1. Standard Cost Chapter Eleven
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Standard Cost
Chapter Eleven
This chapter begins our study of management control and performance measures. It explains how standard costs are used by managers to control costs.

2. 10-2
Standard Costs
Standards are benchmarks or “norms” for measuring performance. Two types of standards are commonly used.
Quantity standards specify how much of an input should be used to make a product or provide a service.
Cost (price) standards specify how much should be paid for each unit of the input.
A standard is a benchmark or “norm” for measuring performance. In managerial accounting, two types of standards are commonly used by manufacturing, service, food and not-for-profit organizations:
 Quantity standards specify how much of an input should be used to make a product or provide a service. For example: a. Auto service centers like Firestone and Sears set labor time standards for the completion of work tasks. b. Fast-food outlets such as McDonald’s have exacting standards for the quantity of meat going into a sandwich.
 Cost (price) standards specify how much should be paid for each unit of the input. For example: a. Hospitals have standard costs for food, laundry, and other items b. Home construction companies have standard labor costs that they apply to sub-contractors such as framers, roofers, and electricians c. Manufacturing companies often have highly developed standard costing systems that establish quantity and cost (price) standards for each separate product’s material, labor and overhead inputs. These standards are listed on a standard cost card.

3. Manufacturing Overhead
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Standard Costs
Deviations from standards deemed significant are brought to the attention of management, a practice known as management by exception.
Standard
Amount
Direct Material
Management by exception is a system of management in which standards are set for various operating activities, with actual results compared to these standards. Any deviations that are deemed significant are brought to the attention of management as “exceptions.”
This chapter applies the management by exception principle to quantity and cost (price) standards with an emphasis on manufacturing applications.
Direct Labor
Manufacturing Overhead
Type of Product Cost

4. Setting Standard Costs
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Setting Standard Costs
Accountants, engineers, purchasing agents, and production managers combine efforts to set standards that encourage efficient future production.
Setting price and quantity standards requires the combined expertise of everyone who has responsibility for purchasing and using inputs. In a manufacturing setting, this might include accountants, engineers, purchasing managers, production supervisors, line managers, and production workers.
Standards should be designed to encourage efficient future operations, not just a repetition of past inefficient operations.

5. Setting Standard Costs
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Setting Standard Costs
Should we use ideal standards that require employees to work at 100 percent peak efficiency?
I recommend using practical standards that are currently attainable with reasonable and efficient effort.
Standards tend to fall into one of two categories:
 Ideal standards can only be attained under the best of circumstances. They allow for no work interruptions, and they require employees to continually work at percent peak efficiency.
 Practical standards are tight, but attainable. They allow for normal machine downtime and employee rest periods and can be attained through reasonable, highly efficient efforts of the average worker. Practical standards can also be used for forecasting cash flows and in planning inventory.
Engineer
Managerial Accountant

6. 10-6
Learning Objective 1
Explain how direct materials standards and direct labor standards are set.
Learning objective number 1 is to explain how direct materials standards and direct labor standards are set.

7. Setting Direct Material Standards
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Setting Direct Material Standards
Price Standards
Quantity Standards
Summarized in a Bill of Materials.
Final, delivered cost of materials, net of discounts.
The standard price per unit for direct materials should reflect the final, delivered cost of the materials, net of applicable discounts.
The standard quantity per unit for direct materials should reflect the amount of material required for each unit of finished product, as well as an allowance for unavoidable waste, spoilage, and other normal inefficiencies.
A bill of materials is a list that shows the quantity of each type of material in a unit of finished product.

8. 10-8
Setting Standards
Six Sigma advocates have sought to eliminate all defects and waste, rather than continually build them into standards.
As a result allowances for waste and spoilage that are built into standards should be reduced over time.
Six Sigma advocates argue that waste and spoilage should not be tolerated. If allowances for waste and spoilage are built into the standard quantity, the level of those allowances should be reduced over time.

9. Setting Direct Labor Standards
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Setting Direct Labor Standards
Rate Standards
Often a single rate is used that reflects the mix of wages earned.
Time Standards
Use time and motion studies for each labor operation.
The standard rate per hour for direct labor includes not only wages earned but also fringe benefits and other labor costs. Many companies prepare a single rate for all employees within a department that reflects the “mix” of wage rates earned.
The standard hours per unit reflects the labor hours required to complete one unit of product. Standards can be determined by using available references that estimate the time needed to perform a given task, or by relying on time and motion studies.

