flexible budgeting and standard costing

8/11/2019 Flexible Budgeting and Standard Costing

1/61

8

PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Flexible Budgets, StandardCosts, and Variance AnalysisChapter 08

8-2

Variance Analysis Cycle

Conduct nextperiods

operations

Identifyquestions

Receiveexplanations

Takecorrective

actions

Analyzevariances

Prepare standardcost performance

report

Begin


2/61

8

8-3

Learning Objective 1

Prepare a flexiblebudget.

8-4

Characteristics of Flexible Budgets

Planning budgetsare prepared fora single, plannedlevel of activity.

Performance

evaluation is difficultwhen actual activity

differs from the plannedlevel of activity.

Hmm! Comparingstatic planning budgets

with actual costsis like comparing

apples and oranges.


3/61

8

8-5

Improve performance evaluation.

May be prepared for any activitylevel in the relevant range.

Show costs that should have beenincurred at the actual level ofactivity, enabling apples to applescost comparisons.

Help managers control costs.

Lets look at Larrys Lawn Service.

Characteristics of Flexible Budgets

8-6

Larrys Lawn Service provides lawn care in a plannedcommunity where all lawns are approximately the same size.At the end of May, Larry prepared his June budget based onmowing 500 lawns. Since all of the lawns are similar in size,Larry felt that the number of lawns mowed in a month wouldbe the best way to measure overall activity for his business.

Larrys Budget

Deficiencies of the Static Planning Budget


4/61

8

8-7

Deficiencies of the Static Planning BudgetLarrys Planning Budget

8-8

Deficiencies of the Static Planning BudgetLarrys Actual Results


5/61

8

8-9


Larrys Actual Results Compared with the Planning Budget

8-10


Larrys Actual Results Compared with the Planning Budget

F = Favorable variance that occurs whenactual costs are less than budgeted costs.

U = Unfavorable variance that occurs when

actual costs are greater than budgeted costs.

F = Favorable variance that occurs when actualrevenue is greater than budgeted revenue.


6/61

8

8-11

Deficiencies of the Static Planning BudgetLarrys Actual Results Compared with the Planning Budget

Since these variances are favorable, hasLarry done a good job controlling costs?

Since these variances are unfavorable, hasLarry done a poor job controlling costs?

8-12

I dont think Ican answer thequestions usinga static budget.

Actual activity is aboveplanned activity.

So, shouldnt the variablecosts be higher if actual

activity is higher?



7/61

8

8-13

The relevant question is . . .

How much of the cost variances aredue to higher activity and how muchare due to cost control?

To answer the question,we must

the budget to theactual level of activity.


8-14

How a Flexible Budget Works

To a budget, we need to know that:

Total variable costs changein direct proportion tochanges in activity.

Total fixed costs remain

unchanged within therelevant range.

Fixed


8/61

8

8-15

Lets prepare abudget

for Larrys LawnService.

How a Flexible Budget Works

8-16

Preparing a Flexible BudgetLarrys Flexible Budget


9/61

8

8-17

Quick CheckWhat should the total wages and salaries costbe in a flexible budget for 600 lawns?

a. $18,000.

b. $20,000.

c. $23,000.

d. $25,000.

8-18

Quick CheckWhat should be the total wages and salariescost in a flexible budget for 600 lawns?

a. $18,000

b. $20,000.

c. $23,000.

d. $25,000.

Total wages and salaries cost

= $5,000 + ($30 per lawn 600 lawns)

$5,000 + $18,000 = $23,000

What should the total wages and salaries costbe in a flexible budget for 600 lawns?

a. $18,000.

b. $20,000.

c. $23,000.

d. $25,000.


10/61

8-

8-19


Prepare a reportshowing revenue andspending variances.

8-20

Revenue and Spending Variances

Flexible budget revenue Actual revenue

The difference is a revenue variance.The difference is a revenue variance.

Flexible budget cost Actual cost

The difference is a spending variance.The difference is a spending variance.


11/61

8-

8-21

Now, lets use budgeting

concepts to compute revenue andspending variances for Larrys Lawn

Service.


