1 Chapter 10. Standard Costs. M11-Chp-10-1-Standard-Costs Edited May 24, Copyright © 2011, Dr. Howard Godfrey This file contains illustrative problems that will be used in the lecture to illustrate important concepts and procedures. Copyright Dr. Howard Godfrey – M11-Chp-10-1-Standard-Costss

2 After studying Chapter 10, you should be able to: LO1 Compute the direct materials quantity and price variances and explain their significance. LO2 Compute the direct labor efficiency and rate variances and explain their significance. LO3 Compute the variable manufacturing overhead efficiency and rate variances and explain their significance. LO4 (Appendix 10A) Compute and interpret the fixed overhead volume and budget variances. LO5 (Appendix 10B) Prepare journal entries to record standard costs and variances.

Goal Company manufactures a product. Standard for one unit is 9 labor hours at $15 per hour. During this period, 500 units were produced. Actual total direct labor cost was $70,000 for 5,000 labor hours worked. What is the direct labor rate variance? a. $5,000 unfavorable b. $5,000 favorable c. $14,250 unfavorable What is the direct labor efficiency variance? a. $7,500 unfavorable b. $7,500 favorable c. $14,250 unfavorable 3

What is the labor rate variance 4 1.$5,000 unfavorable 2.$5,000 favorable 3.$4,500 favorable

What is labor efficiency variance? 5 1.$7,500 unfavorable 2.$7,500 favorable 3.$14,000 favorable

1: Setting standards 6

2: Materials variances 7

Materials Variances Throop Company had budgeted 50,000 units of output using 50,000 units of raw materials at a total material cost of $100,000 ($2 per unit of raw material). Actual output was 50,000 units of product requiring 45,000 units of raw materials at a cost of $2.10 per unit. The direct-material price variance & usage variance were: Price Usage or efficiency a. $ 4,500 unfavorable $10,000 favorable b. $ 5,000 favorable $10,500 unfavorable c. $ 5,000 unfavorable $10,500 favorable d. $10,000 favorable $ 4,500 unfavorable (Source: CPA) 9

Isolating the Causes of Variances During March, Big Company's direct-material costs for the manufacture of product T were: Actual unit purchase price$6.50 Standard quantity allowed for actual production2,700 Quantity purchased & used for actual production2,900 Standard unit price (Std. cost per unit)$6.25 The material usage variance for March was: a. $1,250 unfavorable b. $1,250 favorable c. $1,300 unfavorable d. $1,300 favorable 12

T Accounts for Variance Entries 14

Material Variances Local Company manufactures sofa's with vinyl covering. The standard material cost for the vinyl for one sofa is $27.00 based on twelve square feet of vinyl at a cost of $2.25 per square foot. A production run of 1,000 sofas resulted in usage of 12,600 square feet of vinyl at a cost of $2.50 per square foot, a total cost of $31,500. The price variance resulting from the above production run was: a. $1,200 unfavorable b. $3,150 unfavorable c. $1,800 favorable d. $3,150 favorable e. None of these 15

3: Direct labor variances 18

Labor Variances Information on Barber Company's direct- labor costs for January is as follows: Actual direct-labor hours34,500 Actual labor rate$7.00 Standard direct-labor hours35,000 Standard labor rate$6.40 What is Barber's direct-labor rate variance? a. $17,250 unfavorable b. $20,700 unfavorable c. $21,000 unfavorable d. $21,000 favorable 19

Isolating the Causes of Variances Information on Barber Company's direct- labor costs for January is as follows: Actual direct-labor hours34,500 Actual labor rate$7.00 Standard direct-labor hours35,000 Standard labor rate$6.40 What is Barber's direct-labor efficiency variance? a. $3,200 unfavorable b. $3,200 favorable 20

4: Variable overhead variances 23

Variable-Overhead Variances Note preceding slide. We were more efficient with labor hours than expected. That means we did not pay as much for labor as we would have expected. Overhead is what we spend to support our workers. If workers complete the work in less time, we have two favorable variances: 1.Labor efficiency variance 2.Variable overhead efficiency variance 24

Flexible Budget for Overhead-1 The exhibit on the second following page shows a flexible budget. The overhead application rate for variable overhead should be unchanged within the relevant range. The overhead rate for fixed overhead depends on the “denominator level.” (like how many students come to the dance to cover fixed band costs – earlier example.) The total overhead rate also depends on the denominator level. 25

Flexible Budget for Overhead-2 The exhibit on the next page shows a flexible budget. Recall from our earlier use of this problem that we used the high-low method to compute the fixed cost element of overhead and compute the variable overhead rate. 26