10. Setting Variable Overhead Standards
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Setting Variable Overhead Standards
Rate Standards
The rate is the variable portion of the predetermined overhead rate.
Activity Standards
The activity is the base used to calculate the predetermined overhead.
The price standard for variable manufacturing overhead comes from the variable portion of the predetermined overhead rate.
The quantity standard for variable manufacturing overhead is usually expressed in either direct labor hours or machine hours depending on which is used as the allocation base in the predetermined overhead rate.

11. Standard Cost Card – Variable Production Cost
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Standard Cost Card – Variable Production Cost
A standard cost card for one unit of product might look like this:
The standard cost card is a detailed listing of the standard amounts of direct materials, direct labor, and variable overhead inputs that should go into a unit of product, multiplied by the standard price or rate that has been set for each input.

12. Standards vs. Budgets A standard is a per unit cost.
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Standards vs. Budgets
A standard is a per unit cost.
Standards are often used when preparing budgets.
Are standards the same as budgets?
A budget is set for total costs.
A standard is a unit amount, whereas a budget is a total amount. A standard can be viewed as the budgeted cost for one unit of product.

13. Price and Quantity Standards
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Price and Quantity Standards
Price and and quantity standards are determined separately for two reasons:
The purchasing manager is responsible for raw material purchase prices and the production manager is responsible for the quantity of raw material used.
Price and and quantity standards are determined separately for two reasons:
Different managers are usually responsible for buying and for using inputs For example: The purchasing manager is responsible for raw material purchase prices and the production manager is responsible for the quantity of raw material used.
The buying and using activities occur at different points in time. For example: Raw material purchases may be held in inventory for a period of time before being used in production.
The buying and using activities occur at different times. Raw material purchases may be held in inventory for a period of time before being used in production.

14. A General Model for Variance Analysis
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A General Model for Variance Analysis
Variance Analysis
Price Variance
Difference between actual price and standard price
Quantity Variance
Difference between actual quantity and standard quantity
Differences between standard prices and actual prices and standard quantities and actual quantities are called variances. The act of computing and interpreting variances is called variance analysis.

15. A General Model for Variance Analysis
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A General Model for Variance Analysis
Variance Analysis
Price Variance
Quantity Variance
Price and quantity variances can be computed for all three variable cost elements – direct materials, direct labor, and variable manufacturing overhead – even though the variances have different names as shown.
Materials price variance Labor rate variance VOH spending variance
Materials quantity variance
Labor efficiency variance
VOH efficiency variance

16. A General Model for Variance Analysis
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A General Model for Variance Analysis
Price Variance
Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Although price and quantity variances are known by different names, they are computed exactly the same way (as shown on this slide) for direct materials, direct labor, and variable manufacturing overhead.

17. A General Model for Variance Analysis
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A General Model for Variance Analysis
Price Variance
Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Actual quantity is the amount of direct materials, direct labor, and variable manufacturing overhead actually used.
The actual quantity represents the amount of direct materials, direct labor, and variable manufacturing overhead actually used.

18. A General Model for Variance Analysis
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A General Model for Variance Analysis
Price Variance
Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Standard quantity is the standard quantity allowed for the actual output of the period.
The standard quantity represents the standard quantity allowed for the actual output of the period.

19. A General Model for Variance Analysis
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A General Model for Variance Analysis
Price Variance
Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
The actual price represents the actual amount paid for the input used.
Actual price is the amount actually paid for the input used.

20. A General Model for Variance Analysis
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A General Model for Variance Analysis
Price Variance
Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
The standard price represents the amount that should have been paid for the input used.
Standard price is the amount that should have been paid for the input used.

21. A General Model for Variance Analysis
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A General Model for Variance Analysis
Price Variance
Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
In equation form, price and quantity variances are calculated as shown.
(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)
AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity

22. 10-22
Learning Objective 2
Compute the direct materials price and quantity variances and explain their significance.
Learning objective number 2 is to compute the direct materials price and quantity variances and explain their significance.

23. Material Variances Example
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Material Variances Example
Glacier Peak Outfitters has the following direct material standard for the fiberfill in its mountain parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.
Last month 210 kgs of fiberfill were purchased and used to make 2,000 parkas. The material cost a total of $1,029.
Here’s an example that will give us an opportunity to compute material price and quantity variances.

