Chapter Outline
1. To help identify factors causing the overhead cost variance managers
will analyze the variance separately for controllable and volume
variances.
a. The controllable variance is the difference between the actual
overhead costs incurred and the budgeted overhead costs based on
a flexible budget; named because it refers to activities usually
under management control.
b. The volume variance is the difference between the budged fixed
overhead (at predicted capacity) and the applied fixed overhead).
i. Occurs when there is a difference between the actual volume
of production and the standard volume of production
ii. The budgeted fixed overhead is the same value regardless of
the volume of production.
iii. The applied overhead is based on the standard direct labor
hours allowed for the actual volume of production.
iv. When a company operates at a capacity different from what is
expected, the volume variance will differ from zero
2. Analyzing controllable and volume variances
a. An unfavorable volume means the company did not reach its
expected operating level – a favorable variance means the
company operated at a greater than expected operating level
b. Main purpose of the volume variance to identify what portion of
the total overhead variance is cause by failing to meet the expected
production level.
c. Often the reasons the failing to meet expected operating levels are
due to factors (e.g. customer demand) beyond employees’ control.
3. Overhead Variance Reports
a. Help managers isolate the reasons for a controllable variance.
b. Provides information about specific overhead costs and how they
differ from budgeted amounts
I. Decision AnalysisSales VariancesSimilar to computation and analysis of
cost variances.
A. Sales price variance and sales volume variance can be computed.
B. Managers use sales variances for planning and control purposes.
1. Used to plan future actions to avoid unfavorable variances
2. Question why sales were higher/lower than expected.
3. Evaluate and reward salespeople.
C. When multiple products sold:
1. Sales mix variance is difference between actual and budgeted sales
mix of products.
2. Sales quantity variance is difference between total actual and total
budgeted quantity of units sold.
Notes
Chapter Outline
Appendix 23A
I. Expanded Overhead Variances
A. Computing Overhead Cost Variancesassume predetermined rate is based
on relation between standard overhead and standard labor hours.
1. Framework uses classifications of overhead costs as either variable or
fixed
2. Exhibit 23A.1 shows that the variable overhead spending and
efficiency variances and the fixed overhead spending variance are
combined to get the controllable variance.
3. A spending variance results when amount paid to acquire overhead
items differs from standard price
4. An efficiency variance results when standard direct labor hours (the
assumed allocation base) expected for actual production are different
from actual direct labor hours used; reflects on the cost-effectiveness
in using the overhead allocation base such as direct labor hours.
B. Variable overhead cost variances can be determined by formulas.
Formulas:
Actual Overhead Applied Overhead
AH x AVR AH x SVR SH x SVR
Spending variance Efficiency variance
(AH x AVR) – (AH x SVR) (AH x SVR) – (SH x SVR)
Variable overhead variance
AH = actual hours, AVR = actual variable overhead rate,
SH = standard hours, and SVR = standard variable overhead rate.
C. Fixed overhead cost variances can be determined by formulas that include
only the fixed portion of overhead.
Formulas:
Actual Overhead Budgeted Overhead Applied Overhead
(given) (from budget) SH x SFR
Spending variance Volume variance
(actual – budgeted) (budgeted – applied
Fixed overhead variance
SH = standard hours, and SFR = standard fixed overhead rate
1. Fixed overhead volume variance results when actual volume of
production differs from standard volume of production.
2. Budgeted fixed overhead amount remains same regardless of expected
volume, and is computed based on standard direct labor hours allowed
for the expected production volume.
Notes
II. Standard Cost Accounting Systems
Standard cost systems also record standard costs and variances in most
accounts.
1. Simplifies recordkeeping
2. Helpful in report preparation.
3. Record standard materials costs incurred:
Work in Process Inventory SQ x SP
Direct Materials Price Variance
Direct Materials Quantity Variance
Raw Materials Inventory AQ x AP
(the variances are debited if unfavorable or credited if favorable)
4. Record standard labor cost of goods manufactured:
Work in Process Inventory SQ x SP
Direct Labor Rate Variance
Direct Labor Efficiency Variance
Factory Payroll AQ x AP
(the variances are debited if unfavorable or credited if favorable)
5. Assign standard predetermined overhead to Work in Process:
Work in Process Inventory SQ x SPR
Volume Variance
Variable Overhead Spending Variance
Variable Overhead Efficiency Variance
Fixed Spending Variance
Factory Overhead actual
(the variances are debited if unfavorable or credited if favorable)
6. An alternative is to combine the spending and efficiency variances into
one account called “Controllable Variances”.
7. Accumulate balances in the different variance accounts until end of
accounting period; to close, add to or subtract from the manufacturing
costs recorded in the period.
a. If variance is considered immaterial, add to, or subtract from
balance of Cost of Goods Sold.
b. Recorded costs will equal actual costs in the period;
8. Can use a standard costing income statement to summarize a
company’s performance. The Income Statement reports sales and cost
of goods sold at stand amounts and then lists the individual sales and
cost variances (favorable are subtracted and unfavorable are added) to
compute gross profit at actual cost.
