PowerPoint Authors:
Susan Coomer Galbreath, ., CPA
Charles W. Caldwell, ., CMA
Jon A. Booker, ., CPA, CIA
Cynthia J. Rooney, ., CPA
Copyright © 2015 by McGraw-Hill Education. All rights reserved.
Standard Costs and Variances
Chapter 10
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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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Setting Direct Materials Standards
Standard Price
per Unit
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Setting Direct Labor Standards
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Setting Variable Manufacturing Overhead Standards
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The Standard Cost Card
A standard cost card for one unit of product might look like this:
Sheet1
A B A x B
Standard Standard Standard
Quantity Price Cost
Inputs or Hours or Rate per Unit
Direct materials lbs. $ per lb. $
Direct labor hours per hour
Variable mfg. overhead hours per hour
Total standard unit cost $
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Sheet13
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Using Standards in Flexible Budgets
Standard costs per unit for direct materials, direct labor, and variable manufacturing overhead can be used to compute activity and spending variances.
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A General Model for Variance Analysis
Variance Analysis
Difference between
actual price and
standard price
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Price and Quantity Standards
Price and quantity standards are determined separately for two reasons:
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Variance Analysis
Materials quantity variance
Labor efficiency variance
VOH efficiency variance
A General Model for Variance Analysis
Price Variance
Quantity Variance
Materials price variance
Labor rate variance
VOH rate variance
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A General Model for Variance Analysis
Price Variance
(2) – (1)
Quantity Variance
(3) – (2)
(3)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ × SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ × SP)
(1)
Actual Quantity
of Input,
at Actual Price
(AQ × AP)
Spending Variance
(3) – (1)
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A General Model for Variance Analysis
Actual quantity is the amount of direct materials, direct labor, and variable manufacturing overhead actually used.
Price Variance
(2) – (1)
Quantity Variance
(3) – (2)
(3)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ × SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ × SP)
(1)
Actual Quantity
of Input,
at Actual Price
(AQ × AP)
Spending Variance
(3) – (1)
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A General Model for Variance Analysis
Standard quantity is the standard quantity allowed for the actual output of the period.
Price Variance
(2) – (1)
Quantity Variance
(3) – (2)
(3)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ × SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ × SP)
(1)
Actual Quantity
of Input,
at Actual Price
(AQ × AP)
Spending Variance
(3) – (1)
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A General Model for Variance Analysis
Actual price is the amount actually
paid for the input used.
Price Variance
(2) – (1)
Quantity Variance
(3) – (2)
(3)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ × SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ × SP)
(1)
Actual Quantity
of Input,
at Actual Price
(AQ × AP)
Spending Variance
(3) – (1)
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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
(2) – (1)
Quantity Variance
(3) – (2)
(3)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ × SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ × SP)
(1)
Actual Quantity
of Input,
at Actual Price
(AQ × AP)
Spending Variance
(3) – (1)
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Learning Objective 1
Compute the direct materials price and quantity variances and explain their significance.
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Glacier Peak Outfitters has the following direct materials standard for the fiberfill in its mountain parka.
kg. of fiberfill per parka at $ per kg.
Last month 210 kgs. of fiberfill were purchased and used to make 2,000 parkas. The materials cost a total of $1,029.
Materials Variances – An Example
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210 kgs. 210 kgs. 200 kgs.
× × ×
$ per kg. $ per kg. $ per kg.
= $1,029 = $1,050 = $1,000
Materials Variances Summary
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
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Materials Variances Summary
210 kgs. 210 kgs. 200 kgs.
× × ×
$ per kg. $ per kg. $ per kg.
= $1,029 = $1,050 = $1,000
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
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Materials Variances Summary
210 kgs. 210 kgs. 200 kgs.
× × ×
$ per kg. $ per kg. $ per kg.