8-22

Revenue and Spending VariancesLarrys Flexible Budget Compared with the Actual Results

$1,750 favorable$1,750 favorablerevenue variancerevenue variance


12/61

8-

8-23

Larrys Flexible Budget Compared with the Actual Results


Spendingvariances

8-24


Prepare a flexible budgetwith more than one cost

driver.


13/61

8-

8-25

More than one costdriver may be needed toadequately explain all of

the costs in an organization.

The cost formulas usedto prepare a flexible

budget can be adjustedto recognize multiple

cost drivers.

Flexible Budgets with Multiple Cost

Drivers

8-26

Because of the large unfavorable wages and salaries spendingvariance, Larry decided to add an additional cost driver for

wages and salaries. The variance is due primarily to the numberof hours required for the additional edging and trimming. So

Larry estimates the additional hours and builds those hours intoboth his revenue and expense budget formulas.

Larrys New Budget

Flexible Budgets with Multiple CostDrivers


14/61

8-

8-27

Flexible Budgets with Multiple Cost

DriversLarrys Budget Based on More than One Cost Driver

8-28

Standard Costs

Standards are benchmarks or norms formeasuring performance. In managerial accounting,

two types of standards are commonly used.

Quantity standardsspecify how much of aninput should be used to

make a product orprovide a service.

Price standardsspecify how muchshould be paid for

each unit of theinput.

Examples: Firestone, Sears, McDonalds, hospitals,construction, and manufacturing companies.


15/61

8-

8-29

Setting Direct Materials Standards

Standard PriceStandard Priceper Unitper Unit

Summarized ina Bill of Materials.

Final, deliveredcost of materials,net of discounts.

Standard QuantityStandard Quantityper Unitper Unit

8-30

Setting Direct Labor Standards

Use time andmotion studies for

each labor operation.

Standard Hoursper Unit

Often a singlerate is used that reflectsthe mix of wages earned.

Standard Rateper Hour


16/61

8-

8-31

Setting Variable Manufacturing Overhead

Standards

The rate is thevariable portion of the

predetermined overheadrate.

PriceStandard

The quantity isthe activity in the

allocation base forpredetermined overhead.

QuantityQuantityStandardStandard

8-32

The Standard Cost Card

A standard cost card for one unit ofproduct 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


17/61

8-

8-33

Using Standards in Flexible Budgets

Standard costs per unit for direct materials, directlabor, and variable manufacturing overhead can beused to compute activity and spending variances.

Spending variances become moreSpending variances become moreuseful by breaking them down intouseful by breaking them down into

quantity and price variances.quantity and price variances.

8-34

A General Model for Variance Analysis

Variance Analysis

Price Variance

Difference betweenDifference betweenactual price andactual price andstandard pricestandard price

Quantity Variance

Difference betweenDifference betweenactual quantity andactual quantity andstandard quantitystandard quantity


18/61

8-

8-35

Quantity and Price Standards

Quantity and price standards areQuantity and price standards aredetermined separately for two reasons:determined separately for two reasons:

The purchasing manager is responsible for rawmaterial purchase prices and the production manageris 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 aperiod of time before being used in production.

8-36

Variance Analysis

Materials price varianceMaterials price varianceLabor rate varianceLabor rate varianceVOH rate varianceVOH rate variance

Materials quantity varianceMaterials quantity varianceLabor efficiency varianceLabor efficiency varianceVOH efficiency varianceVOH efficiency variance


Quantity Variance Price Variance


19/61

8-

8-37


Quantity Variance(2) (1)

Price Variance(3) (2)

(1)Standard Quantity

Allowed for Actual Output,at Standard Price

(SQ SP)

(2)Actual Quantity

of Input,at Standard Price

(AQ SP)

(3)Actual Quantity

of Input,at Actual Price

(AQ AP)

Spending Variance(3) (1)

8-38


Actual quantity is the amount of direct materials, directlabor, and variable manufacturing overhead actually used.





(SQ SP)

(2)Actual Quantity


(AQ SP)

(3)Actual Quantity


(AQ AP)



20/61

8-

8-39


Standard quantity is the standard quantity allowedfor the actual output of the period.





