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23-10
Chapter Outline
Appendix 23A
I. Expanded Overhead Variances
A. Computing Overhead Cost Variances⎯assume 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. A spending variance results when amount paid to acquire overhead
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
for the expected production volume.
Notes
23-11
A. Standard cost systems also record standard costs and variances in
accounts.
1. Simplifies recordkeeping
2. Helpful in report preparation.
3. Record standard materials costs incurred:
Goods 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:
Goods in Process Inventory SQ x SP
Direct Labor Rate Variance
5. Assign standard predetermined overhead to cost of goods
manufactured:
Goods in Process Inventory SQ x SPR
(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 “Control Variances”.
7. Accumulate balances in the different variance accounts until end of
GAAP (generally accepted accounting principles).
Notes
23-12
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.
23-13
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.
23-14
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
23-15
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
23-16
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
23-17
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