= $1,029 = $1,050 = $1,000
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
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Materials Variances:
Using the Factored Equations
Materials price variance
MPV = (AQ × AP) – (AQ × SP)
= AQ(AP – SP)
= 210 kgs ($ – $
= 210 kgs (– $ = $21 F
Materials quantity variance
MQV = (AQ × SP) – (SQ × SP)
= SP(AQ – SQ)
= $ (210 kgs – ( kg/parka 2,000 parkas))
= $ (210 kgs – 200 kgs)
= $ (10 kgs) = $50 U
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Materials Price Variance
Materials Quantity Variance
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 Materials Variances
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Responsibility for Materials Variances
Production Manager
Purchasing Manager
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Hanson Inc. has the following direct materials standard to manufacture one Zippy:
pounds per Zippy at $ per pound
Last week, 1,700 pounds of materials were purchased and used to make 1,000 Zippies. The materials cost a total of $6,630.
Quick Check
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How many pounds of materials should Hanson have used to make 1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
c. 1,200 pounds.
d. 1,000 pounds.
Quick Check
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Quick Check
How many pounds of materials should Hanson have used to make 1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
c. 1,200 pounds.
d. 1,000 pounds.
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Hanson’s materials quantity variance (MQV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Quick Check
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Hanson’s materials quantity variance (MQV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Quick Check
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Hanson’s materials price variance (MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Quick Check
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Hanson’s materials price variance (MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Quick Check
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1,700 lbs. 1,700 lbs. 1,500 lbs.
× × ×
$ per lb. $ per lb. $ per lb.
= $6,630 = $ 6,800 = $6,000
Quick Check
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
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Quick Check
1,700 lbs. 1,700 lbs. 1,500 lbs.
× × ×
$ per lb. $ per lb. $ per lb.
= $6,630 = $ 6,800 = $6,000
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
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Learning Objective 2
Compute the direct labor rate and efficiency variances and explain
their significance.
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Glacier Peak Outfitters has the following direct labor standard for its mountain parka.
standard hours per parka at $ per hour
Last month, employees actually worked 2,500 hours at a total labor cost of $26,250 to make 2,000 parkas.
Labor Variances – An Example
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Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
Labor Variances Summary
2,500 hours 2,500 hours 2,400 hours
× × ×
$ per hour $ per hour $ per hour
= $26,250 = $25,000 = $24,000
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Labor Variances Summary
Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
× × ×
$ per hour $ per hour $ per hour
= $26,250 = $25,000 = $24,000
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Labor Variances Summary
Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
× × ×
$ per hour $ per hour $ per hour
= $26,250 = $25,000 = $24,000
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Labor Variances: Using the Factored Equations
Labor rate variance
LRV = (AH × AR) – (AH × SR)
= AH (AR – SR)
= 2,500 hours ($ per hour – $ per hour)
= 2,500 hours ($ per hour)
= $1,250 unfavorable
Labor efficiency variance
LEV = (AH × SR) – (SH × SR)
= SR (AH – SH)
= $ per hour (2,500 hours – 2,400 hours)
= $ 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:
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Responsibility for Labor Variances
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Hanson Inc. has the following direct labor
standard to manufacture one Zippy:
standard hours per Zippy at
$ 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.
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.
Quick Check
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Hanson’s labor efficiency variance (LEV)
for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
Quick Check
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Hanson’s labor efficiency variance (LEV)
for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
Quick Check
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1,550 hours 1,550 hours 1,500 hours
× × ×
$ per hour $ per hour $ per hour
= $18,910 = $18,600 = $18,000
Quick Check
Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
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Learning Objective 3
Compute the variable manufacturing overhead rate and efficiency variances and explain their significance.
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Glacier Peak Outfitters has the following direct variable manufacturing overhead labor standard for its mountain parka.
standard hours per parka at $ 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.