(SQ SP)

(2)Actual Quantity


(AQ SP)

(3)Actual Quantity


(AQ AP)


8-40


Actual price is the amount actuallypaid for the input used.





(SQ SP)

(2)Actual Quantity


(AQ SP)

(3)Actual Quantity


(AQ AP)



21/61


22/61

8-

8-43

Glacier Peak Outfitters has the following directmaterials 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 andused to make 2,000 parkas. The materials cost a

total of $1,029.

Materials Variances An Example

8-44

200 kgs. 210 kgs. 210 kgs.

$5.00 per kg. $5.00 per kg. $4.90 per kg.

= $1,000 = $1,050 = $1,029

Quantity variance$50 unfavorable

Price variance$21 favorable

Materials Variances Summary

Standard Quantity Actual Quantity Actual Quantity

Standard Price Standard Price Actual Price


23/61

8-

8-45


200 kgs. 210 kgs. 210 kgs.


= $1,000 = $1,050 = $1,029





0.1 kg per parka 2,000 parkas= 200 kgs

8-46


200 kgs. 210 kgs. 210 kgs.


= $1,000 = $1,050 = $1,029





$1,029 210 kgs= $4.90 per kg


24/61

8-

8-47

Materials Variances:

Using the Factored EquationsMaterials quantity variance

MQV = (AQ SP) (SQ SP)

= 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

Materials price variance

MPV = (AQ AP) (AQ SP)

= AQ(AP SP)

= 210 kgs ($4.90/kg $5.00/kg)

= 210 kgs ( $0.10/kg) = $21 F

8-48

Materials Price VarianceMaterials Quantity Variance

Production Manager Purchasing Manager

The standard price is used to compute the quantity varianceso that the production manager is not held responsible for

the purchasing managers performance.

Responsibility for MaterialsVariances


25/61

8-

8-49

I am not responsible forthis unfavorable materials

quantity variance.

You purchased cheapmaterial, so my peoplehad to use more of it.

Your poor schedulingsometimes requires me torush order materials at a

higher price, causingunfavorable price variances.

Responsibility for Materials Variances

Production Manager Purchasing Manager

8-50

Hanson Inc. has the following direct materialsstandard to manufacture one Zippy:

1.5 pounds per Zippy at $4.00 per pound

Last week, 1,700 pounds of materials were

purchased and used to make 1,000 Zippies. Thematerials cost a total of $6,630.

ZippyQuick Check


26/61

8-

8-51

ZippyQuick Check

How many pounds of materials should Hansonhave used to make 1,000 Zippies?

a. 1,700 pounds.

b. 1,500 pounds.

c. 1,200 pounds.

d. 1,000 pounds.

8-52

ZippyQuick Check

How many pounds of materials should Hansonhave used to make 1,000 Zippies?

a. 1,700 pounds.

b. 1,500 pounds.

c. 1,200 pounds.

d. 1,000 pounds. The standard quantity is:1,000 1.5 pounds per Zippy.


27/61

8-

8-53

Hansons materials quantity variance (MQV)for the week was:

a. $170 unfavorable.

b. $170 favorable.

c. $800 unfavorable.

d. $800 favorable.

ZippyQuick Check

8-54

Hansons materials quantity variance (MQV)for the week was:


b. $170 favorable.


d. $800 favorable.MQV = SP(AQ - SQ)MQV = $4.00(1,700 lbs - 1,500 lbs)MQV = $800 unfavorable

ZippyQuick Check


28/61

8-

8-55

Hansons materials price variance (MPV)for the week was:


b. $170 favorable.


d. $800 favorable.

ZippyQuick Check

8-56

Hansons materials price variance (MPV)for the week was:


b. $170 favorable.


d. $800 favorable. MPV = AQ(AP - SP)MPV = 1,700 lbs. ($3.90 -4.00)MPV = $170 Favorable

ZippyQuick Check


29/61

8-

8-57

1,500 lbs. 1,700 lbs. 1,700 lbs.

