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Standard Costs and
Operating Performance
Measures
Chapter 11
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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.
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Standard Costs
Direct Material
Deviations from standards deemed significant
are brought to the attention of management, a
practice known as management by exception.
Type of Product Cost
Am
ou
nt
Direct Labor
Manufacturing Overhead
Standard
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Variance Analysis Cycle
Prepare standard
cost performance
report
Analyze
variances
Begin
Identify
questions
Receive
explanations
Take
corrective
actions
Conduct next
period’s
operations
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Setting Standard Costs Accountants, engineers, purchasing
agents, and production managers
combine efforts to set standards that encourage
efficient future operations.
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Setting Standard Costs
Engineer
Should we use
ideal standards that
require employees to
work at 100 percent
peak efficiency?
Managerial Accountant
I recommend using practical
standards that are currently
attainable with reasonable
and efficient effort.
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How direct materials
standards and direct labor
standards are set.
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Setting Direct Material
Standards
Price
Standards
Summarized in
a Bill of Materials.
Final, delivered
cost of materials,
net of discounts.
Quantity
Standards
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Setting Direct Labor
Standards
Rate
Standards
Often a single
rate is used that reflects
the mix of wages earned.
Time
Standards
Use time and
motion studies for
each labor operation.
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Setting Variable
Manufacturing Overhead
Standards Rate
Standards
The rate is the
variable portion of the
predetermined overhead
rate.
Quantity
Standards
The quantity is
the activity in the
allocation base for
predetermined overhead.
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Standard Cost Card – Variable Production Cost
A standard cost card for one unit of
product might look like this:
A A x B
Standard Standard Standard
Quantity Price Cost
Inputs or Hours or Rate per Unit
Direct materials 3.0 lbs. 4.00$ per lb. 12.00$
Direct labor 2.5 hours 14.00 per hour 35.00
Variable mfg. overhead 2.5 hours 3.00 per hour 7.50
Total standard unit cost 54.50$
B
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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 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.
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.
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A General Model for Variance Analysis
Variance Analysis
Price Variance
Difference between
actual price and
standard price
Quantity Variance
Difference between
actual quantity and
standard quantity
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Variance Analysis
•Materials price variance
•Labor rate variance
•VOH rate variance
•Materials quantity variance
•Labor efficiency variance
•VOH efficiency variance
A General Model for Variance Analysis
Price Variance Quantity Variance
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Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
A General Model for Variance Analysis
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Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
A General Model for Variance Analysis
Actual quantity is the amount of direct
materials, direct labor, and variable
manufacturing overhead actually used.
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Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
A General Model for Variance Analysis
Standard quantity is the standard quantity
allowed for the actual output of the period.
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Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
A General Model for Variance Analysis
Actual price is the amount actually
paid for the input used.
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A General Model for Variance Analysis
Standard price is the amount that should
have been paid for the input used.
Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
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A General Model for Variance Analysis
(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)
AQ = Actual Quantity SP = Standard Price
AP = Actual Price SQ = Standard Quantity
Rate/Price Variance Usage/Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
PV = AQ (AP - SP)
QV = SP (AQ - SQ)
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Compute the direct
materials price and
quantity variances and
explain their significance.
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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 @ $4.90/kgs
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210 kgs. 210 kgs. 200 kgs.
× × ×
$4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000
Price variance
$21 favorable
Quantity variance
$50 unfavorable
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Material Variances Summary
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210 kgs. 210 kgs. 200 kgs.
× × ×
$4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000
Price variance
$21 favorable
Quantity variance
$50 unfavorable
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
$1,029 210 kgs
= $4.90 per kg
Material Variances Summary
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210 kgs. 210 kgs. 200 kgs.
× × ×
$4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000
Price variance
$21 favorable
Quantity variance
$50 unfavorable
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
0.1 kg per parka 2,000 parkas
= 200 kgs
Material Variances Summary
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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
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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.
I’ll start computing
the price variance
when material is
purchased rather
than when it’s used.
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Material Variances
A Business purchased and used 1,700 pounds. 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.
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Materials Price Variance Materials Quantity Variance
Production Manager 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.
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.
Responsibility for Material Variances
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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.
Responsibility for Material Variances
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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.
