STANDARD COSTING AND VARIANCE

ANALYSIS

1ST SEMESTER AY 2020-2021

F.O. MATEOS

STANDARD
COSTS
- These are realistic estimates of cost based on analyses of both past and projected operating costs and conditions.
- These are budgeted costs to manufacture a single unit of product or perform a single service

WAYS TO DEVELOP STANDARD COSTS

 Specified by formulas
 Developed from price list provided by suppliers
 Determined by time studies conducted by industrial engineers
 Developed from analysis of past data

3 COMPONENTS OF STANDARD COSTING

1. Standard costs, which provide a standard, or predetermined, performance level
2. A measure of actual performance
3. A measure of the variance between standard and actual performance

STANDARDS SETTING-CONCEPTS
1. Fixed, Unchanging or Basic standards (AICPA/CMA) - These are long-term standards, not changed from year to year
unless the production process is significantly changed. They serve as reference points from which to measure long-run
changes in both actual performance and current standards.
2. Current standards (AICPA) - These reflect what performance should be in the current period. They are based on
conditions expected during the period for which they are established. Variances from current standards represent
efficient or inefficient departures from the desired level of performance.
3. Strict Standards or Ideal Standards or Theoretical standards (CMA) - These presume that (a) manufacturing costs will
always be purchased at minimum prices, (b) used at optimum efficiency at 100% manufacturing capacity. Ideal standards
cannot be met and will consistently result in unfavorable variances. For this reason they have undesirable behavioral
consequences.
4. Attainable standards - Attainable standards consider that manufacturing costs can be purchased at good overall prices.
Attainable standards also consider that (a) labor is not 100% efficient, (b) material usage will have some normal spoilage,
and (c) manufacturing capacity cannot produce at 100% of theoretical capacity. Attainable standards are set above average
levels of efficiency but may be met or surpassed by efficient production.
5. Loose Standards - These are standards, which are easily attained. They are set below the expected achievement level.
Average past performance

DIFFERENCE BETWEEN ACTUAL, NORMAL AND STANDARD COSTING SYSTEMS

MANUFACTURING COSTS
DIRECT MATERIALS DIRECT LABOR OVERHEADS
ACTUAL ACTUAL ACTUAL ACTUAL
NORMAL ACTUAL ACTUAL BUDGETED
STANDARD STANDARD STANDARD STANDARD

USES OF STANDARD COSTS

Standard costs may be used for…
1. Cost control and reduction
4. Budget preparation
2. Efficiency Measurement
5. Inventory valuation
3. Efficient Costing applications
6. Selling prices determination
IMPORTANCE OF STANDARD
COSTING
 Planning—For budget development; product costing, pricing, and distribution
 Performing—For measurement of expenditures and control of costs as they occur
 Evaluating—For variance analysis
 Communicating—For variance reports

VARIANCE ANALYSIS
- is the process of computing the differences between standard costs and actual costs and identifying the causes of those
differences.

ROLE OF FLEXIBLE BUDGETS IN DOING THE VARIANCE ANALYSIS

 A flexible budget summarizes expected costs for a range of production levels:
o Budgeted fixed and variable costs
o Budgeted variable cost per unit
 The flexible budget formula determines total budgeted costs for a range of levels of output.

STEPS ON DOING THE VARIANCE ANALYSIS

1. Compute the amount of the variance.
2. Determine the cause of any significant variance.
 3. Identify performance measures that will track those activities, analyze the results of the tracking, and determine what is
needed to correct the problem.
4. Take corrective action.

IMPORTANCE OF USING COST VARIANCE TO EVALUATE MANAGER’S PERFORMANCE

 To ensure that performance evaluation is effective and fair, a company’s evaluation policies should be based on input from
managers and employees and should be specific about the procedures managers are to follow.
 Entering variances from standard costs into a performance report helps pinpoint areas of operating efficiency and
inefficiency.
 A managerial performance report based on standard costs and related variances should
o Identify the causes of each significant variance.
o Identify the personnel involved.
o Specify the corrective actions taken.
o Be tailored to the manager’s specific areas of responsibility.

