Chapter 9
Standard Costs
PowerPoint Authors:
Jon A. Booker, Ph.D., CPA, CIA
Charles W. Caldwell, D.B.A., CMA
Susan Coomer Galbreath, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
9-2
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.
9-3
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
9-4
Variance Analysis Cycle
Identify
questions
Receive
explanations
Take
corrective
actions
Conduct next
period’s
operations
Analyze
variances
Prepare standard
cost performance
report
Begin
9-5
Setting Standard Costs
Accountants, engineers, purchasing
agents, and production managers
combine efforts to set standards that encourage
efficient future operations.
9-6
Setting Standard Costs
Should we use
ideal standards that
require employees to
work at 100 percent
peak efficiency?
Engineer
I recommend using practical
standards that are currently
attainable with reasonable
and efficient effort.
Managerial Accountant
9-7
Learning Objective 1
Explain how direct
materials standards and
direct labor
standards are set.
9-8
Setting Direct Material Standards
Standard Price
Per Unit
Standard
Quantity Per Unit
Final, delivered
cost of materials,
net of discounts.
Summarized in
a Bill of Materials.
9-9
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.
9-10
Setting Direct Labor Standards
Standard Rate
Per Hour
Often a single
rate is used that reflects
the mix of wages earned.
Standard Hours
Per Unit
Use time and
motion studies for
each labor operation.
9-11
Setting Variable Manufacturing
Overhead Standards
Price
Standard
Quantity
Standard
The rate is the
variable portion of the
predetermined overhead
rate.
The quantity is
the activity in the
allocation base for
predetermined overhead.
9-12
Standard Cost Card
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
(1)
(2)
(1) x (2)
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
9-13
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.
9-14
Price and Quantity Variances
Variance Analysis
Price Variance
Quantity Variance
Difference between
actual price and
standard price
Difference between
actual quantity and
standard quantity
9-15
Price and Quantity Variances
Variance Analysis
Price Variance
Quantity Variance
•Materials price variance
•Labor rate variance
•VOH rate variance
•Materials quantity variance
•Labor efficiency variance
•VOH efficiency variance
9-16
Price and Quantity Variances
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
9-17
Price and Quantity Variances
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.
9-18
Price and Quantity Variances
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.
9-19
Price and Quantity Variances
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.
9-20
Price and Quantity Variances
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.
9-21
Price and Quantity Variances
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
(AQ × AP) – (AQ × SP)
AQ = Actual Quantity
AP = Actual Price
Standard Quantity
×
Standard Price
Quantity Variance
(AQ × SP) – (SQ × SP)
SP = Standard Price
SQ = Standard Quantity
9-22
Learning Objective 2
Compute the direct
materials price and
quantity variances and
explain their significance.
9-23
Glacier Peak Outfitters – 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.
Let’s calculate the material price and quantity
variances.
9-24
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
= $1,050
Standard Quantity
×
Standard Price
200 kgs.
×
$5.00 per kg.
= $1,000
Quantity variance
$50 unfavorable
9-25
Material Variances Summary
Actual Quantity
×
Actual Price
210 kgs.
×
$4.90 per kg.
Actual Quantity
×
Standard Price
210 kgs.
× kgs
$1,029  210
$5.00per
perkg
kg.
= $4.90
= $1,029
Price variance
$21 favorable
= $1,050
Standard Quantity
×
Standard Price
200 kgs.
×
$5.00 per kg.
= $1,000
Quantity variance
$50 unfavorable
9-26
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
= $1,050
= $1,000
Quantity variance
$50 unfavorable
9-27
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
9-28
Direct Materials Variances – Points
of Clarification
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.
I’ll start computing
the price variance
when material is
purchased rather
than when it’s used.
9-29
Direct Materials Variances – Points
of Clarification
Glacier purchased and
used 210 kilograms.
How are the variances
computed if the amount
purchased differs from
the amount used?
The price variance is
computed on the entire
quantity purchased.
The quantity variance
is computed only on
the quantity used.
9-30
Direct Materials Variances – Points
of Clarification
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.
9-31
Direct Materials Variances – Points
of Clarification
I am not responsible for
this unfavorable material
quantity variance.
