Financial%20&%20 management%20accounting%20...
-
Upload
kenesha-marshall -
Category
Business
-
view
419 -
download
0
description
Transcript of Financial%20&%20 management%20accounting%20...
Standard Costingand
Variance Analysis
Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University
Chapter 22
22–2Copyright © Houghton Mifflin Company. All rights reserved.
Learning Objectives
1. Define standard costs and describe how managers use standard costs in the management cycle.
2. Explain how standard costs are developed and compute a standard unit cost.
3. Prepare a flexible budget and describe how variance analysis is used to control costs.
22–3Copyright © Houghton Mifflin Company. All rights reserved.
Learning Objectives (cont’d)
4. Compute and analyze direct materials variances.
5. Compute and analyze direct labor variances.
6. Compute and analyze manufacturing overhead variances.
7. Explain how variances are used to evaluate managers’ performance.
22–4Copyright © Houghton Mifflin Company. All rights reserved.
Standard Costing
• Objective 1– Define standard costs and describe how
managers use standard costs in the management cycle
22–5Copyright © Houghton Mifflin Company. All rights reserved.
Standard Costing
… is a method of cost control that includes a measure of actual
performance and a measure of the difference, or variance, between standard and actual performance
22–6Copyright © Houghton Mifflin Company. All rights reserved.
Standard Costs
• Realistic estimates of costs– Based on analysis of both past and
projected operating costs and conditions
• Provide a predetermined performance level for the standard costing method
• Usually stated in terms of cost per unit
22–7Copyright © Houghton Mifflin Company. All rights reserved.
Standard Costs (cont’d)
• Based on – Past costs
– Engineering estimates
– Forecasted demand
– Worker input
– Time and motion studies
– Type and quality of direct materials
22–8Copyright © Houghton Mifflin Company. All rights reserved.
Standard Costing
• How the standard costing method differs from the normal and actual costing methods
Product Cost Elements
Standard Costing
Normal Costing
Actual Costing
Direct Materials Estimated costs Actual costs Actual costs Direct Labor Estimated costs Actual costs Actual costs Manufacturing Overhead Estimated costs Estimated costs Actual costs
22–9Copyright © Houghton Mifflin Company. All rights reserved.
Standard Costs and the Management Cycle
• Planning– Managers use standard costs to
• Develop budgets– Direct materials
– Direct labor
– Variable manufacturing overhead
• Establish goals for product costing
22–10Copyright © Houghton Mifflin Company. All rights reserved.
Standard Costs and the Management Cycle (cont’d)
• Executing– Managers use standard costs to
• Apply dollar, time, and quality standards to work
• Collect actual cost data
22–11Copyright © Houghton Mifflin Company. All rights reserved.
Standard Costs and the Management Cycle (cont’d)
• Reviewing– Managers compare standard and actual
costs• Compute variances
– Provide measures of performance that can be used to control costs and evaluate managers
– Analyze significant variances to determine cause
» Unfavorable variances may reveal operating problems that require correcting
» Favorable variances may indicate favorable practices that should be implemented elsewhere
22–12Copyright © Houghton Mifflin Company. All rights reserved.
Standard Costs and the Management Cycle (cont’d)
• Reporting– Managers use standard costs to report on
• Operations
• Managers’ performance
22–13
Standard Costing, Variance Analysis, and the
Management Cycle
22–14Copyright © Houghton Mifflin Company. All rights reserved.
The Relevance of Standard Costing in Today's Business Environment
• Manufacturing companies– Increased automation
• Significant decrease in direct labor cost– Corresponding decline in importance of labor-related
standard costs and variances
• Many companies now apply standard costing only to direct materials and manufacturing overhead
• Service organizations– Use standard costing for direct labor and service
overhead costs
22–15Copyright © Houghton Mifflin Company. All rights reserved.
Discussion
Q. What is the main difference between the standard costing and normal costing methods?
A. The standard costing method uses estimated costs for direct materials and direct labor, whereas the normal costing method uses actual costs for these items
The methods are similar in that both use estimated costs for manufacturing overhead
22–16Copyright © Houghton Mifflin Company. All rights reserved.
Computing Standard Costs
• Objective 2– Explain how standard costs are developed
and compute a standard unit cost
22–17Copyright © Houghton Mifflin Company. All rights reserved.