ANALYSIS OF VARIANCE FOR MANUFACTURING OF COSTS

Direct Materials Variance

1. Price variance = ∆ Price x Actual Quantity
= (Standard unit price - Actual unit price) x Actual quantity purchased

If the Price variance is analyzed together with a “joint-price-quantity variance”

Price variance = (Standard unit price - Actual unit price) x Standard quantity used
Joint price-quantity variance = ∆ Price x ∆ Quantity

It results from paying more or less than the standard price for materials.

Some possible causes of A MATERIAL PRICE VARIANCE are:

1. Favorable or unfavorable purchasing contact terms
2. Fluctuations in market prices of materials
3. Higher or lower delivery costs than were expected
4. Excessive shrinkage or losses in transit
5. Failure to take cash discounts available

2. Quantity variance = ∆ Quantity x Standard Price

= (Standard quantity - Actual quantity) x Standard unit price
allowed used

It results from using more or less than the standard quantity of materials on the various jobs or operations. Some

possible causes of A MATERIAL USAGE VARIANCE are:

1. Good or poor control over waste or spoilage.
2. Using a different grade or a substitute material.
3. Lack of proper tools or machines
4. Loss or destruction of materials by workmen
5. Variations in the yield of materials used
6. Failure to return excess materials to stockroom
7. Too rigid inspection.

Note: In case, many materials are combined in different proportions, the quantity variance is supplemented by the analysis of the
materials mix and materials yield variances.

*The variance is best associated with the activity when the price variance is recorded at the time of purchase and the usage
variance is recorded at the time of use.

3. Materials Mix variance = ∆ Quantity (i.e. planned and actual mix) x Standard Price
= (AQ per original mix - AQ used) x Standard Price

A “mix variance” shows the effect on cost of variations from the standard proportion of material used. The mix variance for
each item of material is the difference between the actual quantity of material used and the quantity that would have been
used if standard proportions were adhered to, priced at the standard price. (If a mix variance is calculated, the price variance
is also calculated for each item of material separately).

Responsibility for the Direct Material Variances:

 Price variance can be influenced by quality, quantity discounts, and distance of the source from the plant
– Factors are under the control of the purchasing agent
 Production manager is responsible for direct materials usage
– Standard can be met by minimizing scrap, waste, and rework
 Limitations in using price variance to evaluate performance of purchasing
– Emphasis on meeting or beating the standard can produce undesirable outcomes
– Applying the usage variance to evaluate performance can lead to undesirable behavior
Direct Labor Variance
 1. Labor Rate variance = ∆ Rate x Actual Quantity
It results from paying higher (or lower) than standard wage rates.

Some possible causes of a labor rate variance are:

1. Improper matching of job classification and wage rate.
2. Deviation from standard rates during peak operations and for rush orders.
3. Workers are paid rates independent of their work turnout.
4. Not all workers are paid established standard rates.
5. Unauthorized wage increases.

2. Labor quantity variance = ∆ Quantity x Standard Rate

It results from using more or less than standard time in the various jobs or operations.

Some possible factors affecting labor rate variance are:

1. Effectiveness of supervision or lack of it
2. Efficiency of employed machines
3. Adequacy of planning
4. Workers have varying levels of efficiency

Responsibility for Direct Labor Variance:

• Direct labor rate variances occur when:
– An average wage rate is used for the rate standard
– More skilled and more highly paid laborers are used for less skilled tasks
• Use of direct labor is controllable by the production manager

Overhead Variance
The factory overhead variance is the difference between manufacturing overhead incurred and standard overhead charged to production
for a given period.