You purchased cheap
material, so my people
had to use more of it.
Your poor scheduling
sometimes requires me to
rush order material at a
higher price, causing
unfavorable price variances.
9-32
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.
9-33
Quick Check 
Hanson’s material price variance (MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Zippy
9-34
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.
MPV = AQ(AP - SP)
MPV = 1,700 lbs. × ($3.90 - 4.00)
MPV = $170 Favorable
9-35
Quick Check 
Hanson’s material quantity variance (MQV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Zippy
9-36
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.
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 lbs - 1,500 lbs)
MQV = $800 unfavorable
9-37
Quick Check 
Actual Quantity
×
Actual Price
Zippy
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
Quantity variance
$800 unfavorable
9-38
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.
9-39
Quick Check  Continued
Actual Quantity
Purchased
×
Actual Price
Zippy
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
Price variance increases
because quantity
purchased increases.
9-40
Quick Check  Continued
Actual Quantity
Used
×
Standard Price
Zippy
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.
Quantity variance
$800 unfavorable
9-41
Learning Objective 3
Compute the direct labor
rate and efficiency
variances and explain
their significance.
9-42
Glacier Peak Outfitters - 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.
Let’s calculate the labor rate and efficiency
variances?
9-43
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
Standard Hours
×
Standard Rate
2,400 hours
×
$10.00 per hour
= $24,000
Efficiency variance
$1,000 unfavorable
9-44
Labor Variances Summary
Actual Hours
×
Actual Rate
2,500 hours
×
$10.50 per hour
= $26,250
Actual Hours
×
Standard Rate
Standard 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
= $24,000
Efficiency variance
$1,000 unfavorable
9-45
Labor Variances Summary
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
Standard Hours
×
Standard Rate
2,500 hours
2,500 hours
2,400 hours
×
×  2,000
×
1.2 hours per parka
$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
= $24,000
Efficiency variance
$1,000 unfavorable
9-46
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
9-47
Direct Labor Variances – Points of
Clarification
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
Quality of training
provided to employees.
9-48
Direct Labor Variances – Points of
Clarification
I am not responsible for
the unfavorable labor
efficiency variance!
You purchased cheap
material, so it took more
time to process it.
I think it took more time
to process the
materials because the
Maintenance
Department has poorly
maintained your
equipment.
9-49
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.
9-50
Quick Check 
Hanson’s labor rate variance (LRV) for the
week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Zippy
9-51
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
9-52
Quick Check 
Hanson’s labor efficiency variance (LEV)
for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
Zippy
9-53
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.
LEV = SR(AH - SH)
LEV = $12.00(1,550 hrs - 1,500 hrs)
LEV = $600 unfavorable
9-54
Quick Check 
Zippy
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
Standard Hours
×
Standard Rate
1,500 hours
×
$12.00 per hour
= $18,000
Efficiency variance
$600 unfavorable
9-55
Learning Objective 4
Compute the variable
manufacturing overhead
rate and efficiency
variances.
9-56
Glacier Peak Outfitters – 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.
9-57
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
Efficiency variance
$400 unfavorable
9-58
Variable Manufacturing Overhead
Variances Summary
Actual Hours
×
Actual Rate
2,500 hours
×
$4.20 per hour
= $10,500
Actual Hours
×
Standard Rate
Standard 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
= $9,600
Efficiency variance
$400 unfavorable
9-59
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
= 2,400
hours
$4.20 per hour parkas
$4.00
per hour
= $10,500
= $10,000
Rate variance
$500 unfavorable
Standard Hours
×
Standard Rate
2,400 hours
×
$4.00 per hour
= $9,600
Efficiency variance
$400 unfavorable
9-60
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
9-61
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.
9-62
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.
Zippy
9-63
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
9-64
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.
9-65
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
9-66
Quick Check 
Zippy
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
= $4,500
Efficiency variance
$150 unfavorable
9-67
Variance Analysis and Management
by Exception
How do I know
which variances to
investigate?
Larger variances, in
dollar amount or as
a percentage of the
standard, are
investigated first.