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Flexible Budget for Overhead-5 Note on Slide 7 that we budgeted fixed overhead to be $6,400. When the period was over, we found that we spent $6,500 for fixed overhead items. That is a spending problem. We produced enough product to justify using 900 hours of labor, but we actually used 910 hours of labor. That is an efficiency problem. This involves a waste of payroll dollars, but it also involves a waste of support costs (the support costs for the extra 10 hours of work that was wasted.) Etc. 29

Flexible Budget for Overhead-6 Our total overhead for 900 good hours of work should be: (900 good hours X ($ $1.40)) That would be $7,020. We actually spent $8,000 for overhead ($1,500 + $6,500) Our overall budget variance is $980. What are the specific reasons for this variance. One reason: we planned on operating 1,000 hours, but only had 900 standard hours of work. (Too few persons came to the dance) 30

Flexible Budget for Overhead Adams Corp. has developed the following flexible- budget formulas for annual indirect-labor cost: Annual indirect labor cost = $4,800 + $0.50 per machine hour Operating budgets for the current month are based upon 20,000 hours of planned machine time. Indirect-labor costs included in this monthly planning budget are: a. $14,800 b. $10,000 c. $14,400 d. $10,400 32

Flexible Budget for Overhead - Question When using a flexible budget, what will occur to variable costs (on a per unit basis) as production increases within the relevant range? a. Variable costs are not considered in flexible budgeting. b. Variable costs per unit will decrease. c. Variable costs per unit will increase. d. Variable costs per unit will remain unchanged.

Variable-Overhead Spending Variance Martin Company uses a two-way analysis of overhead variances. Selected data for the April production activity are as follows: Actual variable factory overhead incurred$196,000 Variable factory OH rate per direct-labor hour 6.00 Standard direct-labor hours allowed33,000 Actual direct-labor hours32,000 The variable overhead spending variance is: a. $2,000 favorable b. $4,000 unfavorable c. $4,000 favorable d. $6,000 favorable 35

Variable-Overhead Spending Variance A company uses a standard cost system and prepared the following budget at normal capacity for January: Direct-labor hours (denominator hours)24,000 Variable factory overhead$ 48,000 Fixed factory overhead$108,000 Total factory overhead per direct-labor hour$ 6.50 Actual data for January were as follows: Direct-labor hours worked 22,000 Total fixed factory overhead$105,000 Total variable overhead$ 39,000 Standard direct-labor hours allowed for capacity attained 23,000 What is the variable overhead efficiency variance for January? a. $2,000 favorable b. $5,000 favorable c. $2,000 unfavorable d. none of these 37

5: Performance measures 39

6: Fixed overhead variances 40

Production-Volume Variance A production-volume variance is a variance that appears whenever actual production deviates from the expected volume of production used in computing the fixed overhead rate.

Production-Volume Variance Actual volume - Expected volume Difference X Fixed overhead rate = Production-volume variance

Volume Variance Applied fixed overhead – Budgeted fixed overhead = Production-volume variance In practice, the production-volume variance is usually called simply the volume variance.

Other Variances The fixed-overhead flexible budget variance (also called the fixed-overhead spending variance or simply the budget variance) is the difference between actual fixed overhead and budgeted fixed overhead.

Fixed Overhead Variances Universal Co. uses a standard cost system and prepared the following budget at normal capacity for January: Direct-labor hours (denominator hours)24,000 Variable factory overhead$ 48,000 Fixed factory overhead$108,000 Total factory overhead per direct-labor hour$ 6.50 Actual data for January were as follows: Direct-labor hours worked 22,000 Total fixed factory overhead$105,000 Total variable overhead$ 45,000 Standard direct-labor hrs allowed for capacity attained 20,000 Fixed overhead spending variance for January? a. $2,000 favorable b. $3,000 favorable c. $2,000 unfavorable b. $3,000 unfavorable e. other

7: Journal entries 48

Materials Variances During March, Big Company's direct-material costs for the manufacture of product T were: Actual unit purchase price$6.50 Standard quantity allowed for actual production2,700 Quantity purchased & used for actual production2,900 Standard unit price (Std. cost per unit)$6.25 The material usage variance for March was: a. $1,250 unfavorable b. $1,250 favorable c. $1,300 unfavorable d. $1,300 favorable 49

T Accounts for Variance Entries 51

8: Other 52

Raleigh Corp. has developed the following flexible-budget formulas for annual indirect-labor cost: Total annual indirect labor cost = $4,800 + $0.50 per machine hour. Operating budgets for the current month are based upon 19,200 hours of planned machine time. Indirect-labor costs included in this monthly planning budget are: a. $14,800 b. $10,000 c. $14,400 d. $10,400 53

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5: More than one cost driver 56

6: Common errors 57

The End 58