$4.00 per lb. $4.00 per lb. $3.90 per lb.

= $6,000 = $ 6,800 = $6,630



ZippyQuick Check



8-58

1,500 lbs. 1,700 lbs. 1,700 lbs.

$4.00 per lb. $4.00 per lb. $3.90 per lb.

= $6,000 = $ 6,800 = $6,630



ZippyQuick Check



Recall that the standard quantity for 1,000 Zippiesis 1,000 1.5 pounds per Zippy = 1,500 pounds.


30/61

8-

8-59


Compute the direct laborefficiency and rate

variances and explaintheir significance.

8-60

Glacier Peak Outfitters has the following direct laborstandard for its mountain parka.

1.2 standard hours per parka at $10.00 per hour

Last month, employees actually worked 2,500 hoursat a total labor cost of $26,250 to make 2,000

parkas.

Labor Variances An Example


31/61

8-

8-61

Efficiency variance$1,000 unfavorable

Rate variance$1,250 unfavorable

Standard Hours Actual Hours Actual Hours

Standard Rate Standard Rate Actual Rate

Labor Variances Summary

2,400 hours 2,500 hours 2,500 hours

$10.00 per hour $10.00 per hour $10.50 per hour

= $24,000 = $25,000 = $26,250

8-62








= $24,000 = $25,000 = $26,250

1.2 hours per parka 2,000parkas = 2,400 hours


32/61

8-

8-63








= $24,000 = $25,000 = $26,250

$26,250 2,500 hours= $10.50 per hour

8-64

Labor Variances: Using the FactoredEquationsLabor efficiency variance

LEV = (AH SR) (SH SR)

= SR (AH SH)

= $10.00 per hour (2,500 hours 2,400 hours)

= $10.00 per hour (100 hours)

= $1,000 unfavorable

Labor rate variance

LRV = (AH

AR) (AH

SR)= AH (AR SR)

= 2,500 hours ($10.50 per hour $10.00 per hour)

= 2,500 hours ($0.50 per hour)

= $1,250 unfavorable


33/61

8-

8-65

Responsibility for Labor Variances

Production Manager

Production managers areusually held accountable

for labor variancesbecause they can

influence the:

Mix of skill levelsassigned to work tasks.

Level of employeemotivation.

Quality of productionsupervision.

Quality of trainingprovided to employees.

8-66

I am not responsible forthe unfavorable laborefficiency variance!

You purchased cheapmaterial, so it took more

time to process it.

I think it took more timeto process the

materials because theMaintenance

Department has poorlymaintained your

equipment.

Responsibility for Labor Variances


34/61

8-

8-67

Hanson Inc. has the following direct laborstandard to manufacture one Zippy:

1.5 standard hours per Zippy at$12.00 per direct labor-hour

Last week, 1,550 direct labor-hours wereworked at a total labor cost of $18,910

to make 1,000 Zippies.

ZippyQuick Check

8-68

Hansons labor efficiency variance (LEV)for the week was:


b. $590 favorable.


d. $600 favorable.

ZippyQuick Check


35/61

8-

8-69

Hansons labor efficiency variance (LEV)for the week was:


b. $590 favorable.


d. $600 favorable.

LEV = SR(AH - SH)LEV = $12.00(1,550 hrs - 1,500 hrs)LEV = $600 unfavorable

ZippyQuick Check

8-70

Hansons labor rate variance (LRV) for theweek was:


b. $310 favorable.


d. $300 favorable.

ZippyQuick Check


36/61

8-

8-71

Hansons labor rate variance (LRV) for theweek was:


b. $310 favorable.


d. $300 favorable.

LRV = AH(AR - SR)LRV = 1,550 hrs($12.20 - $12.00)LRV = $310 unfavorable

ZippyQuick Check

8-72

Efficiency variance$600 unfavorable

Rate variance$310 unfavorable



= $18,000 = $18,600 = $18,910

ZippyQuick Check




37/61

8-

8-73


Compute the variablemanufacturing overhead

efficiency and ratevariances and explain

their significance.

8-74

Glacier Peak Outfitters has the following directvariable 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 variablemanufacturing overhead for the month was$10,500.