Variable Manufacturing Overhead Variances – An Example
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2,500 hours 2,500 hours 2,400 hours
× × ×
$ per hour $ per hour $ per hour
= $10,500 = $10,000 = $9,600
Variable Manufacturing Overhead Variances Summary
Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
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Variable Manufacturing Overhead Variances Summary
2,500 hours 2,500 hours 2,400 hours
× × ×
$ per hour $ per hour $ per hour
= $10,500 = $10,000 = $9,600
Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
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Variable Manufacturing Overhead Variances Summary
2,500 hours 2,500 hours 2,400 hours
× × ×
$ per hour $ per hour $ per hour
= $10,500 = $10,000 = $9,600
Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
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Variable Manufacturing Overhead Variances: Using Factored Equations
Variable manufacturing overhead rate variance
VMRV = (AH × AR) – (AH – SR)
= AH (AR – SR)
= 2,500 hours ($ per hour – $ per hour)
= 2,500 hours ($ per hour)
= $500 unfavorable
Variable manufacturing overhead efficiency variance
VMEV = (AH × SR) – (SH – SR)
= SR (AH – SH)
= $ per hour (2,500 hours – 2,400 hours)
= $ per hour (100 hours)
= $400 unfavorable
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Hanson Inc. has the following variable
manufacturing overhead standard to
manufacture one Zippy:
standard hours per Zippy at
$ 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.
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.
Quick Check
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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
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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
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1,550 hours 1,550 hours 1,500 hours
× × ×
$ per hour $ per hour $ per hour
= $5,115 = $4,650 = $4,500
Quick Check
Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
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Materials Variances―An Important Subtlety
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Glacier Peak Outfitters has the following direct materials standard for the fiberfill in its mountain parka.
kg. of fiberfill per parka at $ per kg.
Last month 210 kgs. of fiberfill were purchased at a cost of $1,029. Glacier used 200 kgs. to make 2,000 parkas.
Materials Variances―An Important Subtlety
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210 kgs. 210 kgs. 200 kgs. 200 kgs.
× × × ×
$ per kg. $ per kg. . $ per kg. $ per kg.
= $1,029 = $1,050 = $1,000 = $1,000
Actual Quantity Actual Quantity Actual Quantity
Purchased Purchased Used Standard Quantity
× × × ×
Actual Price Standard Price Standard Price Standard Price
Materials Variances―An Important Subtlety
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Advantages of Standard Costs
Standard costs are
a key element of
the management by
exception approach.
Standards can
provide benchmarks
that promote economy
and efficiency.
Standards can greatly simplify
bookkeeping.
Standards can
support responsibility
accounting systems.
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If variances are misused
as a club to negatively
reinforce employees,
morale may suffer and
employees may make
dysfunctional decisions.
Standard cost variance
reports are usually
prepared on a monthly
basis and may contain
information that is
outdated.
Potential Problems with Standard Costs
Labor variances assume that the production process is labor-paced
and that labor is a variable cost. These assumptions are often invalid
in today’s automated manufacturing environment where employees
are essentially a fixed cost.
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Excessive emphasis on meeting the standards may overshadow other
important objectives such as maintaining and improving quality,
on-time delivery, and customer satisfaction.
In some cases, a
“favorable” variance
can be as bad or
worse than an
unfavorable variance.
Just meeting standards
may not be sufficient;
continuous improvement
may be necessary to
survive in a competitive
environment.
Potential Problems with Standard Costs
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End of Chapter 10
PowerPoint Authors:
Susan Coomer Galbreath, ., CPA
Charles W. Caldwell, ., CMA
Jon A. Booker, ., CPA, CIA
Cynthia J. Rooney, ., CPA
Copyright © 2015 by McGraw-Hill Education. All rights reserved.
Appendix 10A
Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System
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Learning Objective 4
(Appendix 10A)
Compute and interpret the fixed overhead budget and volume variances.