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Quick Check
Hanson’s material price variance (MPV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Hanson’s material price variance (MPV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
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Quick Check
Hanson’s material price variance (MPV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
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
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Quick Check
Hanson’s material quantity variance (MQV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Hanson’s material quantity variance (MQV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
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Quick Check
Hanson’s material quantity variance (MQV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
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
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1,700 lbs. 1,700 lbs. 1,500 lbs.
× × ×
$3.90 per lb. $4.00 per lb. $4.00 per lb.
= $6,630 = $ 6,800 = $6,000
Price variance
$170 favorable
Quantity variance
$800 unfavorable
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Quick Check
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Quick Check Continued
Hanson Inc. has the following material standard to
manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 2,800 pounds of material were
purchased at a total cost of $10,920, and 1,700
pounds were used to make 1,000 Zippies.
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Actual Quantity Actual Quantity Purchased Purchased × × Actual Price Standard Price
2,800 lbs. 2,800 lbs.
× ×
$3.90 per lb. $4.00 per lb.
= $10,920 = $11,200
Price variance
$280 favorable
Price variance increases
because quantity
purchased increases.
Quick Check Continued
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Actual Quantity Used Standard Quantity × × Standard Price Standard Price
1,700 lbs. 1,500 lbs.
× ×
$4.00 per lb. $4.00 per lb.
= $6,800 = $6,000
Quantity variance
$800 unfavorable
Quantity variance is
unchanged because
actual and standard
quantities are unchanged.
Quick Check Continued
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Compute the direct labor
rate and efficiency
variances and explain
their significance.
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Labor Variances – An Example
Glacier Peak Outfitters has the following direct labor
standard for its mountain parka.
$12 standard cost per parka, for 1900 parkas
Last month, employees actually worked 2,500 hours
at a total labor cost of $13.125 to make 2,000
parkas.
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Rate variance
$2,250 unfavorable
Usage variance
$1200 unfavorable
Actual Units Actual Units Standard Units × × × Actual Rate Standard Rate Standard Rate
Labor Variances Summary
2,000 parkas 2,000 parkas 1,900 parkas
× × ×
$13.125 per hour $12.00 per hour. $12.00 per hour
= $26,250 = $24,000 = $22,800
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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 =
$12/parka
Last month, employees actually worked 2,500 hours
at a total labor cost of $26,250 to make 2,000
parkas.
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Rate variance
$1,250 unfavorable
Efficiency variance
$1,000 unfavorable
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
Labor Variances Summary
2,500 hours 2,500 hours 2,400 hours
× × ×
$10.50 per hour $10.00 per hour. $10.00 per hour
= $26,250 = $25,000 = $24,000
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Labor Variances Summary
2,500 hours 2,500 hours 2,400 hours
× × ×
$10.50 per hour $10.00 per hour. $10.00 per hour
= $26,250 = $25,000 = $24,000
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
$26,250 2,500 hours
= $10.50 per hour
Rate variance
$1,250 unfavorable
Efficiency variance
$1,000 unfavorable
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Labor Variances Summary
2,500 hours 2,500 hours 2,400 hours
× × ×
$10.50 per hour $10.00 per hour. $10.00 per hour
= $26,250 = $25,000 = $24,000
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
1.2 hours per parka 2,000
parkas = 2,400 hours
Rate variance
$1,250 unfavorable
Efficiency variance
$1,000 unfavorable
![Page 47: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/47.jpg)
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
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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.
Quality of training
provided to employees.
![Page 49: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/49.jpg)
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.
Responsibility for Labor
Variances
![Page 50: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/50.jpg)
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.
Quick Check
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Hanson’s labor rate variance (LRV) for the
week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Hanson’s labor rate variance (LRV) for the
week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Quick Check
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Hanson’s labor rate variance (LRV) for the
week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Hanson’s labor rate variance (LRV) for the
week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Quick Check
LRV = AH(AR - SR)
LRV = 1,550 hrs($12.20 - $12.00)
LRV = $310 unfavorable
![Page 53: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/53.jpg)
Hanson’s labor efficiency variance (LEV)
for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
Hanson’s labor efficiency variance (LEV)
for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
Quick Check
![Page 54: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/54.jpg)
Hanson’s labor efficiency variance (LEV)
for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
Hanson’s labor efficiency variance (LEV)
for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
Quick Check
LEV = SR(AH - SH)
LEV = $12.00(1,550 hrs - 1,500 hrs)
LEV = $600 unfavorable
![Page 55: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/55.jpg)
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
Rate variance
$310 unfavorable
Efficiency variance
$600 unfavorable
1,550 hours 1,550 hours 1,500 hours
× × ×
$12.20 per hour $12.00 per hour $12.00 per hour
= $18,910 = $18,600 = $18,000
Quick Check
![Page 56: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/56.jpg)
Compute the variable
manufacturing overhead
rate and efficiency
variances.
