M11 CHP 10 1 Standard Costs 2011 0524

Chapter 10.
Standard Costs.
M11-Chp-10-1-Standard-Costs-2011-0524
Edited May 24, 2011.
Copyright © 2011, Dr. Howard Godfrey
This file contains illustrative problems that

will be used in the lecture to illustrate
important concepts and procedures.
Copyright 2011. Dr. Howard Godfrey – M11-Chp-10-1-Standard-Costss-2011-0522 1

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.
2
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?
c. $14,250 unfavorable 3
What is the labor rate variance
1. $5,000 unfavorable
2. $5,000 favorable
3. $4,500 favorable
4
What is labor efficiency variance?
1. $7,500 unfavorable 100%
2. $7,500 favorable
3. $14,000 favorable
0% 0%
1 2 3
5
1: Setting
standards
6
2: Materials
variances
7
Standard Costing for Materials-Throop Note, we
Actual materials costs: change
Actual Units X Actual Cost Per Unit (AQ X AP) price to get
Actual Actual Actual Price Var.
Quantity Price Cost
X = $0 Price
Budget for materials used (AQ X SP) Variance
Actual Standard Budget for $0
Quantity Price RM Used
X = $0 Efficiency
Budget-accomplishment-output (SQ X SP) Variance
Standard Standard Budget (Std) for $0

Quantity Price Units Produced
X = $0
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
Standard Costing for Materials-Throop
Actual materials costs:
Actual Units X Actual Cost Per Unit (AQ X AP)
Actual Actual Actual
Quantity Price Cost
45,000 X $ 2.10 = Price
Actual Standard Budget for
45,000 X $ 2.00 = Efficiency
Standard Standard Budget (Std) for

50,000 X $ 2.00 =
Standard Costing for Materials-Throop
Quantity Price Cost
45,000 X $ 2.10 = $94,500 Price
Actual Standard Budget for $4,500
45,000 X $ 2.00 = $90,000 Efficiency
Standard Standard Budget (Std) for ($10,000)

50,000 X $ 2.00 = $100,000
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 production 2,700
Quantity purchased & used
Standard unit price (Std. cost per unit) $6.25
The material usage variance for March was:
c. $1,300 unfavorable d. $1,300 favorable
12
Standard Costing for Materials-Big Co.
Quantity Price Cost
2,900 X $ 6.50 = $18,850 Price
2,900 X $ 6.25 = $18,125 Efficiency
Standard Standard Budget (Std) for $1,250

2,700 X $ 6.25 = $16,875
T Accounts for Variance Entries
Big Company
Materials Work-in-Process Finished Goods Cost of Sales
18,850 18,850 18,125 18,125 16,875
Cash Accounts Payable Overhead Control Overhead

Applied
Other Accounts Price Variance Efficiency Variance

725 1,250
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
Standard Costing for Materials-Local Co.
Quantity Price Cost
X = $0 Price
X = $0 Efficiency
Standard Standard Budget (Std) for $0

X = $0
Standard Costing for Materials-Local Co.
Quantity Price Cost
12,600 X $ 2.50 = $31,500 Price
Actual Standard Budget for $3,150
12,600 X $ 2.25 = $28,350 Efficiency