Computing Standard Costs
• Fully integrated standard costing system– Uses standard costing for all elements of product
cost• Direct materials
• Direct labor
• Manufacturing overhead
– Inventory accounts and Cost of Goods Sold account
• Maintained and reported in terms of standard costs
• Standard unit costs used to compute account balances
• Actual costs recorded separately– Actual and standard costs can then be compared
22–18Copyright © Houghton Mifflin Company. All rights reserved.
Computing Standard Costs (cont’d)
• Six elements of a standard unit cost for a manufactured product
1. Price standard for direct materials
2. Quantity standard for direct materials
3. Standard for direct labor rate
4. Standard for direct labor time
5. Standard for variable overhead rate
6. Standard for fixed overhead rate
22–19Copyright © Houghton Mifflin Company. All rights reserved.
Standard Direct Materials Cost
… is found by multiplying the price standard for direct materials by the
quantity standard for direct materials
Standard Direct Materials Cost
= Direct Materials Price Standard x
Direct Materials Quantity Standard
22–20Copyright © Houghton Mifflin Company. All rights reserved.
Standard Direct Materials Cost (cont’d)
• Direct materials price standard – Careful estimate of the cost of a specific
direct material in the next accounting period
– Developed by purchasing agent or purchasing department
• Takes into account– All possible price increases
– Changes in available quantities
– New sources of supply
22–21Copyright © Houghton Mifflin Company. All rights reserved.
Standard Direct Materials Cost (cont’d)
• Direct materials quantity standard – Estimate of the amount of direct materials that will
be used in the accounting period• Includes scrap and waste
– Influenced by • Product engineering specifications• Quality of direct materials• Age and productivity of machinery• Quality and experience of work force
– Established and monitored by • Production managers• Management accountants• Others
– Engineers, purchasing agents, machine operators
22–22Copyright © Houghton Mifflin Company. All rights reserved.
Standard Direct Labor Cost
… for a product, task, or job is calculated by multiplying
the standard wage for direct labor by the standard hours of direct labor
Standard Direct Labor Cost
= Direct Labor Rate Standard x
Direct Labor Time Standard
22–23Copyright © Houghton Mifflin Company. All rights reserved.
Standard Direct Labor Cost (cont’d)
• Direct labor rate standard– Hourly direct labor rate expected to prevail
during the next accounting period• For each function or job classification
– Average standard rate is developed for each task
• Standard rate is used even if worker is paid more or less than the standard rate
– Easy to establish• Rates are set by labor unions or defined by the
company
22–24Copyright © Houghton Mifflin Company. All rights reserved.
Standard Direct Labor Cost (cont’d)
• Direct labor time standard– Expected time required for each department,
machine, or process to complete the production of one unit or one batch of output
– Developed using• Current time and motion studies of workers and
machines
• Records of past performance
– Should be revised when• Machinery is replaced
• Quality of work force changes
22–25Copyright © Houghton Mifflin Company. All rights reserved.
Standard Manufacturing Overhead Cost
… is the sum of the estimates of variable and fixed overhead costs in the next
accounting period
• Two parts– Variable costs and fixed costs
• Compute separately because their cost behavior differs
22–26Copyright © Houghton Mifflin Company. All rights reserved.
Standard Manufacturing Overhead Cost (cont’d)
• Standard variable overhead rate– Computed by dividing the total budgeted
variable overhead costs by an expression of capacity, such as number of standard direct labor hours or standard machine hours
Total Budgeted Variable Overhead Costs Standard Variable Overhead Rate
= Expected Number of Standard Machine Hours
22–27Copyright © Houghton Mifflin Company. All rights reserved.
Standard Manufacturing Overhead Cost (cont’d)
• Standard fixed overhead rate– Computed by dividing the total budgeted
fixed overhead costs by an expression of capacity, usually normal capacity in terms of standard hours or units
• Denominator expressed in same terms as the variable overhead rate
Total Budgeted Fixed Overhead Costs Standard Fixed Overhead Rate
= Normal Capacity in Terms of Standard Machine Hours
Normal capacity is the level of operating capacity needed to meet expected sales demand
Its use ensures that all fixed OH* costs have been applied to units produced by the time normal capacity is reached*Overhead
22–28Copyright © Houghton Mifflin Company. All rights reserved.
