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Standard Costs and Operating Performance Measures Chapter 12 Garrison, Noreen, Brewer, Cheng & Yuen © 2012 McGraw-Hill Education (Asia) 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 3 Variance Analysis Cycle Identify questions Receive explanations Conduct next period’s operations Analyze variances Prepare standard cost performance report McGraw-Hill Education (Asia) McGraw-Hill/Irwin Take corrective actions Garrison, Noreen, Brewer, Cheng & Yuen 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 5 Setting Standard Costs Should we use ideal standards that require employees to work at 100 percent peak efficiency? Engineer McGraw-Hill Education (Asia) McGraw-Hill/Irwin I recommend using practical standards that are currently attainable with reasonable and efficient effort. Managerial Accountant Garrison, Noreen, Brewer, Cheng & Yuen Slide 6 Learning Objective 1 Explain how direct materials standards and direct labor standards are set. McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen 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 Education (Asia) 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 $ Garrison, Noreen, Brewer, Cheng & Yuen 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 15 A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Price Variance McGraw-Hill Education (Asia) McGraw-Hill/Irwin Standard Quantity × Standard Price Quantity Variance Garrison, Noreen, Brewer, Cheng & Yuen 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 21 Another Way to Look at the Problems Actual Quantity x Actual Price = AQ x AP Price variance Actual Quantity x Standard Price = AQ x SP Quantity variance Standard Quantity x Standard Price = SQ x SP Total Variance SQ = (Aouput x standard quantity for production) = standard quantity allowed for the actual output McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 22 Learning Objective 2 Compute the direct materials price and quantity variances and explain their significance. McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 23 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 24 Material Variances: The Line-by-line Method AQ x AP = 210 x AP = 1,029 (21) F Price variance AQ x SP = 210 x 5 = 1,050 50 U Quantity variance SQ x SP = (2000 x 0.1) x 5 = 1,000 29 U Total Variance SQ = (Aouput x standard quantity for production) = standard quantity allowed for the actual output Calculation of Actual Purchase Price (AP) per unit can be done but is not necessary because AP will not be used in subsequent calculation and the total actual purchase cost in total is sufficient for the variance calculation. McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 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 = $1,050 Price variance $21 favorable McGraw-Hill Education (Asia) McGraw-Hill/Irwin Standard Quantity × Standard Price 200 kgs. × $5.00 per kg. = $1,000 Quantity variance $50 unfavorable Garrison, Noreen, Brewer, Cheng & Yuen Slide 26 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 = $1,050 Price variance $21 favorable McGraw-Hill Education (Asia) McGraw-Hill/Irwin Standard Quantity × Standard Price 200 kgs. × $5.00 per kg. = $1,000 Quantity variance $50 unfavorable Garrison, Noreen, Brewer, Cheng & Yuen Slide 27 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 = $1,050 Price variance $21 favorable McGraw-Hill Education (Asia) McGraw-Hill/Irwin = $1,000 Quantity variance $50 unfavorable Garrison, Noreen, Brewer, Cheng & Yuen Slide 28 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 29 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 Education (Asia) McGraw-Hill/Irwin I’ll start computing the price variance when material is purchased rather than when it’s used. Garrison, Noreen, Brewer, Cheng & Yuen Slide 30 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 Education (Asia) McGraw-Hill/Irwin The price variance is computed on the entire quantity purchased. The quantity variance is computed only on the quantity used. Garrison, Noreen, Brewer, Cheng & Yuen Slide 31 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 32 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 Education (Asia) McGraw-Hill/Irwin Your poor scheduling sometimes requires me to rush order material at a higher price, causing unfavorable price variances. Garrison, Noreen, Brewer, Cheng & Yuen Slide 33 Zippy Quick Check Hanson Inc. has the following direct material standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound Last week, 1,700 pounds of material were purchased and used to make 1,000 Zippies. The material cost a total of $6,630. McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 34 Zippy Quick Check AQ x AP = 1,700 x AP = 6,630 (170) F Price variance AQ x SP = 1,700 x 4 = 6,800 800 U Quantity variance SQ x SP = (1000 x 1.5) x 4 = 6,000 630 U Total Variance SQ = (Aouput x standard quantity for production) = standard quantity allowed for the actual output McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 35 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. McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 36 Zippy Quick Check MPV = AQ(AP - SP) MPV = 1,700 lbs. × ($3.90 - 4.00) MPV = $170 Favorable Hanson’s material price variance (MPV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. AQ x AP = 1,700 x AP = 6,630 (170) F Price variance AQ x SP = McGraw-Hill Education (Asia) McGraw-Hill/Irwin 1,700 x 4 = 6,800 Garrison, Noreen, Brewer, Cheng & Yuen Slide 37 