Ways to Analyze Overhead Variance:

1. One-Way Analysis = Actual OH – Standard OH
2. Two-Way Analysis
a. Controllable (or budget) variance - The difference between the ACTUAL OVERHEAD COST and THE
AMOUNT OF COST THAT SHOULD BE INCURRED at the STANDARD volume
b. Uncontrollable (or Volume) Variance- The difference between the COST THAT SHOULD BE INCURRED
at the STANDARD volume and the cost ALLOCATED to work in process.
3. Three-Way Analysis
a. Spending Variance - The difference between the ACTUAL COSTS and the OVERHEAD COSTS THAT
SHOULD HAVE BEEN INCURRED AT THE ACTUAL VOLUME of production is a spending variance.
(compose the Controllable Variance)
b. Efficiency Variance (or Capacity) - The difference between the OVERHEAD COSTS THAT SHOULD HAVE
BEEN INCURRED AT THE ACTUAL VOLUME and the COSTS THAT SHOULD HAVE BEEN INCURRED
AT THE STANDARD VOLUME. (compose the Controllable Variance)
c. Volume Variance –same as in two-way variance analysis.
4. Four-Way Analysis
a. Fixed Spending – The difference between actual cost and budgeted overhead
b. Variable Spending – The difference between actual cost and budgeted overhead
c. Efficiency – same as in the three-way analysis
d. Volume - same as in the two and three - way analysis

Interpreting Variable Overhead Variances:

• Variable overhead spending variance
– Affected by price changes and how efficiently an overhead is used
– Variable overhead items are affected by several responsibility centers
 Assigning the cost to a specific area of responsibility requires that cost be traced to the area
• Variable overhead efficiency variance
– If variable overhead is driven by direct labor hours, the variance is caused by efficient or inefficient use of direct
labor

Interpreting Fixed Overhead Variances:

• Fixed overhead spending variance
– Budget variance is usually small
 Many fixed overhead costs are affected primarily by long-run decisions and not by changes in
production levels
• Fixed overhead volume variance
– Measure of planned utilization of capacity if the budgeted volume is the amount that management believed
could be produced and sold
 Volume variance is a direct measure of capacity utilization if practical capacity is used as the
budgeted volume
FORMULAS

DIRECT MATERIALS + DIRECT LABOR

AP x AQ
 + FACTORY OVERHEAD = TOTAL MANUFACTURING COSTS

AR x AH

AP x AQ SP x AQ SP x SQ AR x AH SR x AH SR x SH

(AP - SP) x AQ
(AQ
= - SQ) x SP = (AR - SR) x AH = (AH - SH) x SR =
DIRECT MATERIALS PRICE
DIRECT
VARIANCE
MATERIALS QUANTITY VARIANCE DIRECT LABOR RATE VARIANCE
DIRECT LABOR EFFICIENCY VARIANCE

TOTAL DIRECT MATERIAL VARIANCE TOTAL DIRECT LABOR VARIANCE

VARIABLE FOH + FIXED FOH

DIRECT MATERIALS + DIRECT LABOR + FACTORY OVERHEAD = TOTAL MANUFACTURING COSTS

ACTUAL FOH (ACTUAL FIXED OVERHEAD +

ACTUAL VARIABLE OVERHEAD BUDGETED FOH APPLIED FOH (PDVOHR + PDFOHR) x SH*

BUDGETED FIXED OVERHEAD +BUDGETED

(PDVFOH xFIXED
AH*) OVERHEAD + (PDVFOH x SH*)

VOLUME VARIANCE
THREE-WAY

SPENDING VARIANCE VFOH EFFICIENCY VARIANCE

BUDGET VARIANCE VOLUME VARIANCE

TWO-WAY

TOTAL FACTORY OVERHEAD VARIANCE

ONE-WAY
 DIRECT MATERIALS + DIRECT LABOR + FACTORY OVERHEAD = TOTAL MANUFACTURING COSTS

VARIABLE FOH + FIXED FOH

ACTUAL BUDGETED APPLIED ACTUAL BUDGETED APPLIED

(Predeterm ined VOH
(Predeterm
Rate x AH*)
ined VOH Rate x SH*) (Predeterm ined FOH Rate x SH*)

ACTUAL – (PDVOHR x AH*)(AH

= - SH) x PDVOHR
ACTUAL
= – (PDFOHR x AH*)(AH
= - SH) x PDFOHR =
VFOH SPENDING VARIANCE VFOH EFFICIENCY VARIANCE FFOH SPENDING VARIANCE FFOH VOLUME VARIANCE
FOUR-WAY

*In this illustration, we used the Direct Labor Hours as a basis for the Overheads but this can be changed depending on which activity base that the company
will use for their Overheads.

