ACCT Chapter 10 & Appendix A

Variable Overhead Efficiency Variance

measures the difference between the actual level of activity and the standard activity allowed for the actual output, multiplied by the variable part of the predetermined overhead rate Exactly the same as the DL efficiency variance except the rate that is used to translate the variances into dollars Difference is multiplied by the variable portion of the predetermined overhead rate When DL efficiency variance is favorable, the variable efficiency variance will also be favorable

Variable Overhead Rate Variances

measures the difference between the actual variable overhead cost incurred during the period and the standard cost that should have been incurred based on the actual activity of the period

Standard Cost Card

shows the standard quantity/hour and standard price/rate of the inputs required to product a unit of a specific product

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

Standard Hours Per Unit

the amount of DL-hours that should be used to produce one unit of finished goods

Standard Quantity Per Unit

the amount of DM that should be used for each unit of finished product, including an allowance for normal inefficiencies

Standard Rate Per Hour

the company's expected DL wage rate per hour, including employment taxes and fringe benefits Reflects the expected "mix" of workers, even though the actual hourly wage rates may vary somewhat from individual to individual due to differing skills or seniority

The Materials Price Variance

Measures the difference between an input's actual price and its standard price, multiplied by the actual quantity purchased Labeled unfavorable if the actual price exceeds the standard purchase price

Standard Cost Variance Analysis

decomposes spending variances from the flexible budget into two elements - one due to the price paid for the input and the other due to the amount of the input that is used

Denominator Activity

estimated total amount of the allocation base in the formula for the predetermined overhead rate

Standard Cost Per Unit

for all three variable manufacturing costs is computed the same way Standard quantity/hours per unit is multiplied by the standard price/rate per unit to obtain the standard cost per unit

Negative number should be labeled as a favorable variance

-Indicates that the actual price of the input was less than the standard price per unit -Indicates that the actual quantity of the input was used less than the standard quantity allowed

Predetermined Overhead Rates

= Estimated total MOH cost / estimated total amount of the allocation base = Estimated total MOH cost/ denominator activity Once predetermined overhead rate has been determined, it remains unchanged throughout the period, even if the actual level of activity differs from what was estimated. Consequently, the amount of overhead applied to each unit of product is the same regardless of when it is produced during the period

Budget Variance

= actual fixed overhead - budgeted fixed overhead Simply the difference between the actual fixed MOH and the budgeted fixed MOH for the period If actual exceeds budgeted, the budget variance is labeled unfavorable

Volume Variance

= budgeted fixed overhead - fixed overhead applied to work in process =Fixed component of the predetermined OH rate * (denominator hours - standard hours allowed for the actual output) if budgeted fixed MOH exceeds the fixed MOH applied to work in process, the volume variance is labeled as unfavorable Key to understanding volume variance is to understand that it depends on the difference between the hours used in the denominator to compute the predetermined overhead rate and the standard hours allowed for the actual output of the period If denominator hours exceed the standard hours allowed for the actual output, the volume variance is unfavorable; volume variance is unfavorable if the actual level of activity is less than expected Volume variance does not measure overspending or underspending Often viewed as a measure of utilization

Overhead Applied

= predetermined overhead rate * standard hours allowed for the actual output Overhead is applied to work in process on the basis of the standard hours allowed for the actual output of the period In a standard cost system, every unit of a particular product is charged with the same amount of overhead cost, regardless of how much time the unit actually requires for processing

Cautions in Fixed Overhead Analysis

A volume variance for fixed overhead arises because when applying the costs to work in process, we act as if the fixed costs are variable

An Important Subtlety in the Materials Variances

Companies use the quantity of materials purchased to compute the materials price variance and the quantity of materials used in production to compute the materials quantity variance because... 1) Delaying the computation of the price variance until the materials are used would result in less timely variance reports 2) Computing the price variance when the materials are purchased allows materials to be carried in the inventory accounts at their standard costs Common for a company's quantity of materials purchased to differ from its quantity used in production - When this happens, the materials price variance is computed using the quantity of materials purchased, whereas the materials quantity variance is computed using the quantity of materials used in production A price variance will not be computed when the materials are finally used because the price variance was computed when the materials were purchased Because the price variance is based on the amount purchased and the quantity variance is based on the amount used, the two variances do not generally sum to the spending variance from the flexible budget, which is wholly based on the amount used.