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. McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 38 Zippy Quick Check AQ x SP = 1,700 x 4 = 6,800 800 U Quantity variance SQ x SP = (1000 x 1.5) x 4 = 6,000 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 39 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 Education (Asia) McGraw-Hill/Irwin Quantity variance $800 unfavorable Garrison, Noreen, Brewer, Cheng & Yuen Slide 40 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 41 Zippy Quick Check Continued AQp x AP = 2,800 x AP = 10,920 (280) F Price variance AQp x SP = 2,800 x 4 = 11,200 4,400 U Inventory @ Std cost AQu x SP = SQ x SP 1,700 x = (1000 x 1.5) x 4 = 4 = 6,800 6,000 800 U Usage variance (Quantity variance) 4,920 U Total Variance AQp = Actual Quantity Purchased AQu = Actual Quantity used SQ = (Aouput x standard quantity for production use) = standard quantity allowed for the actual output McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 42 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 Education (Asia) McGraw-Hill/Irwin Price variance increases because quantity purchased increases. Garrison, Noreen, Brewer, Cheng & Yuen Slide 43 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 Education (Asia) McGraw-Hill/Irwin Standard Quantity × Standard Price Quantity variance $800 unfavorable Garrison, Noreen, Brewer, Cheng & Yuen Slide 44 Learning Objective 3 Compute the direct labor rate and efficiency variances and explain their significance. McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 45 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 46 Labor Variances AH x AR = 2,500 x AR = 26,250 1,250 U Rate variance AH x SR = 2,500 x 10 = 25,000 1,000 U Efficiency variance SH x SR = (2000 x 1.2) x 10 = 24,000 2,250 U Total Variance AH = Actual hour paid (and worked in this case) AR = Actual rate per hour SR = Standard rate per hour SH = (Aouput x standard hours for the production) = standard hours allowed for the actual output McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 47 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 Education (Asia) McGraw-Hill/Irwin Standard Hours × Standard Rate 2,400 hours × $10.00 per hour = $24,000 Efficiency variance $1,000 unfavorable Garrison, Noreen, Brewer, Cheng & Yuen Slide 48 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 Education (Asia) McGraw-Hill/Irwin Standard Hours × Standard Rate = $24,000 Efficiency variance $1,000 unfavorable Garrison, Noreen, Brewer, Cheng & Yuen Slide 49 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 Education (Asia) McGraw-Hill/Irwin = $24,000 Efficiency variance $1,000 unfavorable Garrison, Noreen, Brewer, Cheng & Yuen Slide 50 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 51 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 Education (Asia) McGraw-Hill/Irwin Quality of training provided to employees. Garrison, Noreen, Brewer, Cheng & Yuen Slide 52 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 Education (Asia) McGraw-Hill/Irwin I think it took more time to process the materials because the Maintenance Department has poorly maintained your equipment. Garrison, Noreen, Brewer, Cheng & Yuen Slide 53 Zippy Quick Check Hanson Inc. has the following direct labor standard to manufacture one Zippy: 1.5 standard hours per Zippy at $12.00 per direct labor hour Last week, 1,550 direct labor hours were worked at a total labor cost of $18,910 to make 1,000 Zippies. McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 54 Quick Check AH x AR = 1,550 x AR = 18,910 310 U Rate variance AH x SR = 1,550 x 12 = 18,600 600 U Efficiency variance SH x SR = (1000 x 1.5) x 12 = 18,000 910 U Total Variance AH = Actual hour paid (and worked in this case) AR = Actual rate per hour SR = Standard rate per hour SH = (Aouput x standard hours for the production) = standard hours allowed for the actual output McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 55 Zippy Quick Check Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable. McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 56 Zippy Quick Check AH x AR = 1,550 x AR = 18,910 310 U Rate variance AH x SR = 1,550 x 12 = 18,600 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 57 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. McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 58 Zippy Quick Check AH x SR = 1,550 x 12 = 18,600 600 U Efficiency variance SH x SR = (1000 x 1.5) x 12 = 18,000 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 59 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 Education (Asia) McGraw-Hill/Irwin Standard Hours × Standard Rate 1,500 hours × $12.00 per hour = $18,000 Efficiency variance $600 unfavorable Garrison, Noreen, Brewer, Cheng & Yuen Slide 60 Learning Objective 4 Compute the variable manufacturing overhead rate and efficiency variances. McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 61 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 62 Variable Manufacturing Overhead Variances AH x AR = 2,500 x AR = 10,500 500 U Rate variance AH x SR = 2,500 x 4 = 10,000 400 U Efficiency variance SH x SR = (2000 x 1.2) x 4 = 9,600 900 U Total Variance AH = Actual hour paid (and worked in this case) AR = Actual rate per hour SR = Standard rate per hour SH = (Aouput x standard hours for the production) = standard hours allowed for the actual output McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 63 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 Education (Asia) McGraw-Hill/Irwin