Variable Manufacturing OverheadVariances An Example


38/61

8-

8-75



= $9,600 = $10,000 = $10,500



Variable Manufacturing Overhead

Variances SummaryStandard Hours Actual Hours Actual Hours


8-76

Variable Manufacturing OverheadVariances Summary



= $9,600 = $10,000 = $10,500





1.2 hours per parka 2,000parkas = 2,400 hours


39/61

8-

8-77

Variable Manufacturing Overhead

Variances Summary



= $9,600 = $10,000 = $10,500





$10,500 2,500 hours= $4.20 per hour

8-78

Variable Manufacturing OverheadVariances: Using Factored EquationsVariable manufacturing overhead efficiency variance

VMEV = (AH SR) (SH SR)

= SR (AH SH)

= $4.00 per hour (2,500 hours 2,400 hours)

= $4.00 per hour (100 hours)

= $400 unfavorable

Variable manufacturing overhead rate variance

VMRV = (AH AR) (AH SR)= AH (AR SR)

= 2,500 hours ($4.20 per hour $4.00 per hour)

= 2,500 hours ($0.20 per hour)

= $500 unfavorable


40/61

8-

8-79

Hanson Inc. has the following variablemanufacturing 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 forvariable manufacturing overhead.

ZippyQuick Check

8-80

Hansons efficiency variance (VMEV) forvariable manufacturing overhead for the weekwas:


b. $435 favorable.

c. $150 unfavorable.d. $150 favorable.

ZippyQuick Check


41/61

8-

8-81

Hansons efficiency variance (VMEV) forvariable manufacturing overhead for the weekwas:


b. $435 favorable.


d. $150 favorable.VMEV = SR(AH - SH)VMEV = $3.00(1,550 hrs - 1,500 hrs)VMEV = $150 unfavorable

1,000 units 1.5 hrs per unit

ZippyQuick Check

8-82

Hansons rate variance (VMRV) for variablemanufacturing overhead for the week was:


b. $400 favorable.


d. $300 favorable.

ZippyQuick Check


42/61

8-

8-83

Hansons rate variance (VMRV) for variablemanufacturing overhead for the week was:


b. $400 favorable.


d. $300 favorable.

VMRV = AH(AR - SR)VMRV = 1,550 hrs($3.30 - $3.00)VMRV = $465 unfavorable

ZippyQuick Check

8-84





= $4,500 = $4,650 = $5,115

ZippyQuick Check




43/61

8-

8-85

Materials VariancesAn Important

Subtlety

The quantity varianceis computed only on

the quantity used.

The price variance iscomputed on the entire

quantity purchased.

8-86

Glacier Peak Outfitters has the following directmaterials 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 at a

cost of $1,029. Glacier used 200 kgs. to make2,000 parkas.

Materials VariancesAn ImportantSubtlety


44/61

8-

8-87

200 kgs. 200 kgs.

$5.00 per kg. $5.00 per kg.

= $1,000 = $1,000

Quantity variance$0

Standard Quantity Actual Quantity

Standard Price Standard Price

Materials VariancesAn Important

Subtlety

8-88

210 kgs. 210 kgs.

$5.00 per kg. $4.90 per kg.

= $1,050 = $1,029


Actual Quantity Actual Quantity

Standard Price Actual Price

Materials VariancesAn ImportantSubtlety


45/61

8-

8-89

Variance Analysis and Management by

Exception

How do I know

which variances toinvestigate?

Larger variances, indollar amount or as

a percentage of thestandard, are

investigated first.

8-90

Advantages of Standard Costs

Management byexception

Advantages

Promotes economyand efficiency

Simplifiedbookkeeping

Enhancesresponsibility

accounting


46/61

8-

8-91

PotentialProblems

Emphasis onnegative may

impact morale.

Emphasizing standardsmay exclude other

important objectives.

Favorablevariances may

be misinterpreted.

Continuousimprovement maybe more important

than meeting standards.

Standard costreports may

not be timely.

Invalid assumptionsabout the relationship

between laborcost and output.