Total Standard Unit CostDirect materials price standards Casing materials $9.20 per square foot Movement mechanism $2.17 each Direct materials quantity standards Casing materials .025 square foot per watch Movement mechanism 1 per watch Direct labor time standards Case Stamping Department .01 hour per watch Watch Assembly Department .05 hour per watch Direct labor rate standards Case Stamping Department $8.00 per hour Watch Assembly Department $10.20 per hour Standard manufacturing overhead rates Standard variable overhead rate $12.00 per direct labor hour Standard fixed overhead rate $9.00 per direct labor hour
Remember When, Inc., recently updated the standards for its line of watches
Compute the total standard cost of one watch
Direct materials costs Casing ($9.20 per sq.ft. x .025 sq.ft.) $ .23 One movement mechanism 2.17 Direct labor costs Case Stamping Dept. ($8.00 per hour x .01 hour per watch) .08 Watch Assembly Dept. (10.20 per hour x .05 hour per watch) .51 Variable overhead ($12.00 per hour x .06 hour per watch) .72 Total standard variable cost of one watch $3.71 Fixed overhead ($9.00 per hour x .06 hour per watch) .54 Total standard cost of one watch $4.25
22–29Copyright © Houghton Mifflin Company. All rights reserved.
Discussion
Q. Why are the variable and fixed components for the standard manufacturing overhead cost computed separately?
A. Variable costs and fixed costs are computed separately because their cost behavior differs
22–30Copyright © Houghton Mifflin Company. All rights reserved.
Variance Analysis
• Objective 3– Prepare a flexible budget and describe
how variance analysis is used to control costs
22–31Copyright © Houghton Mifflin Company. All rights reserved.
Variance Analysis
… is the process of computing the differences between standard costs and actual costs and identifying the causes
of those differences
• Managers use – Flexible budgets to improve variance analysis
– Variance analysis to control costs
22–32Copyright © Houghton Mifflin Company. All rights reserved.
The Role of Flexible Budgets in Variance Analysis
• Accuracy of variance analysis depends greatly on the type of budget managers use when comparing variances– Static budget
– Flexible budget
22–33Copyright © Houghton Mifflin Company. All rights reserved.
The Role of Flexible Budgets in Variance Analysis (cont’d)
• Static budget– Also called fixed budget
– Forecasts revenues and expenses for just one level of sales and just one level of output
• Does not allow for changes in output level– If actual output differs from budgeted output, a
variance between actual and budgeted amounts will occur
» Cannot judge performance accurately
22–34Copyright © Houghton Mifflin Company. All rights reserved.
Performance Report Using Data from a Static Budget
22–35Copyright © Houghton Mifflin Company. All rights reserved.
The Role of Flexible Budgets in Variance Analysis (cont’d)
• Flexible budget– Also called variable budget
– Summary of expected costs for a range of activity levels
• Provides forecasted data that can be adjusted for changes in output level
– Used primarily as a cost control tool in evaluating performance
22–36Copyright © Houghton Mifflin Company. All rights reserved.
The Role of Flexible Budgets in Variance Analysis (cont’d)
• Flexible budget formula– An equation that determines the expected,
or budgeted, cost for any level of output• Includes
– Per unit amount for variable costs
– Total amount for fixed costs
Costs Fixed Budgeted Produced) Unitsof No. per Unit Cost (Variable Costs Budgeted Total
22–37Copyright © Houghton Mifflin Company. All rights reserved.
Flexible Budget for Evaluation of Overall Performance
22–38Copyright © Houghton Mifflin Company. All rights reserved.
The Role of Flexible Budgets in Variance Analysis (cont’d)
• The flexible budget formula for Remember When, Inc. is
• The company produced 19,100 units during 20x5
$9,450 Produced) Unitsof No. ($3.71 Costs Budgeted Total
$9,450 19,100) ($3.71 Costs Budgeted Total
$9,450 $70,861
$80,311
22–39Copyright © Houghton Mifflin Company. All rights reserved.
Performance Report Using Data from a Flexible Budget
22–40Copyright © Houghton Mifflin Company. All rights reserved.
Using Variance Analysis to Control Costs
Compute variance
Is the variance significant?
No corrective action needed
No
Yes
Analyze variance todetermine its cause
Select performance measures to correct
the problem
Take corrective action
Step 1
Step 2
Step 3
Step 4
22–41Copyright © Houghton Mifflin Company. All rights reserved.