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A General Model for Variance Analysis
(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)
AQ = Actual Quantity SP = Standard Price
AP = Actual Price SQ = Standard Quantity
Rate/Price Variance Usage/Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
PV = AQ (AP - SP)
QV = SP (AQ - SQ)
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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.
![Page 59: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/59.jpg)
2,500 hours 2,500 hours 2,400 hours
× × ×
$4.20 per hour $4.00 per hour $4.00 per hour
= $10,500 = $10,000 = $9,600
Rate variance
$500 unfavorable
Efficiency variance
$400 unfavorable
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
Variable Manufacturing Overhead Variances
Summary
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Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
× × ×
$4.20 per hour $4.00 per hour $4.00 per hour
= $10,500 = $10,000 = $9,600
Rate variance
$500 unfavorable
Efficiency variance
$400 unfavorable
$10,500 2,500 hours
= $4.20 per hour
Variable Manufacturing Overhead Variances
Summary
![Page 61: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/61.jpg)
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
× × ×
$4.20 per hour $4.00 per hour $4.00 per hour
= $10,500 = $10,000 = $9,600
Rate variance
$500 unfavorable
Efficiency variance
$400 unfavorable
1.2 hours per parka 2,000
parkas = 2,400 hours
Variable Manufacturing Overhead Variances
Summary
![Page 62: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/62.jpg)
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
![Page 63: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/63.jpg)
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.
Quick Check
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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.
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.
Quick Check
![Page 65: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/65.jpg)
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.
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.
Quick Check
VMRV = AH(AR - SR)
VMRV = 1,550 hrs($3.30 - $3.00)
VMRV = $465 unfavorable
![Page 66: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/66.jpg)
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.
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.
Quick Check
![Page 67: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/67.jpg)
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.
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.
Quick Check
VMEV = SR(AH - SH)
VMEV = $3.00(1,550 hrs - 1,500 hrs)
VMEV = $150 unfavorable
1,000 units × 1.5 hrs per unit
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Rate variance
$465 unfavorable
Efficiency variance
$150 unfavorable
1,550 hours 1,550 hours 1,500 hours
× × ×
$3.30 per hour $3.00 per hour $3.00 per hour
= $5,115 = $4,650 = $4,500
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
Quick Check
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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.
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A Statistical Control Chart
1 2 3 4 5 6 7 8 9
Variance Measurements
Favorable Limit
Unfavorable Limit
• •
• • •
• •
• •
Warning signals for investigation
Desired Value
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Advantages of Standard
Costs
Management by
exception
Advantages
Promotes economy
and efficiency
Simplified
bookkeeping
Enhances
responsibility
accounting
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Potential
Problems
Emphasis on negative may
impact morale.
Emphasizing standards may exclude other
important objectives.
Favorable variances may
be misinterpreted.
Continuous improvement may be more important
than meeting standards.
Standard cost reports may
not be timely.
Invalid assumptions about the relationship
between labor cost and output.
Potential Problems with
Standard Costs
![Page 73: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/73.jpg)
Compute delivery cycle
time, throughput time, and
manufacturing cycle
efficiency (MCE).
![Page 74: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/74.jpg)
Process time is the only value-added time.
Delivery Performance
Measures
Wait Time Process Time + Inspection Time
+ Move Time + Queue Time
Delivery Cycle Time
Order Received
Production Started
Goods Shipped
Throughput Time
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Manufacturing
Cycle
Efficiency
Value-added time
Manufacturing cycle time =
Wait Time Process Time + Inspection Time
+ Move Time + Queue Time
Delivery Cycle Time
Order Received
Production Started
Goods Shipped
Throughput Time
Delivery Performance Measures
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Quick Check A TQM team at Narton Corp has recorded the following
average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the throughput time?
a. 10.4 days.
b. 0.2 days.
c. 4.1 days.
d. 13.4 days.