24. Material Variances Summary
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Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
210 kgs kgs kgs × × × $4.90 per kg $5.00 per kg $5.00 per kg.
= $1, = $1, = $1,000
Price variance $21 favorable
Quantity variance $50 unfavorable
The materials price variance, defined as the difference between what is paid for a quantity of materials and what should have been paid according to the standard, is $21 favorable. The price variance is labeled favorable because the actual price was less than the standard price by $0.10 per kilogram.
The materials quantity variance, defined as the difference between the quantity of materials used in production and the quantity that should have been used according to the standard, is $50 unfavorable. The quantity variance is labeled unfavorable because the actual quantity exceeds the standard quantity allowed by 10 kilograms

25. Material Variances Summary
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Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
210 kgs kgs kgs × × × $4.90 per kg $5.00 per kg $5.00 per kg.
= $1, = $1, = $1,000
$1,029  210 kgs = $4.90 per kg
The actual price of $4.90 per kilogram is computed by dividing the actual cost of the material by the actual number of kilograms purchased.
Price variance $21 favorable
Quantity variance $50 unfavorable

26. Material Variances Summary
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Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
210 kgs kgs kgs × × × $4.90 per kg $5.00 per kg $5.00 per kg.
= $1, = $1, = $1,000
0.1 kg per parka  2,000 parkas = 200 kgs
The standard quantity of 200 kilograms is computed by multiplying the standard quantity per parka times the number of parkas made.
Price variance $21 favorable
Quantity variance $50 unfavorable

27. Material Variances: Using the Factored Equations
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Material Variances: Using the Factored Equations
Materials price variance
MPV = AQ (AP - SP)
= 210 kgs ($4.90/kg - $5.00/kg)
= 210 kgs (-$0.10/kg)
= $21 F
Materials quantity variance
MQV = SP (AQ - SQ)
= $5.00/kg (210 kgs-(0.1 kg/parka 2,000 parkas))
= $5.00/kg (210 kgs kgs)
= $5.00/kg (10 kgs)
= $50 U
The equations that we have been using thus far can be factored as shown and used to compute price and quantity variances.

28. Isolation of Material Variances
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Isolation of Material Variances
I’ll start computing the price variance when material is purchased rather than when it’s used.
I need the price variance sooner so that I can better identify purchasing problems.
You accountants just don’t understand the problems that purchasing managers have.
Most companies compute the materials price variance when materials are purchased. They calculate the materials quantity variance after materials are used in production.

29. 10-29
Material Variances
The price variance is computed on the entire quantity purchased.
The quantity variance is computed only on the quantity used.
Hanson purchased and used 1,700 pounds. How are the variances computed if the amount purchased differs from the amount used?
The materials price variance is computed using the entire amount of material purchased during the period. The materials quantity variance is computed using only the portion of materials that was used in production during the period.

30. Responsibility for Material Variances
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Responsibility for Material Variances
Materials Quantity Variance
Materials Price Variance
Purchasing Manager
Production Manager
The purchasing manager and production manager are usually held responsible for the materials price variance and materials quantity variance, respectively. The standard price is used to compute the quantity variance so that the production manager is not held responsible for the performance of the purchasing manager.
The standard price is used to compute the quantity variance so that the production manager is not held responsible for the purchasing manager’s performance.

31. Responsibility for Material Variances
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Responsibility for Material Variances
Your poor scheduling sometimes requires me to rush order material at a higher price, causing unfavorable price variances.
I am not responsible for this unfavorable material quantity variance.
You purchased cheap material, so my people had to use more of it.
The materials variances are not always entirely controllable by one person or department. For example, the production manager may schedule production in such a way that it requires express delivery of raw materials resulting in an unfavorable materials price variance. The purchasing manager may purchase lower quality raw materials resulting in an unfavorable materials quantity variance for the production manager.

32. 1.5 pounds per Zippy at $4.00 per pound
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Quick Check 
Zippy
Hanson Inc. has the following direct material standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 1,700 pounds of material were purchased and used to make 1,000 Zippies. The material cost a total of $6,630.
In this example, the company produces a Zippy. The direct materials standard calls for 1.5 pounds per Zippy at $4.00 per pound. Last week, Hanson purchased and used 1,700 pounds of material to produce 1,000 Zippies. The 1,700 pounds of material cost a total of $6,630. Now, we will see several questions based on the information on this screen. You may wish to take some notes to use as you answer the questions. Try to answer each question before advancing to the solution.