Potential Problems with Standard Costs



PREDETERMINED OVERHEADRATES AND OVERHEAD

ANALYSIS IN A STANDARDCOSTING SYSTEM

Appendix 8A


47/61

8-

8-93


(Appendix 8A)

Compute and interpretthe fixed overheadvolume and budget

variances.

8-94

Volumevariance

Fixed Overhead Volume VarianceFixed

OverheadApplied

ActualFixed

Overhead

BudgetedFixed

Overhead

Volumevariance

Fixedoverheadapplied to

work in process

Budgetedfixed

overhead=


48/61

8-

8-95

FPOHR = Fixed portion of the predetermined overhead rateDH = Denominator hoursSH = Standard hours allowed for actual output

SH FR DH FR

Fixed Overhead Volume Variance

Volume variance FPOHR (DH SH)=

FixedOverheadApplied

ActualFixed

Overhead

BudgetedFixed

Overhead

Volumevariance

8-96

Budgetvariance

Fixed Overhead Budget Variance

Budgetvariance

Budgetedfixed

overhead

Actualfixed

overhead=

FixedOverheadApplied

ActualFixed

Overhead

BudgetedFixed

Overhead


49/61

8-

8-97

Computing Fixed Overhead Variances

Budgeted production 30,000 units

Standard machine-hours per unit 3 hours

Budgeted machine-hours 90,000 hours

Actual production 28,000 units

Standard machine-hours allowed for the actual production 84,000 hours

Actual machine-hours 88,000 hours

Production and Machine-Hour Data

ColaCo

8-98

Computing Fixed Overhead Variances

Budgeted variable manufacturing overhead 90,000$

Budgeted fixed manufacturing overhead 270,000Total budgeted manufacturing overhead 360,000$

Actual variable manufacturing overhead 100,000$

Actual fixed manufacturing overhead 280,000Total actual manufacturing overhead 380,000$

ColaCo

Cost Data


50/61

8-

8-99

Predetermined Overhead Rates

Predeterminedoverhead rate

Estimated total manufacturing overhead costEstimated total amount of the allocation base

=


$360,00090,000 Machine-hours

=

Predetermined

overhead rate

= $4.00 per machine-hour

8-100

Predetermined Overhead Rates

Variable component of thepredetermined overhead rate

$90,00090,000 Machine-hours

=

Variable component of thepredetermined overhead rate


Fixed component of the

predetermined overhead rate

$270,000

90,000 Machine-hours=

Fixed component of thepredetermined overhead rate



51/61

8-

8-101

Applying Manufacturing Overhead

Overheadapplied


Standard hours allowedfor the actual output

=

Overheadapplied

$4.00 permachine-hour

84,000 machine-hours=

Overheadapplied

$336,000=

8-102

Computing the Volume Variance

Volumevariance

Fixedoverheadapplied to

work in process

Budgetedfixed

overhead=

Volumevariance

= $18,000 Unfavorable

Volume

variance

= $270,000$3.00 per

machine-hour

( $84,000machine-hours

)


52/61

8-

8-103

Computing the Volume Variance

FPOHR = Fixed portion of the predetermined overhead rateDH = Denominator hoursSH = Standard hours allowed for actual output

Volume variance FPOHR (DH SH)=

Volumevariance

=$3.00 per

machine-hour (90,000

mach-hours

84,000mach-hours)

Volumevariance

= 18,000 Unfavorable

8-104

Computing the Budget Variance

Budgetvariance

Budgetedfixed

overhead

Actualfixed

overhead=

Budgetvariance

= $280,000 $270,000

Budgetvariance

= $10,000 Unfavorable


53/61

8-

8-105

A Pictorial View of the Variances

Fixed OverheadApplied to

Work in Process

ActualFixed

Overhead

BudgetedFixed

Overhead

280,000270,000252,000

Total variance, $28,000 unfavorable

Budget variance,$10,000 unfavorable

Volume variance,$18,000 unfavorable

8-106

Fixed Overhead Variances A Graphic Approach

Lets look at agraph showingfixed overhead

variances. We willuse ColaCos

numbers from theprevious example.