A TQM team at Narton Corp has recorded the following
average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the throughput time?
a. 10.4 days.
b. 0.2 days.
c. 4.1 days.
d. 13.4 days.
![Page 77: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/77.jpg)
Quick Check A TQM team at Narton Corp has recorded the following
average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the throughput time?
a. 10.4 days.
b. 0.2 days.
c. 4.1 days.
d. 13.4 days.
A TQM team at Narton Corp has recorded the following
average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the throughput time?
a. 10.4 days.
b. 0.2 days.
c. 4.1 days.
d. 13.4 days.
Throughput time = Process + Inspection + Move + Queue
= 0.2 days + 0.4 days + 0.5 days + 9.3 days
= 10.4 days
![Page 78: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/78.jpg)
Quick Check A TQM team at Narton Corp has recorded the following
average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the Manufacturing Cycle Efficiency (MCE)?
a. 50.0%.
b. 1.9%.
c. 52.0%.
d. 5.1%.
A TQM team at Narton Corp has recorded the following
average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the Manufacturing Cycle Efficiency (MCE)?
a. 50.0%.
b. 1.9%.
c. 52.0%.
d. 5.1%.
![Page 79: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/79.jpg)
Quick Check A TQM team at Narton Corp has recorded the following
average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the Manufacturing Cycle Efficiency (MCE)?
a. 50.0%.
b. 1.9%.
c. 52.0%.
d. 5.1%.
A TQM team at Narton Corp has recorded the following
average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the Manufacturing Cycle Efficiency (MCE)?
a. 50.0%.
b. 1.9%.
c. 52.0%.
d. 5.1%.
MCE = Value-added time ÷ Throughput time
= Process time ÷ Throughput time
= 0.2 days ÷ 10.4 days
= 1.9%
![Page 80: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/80.jpg)
Quick Check
A TQM team at Narton Corp has recorded the following
average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the delivery cycle time (DCT)?
a. 0.5 days.
b. 0.7 days.
c. 13.4 days.
d. 10.4 days.
A TQM team at Narton Corp has recorded the following
average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the delivery cycle time (DCT)?
a. 0.5 days.
b. 0.7 days.
c. 13.4 days.
d. 10.4 days.
![Page 81: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/81.jpg)
Quick Check A TQM team at Narton Corp has recorded the following
average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the delivery cycle time (DCT)?
a. 0.5 days.
b. 0.7 days.
c. 13.4 days.
d. 10.4 days.
A TQM team at Narton Corp has recorded the following
average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the delivery cycle time (DCT)?
a. 0.5 days.
b. 0.7 days.
c. 13.4 days.
d. 10.4 days. DCT = Wait time + Throughput time
= 3.0 days + 10.4 days
= 13.4 days
![Page 82: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/82.jpg)
Demonstration Case 3
Usage and Cost Variances
Variable Costs Per
Unit
Standard Actual
Direct Materials Cost $16.00 $16.34
Direct Labor Cost 12.00 10.92
Overhead Cost 14.00 14.20
Total $42.00 41.46
Expected Fixed Cost
Manufacturing $120,400 $114,000
# of Units 43,000 44,000
![Page 83: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/83.jpg)
Demonstration Case
Material Usage and Cost Variances
Variable Costs Per
Unit
Standard Actual
Direct Materials Cost $16.00 $16.34
# board Feet/unit 8 ft 8.6 ft
Cost per bd foot $2 $1.90
![Page 84: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/84.jpg)
Material Flexible-Budget Variances
Total flexible-budget variance
= Total actual results
– Total flexible-budget planned results
Flexible-budget variances
Actual Results
16.34 x 44,000 $(718,960)
Flexible Budget
16.00 x 44,000 $(704,000)
$14,960 Unfavorable
![Page 85: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/85.jpg)
Material Cost and
Volume Variances
Actual Quantity
Used
×
Actual (fixed) Cost
Actual Quantity