33. Quick Check  Hanson’s material price variance (MPV) for the week was:
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Quick Check 
Zippy
Hanson’s material price variance (MPV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Here’s your first question.

34. 10-34
Quick Check 
Zippy
Hanson’s material price variance (MPV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
MPV = AQ(AP - SP) MPV = 1,700 lbs. × ($ ) MPV = $170 Favorable
We find the material price variance by multiplying the actual quantity of material purchased times the difference between the actual price per pound and the standard price per pound. We find the actual price per pound by dividing the $6,630 total actual price paid for the material by the 1,700 pounds purchased.
The $170 favorable material price variance results because Hanson paid 10 cents per pound less than standard for 1,700 pounds of material.

35. 10-35
Quick Check 
Zippy
Hanson’s material quantity variance (MQV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Here’s your second question.

36. 10-36
Quick Check 
Zippy
Hanson’s material quantity variance (MQV) for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
The standard quantity is the amount of material that Hanson should have used to make 1,000 Zippies. We find the standard quantity by multiplying the 1.5 pounds per unit standard for one Zippy times the 1,000 Zippies.
Now that we know the standard quantity, let’s calculate the material quantity variance. We find the material quantity variance by multiplying the standard price for one pound of material times the difference between the actual quantity of material and the standard quantity of material. The $800 unfavorable material quantity variance results because Hanson used 200 pounds more than standard to make the 1,000 Zippies, and each pound of material has a standard price of $4.00.
MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800 unfavorable

37. 10-37
Quick Check 
Zippy
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
1,700 lbs ,700 lbs ,500 lbs × × × $3.90 per lb $4.00 per lb $4.00 per lb.
= $6, = $ 6, = $6,000
Here we see a summary of the material price and quantity variance computations in a convenient three-column format. You may find this three-column format more helpful than the equations that we used to answer the previous two questions.
Price variance $170 favorable
Quantity variance $800 unfavorable

38. Quick Check  Continued
10-38
Quick Check  Continued
Zippy
Hanson Inc. has the following material standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 2,800 pounds of material were purchased at a total cost of $10,920, and 1,700 pounds were used to make 1,000 Zippies.
Let’s extend the Hanson example by increasing the quantity of material purchased to 2,800 pounds at a total cost of $10,920. All other information is the same as before.

39. Quick Check  Continued
10-39
Quick Check  Continued
Zippy
Actual Quantity Actual Quantity Purchased Purchased × × Actual Price Standard Price
2,800 lbs ,800 lbs × × $3.90 per lb $4.00 per lb.
= $10, = $11,200
Hanson actually paid $10,920 for the 2,800 pounds of material. Multiplying the standard price of $4.00 per pound times the 2,800 pounds of material purchased, we find that Hanson should have paid $11,200. The price variance is now $280 favorable. The price variance increases in this example because the quantity purchased increased.
The $280 favorable material price variance results because Hanson paid $0.10 per pound less than standard for 2,800 pounds of material.
Price variance $280 favorable
Price variance increases because quantity purchased increases.

40. Quick Check  Continued
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Quick Check  Continued
Zippy
Actual Quantity Used Standard Quantity × × Standard Price Standard Price
1,700 lbs ,500 lbs × × $4.00 per lb $4.00 per lb.
= $6, = $6,000
The material quantity variance is the same as before because Hanson again used the same amount of material as before to make the same number of Zippies.
Quantity variance is unchanged because actual and standard quantities are unchanged.
Quantity variance $800 unfavorable

41. 10-41
Learning Objective 3
Compute the direct labor rate and efficiency variances and explain their significance.
Learning objective number 3 is to compute the direct labor rate and efficiency variances and explain their significance.

42. Labor Variances Example
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Labor Variances Example
Glacier Peak Outfitters has the following direct labor standard for its mountain parka.
1.2 standard hours per parka at $10.00 per hour
Last month, employees actually worked 2,500 hours at a total labor cost of $26,250 to make 2,000 parkas.
Now let’s turn our attention back to Glacier Peak Outfitters to illustrate the computation of labor rate and efficiency variances.

