed for the actual output
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-57
Fixed Overhead Variances
Actual Fixed
Overhead
Incurred
Fixed
Overhead
Budget
Fixed
Overhead
Applied (SC)
SH × SR
Budget
Variance
Volume
Variance
SR = Standard Fixed Overhead Rate
SH = Standard Hours Allowed
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-58
Fixed Overhead Variances – Example
ColaCo’s predetermined overhead rate is based on
3,000 machine hours to produce 1,000 units.
Actual production was 1,067 units and the standard
machine hours required for that production was 3,200.
Actual fixed overhead was $8,450.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-59
Fixed Overhead Variances – Example
Actual Fixed
Overhead
Incurred
Fixed
Overhead
Budget
$8,450
$9,000
Fixed
Overhead
Applied
Budget variance
$550 favorable
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-60
Fixed Overhead Variances – Example
Actual Fixed
Overhead
Incurred
Fixed
Overhead
Budget
Fixed
Overhead
Applied (SC)
SH × SR
3,200 hours
×
$3.00 per hour
$8,450
Budget variance
$550 favorable
McGraw-Hill/Irwin
$9,000
$9,600
Volume variance
$600 favorable
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-61
Quick Check 
Yoder Enterprises’ actual production for the
period required 2,100 standard direct labor
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 labor hour.
What was the budget variance?
a. $350 U
b. $350 F
c. $100 F
d. $100 U
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-62
Quick Check 
Budget Enterprises’
variance
Yoder
actual production for the
= Actual
fixed overhead
– Budgeteddirect
fixed overhead
period
required
2,100 standard
labor
hours.
Actual
fixed overhead for the period
= $14,800
– $14,450
was $14,800. The budgeted fixed overhead
$350 U
was= $14,450.
The predetermined fixed
overhead rate was $7 per direct labor hour.
What was the budget variance?
a. $350 U
b. $350 F
c. $100 F
d. $100 U
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-63
Quick Check 
Yoder Enterprises’ actual production for the
period required 2,100 standard direct labor
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 labor hour.
What was the volume variance?
a. $250 U
b. $250 F
c. $100 F
d. $100 U
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-64
Quick Check 
Volume variance
Yoder Enterprises’ actual production for
= Budgeted fixed overhead – (SH  SR)
the
period required 2,100 standard direct labor
$14,450fixed
– (2,100
hours  $7
hour)
hours. =Actual
overhead
forper
the
period
= $14,450The
– $14,700
was $14,800.
budgeted fixed overhead
= $250 F The predetermined fixed
was $14,450.
overhead rate was $7 per direct labor hour.
What was the volume variance?
a. $250 U
b. $250 F
c. $100 F
d. $100 U
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11-65
Quick Check Summary
Actual Fixed
Overhead
Incurred
Fixed
Overhead
Budget
Fixed
Overhead
Applied
SH × FR
2,100 hours
×
$7.00 per hour
$14,800
Budget variance
$350 unfavorable
McGraw-Hill/Irwin
$14,450
$14,700
Volume variance
$250 favorable
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11-66
Volume Variance – A Closer Look
Volume
Variance
arises when standard hours
allowed for actual output differs
from the denominator activity.
Unfavorable
when standard hours
< denominator hours
McGraw-Hill/Irwin
Favorable
when standard hours
> denominator hours
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11-67
Volume Variance – A Closer Look
Volume
Variance
Does not
measure overor under spending
Results when standard hours
actualtreating
output differs
Itallowed
resultsforfrom
fixed
from the denominator activity.
overhead as if it were a
variable cost.
Unfavorable
when standard hours
< denominator hours
McGraw-Hill/Irwin
Favorable
when standard hours
> denominator hours
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-68
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.
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11-69
Fixed Overhead Variances –
A Graphic Approach
Cost
$9,000 budgeted fixed OH
Activity
3,000 Hours
Expected
Activity
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Copyright © 2008, The McGraw-Hill Companies, Inc.
Fixed Overhead Variances –
A Graphic Approach
11-70
Cost
$9,000 budgeted fixed OH
{
$550
Favorable
Budget
Variance
$8,450 actual fixed OH
Activity
3,000 Hours
Expected
Activity
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
Fixed Overhead Variances –
A Graphic Approach
11-71
Cost
$600
Favorable
Volume
Variance
{
$550 {
Favorable
3,200 machine hours × $3.00 fixed overhead rate
$9,600 applied fixed OH
$9,000 budgeted fixed OH
$8,450 actual fixed OH
Budget
Variance
3,000 Hours
Expected
Activity
McGraw-Hill/Irwin
Activity
3,200
Standard
Hours
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11-72
Overhead Variances and Under- or
Overapplied Overhead Cost
In a standard
cost system:
Unfavorable
variances are equivalent
to under-applied overhead.
Favorable
variances are equivalent
to over-applied overhead.
The sum of the overhead variances
equals the under- or over-applied
overhead cost for a period.
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11-73
Summary of Variance Analysis
DM, DL, VOH:
AC (APAQ)
SPAQ
SC (= SPSQ)=FB
|___________________|_________________|
DMPV, DLRV,VOHSV DMQV, DLEV, VOHEV
FOH:
AC
FOH FB
SC(=SRSH)
|___________________|_________________|
FOHBV
FOHVV
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
11-74
A Summary of Variance Analysis
Variance = Actual cost (AC) – Standard Cost (SC)
= AQ (AP – SP) + (AQ – SQ) SP
We have favorable (F) or unfavorable (U) variance as
follows:
•Total Variance is F (U) if AC < (>) SC;
•Price (Rate, Spending) Variance is F (U) if AP < (>) SP;
•Quantity (Efficiency) Variance is F (U) if AQ < (>) SQ.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
Variance Analysis and
Management by Exception
11-75
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.
Copyright © 2008, The McGraw-Hill Companies, Inc.
Exhibit
10-9
11-76
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
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11-77
Advantages of Standard Costs
Management by
exception
Promotes economy
and efficiency
Advantages
Simplified
bookkeeping
McGraw-Hill/Irwin
Enhances
responsibility
accounting
Copyright © 2008, The McGraw-Hill Companies, Inc.