Using Variance Analysis to Control Costs (cont’d)
• Computing the amount of a variance is important– But, this does not prevent the variance
from reoccurring
– Must determine its cause• Select performance measures that will help
track the problem
• Must then find the best solution
22–42Copyright © Houghton Mifflin Company. All rights reserved.
Discussion
Q. What is the flexible budget formula?
A. It is an equation used to determine expected, or budgeted cost for any level of output
per Unit Cost (Variable Costs Budgeted Total
Produced) Unitsof No.
Costs Fixed Budgeted
22–43Copyright © Houghton Mifflin Company. All rights reserved.
Computing and Analyzing Direct Materials Variances
• Objective 4– Compute and analyze direct materials
variances
22–44Copyright © Houghton Mifflin Company. All rights reserved.
Computing and Analyzing Direct Materials Variances
• To control operations, managers compute and analyze variances for– Whole cost categories
• Such as total direct materials costs
– Elements of those categories• Such as the price and quantity of each direct
material
The more detailed the analysis of a variance is, the more effective managers will be in controlling costs
22–45Copyright © Houghton Mifflin Company. All rights reserved.
Computing Direct Materials Variances
• Total direct materials cost variance– Difference between the standard cost and
actual cost of direct materials
22–46Copyright © Houghton Mifflin Company. All rights reserved.
Computing Direct Materials Variances
Cambria Company makes leather bags. Each bag should use 4 feet of leather (standard quantity), and the standard price of leather is $6.00 per foot. During August, the company purchased 760 feet of leather costing $5.90 per foot and used the leather to produce 180 bags
cost Standard
bag)per feet 4 bags (180foot per $6.00$4,320 720foot per $6.00
cost actual Less
4,484 760foot per $5.90
quantity standard price Standard
quantity actual price Actual
ncecost varia materialsdirect Total (U) 164 $
Actual cost > standard cost
This is an unfavorable (U) situation
22–47Copyright © Houghton Mifflin Company. All rights reserved.
Computing Direct Materials Variances (cont’d)
• Total direct materials cost variance must be broken into two parts to find the cause of the variance– Direct materials price variance
– Direct materials quantity variance
22–48Copyright © Houghton Mifflin Company. All rights reserved.
Computing Direct Materials Variances (cont’d)
• Direct materials price variance– Difference between the standard price and the
actual price per unit multiplied by the actual quantity purchased
– Also called the direct materials spending or rate variance
Price) Actual Price (Standard Variance Price MaterialsDirect Quantity Actual
feet 760 $5.90) ($6.00
Because the company paid less for direct materials than it expected, the variance is favorable (F)
(F) $76
22–49Copyright © Houghton Mifflin Company. All rights reserved.
Computing Direct Materials Variances (cont’d)
• Direct materials quantity variance– Difference between the standard quantity and the
actual quantity used multiplied by the standard price
– Also called the direct materials efficiency or usage variance
Quantity (Standard Price Standard VarianceQuantity MaterialsDirect Quantity) Actual Allowed
feet) 760 feet (720 foot per $6.00
Because the company used more for direct materials than it expected, the variance is unfavorable (U)
(U) $240
22–50Copyright © Houghton Mifflin Company. All rights reserved.
Computing Direct Materials Variances (cont’d)
• Test calculations of variances– If correct, the net of the direct materials
price variance and direct materials quantity variance will equal the total direct materials cost variance
Direct materials price variance $ 76 (F) Direct materials quantity variance 240 (U) Total direct materials cost variance $164 (U)
22–51Copyright © Houghton Mifflin Company. All rights reserved.
Diagram of Direct Materials Variance Analysis
22–52Copyright © Houghton Mifflin Company. All rights reserved.
Analyzing and Correcting Direct Materials Variances
• Company had been experiencing direct materials price variances and quantity variances for some time
• For three months, managers tracked – Purchasing activities
• Discovered that the purchasing agent had purchased, without authorization, a lower grade of leather at a reduced price
– After analysis, engineers determined the lower grade of leather was not appropriate
– Scrap and rework• Discovered that inferior leather was causing the
unfavorable quantity variance
22–53Copyright © Houghton Mifflin Company. All rights reserved.