43. Labor Variances Summary
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Labor Variances Summary
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
2,500 hours ,500 hours ,400 hours × × × $10.50 per hour $10.00 per hour $10.00 per hour
= $26, = $25, = $24,000
Rate variance $1,250 unfavorable
Efficiency variance $1,000 unfavorable
The labor rate variance, defined as the difference between the actual average hourly wage paid and the standard hourly wage, is $1,250 unfavorable. The rate variance is labeled unfavorable because the actual average wage rate was more than the standard wage rate by $0.50 per hour.
The labor efficiency variance, defined as the difference between the actual quantity of labor hours and the quantity allowed according to the standard, is $1,000 unfavorable. The efficiency variance is labeled unfavorable because the actual quantity of hours exceeds the standard quantity allowed by 100 hours.

44. Labor Variances Summary
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Labor Variances Summary
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
2,500 hours ,500 hours ,400 hours × × × $10.50 per hour $10.00 per hour $10.00 per hour
= $26, = $25, = $24,000
$26,250  2,500 hours = $10.50 per hour
Rate variance $1,250 unfavorable
Efficiency variance $1,000 unfavorable
The actual price (or rate) of $10.50 per hour is computed by dividing the actual total cost for labor by the actual number of hours worked.

45. Labor Variances Summary
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Labor Variances Summary
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
2,500 hours ,500 hours ,400 hours × × × $10.50 per hour $10.00 per hour $10.00 per hour
= $26, = $25, = $24,000
1.2 hours per parka  2,000 parkas = 2,400 hours
Rate variance $1,250 unfavorable
Efficiency variance $1,000 unfavorable
The standard quantity of 2,400 hours is computed by multiplying the standard hours for one parka times the number of parkas made.

46. Labor Variances: Using the Factored Equations
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Labor Variances: Using the Factored Equations
Labor rate variance
LRV = AH (AR - SR)
= 2,500 hours ($10.50 per hour – $10.00 per hour)
= 2,500 hours ($0.50 per hour)
= $1,250 unfavorable
Labor efficiency variance
LEV = SR (AH - SH)
= $10.00 per hour (2,500 hours – 2,400 hours)
= $10.00 per hour (100 hours)
= $1,000 unfavorable
Factored equations can also be used to compute the rate and efficiency variances.

47. Responsibility for Labor Variances
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Responsibility for Labor Variances
Production managers are usually held accountable for labor variances because they can influence the:
Mix of skill levels assigned to work tasks.
Level of employee motivation.
Quality of production supervision.
Quality of training provided to employees.
Production Manager
Labor variances are partially controllable by employees within the Production Department. For example, production managers/supervisors can influence:
The deployment of highly skilled workers and less skilled workers on tasks consistent with their skill levels.
The level of employee motivation within the department.
  The quality of production supervision.
The quality of the training provided to the employees.

48. Responsibility for Labor Variances
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Responsibility for Labor Variances
I think it took more time to process the materials because the Maintenance Department has poorly maintained your equipment.
I am not responsible for the unfavorable labor efficiency variance!
You purchased cheap material, so it took more time to process it.
However, labor variances are not entirely controllable by one person or department. For example:
The Maintenance Department may do a poor job of maintaining production equipment. This may increase the processing time required per unit, thereby causing an unfavorable labor efficiency variance.
The purchasing manager may purchase lower quality raw materials resulting in an unfavorable labor efficiency variance for the production manager.

49. 1.5 standard hours per Zippy at $12.00 per direct labor hour
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Quick Check 
Zippy
Hanson Inc. has the following direct labor standard to manufacture one Zippy:
1.5 standard hours per Zippy at $12.00 per direct labor hour
Last week, 1,550 direct labor hours were worked at a total labor cost of $18,910 to make 1,000 Zippies.
Let’s return to the Hanson Company and compute labor variances.
The direct labor standard to produce each Zippy is 1.5 hours at $12.00 per hour. Last week, it took 1,550 direct labor hours to produce 1,000 Zippies, and the total labor cost was $18,910.
Next, we will see several questions based on the information on this screen. Again, you may wish to take some notes to use as you answer the questions. Also, just as you did with the material variance questions, try to answer each question before advancing to the solution.

50. Quick Check  Hanson’s labor rate variance (LRV) for the week was:
10-50
Quick Check 
Zippy
Hanson’s labor rate variance (LRV) for the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Here’s your first labor variance question.

