Chapter Outline
Appendix 21A
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 21
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:
$12
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.
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