Discussion
Q. What is the direct materials price variance?
A. It is the difference between the standard price and the actual price per unit multiplied by the actual quantity purchased. It is also called the direct materials spending or rate variance
Price) Actual Price (Standard Variance Price MaterialsDirect Quantity Actual
22–54Copyright © Houghton Mifflin Company. All rights reserved.
Computing and Analyzing Direct Labor Variances
• Objective 5– Compute and analyze direct labor
variances
22–55Copyright © Houghton Mifflin Company. All rights reserved.
Computing Direct Labor Variances
• Total direct labor cost variance– Difference between the standard direct
labor cost for good units produced and actual direct labor costs
• Good units are the total units produced less units that are scrapped or need to be reworked
22–56Copyright © Houghton Mifflin Company. All rights reserved.
Computing Direct Labor Variances (cont’d)
At Cambria Company, each leather bag requires 2.4 standard direct labor hours, and the standard direct labor rate is $8.50 per hour. During August, 450 direct labor hours were used to make 180 bags at an average pay rate of $9.20 per hour
cost Standard
bag)per hours 2.4 bags (180foot per $8.50$3,672 hours 432hour per $8.50
cost actual Less
4,140 hours 450 hour per $9.20
allowed hours standard rate Standard
hours actual rate Actual
ncecost varialabor direct Total (U) 468 $
Actual cost > standard cost
22–57Copyright © Houghton Mifflin Company. All rights reserved.
Computing Direct Labor Variances (cont’d)
• Total direct labor cost variance must be broken onto two parts to find the cause of the variance– Direct labor rate variance
– Direct labor efficiency variance
22–58Copyright © Houghton Mifflin Company. All rights reserved.
Computing Direct Labor Variances (cont’d)
• Direct labor rate variance– Difference between the standard direct labor rate
and the actual direct labor rate multiplied by the actual direct labor hours worked
– Also called the direct labor spending variance
Rate) Actual Rate (Standard Variance RateLabor Direct
Hours Actual hours 450 $9.20) ($8.50
(U) $315
Because the company paid more per hour for direct labor than it expected, the variance is unfavorable
22–59Copyright © Houghton Mifflin Company. All rights reserved.
Computing Direct Labor Variances (cont’d)
• Direct labor efficiency variance– Difference between the standard direct labor hours
allowed for good units produced and the actual direct labor hours worked multiplied by the standard direct labor rate
– Also called the direct labor quantity or usage variance
Allowed Hours (Standard Rate Standard Variance EfficiencyLabor Direct Hours) Actual
hours) 450 hours (432 hour per $8.50
(U) $153
Because the company used more direct labor hours than it expected, the variance is unfavorable (U)
22–60Copyright © Houghton Mifflin Company. All rights reserved.
Computing Direct Labor Variances (cont’d)
• Test calculations of variances– If correct, the net of the direct labor rate
variance and direct labor efficiency variance will equal the total direct labor cost variance
Direct labor rate variance $ 315 (U) Direct labor efficiency variance 153 (U) Total direct labor cost variance $468 (U)
22–61
Diagram of Direct Labor
Variance Analysis
22–62Copyright © Houghton Mifflin Company. All rights reserved.
Analyzing and Correcting Direct Labor Variances
• Managers analyzed – Employee time cards
• An assembly worker who had fallen ill was replaced with a machinery operator from another department
– Assembly worker is paid $8.50 per hour and the machine operator is paid $9.20 per hour
– Machine operator not as skilled as the assembly worker
» Temporary situation so no corrective action taken
– Materials handling• Parts delivered late on five occasions
– Will track delivery time and number of delays for next three months
22–63Copyright © Houghton Mifflin Company. All rights reserved.
Discussion
Q. What is the direct labor efficiency variance?
A. The direct labor efficiency variance is the difference between the standard direct labor hours allowed for good units produced and the actual direct labor hours worked multiplied by the standard direct labor rate. It is also called the direct labor quantity or usage variance
Hours (Standard Rate Standard Variance EfficiencyLabor Direct Hours) Actual Allowed
22–64Copyright © Houghton Mifflin Company. All rights reserved.
Computing and Analyzing Manufacturing Overhead Variances
• Objective 6– Compute and analyze manufacturing
overhead variances
22–65Copyright © Houghton Mifflin Company. All rights reserved.