51. 10-51
Quick Check 
Zippy
Hanson’s labor rate variance (LRV) for the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
LRV = AH(AR - SR) LRV = 1,550 hrs($ $12.00) LRV = $310 unfavorable
We find the actual labor rate by dividing the $18,910 total labor cost by 1,550 direct labor hours actually worked.
Now that we know the actual labor rate, let’s calculate the labor rate variance.
We find the labor rate variance by multiplying the actual labor hours worked times the difference between the actual rate per labor hour and the standard rate per labor hour. The $310 unfavorable labor rate variance results because Hanson paid $0.20 per labor hour more than standard for 1,550 labor hours actually worked.

52. 10-52
Quick Check 
Zippy
Hanson’s labor efficiency variance (LEV) for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
Here’s your second labor variance question.

53. 10-53
Quick Check 
Zippy
Hanson’s labor efficiency variance (LEV) for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
The total standard hours for labor is the amount of time Hanson’s employees should have worked to make 1,000 Zippies. We find the total standard hours by multiplying the 1.5 standard hours for one Zippy times the 1,000 Zippies made.
Now that we know the total standard hours, let’s calculate the labor efficiency variance.
We find the labor efficiency variance by multiplying the standard rate for one hour of labor times the difference between the actual hours of labor and the standard hours of labor. The $600 unfavorable labor efficiency variance results because Hanson’s employees worked 50 hours more than standard to make 1,000 Zippies, and each hour of labor has a standard rate of $12.00.
LEV = SR(AH - SH) LEV = $12.00(1,550 hrs - 1,500 hrs) LEV = $600 unfavorable

54. 10-54
Quick Check 
Zippy
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
1,550 hours ,550 hours ,500 hours × × × $12.20 per hour $12.00 per hour $12.00 per hour
= $18, = $18, = $18,000
Here we see a summary of the labor rate and efficiency variance computations in a convenient three-column format. You may find this three-column format more helpful than the equations that we used to answer the previous two questions.
Rate variance $310 unfavorable
Efficiency variance $600 unfavorable

55. 10-55
Learning Objective 4
Compute the variable manufacturing overhead spending and efficiency variances.
Learning objective number 4 is to compute the variable manufacturing overhead spending and efficiency variances.

56. Variable Manufacturing Overhead Variances Example
10-56
Variable Manufacturing Overhead Variances Example
Glacier Peak Outfitters has the following direct variable manufacturing overhead labor standard for its mountain parka.
1.2 standard hours per parka at $4.00 per hour
Last month, employees actually worked 2,500 hours to make 2,000 parkas. Actual variable manufacturing overhead for the month was $10,500.
Now that we have studied material and labor variances, let’s take a look a variable manufacturing overhead variances. We will return to Glacier Peak Outfitters to illustrate the computation of variable manufacturing spending and efficiency variances.

57. Variable Manufacturing Overhead Variances Summary
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Variable Manufacturing Overhead Variances Summary
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
2,500 hours ,500 hours ,400 hours × × × $4.20 per hour $4.00 per hour $4.00 per hour
= $10, = $10, = $9,600
Spending variance $500 unfavorable
Efficiency variance $400 unfavorable
The variable overhead spending variance, defined as the difference between the actual variable overhead costs incurred during the period and the standard cost that should have been incurred based on the actual activity of the period, is $500 unfavorable. The spending variance is labeled unfavorable because the actual variable overhead rate was more than the standard variable overhead rate by $0.20 per hour.
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. The efficiency variance is labeled unfavorable because the actual quantity of the activity (hours) exceeds the standard quantity of the activity allowed by 100 hours.

58. Variable Manufacturing Overhead Variances Summary
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Variable Manufacturing Overhead Variances Summary
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
2,500 hours ,500 hours ,400 hours × × × $4.20 per hour $4.00 per hour $4.00 per hour
= $10, = $10, = $9,600
$10,500  2,500 hours = $4.20 per hour
Spending variance $500 unfavorable
Efficiency variance $400 unfavorable
The actual price of $4.20 per hour is computed by dividing the actual total cost for variable manufacturing overhead by the actual number of hours worked.

59. Variable Manufacturing Overhead Variances Summary
10-59
Variable Manufacturing Overhead Variances Summary
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
2,500 hours ,500 hours ,400 hours × × × $4.20 per hour $4.00 per hour $4.00 per hour
= $10, = $10, = $9,600
1.2 hours per parka  2,000 parkas = 2,400 hours
Spending variance $500 unfavorable
Efficiency variance $400 unfavorable
The standard quantity of 2,400 hours is computed by multiplying the standard hours for one parka times the number of parkas made.