JOURNAL ENTRIES FOR STANDARD COSTING

DIRECT MATERIALS PRICE VARIANCE

Materials (SP x AQ) xxxxx

Direct Materials Price Variance (if UF) xxxxx
Direct Materials Price Variance (if F) xxxxx
Accounts Payable (AP x AQ) xxxxx

DIRECT MATERIALS QUANTITY VARIANCE

Work in Process (SQ x SP) xxxxx

Direct Materials Usage Variance (if UF) xxxxx
Direct Materials Usage Variance (if F) xxxxx
Accounts Payable (AQ x SP) xxxxx

DIRECT LABOR RATE AND EFFICIENCY VARIANCES

Work in Process (SH x SR) xxxxx

Direct Labor Rate Variance (if UF) xxxxx
Direct Labor Efficiency Variance (if UF) xxxxx
Direct Labor Rate Variance (if F) xxxxx
Direct Labor Efficiency Variance (if F) xxxxx
Wages Payable (AH x AR) xxxxx

FACTORY OVERHEAD VARIANCES (4-way)

Variable Overhead Control (if Actual > Applied) xxxxx

Fixed Overhead Control (if Actual > Applied) xxxxx
Variable Overhead Spending Variance (if UF) xxxxx
Variable Overhead Efficiency Variance (if UF) xxxxx
Fixed Overhead Spending Variance (if UF) xxxxx
Fixed Overhead Volume Variance (if UF) xxxxx
Variable Overhead Control (if Applied > Actual) xxxxx
Fixed Overhead Control (if Applied > Actual) xxxxx
Variable Overhead Spending Variance (if F) xxxxx
Variable Overhead Efficiency Variance (if F) xxxxx
Fixed Overhead Spending Variance (if F) xxxxx
Fixed Overhead Volume Variance (if F) xxxxx

CLOSING THE VARIANCES TO COST OF GOODS SOLD ACCOUNT

(All variances that are F) xxxxx

Cost of Goods Sold (Closing Account) xxxxx
(All variances that are UF) xxxxx
Cost of Goods Sold (Closing Account) xxxxx
ILLUSTRATIVE PROBLEMS:

PROBLEM 1
GoraBelles Manufacturing Company manufactures a single product. The standard cost of one unit of this product is:

Direct materials: 6 feet at P1.50 ........... P 9.00

Direct labor: 1 hour at P6.75 ............... 6.75
Variable overhead: 1 hour at P4.50................ 4.50
Total standard variable cost per unit...............P20.25

During the month of October, 6,000 units were produced. Selected cost data relating to the month's production follow:

Material purchased: 60,000 feet at P1.43 .... P85,800

Material used in production: 38,000 feet ... -
Direct labor: ? hours at P ? per hr .. P41,925
Variable overhead cost incurred ............. P30,713
Variable overhead efficiency variance ....... P 2,250

There was no beginning inventory of raw materials. The variable overhead rate is based on direct labor-hours.

Required:
a. For direct materials, compute the price and quantity variances for the month .
b. For direct labor, compute the rate and efficiency variances for the month.
c. For variable overhead, compute the spending variance for the month.

PROBLEM 2
Erna G. Company’s standard and actual costs per unit for the most recent period, during which 400 units were actually
produced, are given below:

Standard Actual
Materials:
Standard: 2 ft. at P1.50 per ft. ........ P 3.00
Actual: 2.1 ft. at P1.60 per ft. ........ P 3.36
Direct labor:
Standard: 1.5 hrs. at P6.00 per hr...................9.00
Actual: 1.4 hrs. at P6.50 per hr. ....... 9.10
Variable overhead:
Standard: 1.5 hrs. at P3.40 per hr. ..... 5.10
Actual: 1.4 hrs. at P3.10 per hr. ....... 4.34
Total unit cost ............................ P17.10 P16.80

Required:
From the foregoing information, compute the following variances. Show whether the variance is favorable (F) or unfavorable (U):
a. Material price variance
b. Material quantity variance
c. Direct labor rate variance
d. Direct labor efficiency variance
e. Variable overhead spending variance
f. Variable overhead efficiency variance

MULTIPLE CHOICE QUESTIONS:

1. The standards that allow for no machine breakdowns or other work interruptions and that require peak efficiency at all times
are referred to as:
a. normal standards.
b. practical standards.
c. ideal standards.
d. budgeted standards.