54/61

8-

8-107

Graphic Analysis of Fixed

Overhead Variances

Machine-hours (000)

Budget$270,000

90

Denominatorhours

00

8-108

Graphic Analysis of FixedOverhead VariancesActual

$280,000

Machine-hours (000)

Budget$270,000

90

Denominatorhours

00

Budget Variance 10,000 U{


55/61

8-

8-109

Applied$252,000

Machine-hours (000)

Budget$270,000

Graphic Analysis of Fixed

Overhead Variances

908400

Standardhours

Denominatorhours

Budget Variance 10,000 U

Volume Variance 18,000 U

{{

Actual$280,000

8-110

Reconciling Overhead Variances andUnderapplied or Overapplied Overhead

In a standardIn a standardcost system:cost system:

Unfavorablevariances are equivalent

to underapplied overhead.

Favorablevariances are equivalentto overapplied overhead.

The sum of the overhead variancesequals the under- or overapplied

overhead cost for the period.


56/61

8-

8-111

Predetermined overhead rate (a) 4.00$ per machine-hour

Standard hours allowed for the actual output (b) 84,000 machine-hours

Manufacturing overhead applied (a) (b) 336,000$

Actual manufacturing overhead 380,000$

Manufacturing overhead underapplied or

overapplied 44,000$ underapplied

Computation of Underapplied Overhead

ColaCo

Reconciling Overhead Variances and

Underapplied or Overapplied Overhead

8-112

Computing the Variable OverheadVariances

Variable manufacturing overhead efficiency varianceVMEV = (AH SR) (SH SR)

= $88,000 (84,000 hours $1.00 per hour)= $4,000 unfavorable


57/61

8-

8-113

Computing the Variable Overhead

Variances

Variable manufacturing overhead rate varianceVMRV = (AH AR) (AH SR)

= $100,000 (88,000 hours $1.00 per hour)= $12,000 unfavorable

8-114

Computing the Sum of All Variances

Variable overhead rate variance 12,000$ U

Variable overhead efficiency variance 4,000 U

Fixed overhead budget variance 10,000 U

Fixed overhead volume variance 18,000 U Total of the overhead variances 44,000$ U

Computing the Sum of All variances

ColaCo


58/61

8-



GENERAL LEDGER ENTRIES TORECORD VARIANCES

Appendix 8B

8-116


(Appendix 8B)

Prepare journal entriesto record standard

costs and variances.


59/61

8-

8-117

Glacier Peak Outfitters RevisitedWe will use information from the Glacier Peak Outfitters

example presented earlier in the chapter to illustrate journalentries for standard cost variances. Recall the following:

Material

AQ AP = $1,029AQ SP = $1,050SQ SP = $1,000MPV = $21 FMQV = $50 U

Labor

AH AR = $26,250AH SR = $25,000SH SR = $24,000LRV = $1,250 ULEV = $1,000 U

Now, lets prepare the entries to recordthe labor and material variances.

8-118

GENERAL JOURNAL Page 4

Date Description

Post.

Ref. Debit Credit

Raw Materials 1,050

Materials Price Variance 21

Accounts Payable 1,029

To record the purchase of material

Work in Process 1,000

Materials Quantity Variance 50

Raw Materials 1,050

To record the use of material

Recording Materials Variances


60/61

8-

8-119

GENERAL JOURNAL Page 4

Date Description

Post.

Ref. Debit Credit

Work in Process 24,000

Labor Rate Variance 1,250

Labor Efficiency Variance 1,000

Wages Payable 26,250

To record direct labor

Recording Labor Variances

8-120

Cost Flows in a Standard Cost System

Inventories are recorded at standard cost.

Variances are recorded as follows:

Favorable variances are credits, representingsavings in production costs.

Unfavorable variances are debits, representingexcess production costs.

Standard cost variances are usually closed outto cost of goods sold.

Unfavorable variances increase cost of goods sold.

Favorable variances decrease cost of goods sold.


61/61

8-

8-121

End of Chapter 08

flexible budgeting and standard costing

Documents