Notes
Alternate Demo Problems Twenty-Three
Problem #1
XYZ Company manufactures tables. A standard cost card for the
manufacture of one table shows the following:
Standard Cost per Table:
Direct material: 4 sq. ft. @ $3/sq. ft. $12
Direct labor: 2 hours @ $8/hr 16
Total prime costs $28
In November, the company produced 1,000 tables. Actual production costs
and quantities were:
Direct material: 3,900 sq. ft. @ $3.10/sq. ft. $12
Direct labor: 2,300 hours @ $7.80/hr 16
Required:
Calculate the price and quantity variances for direct material and direct
labor.
Problem #2
Atlantic Company has the following monthly flexible budget information
based on an expectation of operating at 80% of the factory’s capacity or
10,000 units produced:
Operating Levels
70% 80% 90%
Budgeted output in units 8,000 10,000 12,000
Budgeted labor (standard hours) 16,000 20,000 24,000
Budgeted overhead
Variable overhead $ 48,000 $60,000 $ 72,000
Fixed overhead 40,000 40,000 40,000
Total overhead $ 88,000 $100,000 $112,000
During the current month, the company operated at 70% of capacity and
employees worked 16,500 hours and the flowing actual overhead costs
were incurred:
Variable overhead $ 47,300
Fixed overhead 41,000
Total overhead $88,300
Required:
1. Compute the predetermined overhead rate per direct labor hour for
variable overhead, fixed overhead, and total overhead.
2. Compute the variable overhead spending and efficiency variances.
3. Compute the fixed overhead spending and volume variance.
4. Solution: Problem #1
Materials Variances
Units produced…………………………………….. 1,000 tables
X std. quantity of materials per unit………….. X 4 Sq. ft per table
Standard quantity of materials for 1,000 tables 4,000 Sq ft
AQ 3,900 Sq ft. AQ 3,900 Sq ft. SQ 4,000 Sq ft.
X AP X $3.10 X SP X 3.00 X SP X 3.00
$12,090 $11,700 $12,000
Price Variance Quantity Variance
($390) U $300 F
Total Materials Variance
($90) U
Labor Variances
Units produced…………………………………….. 1,000 tables
X standard direct labor hrs per unit………….. X 2 hours
Standard quantity of hours for 1,000 tables 2,000 hours
AQ 2,300 Hrs. AQ 2,300 Hrs. SQ 2,000 Hrs.
X AP X $7.80 X SP X 8.00 X SP X 8.00
$17,940 $18,400 $16,000
Price Variance Quantity Variance
$460 F ($2,400) U
Total Materials Variance
($1,940) U
Material Variances:
Quantity Variance:
Standard units at standard price 4,000 ft @ $3.00 = $12,000
Actual units at standard price 3,900 ft @ $3.00 = 11,700
Variance (favorable) 100 ft @ $3.00 = $ 300
Price Variance:
Actual units at actual price 3,900 ft @ $3.10 = $12,090
Actual units at standard price 3,900 ft @ $3.00 = 11,700
Variance (unfavorable) 3,900 ft @ $0.10 = 390
Direct material cost variance
(unfavorable) $ 90
Labor Variances:
Efficiency (Quantity) Variance
Actual hours at standard rate 2,300 hrs. @ $8.00 = $18,400
Standard hours at standard rate 2,000 hrs. @ $8.00 = 16,000
Variance (unfavorable) 300 hrs. @ $8.00 = $2,400
Rate (Price) Variance:
Actual hours at standard rate 2,300 hrs. @ $8.00 = $18,400
Actual hours at actual rate 2,300 hrs. @ $7.80 = 17,940
Variance (favorable) 2,300 hrs. @ $0.20 = 460
Direct labor cost variance
(unfavorable) $1,940
Solution: Problem #2
1. Compute the predetermined overhead rates
Overhead at operating level expected (80%) or 10,000 units
Variable Overhead Rate:
Expected Variable Overhead $ 60,000 = $ 3.00 per DLH
Expected Direct Labor Hours 20,000
Fixed Overhead Rate:
Expected Fixed Overhead $ 40,000 = $ 2.00 per DLH
Expected Direct Labor Hours 20,000
Total Overhead Rate:
Expected Total Overhead $100,000 = $ 5.00 per DLH
Expected Direct Labor Hours 20,000
2. Variable Overhead Variance Computations
Actual Variable Applied Variable
Overhead Overhead
AH AH 16,500 SH 16,000
x AVR x SVR $ 3.00 x SVR $ 3.00
total $47,300 $49,500 $48,000
Variable Variable
Spending Variance Efficiency Variance
$ 2,200 F $(1,500) U
3. Fixed Overhead Variance Computations
Actual Fixed Applied Fixed
Overhead Overhead
SH 16,000
From x SVR $ 2.00
Given $41,000 Budget $40,000 $32,000
Fixed Fixed
Spending Variance Volume Variance
($1,000) U ($8,000) U