2. To measure controllable production inefficiencies, which of the following is the best basis for a company to use in
establishing the standard hours allowed for the output of one unit of product?
a. Average historical performance for the last several years.
b. Engineering estimates based on ideal performance.
c. Engineering estimates based on attainable performance.
d. The hours per unit that would be required for the present workforce to satisfy expected demand over the long run.

3. Which of the following statements concerning practical standards is incorrect?

a. Practical standards can be used for product costing and cash budgeting.
b. Practical standards can be attained by the average worker.
c. When practical standards are used, there is no reason to adjust standards if an old machine is replaced by a newer,
faster machine.
d. Under practical standards, large variances are less likely than under ideal standards.
4. If a company follows a practice of isolating variances at the earliest point in time, what would be the appropriate time to
isolate and recognize a direct material price variance?
a. When material is issued.
b. When material is purchased.
c. When material is used in production.
d. When production is completed.

5. An unfavorable labor efficiency variance indicates that:

a. The actual labor rate was higher than the standard labor rate.
b. The labor rate variance must also be unfavorable.
c. Actual labor hours worked exceeded standard labor hours for the production level achieved.
d. Overtime labor was used during the period.

6. A favorable labor rate variance indicates that

a. actual hours exceed standard hours.
b. standard hours exceed actual hours.
c. the actual rate exceeds the standard rate.
d. the standard rate exceeds the actual rate.

7. What does a credit balance in a direct labor efficiency variance account indicate?
a. the average wage rate paid to direct labor employees was less than the standard rate.
b. the standard hours allowed for the units produced were greater than actual direct labor hours used.
c. actual total direct labor costs incurred were less than standard direct labor costs allowed for the units produced.
d. the number of units produced was less than the number of units budgeted for the period.

8. If the actual labor hours worked exceed the standard labor hours allowed, what type of variance will occur?
a. Favorable labor efficiency variance.
b. Favorable labor rate variance.
c. Unfavorable labor efficiency variance.
d. Unfavorable labor rate variance.

9. Which of the following is the most probable reason a company would experience an unfavorable labor rate variance and a
favorable labor efficiency variance?
a. The mix of workers assigned to the particular job was heavily weighted towards the use of higher paid, experienced
individuals.
b. The mix of workers assigned to the particular job was heavily weighted towards the use of new relatively low paid,
unskilled workers.
c. Because of the production schedule, workers from other production areas were assigned to assist this particular
process.
d. Defective materials caused more labor to be used in order to produce a standard unit.

10. Which department is usually held responsible for an unfavorable materials quantity variance?
a. Marketing
b. Purchasing
c. Engineering
d. Production

11. A favorable material price variance coupled with an unfavorable material usage variance would MOST likely result from:
a. problems with processing machines.
b. the purchase of low quality materials.
c. problems with labor efficiency.
d. changes in the product mix.

12. Tower Company planned to produce 3,000 units of its single product, Titactium, during November. The standards for one
unit of Titactium specify six pounds of materials at P0.30 per pound. Actual production in November was 3,100 units of
Titactium. There was a favorable materials price variance of P380 and an unfavorable materials quantity variance of
P120. Based on these variances, one could conclude that:
a. more materials were purchased than were used.
b. more materials were used than were purchased.
c. the actual cost per pound for materials was less than the standard cost per pound.
d. the actual usage of materials was less than the standard allowed.

13. A labor efficiency variance resulting from the use of poor quality materials should be charged to:
a. the production manager.
b. the purchasing agent.
c. manufacturing overhead.
d. the engineering department.

14. Under a standard cost system, the material price variances are usually the responsibility of the:
a. production manager.
b. sales manager.
c. purchasing manager.
d. engineering manager.
 15. The terms "standard quantity allowed" or "standard hours allowed" mean:
a. the actual output in units multiplied by the standard output allowed.
b. the actual input in units multiplied by the standard output allowed.
c. the actual output in units multiplied by the standard input allowed.
d. the standard output in units multiplied by the standard input allowed.