Computing and Analyzing Manufacturing Overhead Variances
• Controlling variable and fixed overhead costs is more difficult for managers than controlling direct materials and direct labor costs– Responsibility for manufacturing overhead costs is
hard to assign• Fixed overhead costs
– Unavoidable past costs
– Not under the control of any department manager
• Variable overhead costs– Some control possible if they can be related to
departments or activities
22–66Copyright © Houghton Mifflin Company. All rights reserved.
Using a Flexible Budget to Analyze Manufacturing Overhead Variances
• Cambria Company’s managers use a flexible budget to evaluate performance– For manufacturing overhead costs only
– Evaluate activity level using direct labor hours
• Variable costs vary with the number of direct labor hours worked
• Total fixed overhead costs remain constant
22–67
Flexible Budget for
Evaluation of Manufacturing
Overhead Costs
22–68Copyright © Houghton Mifflin Company. All rights reserved.
Using a Flexible Budget to Analyze Manufacturing Overhead Variances
• Flexible budget formula
• Flexible budget formula when applied to Cambria’s data
Hour Labor Direct per Costs (Variable Costs OH Budgeted Total
Hours)Labor Direct ofNumber
Costs OH Fixed Budgeted
Hours)Labor Direct of No. ($5.75 Costs OH Budgeted Total
$1,300
To find the total monthly budgeted overhead costs, insert direct labor hours into the flexible budget
22–69Copyright © Houghton Mifflin Company. All rights reserved.
Computing Manufacturing Overhead Variances
• Total manufacturing overhead variance– Difference between actual overhead costs
and standard overhead costs• Standard overhead costs are applied to
production using a standard overhead rate– Standard overhead rate has two parts
» Variable
» Fixed
22–70Copyright © Houghton Mifflin Company. All rights reserved.
Computing Manufacturing Overhead Variances (cont’d)
For Cambria Company, the standard variable overhead rate is $5.75 per direct labor hour (from the flexible budget). Total budgeted overhead is $1,300 by normal capacity, which is 400 direct labor hours.
rate overhead Fixed
$3.25 hourslabor direct 400 $1,300
rate overhead standard Total
$9.00 $3.25 $5.75
capacity normal overhead fixed Budgeted
rate overhead fixed standard rate overhead variableStandard
22–71Copyright © Houghton Mifflin Company. All rights reserved.
Computing Manufacturing Overhead Variances (cont’d)
For Cambria Company, the standard variable overhead rate is $5.75 per direct labor hour (from the flexible budget). Total budgeted overhead is $1,300 by normal capacity, which is 400 direct labor hours.
888,3$ bag)per hours 2.4 bags (180hour labor direct per $9.00 costs overhead actual Less
produced units good toapplied costs OH Standard
varianceoverhead ingmanufactur Total (U) 212 $
This amount can be divided into variable overhead variances and fixed overhead variances
produced units good No.( rate OH standard Total allowed) hours standard
4,100
Actual cost > standard cost
22–72Copyright © Houghton Mifflin Company. All rights reserved.
Variable Overhead Variance
• Total variable overhead variance– Difference between actual variable
overhead costs and the standard variable overhead costs that are applied to good units produced using the standard variable rate
22–73Copyright © Houghton Mifflin Company. All rights reserved.
Variable Overhead Variances (cont’d)
At Cambria Company, each leather bag requires 2.4 standard labor hours and the variable overhead rate is $5.75 per direct labor hour. During August, the company incurred $2,500 of variable overhead costs
Actual cost > standard cost
bag)per hours 2.4 bags (180hour per $5.75
cost actual Less
produced units good toapplied Overhead
ncecost varia overhead variableTotal (U) 16 $
allowed hourslabor direct standard rate variableStandard
2,500$2,484 hours 432 hour per $5.75
22–74
Diagram of Variable
Overhead Variance Analysis
22–75Copyright © Houghton Mifflin Company. All rights reserved.
Variable Overhead Variances (cont’d)
• Total variable overhead cost variance must be broken into two parts to find the cause of the variance– Variable overhead spending variance
– Variable overhead efficiency variance
22–76Copyright © Houghton Mifflin Company. All rights reserved.
