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processing time required per unit, thereby
causing an unfavorable labor efficiency
variance.
Quick Check – direct labor variance calculations
VII. Using standard costs—variable manufacturing
overhead variances
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A. Glacier Peak Outfitters – continued
i. The variable overhead efficiency variance,
defined as the difference between the actual activity
of a period and the standard activity allowed,
multiplied by the variable part of the predetermined
overhead rate, is $400 unfavorable.
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cost that should have been incurred based on the
actual activity of the period, is $500 unfavorable.
iii. Supporting/additional computations
1. The standard quantity of 2,400 hours was
computed as shown.
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Quick Check – variable overhead variance calculations
VIII. Materials variances—an important subtlety
A. When the quantity of materials purchased differs
from the quantity used in production, the quantity
B. Glacier Peak Outfitters—revisited
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ii. The materials price variance is computed using
the actual quantity purchased (210 kgs.); therefore,
the materials price variance is $21 favorable.
IX. Variance analysis and management by exception
A. All variances are not worth investigating. Methods
for highlighting a subset of variances as exceptions
include:
i. Looking at the size of the variance.
X. Evaluation of controls based on standard costs
A. Research has shown that a substantial portion of
companies in the United Kingdom, Canada, Japan, and
the United States use standard cost systems. This is
because standard cost systems offer many advantages
including:
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ii. Standards that are viewed as reasonable by
employees can serve as benchmarks that promote
economy and efficiency.
B. The use of standard costs can also present a number of
problems. For example:
i. Standard cost variance reports are usually prepared
on a monthly basis; hence, they may contain
information that is outdated.
iii. Labor variances make two important
assumptions. First, they assume that production is
labor-paced; if labor works faster, output will go
up. Second, they assume that labor is a variable
cost. These assumptions are often invalid in today’s
automated manufacturing environment where
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vi. Just meeting standards may not be sufficient;
continual improvement using techniques such as
Six Sigma may be necessary to survive in a
competitive environment.
XI. Appendix 10A: predetermined overhead rates and
overhead analysis in a standard costing system (Slide
#70 is the title slide)
A. Fixed manufacturing overhead variances
i. Volume variance
1. The equation for computing the volume
variance is shown on this slide. It is the
ii. Budget variance
1. The equation for computing the budget
variance is shown on this slide. It is simply
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B. ColaCo: computing fixed overhead variances
i. The background data needed for this example are
shown in these two slides.
ii. Predetermined overhead rates
1. The predetermined overhead rate ($4.00) is
computed as shown on this slide.
2. This rate can be broken down into a variable
component ($1.00) and a fixed component
($3.00).
3. The total overhead applied to work in
process ($336,000) is computed as shown on
this slide.
a. Notice, the standard hours allowed
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iii. Computing the volume variance
1. The volume variance of $18,000 U is
computed as shown.
2. The volume variance of $18,000 U can also
be computed using the equation shown on
this slide.
iv. Computing the budget variance
1. The budget variance of $10,000 U is
computed as shown. It is simply the
difference between the actual fixed overhead
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v. A pictorial view of the variances
C. ColaCo: a graphic analysis of the variances
i. The vertical axis is used to graph fixed overhead
cost.
ii. The horizontal axis is used to graph the volume of
activity.
iii. The linear manner in which fixed overhead is
applied to products is depicted by drawing a
straight line from the origin to the intersection of
the budgeted fixed overhead ($270,000) and the
denominator activity (90,000 machine hours).
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iv. Next, plot the actual amount of fixed overhead
costs on the vertical axis ($280,000).
v. Finally, identify the standard hours allowed for
the actual level of output (84,000 hours). Draw a
vertical line from this activity level until it
intersects the sloped line that depicts the fixed
overhead applied to products. From this point, draw
a horizontal line that intersects the vertical axis.
This dollar amount ($252,000) represents the fixed
overhead applied.
D. ColaCo: reconciling overhead variances and
underapplied or overapplied overhead
i. In a standard cost system, the sum of the overhead
variances equals the underapplied or overapplied
overhead cost for the period.
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iii. Computing the variable overhead variances
iv. Computing the sum of all variances.
1. The sum of the variable and fixed overhead
variances ($44,000 U) is shown on this
slide.
XII. Appendix 10B: General Ledger Entries to Record
Variances (Slide #93 is the title slide)
Learning Objective 5: Prepare journal entries to record
standard costs and variances.
A. Glacier Peak Outfitters – revisited
i. Direct materials variances
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ii. Direct labor variances
1. The journal entry to record the incurrence
of direct labor cost would be as shown.
iii. Cost flows in a standard cost system
1. The entries into the various accounts are
made at standard cost – not actual cost.
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