FOR 16-21
The Litton Company has established standards as follows:

Direct material 3 lbs. @ P4/lb. = P12 per unit

Direct labor 2 hrs. @ P8/hr. = P16 per unit
Variable manuf. overhead 2 hrs. @ P5/hr. = P10 per unit

Actual production figures for the past year are given below. The company records the materials price variance when materials are
purchased.

Units produced 600

Direct material used 2,000 lbs.
Direct material purchased (3,000 lbs.) P11,400
Direct labor cost (1,100 hrs.) P 9,240
Variable manuf. overhead cost incurred P 5,720

The company applies variable manufacturing overhead to products on the basis of direct labor hours.

16. The materials price variance is:

a. P400 U.
b. P400 F.
c. P600 F.
d. P600 U.

Solution:
Direct Material AQ x SP
P11,400 3,000 x P4 = P12,000
Price Variance = P11,400 – P12,000 = P600 F

17. The materials quantity variance is:

a. P800 U.
b. P4,000 U.
c. P760 U.
d. P760 F.

Solution:
AQ x SP SQ x SP
2,000 x P4 = P8,000 600 units x 3 lbs/unit x P4 = P7,200
Quantity Variance = P8,000 – P7,200 = P800 U

18. The labor rate variance is:

a. P480 F.
b. P480 U.
c. P440 F.
d. P440 U.

Solution:
Direct Labor AH x SR
P9,240 1,100 x P8 = P8,800
Labor Rate Variance = P9,240 – P8,800 = P440 U

19. The labor efficiency variance is:

a. P800 F.
b. P800 U.
c. P840 F.
d. P840 U.

Solution:
AH x SR SH x SR
1,100 x P8 = P8,800 600 units x 2 hrs/unit x P8 = P9,600
Labor Efficiency Variance = P8,800 – P9,600 = P800 F

20. The variable overhead spending variance is:

a. P240 U.
 b. P220 U.
c. P220 F.
d. P240 F.

Solution:
Variable Overhead AH x SR
P5,720 1,100 x P5 = P5,500
Variable Overhead Spending Variance = P5,720 – P5,500 = P220 U

21. The variable overhead efficiency variance is:

a. P520 F.
b. P520 U.
c. P500 U.
d. P500 F.

Solution:
AH x SR SH x SR
1,100 x P5 = P5,500 600 units x 2 hrs/unit x P5 = P6,000
Variable Overhead Efficiency Variance = P5,500 – P6,000 = P500 F

FOR 22-26
Cole laboratories makes and sells a lawn fertilizer called Fastgro. The company has developed standard costs for one bag of
Fastgro as follows:

Standard
Standard Quantity Cost per Bag
Direct material ........... 20 pounds P8.00
Direct labor .............. 0.1 hours 1.10
Variable manuf. overhead .. 0.1 hours .40

The company had no beginning inventories of any kind on Jan. 1. Variable manufacturing overhead is applied to production on the
basis of direct labor hours. During January, the following activity was recorded by the company:
• Production of Fastgro: 4,000 bags
• Direct materials purchased: 85,000 pounds at a cost of P32,300
• Direct labor worked: 390 hours at a cost of P4,875
• Variable manufacturing overhead incurred: P1,475
• Inventory of direct materials on Jan. 31: 3,000 pounds

22. The materials price variance for January is:

a. P1,640 F.
b. P1,640 U.
c. P1,700 F.
d. P1,300 U.

Solution:
 AP (.38) =  P32,300/85,000 ; SP (.40) = P8.00/20 pounds
 MPV = (.38 - .40) 85,000 = 1,700 F

23. The materials quantity variance for January is:

a. P800 U.
b. P300 U.
c. P300 F.
d. P750 F.

Solution:
AQ (82,000) = 85,000 pounds – 3,000 pounds ; SQ (80,000) = 20 pounds X 4000 bags produced
MQV = (82,000 – 80,000) .40 = 800 U

24. The labor rate variance for January is:

a. P475 F.
b. P475 U.
c. P585 F.
d. P585 U.