Variable Overhead Variances (cont’d)
• Variable overhead spending variance– Difference between the budgeted variable
overhead costs at actual hours and actual variable overhead
Hours Actualat Costs Variable Budgeted Variance Spending OH Variable Overhead Variable Actual
Actual Rate Variable (Standard OH Variable Actual Worked)Hours
$2,500 hours) 450 ($5.75 (F) $87.50
22–77Copyright © Houghton Mifflin Company. All rights reserved.
Variable Overhead Variances (cont’d)
• Variable overhead efficiency variance– Difference between the standard direct
labor hours allowed for good units produced and the actual hours worked multiplied by the standard variable overhead rate
(Standard Rate Variable Standard Variance Efficiency OH Variable
Hours) Actual Allowed Hours
22–78Copyright © Houghton Mifflin Company. All rights reserved.
• Compute standard hours allowed
• Compute variable overhead efficiency variance
Variable Overhead Variances (cont’d)
hours) 450 hours (432 $5.75
Bagper Hours Standard Produced UnitsGood Allowed Hours Standard bagper hours 2.4 bags 180
hours 432
(U) 50.103$
(Standard Rate Variable Standard Variance Efficiency OH Variable
Hours) Actual Allowed Hours
22–79Copyright © Houghton Mifflin Company. All rights reserved.
Variable Overhead Variances (cont’d)
• Test calculations of variances– If correct, the net of the variable overhead
spending variance and variable overhead efficiency variance will equal the total variable overhead cost variance
Variable overhead spending variance $ 87.50 (F) Variable overhead efficiency variance 103.50 (U) Total variable overhead cost variance $ 16.00 (U)
22–80Copyright © Houghton Mifflin Company. All rights reserved.
Fixed Overhead Variances
• Total fixed overhead variance– Difference between actual fixed overhead
costs and the standard fixed overhead costs that are applied to good units produced using the standard fixed overhead rate
22–81
Diagram of Fixed
Overhead Variance Analysis
22–82Copyright © Houghton Mifflin Company. All rights reserved.
Fixed Overhead Variances (cont’d)
At Cambria Company, each leather bag requires 2.4 standard direct labor hours and the standard fixed overhead rate is $3.25 per direct labor hour. During August, the company incurred $1,600 of actual fixed overhead costs
bag)per hours 2.4 bags (180hour per $3.25
produced units good toapplied Overhead
ncecost varia overhead fixed Total (U) 196 $
allowed hourslabor direct standard rate fixed Standard
cost actual Less 1,600$1,404 hours 432 hour per $3.25
22–83Copyright © Houghton Mifflin Company. All rights reserved.
Fixed Overhead Variances (cont’d)
• Total fixed overhead cost variance must be broken into two parts to find the cause of the variance– Fixed overhead budget variance
– Fixed overhead volume variance
22–84Copyright © Houghton Mifflin Company. All rights reserved.
Fixed Overhead Variances (cont’d)
• Fixed overhead budget variance– Difference between the budgeted and
actual fixed overhead costs
– Also called budgeted fixed overhead variance
Overhead Fixed Budgeted VarianceBudget OH Fixed
Overhead Fixed Actual
$1,600 $1,300
(U) $300
22–85Copyright © Houghton Mifflin Company. All rights reserved.
Fixed Overhead Variances (cont’d)
• Fixed overhead volume variance– Difference between budgeted fixed
overhead costs and manufacturing overhead costs applied to production using the standard fixed overhead rate
hourslabor direct 432for applied OH fixed Standard
bag)per hours 2.4 bags (180 hour labor direct per $3.25 $1,404
overhead fixed budgeted totalLess 1,300
ncecost varia overhead variableTotal (F) 104 $
22–86Copyright © Houghton Mifflin Company. All rights reserved.
Fixed Overhead Variances (cont’d)
• A volume variance will occur if more or less than normal capacity is used– Fixed overhead volume variance measures the
use of existing facilities and capacity
– Favorable overhead volume variance• Capacity exceeds the expected amount
– Unfavorable overhead volume variance• Company operates at a level below normal capacity
– May be in best interest of company during periods of slow sales
– Means company is not building up excess inventory
22–87Copyright © Houghton Mifflin Company. All rights reserved.