Efficiency variance $400 unfavorable Garrison, Noreen, Brewer, Cheng & Yuen Slide 64 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 Education (Asia) McGraw-Hill/Irwin Standard Hours × Standard Rate = $9,600 Efficiency variance $400 unfavorable Garrison, Noreen, Brewer, Cheng & Yuen Slide 65 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 Education (Asia) McGraw-Hill/Irwin Standard Hours × Standard Rate 2,400 hours × $4.00 per hour = $9,600 Efficiency variance $400 unfavorable Garrison, Noreen, Brewer, Cheng & Yuen Slide 66 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 67 Zippy 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 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 68 Quick Check AH x AR = 1,550 x AR = 5,115 465 U Rate variance AH x SR = 1,550 x 3 = 4,650 150 U Efficiency variance SH x SR = (1000 x 1.5) x 3 = 4,500 615 U Total Variance AH = Actual hour paid (and worked in this case) AR = Actual rate per hour SR = Standard rate per hour SH = (Aouput x standard hours for the production) = standard hours allowed for the actual output McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 69 Zippy Quick Check 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 70 Zippy Quick Check AH x AR = 1,550 x AR = 5,115 465 U Rate variance AH x SR Hanson’s = 1,550rate x 3 variance = 4,650 (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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 71 Zippy Quick Check 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 72 Zippy Quick Check AH x SR = 1,550 x 3 = 4,650 150 U Efficiency variance SH x SR = (1000 x 1.5) x 3 = 4,500 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 73 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 Education (Asia) McGraw-Hill/Irwin = $4,500 Efficiency variance $150 unfavorable Garrison, Noreen, Brewer, Cheng & Yuen Slide 74 Variance Analysis and Management by Exception How do I know which variances to investigate? McGraw-Hill Education (Asia) McGraw-Hill/Irwin Larger variances, in dollar amount or as a percentage of the standard, are investigated first. Garrison, Noreen, Brewer, Cheng & Yuen Slide 75 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 76 Advantages of Standard Costs Management by exception Promotes economy and efficiency Advantages Enhances responsibility accounting Simplified bookkeeping McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 77 Potential Problems with Standard Costs Emphasizing standards may exclude other important objectives. Favorable variances may be misinterpreted. Potential Problems Standard cost reports may not be timely. Invalid assumptions about the relationship between labor cost and output. McGraw-Hill Education (Asia) McGraw-Hill/Irwin Emphasis on negative may impact morale. Continuous improvement may be more important than meeting standards. Garrison, Noreen, Brewer, Cheng & Yuen Slide 78 Learning Objective 5 Compute delivery cycle time, throughput time, and manufacturing cycle efficiency (MCE). McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 79 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 80 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 Education (Asia) McGraw-Hill/Irwin Value-added time Manufacturing cycle time Garrison, Noreen, Brewer, Cheng & Yuen Slide 81 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 82 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 83 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 84 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 85 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 86 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 87 Generalized Model of the Row by Row Approach and Its Preparation of the Performance Report (Reconcile Actual Results to the Budgeted Figures) Supplementary Note Garrison, Noreen, Brewer, Cheng & Yuen © 2012 McGraw-Hill Education (Asia) Generalized Model of the Row by Row Approach and Its Preparation of the Performance Report (Reconcile Actual Results to the Budgeted Figures) Actual Quantity x Actual Price = AQ x AP Price variance Actual Quantity x Standard Price = AQ x SP Quantity variance Standard Quantity x Standard Price = SQ x SP Total Flexible Variance Activity Variance Budgeted Quantity x Standard Price = BQ x SP Static variance SQ = (Aouput x standard quantity for production) = standard quantity allowed for the actual output BQ = Budgeted quantity McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 89 Performance Report for Variance Analysis: Recall Example from Chapter 11 McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 90 Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System Appendix 12A Garrison, Noreen, Brewer, Cheng & Yuen © 2012 McGraw-Hill Education (Asia) Learning Objective 6 (Appendix 12A) Compute and interpret the fixed overhead budget and volume variances. McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 92 Fixed Manufacturing Overhead Variances: The Line-by-line method Actual Fixed Overhead Budget variance Budgeted Fixed Overhead = BH x SR (Spending variance) Volume variance Applied Fixed Overhead = SH x SR Total Variance BH = Budgeted hours (a.k.a. Denominator hours) SH = (Aouput x standard hours for the production) = standard hours allowed for the actual output McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 93 Fixed Overhead Budget Variance Actual Fixed Overhead Budgeted Fixed Overhead Fixed Overhead Applied Budget variance Budget variance McGraw-Hill Education (Asia) McGraw-Hill/Irwin = Actual