Used
×
Standard (fixed) Cost
Standard
Quantity
×
Standard (fixed) Cost
44,000
×
8.6 ft
x
$1.90
$718,960
44,000
x
8.6 ft
x
$2/ ft
756,800
Cost Variance
$37,960 Favorable
44,000
x
8 ft
x
$2/ft
$704,000
Volume Variance
$52,800 Unfavorable
Total Variance
$14,960 UnFavorable
Actual Cost
Column
Variance Dividing
Column
Flexible Standard Cost
Column
![Page 86: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/86.jpg)
Demonstration Case
Labor Usage and Cost
Variances
Variable Costs Per
Unit
Standard Actual
Direct Labor Cost $12.00 $10.92
# hours /unit 1.5 hr 1.4 hrs
Labor cost/hr $8.00 $7.80
![Page 87: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/87.jpg)
Labor Flexible-Budget Variances
Total flexible-budget variance
= Total actual results
– Total flexible-budget planned results
Flexible-budget variances
Actual Results
10.92 x 44,000 $(480,480)
Flexible Budget
12.00 x 44,000 $(528,000)
$47,520 Favorable
![Page 88: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/88.jpg)
Labor Cost and
Volume Variances
Actual Quantity
Used
×
Actual (fixed) Cost
Actual Quantity
Used
×
Standard (fixed) Cost
Standard
Quantity
×
Standard (fixed) Cost
×
1.4 hr
x
$7.80
$480,480
44,000 44,000
x
1.4 hr
x
$ 8.00
492,800
Cost Variance
$12,320 Favorable
44,000
x
1.5 hr
x
$ 8.00
$528,000
Volume Variance
$35,200 Favorable
Total Variance
$47,520 Favorable
Actual Cost
Column
Variance Dividing
Column
Flexible Standard Cost
Column
![Page 89: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/89.jpg)
Demonstration Case
Variable MFG Overhead Usage and
Cost Variances
Variable Costs Per
Unit
Standard Actual
Overhead Cost $14.00 $14.20
![Page 90: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/90.jpg)
Variable MFG Overhead Flexible-Budget
Variances
Total flexible-budget variance
= Total actual results
– Total flexible-budget planned results
Flexible-budget variances
Actual Results
14.20 x 44,000 $(624,000)
Flexible Budget
14.00 x 44,000 $(616,000)
$8,800 Unfavorable
![Page 91: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/91.jpg)
Demonstration Case
Summary of Usage and Cost Variances
Variable Costs Per
Unit
Standard Actual Variance
Direct Materials Cost $16.00 $16.34 $14, 960 UF
Direct Labor Cost 12.00 10.92 $ 47,520 F
Overhead Cost 14.00 14.20 $ 8,800 UF
Total $42.00 41.46 $ 23,760 F
Expected Fixed Cost
Manufacturing $120,400 $114,000 $ 6,400 F
# of Units 43,000 44,000
![Page 92: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/92.jpg)
Demonstration Case
Fixed Overhead Volume and
SpendingVariances
Variable Costs Per
Unit
Standard Actual
OVH Cost $120,400 $114,000
Cost/unit 2.80 2.59 (114,000/44,000=2.59)
Total Units 43,000 44,000
![Page 93: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/93.jpg)
Fixed Overhead Flexible-
Budget Variances
Total flexible-budget variance
= Total actual results
– Total flexible-budget planned results
Flexible-budget variances
Actual Results
2.59 x 44,000 $(114,000) rnd
Master Budget
2.80 x 43,000 $(120,400)
$6,400 Favorable
![Page 94: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/94.jpg)
Fixed Overhead Spending and
Volume Variances
Actual Quantity
Used
×
Actual (fixed) Cost
Standard Quantity
Used
×
Standard (fixed) Cost
Actual
Quantity
×
Standard (fixed) Cost
44,000
×
2.59
114,000
43,000
x
2.80
120,400
Spending Variance
$6,400 Favorable
44,000
x
2.80
$123,200
Volume Variance
$2,800 Favorable
Actual Cost
Column
Master Budget Dividing
Column
Flexible Standard Cost
Column
Total Variance
$9,200 Favorable
![Page 95: Standard Costs and Operating Performance Measurescabrillo.edu/~mbooth/acct1b/Week 11_12 Chap 10 Garrison 14e.pdf · Standard Costs Standards are ... Variance Analysis Cycle Prepare](https://reader031.vdocuments.mx/reader031/viewer/2022022508/5ad130257f8b9a05208b624b/html5/thumbnails/95.jpg)
Assignments:
See web: http//cabrillo.edu/~mbooth
This will be updated weekly
Note: Use McGrawHill CONNECT manager to submit assignments