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Budget variance
Fixed Overhead Budget Variance
Budget
variance
Budgeted
fixed
overhead
Actual
fixed
overhead
=
–
Actual
Fixed
Overhead
Fixed
Overhead
Applied
Budgeted
Fixed
Overhead
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Volume
variance
Fixed Overhead Volume Variance
Volume
variance
Fixed
overhead
applied to
work in process
Budgeted
fixed
overhead
=
–
Actual
Fixed
Overhead
Fixed
Overhead
Applied
Budgeted
Fixed
Overhead
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FPOHR = Fixed portion of the predetermined overhead rate
DH = Denominator hours
SH = Standard hours allowed for actual output
SH × FPOHR
DH × FPOHR
Fixed Overhead Volume Variance
Volume variance
FPOHR × (DH – SH)
=
Actual
Fixed
Overhead
Fixed
Overhead
Applied
Budgeted
Fixed
Overhead
Volume
variance
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Computing Fixed Overhead Variances
Sheet1
ColaCo
Production and Machine-Hour Data
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
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Computing Fixed Overhead Variances
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ColaCo
Cost Data
Budgeted variable manufacturing overhead $90,000
Budgeted fixed manufacturing overhead 270,000
Total budgeted manufacturing overhead $360,000
Actual variable manufacturing overhead $100,000
Actual fixed manufacturing overhead 280,000
Total actual manufacturing overhead $380,000
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Predetermined Overhead Rates
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Predetermined Overhead Rates
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Applying Manufacturing Overhead
Overhead
applied
Predetermined
overhead rate
Standard hours allowed
for the actual output
=
×
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Computing the Budget Variance
Budget
variance
Budgeted
fixed
overhead
Actual
fixed
overhead
=
–
Budget
variance
= $280,000 – $270,000
Budget
variance
= $10,000 Unfavorable
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Computing the Volume Variance
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Computing the Volume Variance
FPOHR = Fixed portion of the predetermined overhead rate
DH = Denominator hours
SH = Standard hours allowed for actual output
Volume variance
FPOHR × (DH – SH)
=
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A Pictorial View of the Variances
Fixed Overhead
Applied to
Work in Process
Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
252,000
270,000
280,000
Total variance, $28,000 unfavorable
Budget variance,
$10,000 unfavorable
Volume variance,
$18,000 unfavorable
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Fixed Overhead Variances –
A Graphic Approach
Let’s look at a graph showing fixed overhead variances. We will use ColaCo’s numbers from the previous example.
10-*
Graphic Analysis of Fixed
Overhead Variances
Machine-hours (000)
Budget
$270,000
90
Denominator
hours
0
0
Fixed overhead applied at
$ per standard hour
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Graphic Analysis of Fixed
Overhead Variances
Actual
$280,000
Machine-hours (000)
Budget
$270,000
90
Denominator
hours
0
0
Fixed overhead applied at
$ per standard hour
Budget Variance 10,000 U
{
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Applied
$252,000
Machine-hours (000)
Budget
$270,000
Graphic Analysis of Fixed
Overhead Variances
90
84
0
0
Standard
hours
Fixed overhead applied at
$ per standard hour
Denominator
hours
Budget Variance 10,000 U
Volume Variance 18,000 U
{
{
Actual
$280,000
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Reconciling Overhead Variances and Underapplied or Overapplied Overhead
In a standard
cost system:
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Reconciling Overhead Variances and Underapplied or Overapplied Overhead
Sheet1
ColaCo
Computation of Underapplied Overhead
Predetermined overhead rate (a) $ 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
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Computing the Variable Overhead Variances
Variable manufacturing overhead rate variance
VMRV = (AH × AR) – (AH × SR)
= $100,000 – (88,000 hours × $ per hour)
= $12,000 unfavorable
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Computing the Variable Overhead Variances
Variable manufacturing overhead efficiency variance
VMEV = (AH × SR) – (SH × SR)
= $88,000 – (84,000 hours × $ per hour)
= $4,000 unfavorable
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Computing the Sum of All Variances
Sheet1
ColaCo
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
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End of Appendix 10A
PowerPoint Authors:
Susan Coomer Galbreath, ., CPA
Charles W. Caldwell, ., CMA
Jon A. Booker, ., CPA, CIA
Cynthia J. Rooney, ., CPA
Copyright © 2015 by McGraw-Hill Education. All rights reserved.
Journal Entries to Record Variances
Appendix 10B
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Learning Objective 5
(Appendix 10B)
Prepare journal entries
to record standard
costs and variances.
10-*
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.
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Recording Materials Variances
Gen Journal
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
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Recording Labor Variances
Gen Journal
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
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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.
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End of Appendix 10B
