To illustrate the use of standard costs, consider the Herman O. Thompson Sports, Inc. aka

Recall standard cost card

QuantityPriceCost DM3.5 Yards$6.00$21.00 DL2.0 Hours VOH2.0 Hours Standard Cost Per Unit$65.00

First, a General Model for Variance Analysis AQ x APAQ x SPSQ x SP Total Variance Variance Materials Price Var. Labor Rate Var. VOH Spending Var. Material Quan Var. Labor Eff. Var. VOH efficiency Var.

AQ x APAQ x SPSQ x SP Total Variance Variance DM Price Variance DL Rate Variance VOH Spending Var. DM Quantity Var. DL Efficiency Var. VOH Efficiency Var.

Another Way to Calculate Variances

DM Price Variances...

DM Quantity Variances...

An Example Calculating Variances

Calculating Direct Materials Variances

QuantityPriceCost DM3.5 Yards$6.00$21.00 DL2.0 Hours VOH2.0 Hours Standard Cost Per Unit$65.00

Data for last month’s production: # of suits completed Cost of DM purchases (20,000 x $5.40) Yards of material used 5,000 $108,000 20,000

Using these data and the data from the standard cost card, calculate the material price and quantity variances.

AQ x APAQ x SPSQ x SP $20,000 x $5.40 $108,000 $20,000 x $6 $120,000 17,500 Yds x $6 $105,000 Price Variance Quantity Variance $3,000(U) $12,000(F)$15,000(U) Total Variance

Alternative method – Direct Materials Price Variance

Alternative method – Direct Materials Quantity Variance

Isolating the Variances

The objective of variance analysis is to isolate the variances as soon in the process as possible.

AQ x APAQ x SPSQ x SP $20,000 x $5.40 $108,000 $20,000 x $6 $120,000 17,500 Yds x $6 $105,000 Price Variance Quantity Variance $3,000(U) $12,000(F)$15,000(U) Total Variance

Placing Responsibility For Variances

AQ x APAQ x SPSQ x SP $20,000 x $5.40 $108,000 $20,000 x $6 $120,000 17,500 Yds x $6 $105,000 Price Variance Quantity Variance $3,000(U) $12,000(F)$15,000(U) Total Variance

Calculating Direct Labor Variances

Data for last month’s production: # of suits completed Cost of Direct Labor (10,500 x $20) 5,000 $210,000

Using these data and the data from the standard cost card, calculate the labor rate and efficiency variances.

AH x ARAH x SRSH x SR 10,500 Hrs x $20 $210,000 10,500 Hrs x $18 $189,000 10,000 Hrs x $18 $180,000 $30,000(U) $21,000(U)$9,000(U) Rate Variance Efficiency Variance

Alternative Method DL Rate Variance

Alternative Method DL Efficiency Variance

Calculating Variable Overhead

Data for last month’s production: # of suits completed5,000 Actual DLHs10,500 Actual VMOH$40,950

Using these data and the data from the standard cost card, calculate the variable overhead variances.

AH x ARAH x SRSH x SR $950(U) $1,050(F)$2,000(U) Actual OH Cost $40,950 10,500Hrs. x $4 $42,000 10,000 Hrs. x $4 $40,000 Spending Variance Efficiency Variance

Alternative Method Overhead Spending Variance

Alternative Method Overhead Efficiency Variance

This is still an accounting class isn’t it? Where are the journal entries. I want journal entries!

Purchase of Materials Raw Materials DM Price Variance Accounts Payable 120,000 12, ,000

Usage of Materials Work in Process DM Qty Variance Raw Materials 105,000 15, ,000

Direct Labor Cost Work in Process Labor Rate Variance Labor Eff Variance 180,000 21,000 9,000 Wages Payable210,000