fixed overhead – Garrison, Noreen, Brewer, Cheng & Yuen Budgeted fixed overhead Slide 94 Fixed Overhead Volume Variance Actual Fixed Overhead Budgeted Fixed Overhead Fixed Overhead Applied Volume variance Volume variance McGraw-Hill Education (Asia) McGraw-Hill/Irwin = Budgeted fixed overhead – Garrison, Noreen, Brewer, Cheng & Yuen Fixed overhead applied to work in process Slide 95 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 96 Computing Fixed Overhead Variances ColaCo Production and Machine-Hour Data Budgeted production Standard machine-hour per unit Budgeted machine-hour Actual production Standard machine-hour allowed for the actual production Actual machine-hour McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen 30,000 3 90,000 28,000 84,000 88,000 units hours hours units hours hours Slide 97 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen $ $ 90,000 270,000 360,000 100,000 280,000 380,000 Slide 98 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-hour Predetermined = $4.00 per machine-hour overhead rate McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 99 Predetermined Overhead Rates Variable component of the predetermined overhead rate $90,000 = 90,000 Machine-hour Variable component of the predetermined overhead rate = $1.00 per machine-hour Fixed component of the predetermined overhead rate $270,000 = 90,000 Machine-hour Fixed component of the predetermined overhead rate = $3.00 per machine-hour McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 100 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-hour Overhead applied = $336,000 McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 101 Fixed Manufacturing Overhead Variances Actual = = 280,000 10,000 U Budget variance Budgeted = = 270,000 18,000 U Volume variance SH x SR = (28000 x 3) x 3 = 252,000 28,000 U Total Underapplied overhead SH = (Aouput x standard hours for the production) = standard hours allowed for the actual output McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 102 Computing the Budget Variance Actual fixed overhead Budgeted fixed overhead Budget variance = Budget variance = $280,000 – $270,000 Budget variance = $10,000 Unfavorable McGraw-Hill Education (Asia) McGraw-Hill/Irwin – Garrison, Noreen, Brewer, Cheng & Yuen Slide 103 Computing the Volume Variance Volume variance = Budgeted fixed overhead – ( Fixed overhead applied to work in process $3.00 per $84,000 × machine-hour machine-hour Volume variance = $270,000 – Volume variance = $18,000 Unfavorable McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen ) Slide 104 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 – 90,000 84,000 machine-hour machine-hour ( Volume variance $3.00 per × = machine-hour Volume variance = 18,000 Unfavorable McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 105 ) 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 106 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 107 Graphic Analysis of Fixed Overhead Variances Budget $270,000 Denominator hours 0 0 McGraw-Hill Education (Asia) McGraw-Hill/Irwin Machine-hours (000) Garrison, Noreen, Brewer, Cheng & Yuen 90 Slide 108 Graphic Analysis of Fixed Overhead Variances Actual $280,000 Budget $270,000 { Budget Variance 10,000 U Denominator hours 0 0 McGraw-Hill Education (Asia) McGraw-Hill/Irwin Machine-hours (000) Garrison, Noreen, Brewer, Cheng & Yuen 90 Slide 109 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 Education (Asia) McGraw-Hill/Irwin Machine-hours (000) Garrison, Noreen, Brewer, Cheng & Yuen 84 90 Slide 110 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 111 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen $ $ $ $ 4.00 per machine-hour 84,000 machine hours 336,000 380,000 44,000 underapplied Slide 112 Variable Overhead Variances AH x AR = = 100,000 12,000 U Rate variance AH x SR = 88,000 x 1 = 88,000 4,000 U Efficiency variance SH x SR = 84,000 x 1 = 84,000 (= 28,000 x 3) SR = Standard rate per hour SH = (Aouput x standard hours for the production) = standard hours allowed for the actual output McGraw-Hill Education (Asia) McGraw-Hill/Irwin 16,000 U Total Variance = Total underapplied variable overhead Garrison, Noreen, Brewer, Cheng & Yuen Slide 113 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 114 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 115 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen $ $ 12,000 4,000 10,000 18,000 44,000 U U U U U Slide 116 Journal Entries to Record Variances Appendix 12B Garrison, Noreen, Brewer, Cheng & Yuen © 2012 McGraw-Hill Education (Asia) Learning Objective 7 (Appendix 12B) Prepare journal entries to record standard costs and variances. McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 118 Appendix 12B 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 119 Appendix 12B 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 1,000 Materials Quantity Variance Raw Materials 50 1,050 To record the use of material McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 120 Appendix 12B Recording Labor Variances GENERAL JOURNAL Description Date Post. Ref. Page 4 Debit Credit 24,000 Work in Process Labor Rate Variance 1,250 Labor Efficiency Variance 1,000 Wages Payable 26,250 To record direct labor McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 121 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 Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 122 End of Chapter 12 McGraw-Hill Education (Asia) McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 123