60. Variable Manufacturing Overhead Variances: Using Factored Equations
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Variable Manufacturing Overhead Variances: Using Factored Equations
Variable manufacturing overhead spending variance
VMSV = AH (AR - SR)
= 2,500 hours ($4.20 per hour – $4.00 per hour)
= 2,500 hours ($0.20 per hour)
= $500 unfavorable
Variable manufacturing overhead efficiency variance
VMEV = SR (AH - SH)
= $4.00 per hour (2,500 hours – 2,400 hours)
= $4.00 per hour (100 hours)
= $400 unfavorable
Factored equations can be used to compute the spending and efficiency variances.

61. 1.5 standard hours per Zippy at $3.00 per direct labor hour
10-61
Quick Check 
Zippy
Hanson Inc. has the following variable manufacturing overhead standard to manufacture one Zippy:
1.5 standard hours per Zippy at $3.00 per direct labor hour
Last week, 1,550 hours were worked to make 1,000 Zippies, and $5,115 was spent for variable manufacturing overhead.
Now let’s return to the Hanson company and compute the variable manufacturing overhead variances.
The variable manufacturing overhead standard to produce each Zippy is 1.5 hours at $3.00 per hour. Last week, it took 1,550 hours to produce 1,000 Zippies, and the total variable manufacturing overhead cost was $5,115.
Next, we will see several questions based on the information on this screen. Again, you may wish to take some notes to use as you answer the questions. Also, just as you did with the material and labor variance questions, try to answer each question before advancing to the solution.

62. 10-62
Quick Check 
Zippy
Hanson’s spending variance (VOSV) for variable manufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.
Here’s your first variable manufacturing overhead variance question.

63. 10-63
Quick Check 
Zippy
Hanson’s spending variance (VOSV) for variable manufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.
VOSV = AH(AR - SR) VOSV = 1,550 hrs($ $3.00) VOSV = $465 unfavorable
We find the actual variable manufacturing overhead rate by dividing the $5,115 total variable manufacturing overhead cost by $1,550 direct labor hours actually worked.
Now that we know the actual variable manufacturing overhead rate, let’s calculate the variable manufacturing overhead spending variance.
We find the variable manufacturing overhead spending variance by multiplying the actual hours worked times the difference between the actual variable manufacturing overhead rate per hour and the standard variable manufacturing overhead rate per hour. The $465 unfavorable variable manufacturing overhead rate variance results because Hanson’s actual variable manufacturing overhead rate per labor hour is $0.30 per hour more than the standard variable manufacturing overhead rate per hour for the 1,550 hours actually worked.

64. 10-64
Quick Check 
Zippy
Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.
d. $150 favorable.
Here’s your second variable manufacturing overhead variance question.

65. 10-65
Quick Check 
Zippy
Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.
d. $150 favorable.
1,000 units × 1.5 hrs per unit
The total standard hours is the amount of time Hanson’s employees should have worked to make 1,000 Zippies. We find the total standard hours by multiplying the 1.5 standard hours for one Zippy times the 1,000 Zippies made.
Now that we know the total standard hours, let’s calculate the variable manufacturing overhead efficiency variance.
We find the variable manufacturing overhead efficiency variance by multiplying the standard rate for variable manufacturing overhead times the difference between the actual hours of labor and standard hours of labor. The $150 unfavorable variable manufacturing overhead efficiency variance results because Hanson’s employees worked 50 hours more than standard to make 1,000 Zippies at a standard variable manufacturing overhead rate of $3.00 per hour.
VOEV = SR(AH - SH) VOEV = $3.00(1,550 hrs - 1,500 hrs) VOEV = $150 unfavorable

66. 10-66
Quick Check 
Zippy
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
1,550 hours ,550 hours ,500 hours × × × $3.30 per hour $3.00 per hour $3.00 per hour
= $5, = $4, = $4,500
Just as we did with labor and material variances, we can summarize the variable manufacturing overhead variance computations in a convenient three-column format. You may find this three-column format more helpful than the equations that we used to answer the previous two questions.
Spending variance $465 unfavorable
Efficiency variance $150 unfavorable

67. Variance Analysis and Management by Exception
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Variance Analysis and Management by Exception
Larger variances, in dollar amount or as a percentage of the standard, are investigated first.
All variances are not worth investigating. Methods for highlighting a subset of variances as exceptions include:
Looking at the size of the variance.
Looking at the size of the variance relative to the amount of spending.
How do I know which variances to investigate?