12,000 X $ 2.25 = $27,000
3: Direct
labor
variances
18
Labor Variances
Information on Barber Company's direct-
labor costs for January is as follows:
Actual direct-labor hours 34,500
Actual labor rate $7.00
Standard direct-labor hours 35,000
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 labor rate $7.00
Standard direct-labor hours 35,000
Standard labor rate $6.40
What is Barber's direct-labor efficiency variance?
20
Labor Variances-
Actual labor costs: (i.e. AH X AR)
Hours Rate Cost Price
X = $0 Variance
Budget for activity level (AHXSR) $0
Hours Rate Hours Worked Efficiency
X = $0 Variance
Budget for output (i.e. SH X SR) $0
Hours Rate Units Produced
X = $0
Labor Variances- Barber Company
Actual labor costs: (i.e. AH X AR)
Hours Rate Cost Price
34,500 X $7.00 = $241,500 Variance
Budget for activity level (AHXSR) $20,700
Hours Rate Hours Worked Efficiency
34,500 X $6.40 = $220,800 Variance
Budget for output (i.e. SH X SR) ($3,200)
Hours Rate Units Produced
35,000 X $6.40 = $224,000
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
• 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
FLEXIBLE BUDGET FOR OVERHEAD-3
UNCC Corp. operates its production department under a flexible budget
with monthly allowances at 20% intervals. Capacity is based on direct
labor hours with 1,000 direct labor hours representing 100% normal
capacity. Exhibit shows budget allowance at the 80% & 100% levels.
Flexible Budget Costs Budgeted
at Various Output Levels Fixed O.H
ACTIVITY: 80% 100% 90%
Direct labor hours 800 1,000 900
Direct labor costs - at $10 per hour $8,000 $10,000 $ 9,000
COSTS:
Foreman's salary $3,000 $3,000
Indirect labor 2,800 3,000
Depreciation 1,000 1,000
Power 720 800
Total overhead $7,520 $7,800
Total Factory OH rate per hour: $9.40 $7.80
27
FLEXIBLE BUDGET FOR OVERHEAD - 4
Flexible Budget Costs Budgeted
at Various Output Levels Fixed O.H
ACTIVITY: 80% 100% 90%
Direct labor hours 800 1,000 900
Direct labor costs - at $10 per hour $8,000 $10,000 $ 9,000
COSTS:
Foreman's salary $3,000 $3,000 $3,000 $3,000
Indirect labor 2,800 3,000 2,900 2,000
Depreciation 1,000 1,000 1,000 1,000
Power 720 800 760 400
Total overhead $7,520 $7,800 $7,660 $6,400
Total Factory OH rate per hour: $9.40 $7.80 8.5111
Capacity used for determining overhead rate (100% ) - Hours 1,000
Standard fixed factoryOH rate per hour (Capacity is 100% ) $ 6.40
Standard variable factory overhead rate per hour $ 1.40
• 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
• Our total overhead for 900 good hours of work
should be:
(900 good hours X ($6.40 + $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 - 7
Actual variable overhead for October was 1,500
Actual fixed overhead for October was 6,500
Output level as % of capacity 90%
Standard Hours 900
Actual hours required for the output 910
Required:
1. Detailed flexible budget for 90% level. (Fill in blanks above).
$ 6,400 2. Total amount of budgeted fixed overhead.
$ 6.40 3. Standard fixed OH rate per hour, assuming the
denominator activity level is full capacity.
$ 1.40 4. Standard variable overhead rate per hour.
$ 980 5. Total overapplied or underapplied overhead for October.
(Actual factory output was at the 90% level).
$ (14.00) 6. Variable overhead efficiency variance. (Also F. or U.?)
(226.00) 7. Variable overhead spending variance. (Also F. or U.?)
$ (100.00) 8. Labor Efficiency Variance (Also F. or U.?)
$ (100.00) 9. Fixed overhead spending variance. (Also F. or U.?)

$ (640.00) 10. Fixed overhead volume variance. (Also F. or U.?)
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.
Standard Costing for Variable Overhead
Actual Cost
Actual Hours Actual Rate Actual Cost
X = $0 Spend. Var.
Budget for input $0

(Based on actual hours worked) Budget for actual
Actual Hours Std. Rate Hrs Worked
X = $0 Efficiency Var.
Budget for output $0

(Based on output or good hours) Budget (Std) for
Std. Hours Std. Rate Units Produced
X = $0 No Variance
Standard Cost Two amounts

are equal
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 allowed 33,000
The variable overhead spending variance is:
a. $2,000 favorable b. $4,000 unfavorable
c. $4,000 favorable d. $6,000 favorable
35
Actual Cost
X = $196,000 Spend. Var.
Budget for input $4,000