Solution:
AR (12.5) =  P4,875/390 ; SR (11.00) = P1.10 X 10
LRV = (12.50 – 11.00) 390 = P585 U

25. The labor efficiency variance for January is:

a. P475 F.
b. P350 U.
c. P130 U.
d. P110 F.

Solution:
SQ (400) = 4000 bags produced X .1 DL hour
LEF = (390 – 400) P11.00 = P110 F

26. The total variance for variable overhead for January is:
a. P85 F.
b. P40 F.
c. P100 U.
d. P125 F.

27. Hoag Corporation applies manufacturing overhead to products on the basis of standard machine-hours. Budgeted and actual
fixed manufacturing overhead costs for the most recent month appear below:

Original Budget Actual Costs

Fixed overhead costs:
Supervision $ 9,880 $ 9,970
Utilities 4,160 4,440
Factory depreciation 21,320 21,190
Total fixed manufacturing overhead cost $ 35,360 $ 35,600

The company based its original budget on 2,600 machine-hours. The company actually worked 2,280 machine-hours
during the month. The standard hours allowed for the actual output of the month totaled 2,080 machine-hours. What was
the overall fixed manufacturing overhead volume variance for the month?
a. $4,352 Favorable
b. $4,352 Unfavorable
c. $7,072 Unfavorable
d. $7,072 Favorable
 Solution:
Predetermined overhead rate = Total overhead ÷ Budgeted hours
$35,360 ÷ 2,600 MHs = $13.60 per MH
Volume variance = $13.60 per MH × (2,600 MHs − 2,080 MHs)
$13.60 per MH × 520 MHs = $7,072 U

28. Dapice Incorporated makes a single product—a critical part used in commercial airline seats. The company has a
standard cost system in which it applies overhead to this product based on the standard labor-hours allowed for the actual
output of the period. Data concerning the most recent year appear below:

Budgeted fixed manufacturing overhead $ 76,815

Budgeted hours 13,500 labor-hours
Standard hours allowed for the actual production 14,400 labor-hours

The fixed overhead volume variance is:

a. $5,121 U
b. $5,121 F
c. $21,121 F
d. $21,121 U

Solution:
Predetermined overhead rate = Total overhead ÷ Budgeted hours
$76,815 ÷ 13,500 LHs = $5.69 per LH
Volume variance = $5.69 per LH × (13,500 LHs – 14,400 LHs)
$5.69 per LH × -900 MHs = $5,121 F

29. Dellarocco Incorporated makes a single product—a cooling coil used in commercial refrigerators. The company has a standard cost
system in which it applies overhead to this product based on the standard labor-hours allowed for the actual output of the period.
Data concerning the most recent year appear below:

Budgeted fixed manufacturing overhead $ 355,740

Budgeted hours 49,000 labor-hours
Actual fixed manufacturing overhead $ 372,740
Actual hours 45,600 labor-hours
The fixed overhead budget variance is:
a. $37,328 U
b. $37,328 F
c. $17,000 F
d. $17,000 U

Solution:
The fixed overhead budget variance = Budgeted fixed manufacturing overhead - Actual fixed manufacturing overhead
$355,740 - $372,740
= $17,000 U
30. Carattini Incorporated makes a single product—an electrical motor used in many long-haul trucks. The company has a
standard cost system in which it applies overhead to this product based on the standard labor-hours allowed for the actual
output of the period. Data concerning the most recent year appear below:

Total budgeted manufacturing overhead $ 360,000

Budgeted hours 36,000 labor-hours
Standard hours allowed for the actual production 34,200 labor-hours
Total actual manufacturing overhead $ 340,376
Actual hours 37,200 labor-hours

The total amount of manufacturing overhead applied is closest to: a.

$340,376
b. $342,000
c. $312,900
d. $372,000

Solution:
Manufacturing overhead applied = Predetermined overhead rate ($360,000 ÷36,000 LHs) × Actual labor-hours
= $10 per LH × 37,200 LHs
= $372,000