Graphic Analysis of Fixed Overhead Variances

If the denominator hours and the standard hours allowed for the actual output are the same, there is no volume variance; it is only when the standard hours differ from the denominator hours that a volume variance arises

The Labor Rate Variance

Measures the difference between the actual hourly rate and the standard hourly rate, multiplied by the actual number of hours worked during the period Labeled unfavorable if the actual hourly rate had been greater than the standard hourly rate - Favorable rate variance would result when workers who are paid at a rate lower than specified in the standard are assigned to the task - Overtime work at premium rates will result in an unfavorable labor rate variance if the overtime premium is charged to the direct labor account

The Labor Efficiency Variance

Measures the difference between the actual hours used and the standard hours allowed for the actual output, multiplied by the standard hourly rate

The Materials Quantity Variance

Measures the difference between the actual quantity of materials used in production and the standard quantity of materials allowed for the actual output, multiplied by the standard price per unit of materials Labeled unfavorable when the actual quantity of material used in production is greater than the quantity of material that should have been used according to the standard

Potential Problems with Standard Costs

Standard cost variance reports are usually prepared on a monthly basis and often are released days or even weeks after the end of the month. As a consequence, the information in the reports may be so outdates that it is almost useless. Timely, frequent reports that are approximately correct are better than infrequent reports that are very precise but out of date by the time they are released. If managers use variances only to assign blame and punish subordinates, morale may suffer. Subordinates may be tempted to cover up unfavorable variances or take actions that are not in the best interests of the company to make sure the variances are favorable Labor-hour standards and efficiency variances make two important assumptions. First they assume that the production process is labor-paced; if labor works faster, output will go up. However, output in many companies is not determined by how fast labor works; rather, it is determined by the processing speed of machines. Second, the computations assume that labor is a variable cost. However, direct labor may be essentially fixed. If labor is fixed, then an undue emphasis on labor efficiency variances creates pressure to build excess inventories. In some cases, a "favorable" variance can be worse than an "unfavorable" variance. Too much emphasis on meeting the standards may overshadow other important objectives such as maintaining and improving quality, on-time delivery, and customer satisfaction

Advantages of Standard Costs

Standard costs are a key element in a management by exception approach. If costs conform to the standards, managers can focus on other issues. When costs are significantly outside the standards, managers are alerted that problems may exist that require attention. This approach helps managers focus on important issues Standards that are viewed as reasonable by employees can promote economy and efficiency. They provide benchmarks that individuals can use to judge their own performance Standard costs can greatly simplify bookkeeping. Instead of recording actual costs for each job, the standard costs for direct materials, direct labor, and overhead can be charged to jobs Standard costs fit naturally in an integrated system of "responsibility accounting." The standards establish what costs should be, who should be responsible for them, and whether actual costs are under control.

Direct Materials Variances

Standard quantity allowed for actual output = actual output * standard quantity Unfavorable if the amount spend exceeds the amount that should have been spent

Setting Variable MOH Standards

The quantity and price standards for variable MOH are usually expressed in terms of hours and a rate Standard hours per unit for variable OH measures the amount of the allocation base from a company's predetermined OH rate that is required to produce one unit of finished goods Standard rate per unit that a company expects to pay for variable OH equals the variable portion of the predetermined OH rat

Reconciling Overhead Variances and Under-applied or Over-applied Overhead

Under-applied or over-applied overhead for a period equals the sum of the overhead variances If the overhead is under-applied, the total of the standard cost overhead variances is unfavorable

Variable Manufacturing Overhead Variances

Variable portion of MOH can be analyzed using the same basic formulas that we used to analyze direct materials and direct labor

Price Variance

the different between the actual amount paid for an input and the standard amount that should have been paid, multiplied by the actual amount of the input purchased Responsibility of the purchasing manager -Materials price variance in the case of DM -Labor rate variance in cas of DL -Variable OH rate variance in case of variable MOH

Standard Price Per Unit

the price that should be paid for each unit of DM and it should reflect the final, delivered cost of those materials

Positive number should be labeled as an _______________ variance

unfavorable -Indicates that the actual price per unit of the input was greater than the standard price per unit -Indicates that the actual quantity of the input used was greater than the standard quantity allowed

Standard hours allowed

used when computing direct labor and variable manufacturing overhead variances; refers to the amount of input that should have been used to manufacture the actual output of finished goods produced during the period

Standard Quantity Allowed

used when computing direct materials variances; refers to the amount of input that should have been used to manufacture the actual output of finished goods produced during the period