Summary of Manufacturing Overhead Variances
Variable overhead spending variance $ 87.50 (F) Variable overhead efficiency variance 103.50 (U) Fixed overhead budget variance 300.00 (U) Fixed overhead volume variance 104.00 (F) Total manufacturing overhead variance $212.00 (U)
22–88Copyright © Houghton Mifflin Company. All rights reserved.
Analyzing and Correcting Manufacturing Overhead Variances
Variance Amount Cause Corrective Action Variable overhead spending variance
$87.50 (F) Savings on purchases No action
Variable overhead efficiency variance
103.50 (U) Inefficiency of machine operator who substituted for ill assembly worker
Consider feasibility of implementing a program for cross-training employees
Fixed overhead budget variance
300.00 (U)
Higher than expected factory insurance premiums due to increased claims filed by employees
Study insurance claims filed over a three-month period
Fixed overhead volume variance
104.00 (F) Overutilization of capacity traced to high seasonal demand
No action necessary because variance fell within anticipated range
22–89Copyright © Houghton Mifflin Company. All rights reserved.
Discussion
Q. What four variances are used to analyze the total manufacturing overhead variance?
A. Variable overhead spending variance
Variable overhead efficiency variance
Fixed overhead budget variance
Fixed overhead volume variance
22–90Copyright © Houghton Mifflin Company. All rights reserved.
Using Cost Variances to Evaluate Managers’ Performance
• Objective 7– Explain how variances are used to
evaluate managers’ performance
22–91Copyright © Houghton Mifflin Company. All rights reserved.
Using Cost Variances to Evaluate Managers’ Performance
• The effectiveness and fairness of a manager's performance evaluation depends on– Human factors
– Company policies• Should be based on input from managers and
employees
• Should specify procedures that managers are to use
22–92Copyright © Houghton Mifflin Company. All rights reserved.
Using Cost Variances to Evaluate Managers’ Performance (cont’d)
• Procedures that should be specified for managers – Preparing operational plans– Assigning responsibility for carrying out the
operational plans– Communicating operational plans to key personnel– Evaluating performance in each area of
responsibility– Identifying causes of significant variances from the
operational plan– Taking corrective action to eliminate problems
22–93Copyright © Houghton Mifflin Company. All rights reserved.
Using Cost Variances to Evaluate Managers’ Performance (cont’d)
• Variance analysis– Provides detailed data about differences
between standard and actual costs• Effective at pinpointing efficient and inefficient
operating areas– Basic comparison of budgeted and actual data not
as effective
22–94Copyright © Houghton Mifflin Company. All rights reserved.
Using Cost Variances to Evaluate Managers’ Performance (cont’d)
• Effective managerial performance reports based on standard costs and related variances should – Identify
• Causes of the differences
• Personnel involved
• Corrective actions taken
– Be tailored to the manager’s specific areas of responsibility
• Explain clearly and accurately in what way the manager’s department did or did not meet operating expectations
Managers should only be held accountable for cost areas under their control
22–95Copyright © Houghton Mifflin Company. All rights reserved.
Using Cost Variances to Evaluate Managers’ Performance (cont’d)
• Managerial performance reports should– Summarize all cost data
– Include variances for direct materials, direct labor, and manufacturing overhead
– Identify• Causes of variances
• Corrective actions taken
22–96Copyright © Houghton Mifflin Company. All rights reserved.
Using Cost Variances to Evaluate Managers’ Performance (cont’d)
• The occurrence of a variance does not indicate poor performance
• If a variance consistently occurs, its cause is not identified, and no corrective action is taken, it may indicate poor performance on the part of the manager
22–97Copyright © Houghton Mifflin Company. All rights reserved.
Discussion
Q. What items should be included in an effective managerial performance report?
A. Summarization of all cost data
Variances for direct materials, direct labor, and manufacturing overhead
Identification of the causes of the variances, personnel involved, and any corrective actions taken
22–98Copyright © Houghton Mifflin Company. All rights reserved.
Time for Review
1. Define standard costs and describe how managers use standard costs in the management cycle
2. Explain how standard costs are developed and compute a standard unit cost
3. Prepare a flexible budget and describe how variance analysis is used to control costs
22–99Copyright © Houghton Mifflin Company. All rights reserved.
And Finally…
4. Compute and analyze direct materials variances
5. Compute and analyze direct labor variances
6. Compute and analyze manufacturing overhead variances
7. Explain how variances are used to evaluate managers’ performance