68. A Statistical Control Chart
10-68
Exhibit
10-9
A Statistical Control Chart
Warning signals for investigation • •
Favorable Limit • • • •
Desired Value • •
Unfavorable Limit •
Plotting variance analysis data on a statistical control chart is helpful in variance investigation decisions. Variances are investigated if:
They are unusual relative to the normal level of random fluctuation.
An unusual pattern emerges in the data. 1 2 3 4 5 6 7 8 9
Variance Measurements

69. 10-69
Learning Objective 6
Compute delivery cycle time, throughput time, and manufacturing cycle efficiency (MCE).
Learning objective number 6 is to compute delivery cycle time, throughput time, and manufacturing cycle efficiency.

70. Delivery Performance Measures
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Delivery Performance Measures
Order Received
Production Started
Goods Shipped
Process Time + Inspection Time + Move Time + Queue Time
Wait Time
Throughput Time
Delivery cycle time is the elapsed time from when a customer order is received to when the completed order is shipped.
Throughput (manufacturing cycle) time is the amount of time required to turn raw materials into completed products. This includes process time, inspection time, move time, and queue time. Process time is the only value-added activity of the four times mentioned.
Delivery Cycle Time
Process time is the only value-added time.

71. Delivery Performance Measures
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Delivery Performance Measures
Order Received
Production Started
Goods Shipped
Process Time + Inspection Time + Move Time + Queue Time
Wait Time
Throughput Time
Manufacturing cycle efficiency (MCE) is computed by dividing value-added time by manufacturing cycle (throughput) time. An MCE less than one indicates that non-value-added time is present in the production process.
Next, we will look at a series of questions dealing with delivery performance measures.
Delivery Cycle Time
Manufacturing
Cycle
Efficiency
Value-added time Manufacturing cycle time =

72. 10-72
Quick Check 
A TQM team at Narton Corp has recorded the following average times for production:
Wait days Move days
Inspection 0.4 days Queue days
Process days
What is the throughput time?
a days
b days
c days
d days
Here’s your first question on delivery performance measures asking for a computation of throughput time.

73. 10-73
Quick Check 
A TQM team at Narton Corp has recorded the following average times for production:
Wait days Move days
Inspection 0.4 days Queue days
Process days
What is the throughput time?
a days
b days
c days
d days
Throughput time is the sum of process time, inspection time, move time, and queue time. The total for these four times is 10.4 days.
Throughput time = Process + Inspection + Move + Queue
= 0.2 days days days days
= 10.4 days

74. 10-74
Quick Check 
A TQM team at Narton Corp has recorded the following average times for production:
Wait days Move days
Inspection 0.4 days Queue days
Process days
What is the Manufacturing Cycle Efficiency?
a. 50.0%
b %
c. 52.0%
d %
Here’s your second question on delivery performance measures asking for a computation of manufacturing cycle efficiency.

75. Quick Check  MCE = Value-added time ÷ Throughput time
10-75
Quick Check 
A TQM team at Narton Corp has recorded the following average times for production:
Wait days Move days
Inspection 0.4 days Queue days
Process days
What is the Manufacturing Cycle Efficiency?
a. 50.0%
b %
c. 52.0%
d %
Manufacturing cycle efficiency is found by dividing value-added time by throughput time. Process time is the only value-added time. Process time of 0.2 days divided by throughput time of 10.4 days results in a manufacturing cycle efficiency of 1.9 percent.
MCE = Value-added time ÷ Throughput time
= Process time ÷ Throughput time
= 0.2 days ÷ 10.4 days
= 1.9%

76. 10-76
Quick Check 
A TQM team at Narton Corp has recorded the following average times for production:
Wait days Move days
Inspection 0.4 days Queue days
Process days
What is the delivery cycle time?
a days
b days
c days
d days
Here’s your third question on delivery performance measures asking for a computation of delivery cycle time.

77. Quick Check  Delivery cycle time = Wait time + Throughput time
10-77
Quick Check 
Delivery cycle time = Wait time + Throughput time
= 3.0 days days
= 13.4 days
A TQM team at Narton Corp has recorded the following average times for production:
Wait days Move days
Inspection 0.4 days Queue days
Process days
What is the delivery cycle time?
a days
b days
c days
d days
Delivery cycle time is the sum of wait time plus throughput time. The total for these two times is 13.4 days.

78. 10-78
End of Chapter 10
End of Chapter 10.