32,000 X $6.00 = $192,000 Efficiency Var.
Budget for output ($6,000)

33,000 X $6.00 = $198,000 No Variance

are equal
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
Actual Cost
22,000 X $1.77 = $39,000 Spend. Var.
Budget for input ($5,000)

22,000 X $2.00 = $44,000 Efficiency Var.
Budget for output ($2,000)

23,000 X $2.00 = $46,000 No Variance

are equal
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
Standard Costing for Fixed Overhead
Actual Fixed Overhead Go directly to third box
Actual Cost
X = $105,000 Spend.
Budgeted Fixed OH for input Var.
(Based on actual hours worked) $3,000
Go directly to third box Budget for
Actual Hrs No
X = $108,000 Efficiency
Variance
Budget Fixed OH for output Two amts
(Based on std hours worked) Budget (Std) for are equal
Units Produced
X =
Overhead Applied Volume
Std. Hours Std. Rate Standard Cost Var.
20,000 X $4.50 =
Standard Costing for Fixed Overhead
Actual Fixed Overhead Go directly to third box
Actual Cost
X = $105,000 Spend.
Budgeted Fixed OH for input Var.
(Based on actual hours worked) $3,000
Go directly to third box Budget for
Actual Hrs No
X = $108,000 Efficiency
Variance
Budget Fixed OH for output Two amts
(Based on std hours worked) Budget (Std) for are equal
Units Produced
X = $108,000
Overhead Applied Volume
Std. Hours Std. Rate Standard Cost Var.
20,000 X $4.50 = $90,000 ($18,000)
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
Quantity purchased & used
Standard unit price (Std. cost per unit) $6.25
The material usage variance for March was:
c. $1,300 unfavorable d. $1,300 favorable
49
Standard Costing for Materials-Big Co.
Quantity Price Cost
2,900 X $ 6.50 = $18,850 Price
2,900 X $ 6.25 = $18,125 Efficiency

2,700 X $ 6.25 = $16,875
T Accounts for Variance Entries
Big Company
Materials Work-in-Process Finished Goods Cost of Sales
18,850 18,850 18,125 18,125 16,875
Cash Accounts Payable Overhead Control Overhead

Applied
Other Accounts Price Variance Efficiency Variance

725 1,250
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
Raleigh Flexible Budgeting
Annual Cost Formula:
Cost = $4,800 + $0.50 per machine hour
Budget: 19,200 machine hours of work.
Cost for
Hours Rate Month
Variable
Indirect Labor
Fixed
Indirect Labor
Total budget
54
Raleigh Flexible Budgeting
Annual Cost Formula:
Cost = $4,800 + $0.50 per machine hour
Budget: 19,200 machine hours of work.
Cost for
Hours Rate Month
Variable
Indirect Labor 19,200 $0.50 $9,600
Fixed
Indirect Labor $400
Total budget $10,000
55
5: More than
one cost
driver 56
6: Common
errors
57
The End
58

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Chapter 10.

This file contains illustrative problems that

Copyright 2011. Dr. Howard Godfrey – M11-Chp-10-1-Standard-Costss-2011-0522 1

Standard Standard Budget (Std) for $0

Standard Standard Budget (Std) for

Standard Standard Budget (Std) for ($10,000)

Standard Standard Budget (Std) for $1,250

Cash Accounts Payable Overhead Control Overhead

Other Accounts Price Variance Efficiency Variance

Standard Standard Budget (Std) for $0

Standard Standard Budget (Std) for $1,350

$ (100.00) 9. Fixed overhead spending variance. (Also F. or U.?)

Budget for input $0

Budget for output $0

Standard Cost Two amounts

Budget for input $4,000

Budget for output ($6,000)

Standard Cost Two amounts

Budget for input ($5,000)

Budget for output ($2,000)

Standard Cost Two amounts

Standard Standard Budget (Std) for $1,250

Cash Accounts Payable Overhead Control Overhead

Other Accounts Price Variance Efficiency Variance

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