9-68
A Statistical Control Chart
Warning signals for investigation
Favorable Limit
•
Desired Value
•
•
•
•
•
•
Unfavorable Limit
1
2
3
4
5
6
7
Variance Measurements
•
8
•
9
9-69
Advantages of Standard Costs
Management by
exception
Promotes economy
and efficiency
Advantages
Simplified
bookkeeping
Enhances
responsibility
accounting
9-70
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.
Potential
Problems
Favorable
variances may
be misinterpreted.
Emphasis on
negative may
impact morale.
Continuous
improvement may
be more important
than meeting standards.
Appendix 9A
Predetermine Overhead Rates and
Overhead Analysis in a Standard
Costing System
PowerPoint Authors:
Jon A. Booker, Ph.D., CPA, CIA
Charles W. Caldwell, D.B.A., CMA
Susan Coomer Galbreath, Ph.D., CPA
9-72
Learning Objective 5
Compute and interpret
the fixed overhead
budget and volume
variances.
9-73
Fixed Overhead Budget Variance
Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
Fixed
Overhead
Applied
Budget
variance
Budget
variance
=
Actual
fixed
overhead
–
Budgeted
fixed
overhead
9-74
Fixed Overhead Volume Variance
Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
Fixed
Overhead
Applied
Volume
variance
Volume
variance
=
Budgeted
fixed
overhead
–
Fixed overhead
applied to
work in process
9-75
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
9-76
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
30,000
3
90,000
28,000
84,000
88,000
units
hours
hours
units
hours
hours
9-77
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
$
$
$
90,000
270,000
360,000
100,000
280,000
380,000
9-78
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
9-79
Predetermined Overhead Rates
$90,000
90,000 Machine-hours
Variable component of the
predetermined overhead rate
=
Variable component of the
predetermined overhead rate
= $1.00 per machine-hour
Fixed component of the
predetermined overhead rate
=
Fixed component of the
predetermined overhead rate
= $3.00 per machine-hour
$270,000
90,000 Machine-hours
9-80
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
9-81
Computing the Budget Variance
Actual
fixed
overhead
Budgeted
fixed
overhead
Budget
variance
=
Budget
variance
=
$280,000 – $270,000
Budget
variance
=
$10,000 Unfavorable
–
9-82
Computing the Volume Variance
Volume
variance
=
Budgeted
fixed
overhead
(
–
Fixed overhead
applied to
work in process
)
84,000
$3.00 per
×
machine-hours
machine-hour
Volume
variance
= $270,000 –
Volume
variance
= $18,000 Unfavorable
9-83
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
)
90,000
84,000
– machine-hours
machine-hours
9-84
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
9-85
ColaCo: A Graphic Analysis of the
Variances
Let’s look at a graph
showing fixed
overhead variances.
We will use ColaCo’s
numbers from the
previous example.
9-86
ColaCo: A Graphic Analysis of the Variances
Budget
$270,000
Denominator
hours
0
0
Machine-hours (000)
90
9-87
ColaCo: A Graphic Analysis of the Variances
Actual
$280,000
Budget
$270,000
{
Budget Variance 10,000 U
Denominator
hours
0
0
Machine-hours (000)
90
9-88
ColaCo: A Graphic Analysis of the 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
Machine-hours (000)
84
90
9-89
ColaCo: 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.
9-90
ColaCo: 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
$
$
$
$
4.00 per machine-hour
84,000 machine hours
336,000
380,000
44,000 underapplied
9-91
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
9-92
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
9-93
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
$
$
12,000
4,000
10,000
18,000
44,000
U
U
U
U
U
Appendix 9B
General Ledger Entries to Record
Variances
PowerPoint Authors:
Jon A. Booker, Ph.D., CPA, CIA
Charles W. Caldwell, D.B.A., CMA
Susan Coomer Galbreath, Ph.D., CPA
9-95
Learning Objective 6
Prepare journal entries to
record standard costs
and variances.
9-96
Glacier Peak Outfitters - Revisited
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.
9-97
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
To record the use of material
1,000
50
1,050
9-98
Recording Direct 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
To record direct labor
Credit
26,250
9-99
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.
9-100
End of Chapter 9